Good day ladies and gentlemen and welcome to the Q4 2016 Pacira Pharmaceuticals Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Ms. Susan Mesco. Ms. Mesco you may begin.

Thank you, Sandra, and good morning, everyone. Welcome to today's conference call to discuss our financial results for 2016 and provide guidance for 2017. Before we start, let me remind you that this call will include forward-looking statements based on current expectations. Such statements represent our judgment as of today and may involve risks and uncertainties. Please refer to our filings with the SEC which are available on the SEC or our website for information concerning the risk factors that could affect the company. Joining me on today's call are members of our executive management team including Dave Stack, Chief Executive Officer and Chairman; Jim Scibetta, President; Charlie Reinhart, our Chief Financial Officer; and Scott Braunstein, Senior Vice President of Strategy And Corporate Development. With that, I will now turn the call over to Dave Stack.

Thanks, Susan. Good morning everyone and thank you for joining. 2016 was a year of solid execution and 2017 is up to a great start. We delivered 11% year-over-year revenue growth. In January we announced our collaboration with the DePuy Synthes Johnson & Johnson which we believe will significantly accelerate EXPAREL growth. We've recently added to our IP Estate [ph] with a new EXPAREL patent that extends exclusivity to December 2021 and today we are reporting positive topline results from our Phase 4 study in total knee arthroplasty or TKA. This progress is just the beginning. The stage is now set for multiple major milestones for the remainder of this year and beyond. As you know the opioid epidemic is a crisis of epic proportions. The operating room is a gateway to opioid abuse and places patients at serious risk for addiction independence. As an innovative opioid sparing option for postsurgical pain, EXPAREL can play a critical role in taking on this national issue. This is why we are so passionate about our mission to make EXPAREL accessible to as many patients as possible. With more than 70 million procedures providing patients access to opioids in the United States each year the opportunity before us is vast and largely untapped. Last year we set forth a detailed EXPAREL growth strategy built on three pillars. First, expanding awareness around opioid sparing solutions, second generating robust clinical data and third, forming strategic collaborations with partners who share our commitment to providing patients with opioid sparing alternatives. We are delivering results within each of these areas. Today, I'd like to walk through some key highlights. It is critical that patients and healthcare providers understand the importance of minimizing or even eliminating the use of opioids to reduce the risk of abuse independence. Last…

Thanks Dave and good morning to all joining us today. On the commercial side of the business 2016 was marked by solid progress that allows us to begin 2017 in a position of significant strength. Some of the key investments we made last year include establishing a robust commercial leadership team of seasoned executives rolling out cutting-edge educational tools that demonstrate proper EXPAREL technique and these include our Touch Surgery App, best practice videos and our virtual reality platform forming a high-caliber team of MSLs to deploy in hospitals to establish best practice protocols and maximize the benefits of non-opioid multimodal therapy and launching an online portal to help pharmacists and healthcare providers quantify the value of EXPAREL using evidence-based analyses and a wide variety of surgical models. This is just a brief glimpse into some of our 2016 commercial investments. Our activities focus on education training around EXPAREL and they hammer home the message about proper technique and opioid minimization. This is driving more consistent results and an increasingly satisfied and loyal customer base. As for 2017 we're extremely excited about how to start it. As you know the EXPAREL commercial opportunity is vast and we've only scratched the surface. This is why we're so excited about our newly formed collaboration with J&J. Through this collaboration we can accelerate our three-part EXPAREL growth strategy by quickly leveraging the broad reach of J&J, their established relationships and scale within hospitals and ambulatory surgery centers. Our Joint Commercial Committee is now in place and includes VP level professionals from sales, marketing, medical affairs and alliance management. This committee is currently defining the positioning of EXPAREL within each of the J&J orthopedic sales channels, ambulatory joint reconstruction, spine, sports medicine and trauma. The team has also defined objectives and timelines for our…

Thanks Jim and good morning everyone. I'll start with a brief recap of our 2016 financial results and then walk through our outlook for 2017. To remind you, we will be discussing non-GAAP financial measures this morning. A description of these metrics along with the reconciliation to GAAP can be found in the news release we issued this morning. I am pleased to report that we ended 2016 in a strong financial position. This gives us a very stable base to support our three-part EXPAREL growth strategy. EXPAREL net product sales were $71.4 million for the fourth quarter and $265.8 million for the year, which was in line with our guided range of $263 million to $268 million. These results reflect the continued success of EXPAREL as an opioid sparing solution for postsurgical pain. Our non-GAAP gross margin was 68% for the fourth quarter and 70% for the full year. This was within our guided range for 2016 of 70% to 73%. Non-GAAP research and development expense increased to $16.4 million for the fourth quarter and $42.4 million for the year. This was in line with our guided range of $40 million to $45 million. The increases in R&D expense over the prior year were largely the result of our two Phase 3 studies in nerve block and our Phase 4 study in TKA. Our non-GAAP selling, general and administrative expenses were $29.3 million for the fourth quarter and $124 million for the year. This was just below our guided range for 2016 of $125 million to $135 million. The increase in full-year SG&A over the prior year was primarily due to EXPAREL promotional activities including our Choices Matter, public relations campaign and our TKA virtual-reality educational program. The end result was non-GAAP net income of $3.6 million or $0.09…

[Operator Instructions] And our first question comes from the line of Douglas Tsao of Barclays. Your line is now open.

Hi, good morning, thanks for taking the questions. Just may be to start with help us sort of understand a little bit, the context of the knee study and how you think that’s going to affect results in 2017, I think Charlie you might have said in the second half of the year should we think about that largely in the fourth quarter were just generally pretty heavy in elective procedures? And then just also in terms of the guidance, maybe just help us think through some of the assumptions in terms of the underlying growth rates for 2017 between ortho as reported soft-tissue obviously in 2016 soft-tissue grew, I think probably about over 20% and so should we expect that momentum to sort to continue?

Thanks Doug. This is Dave and I’ll ask Charlie to pick me up any of the issues. We've been working with the journals on what an approach would be in terms of dissemination of data and the preservation of a peer-reviewed journal opportunity and part of those discussions has been around a timeline that we think hopefully at least will be accelerated. So I would expect that you'll see a TKA journal before the fourth quarter. So it should have more of an impact from a timing perspective on a broad dissemination. We will also work with the J&J booth with the primary endpoints and so there will be a significant presence of J&J around the TKA trial Doug just to give you an example. They’ve purchased a couple of the virtual reality machines that I know you've seen. And so in our booth as well as in their booth we will be demonstrating and people with virtual reality will be able to see for themselves exactly what the technique was that led to these results. So, while the paper won’t be out until sometime later this year, I think you'll see the opportunity to train and to make the 331 protocol part of the Johnson & Johnson training programs and so I do expect that you'll see a benefit of this for the field organization as well as for our clinicians. And remember we had a pretty high-end steering committee and docs who are part of the program and so we had a call with them last night. They know the primary endpoints and so they will be able to talk about this at AOS at a high level at least. I don’t know if that’s the best answer we've got right now Doug. We honestly haven’t seen the secondary endpoints yet. We don't have the full data set yet. So it's hard to comment any further than that. On the growth drivers, we are training the Johnson & Johnson organization across all of their sales forces as we speak. So that will roll out over time between now and the summer time, that clearly will have a benefit as we just have more critical mass. And this allows us to move our sales force over to soft-tissue. So we believe that the primary drivers will be our ability to focus on soft tissue and maintain the growth rate we had last year, while at the same time taking on the concept that you could go to cocktail for total knees and make bupivacaine into EXPAREL and I think with this trial we proven without any question that the only way you can make bupivacaine into EXPAREL is if you willing to use a lot of opioids which of course we think is not in the best interest of healthcare systems or patients or anybody, but in fact that is what's going on.

Dave, its Scott Doug. If I were to add a little bit to Dave's commentary, I think from the orthopedic perspective overall with our partners DePuy I think we view both the knee opportunity and the spine opportunity as kind of little bit of the low hanging fruit here. What we’re doing in spine now with the 409 trial with virtual reality we will mimic that identical 331 protocol and approach. We get great feedback every day in the field about that educational technique around 331. We are doing the same with 409 and as a reminder for folks spine infiltration is significantly simpler than a knee infiltration and so we think there's a lot of applicability from the 331 data how this will be viewed and at least educated to the spine, educated and talk to the spine community and then certainly hip fracture, trauma and sports are right behind that.

Okay, but I guess just explicitly in terms of the guidance, I mean what's the sort of underlying assumption between sort of soft-tissue versus ortho in terms of growth rates? And then just maybe one followup in terms of the 331 study, I mean you expect it to have greater impact with surgeons or hospital formulas?

Doug this is Charlie. From a guidance perspective we're not going to comment on specific growth rates between sections of the business, but generally the theme is, we have a base business, it's alive and well. It will benefit from some really exciting things this year, but that’s going to be a big question of timing. The 331 data obviously will impact the with the side of the business the relationship with DePuy, J&J will impact the orthopaedics side of the business, but as we transition our sales force will then get the benefit of being able to focus their attention on the soft-tissue side of the business as well. So everything is going to be impacted.

Doug that’s the best short wish the most reasonable short-term opportunity here is, we've been asked by many, many orthopedic surgeons who have used EXPAREL in the past and one access to EXPAREL and that access has been blocked by budget holders. And what we've heard repeatedly is that they do not have a level 1 data set that allows them to demonstrate clearly that EXPAREL improves patient care and saves money, we now have that data. So I think we will put information into the hands of folks who want to use EXPAREL to be able to win and demonstrate the benefits of appropriate technique, et cetera. The other place we will see an immediate, well a more immediate uptake is in these discussions that we're having with hospital systems, this clearly provides an opportunity for us to put a little kick in step of those discussions because it's very clear that the orthopedic surgery, the OR is the Gateway to the opioid epidemic with a specific focus on the OR Gateway. And if you're using bupivacaine thinking that you're not increasing the use of opioids we've just proved without any question that that's an inappropriate strategy.

Okay great thank you very much.

Thanks.

And our next question comes from the line of David Amsellem of Piper Jaffray. Your line is now open.

Hey guys, this is Sameer on for David. Just a quick one here, can you talk about the current volume mix that's in total knee replacement and then on how much of the overall mix for EXPAREL is in total hip replacement? Thank you.

Yes, when we look at our business overall and I have to tell you Sameer, our data is not as good as it was even a year ago when we went from ICD-9 to ICD-10. The data sets are all mixed up now and so I'll give you what is the triangulation of a number of data sources, but it's pretty soft I have to tell you. So we believe now I'm not sure if you are asking about hips and well I’ll answer the question both ways, if you are looking at the EXPAREL business we continue to believe that the mix between orthopedics and soft-tissue is about 50-50 maybe slightly more than that in orthopaedics. If we look specifically inside orthopaedics, then knee is far and away the greatest percentage of the orthopedic business. Hip is behind it. There is some belief in the marketplace that hip doesn't hurt enough in order to require the use of a product like EXPAREL and to address that Scott and his team are working with a group of surgeons on a hip fracture study and so when we start talking to about the trauma aspect of hip we think that there is a great opportunity there for us to growth hip and then sort of leap backwards if you willing into regular hip, because clearly patients report that there's a great need for enhanced pain relief especially if you're moving hip to an outpatient environment. So I hope, but and if I look at the other way and you say what percentage of all knees and hips are you using, the knee number is in the neighborhood of 20%. The hip number is in the neighborhood of 5% or 6%, so we've got a long way to go still.

Thanks.

Thanks Sameer.

And our next question comes from the line of Corey Davis with H.C. Wainwright. Your line is now open

Thanks very much. Just kind of back to the timing of the publication and how you can use the data before it's published, how much of the information can you actually go in and speak to the hospital administrators of about it in the absence of a publication? And the same holds true with speaking to orthopedic surgeons. I think just to be clear you said that you're going to elaborate more on the primary endpoints at AOS. Does that mean you're going to give numbers like percent reduction in opioids and percent reduction in pain?

No, so the way this works Corey, thanks for the question is that the company has to make a decision as to whether we’re going to go out rapidly with the information and just accept the consequences or whether we think that it's critical that we get a peer-reviewed journal. Given the nature of some of the negative trials that have been put into the marketplace, we believe strongly that we have to have a level 1 peer-reviewed journal in order to maintain the maximum benefit here. So what will happen is that we’ve disclosed the primary endpoints with P values. We will have the secondary data set and we will have some secondary endpoints that can be discussed by the KOLs and by the members of the steering committee and the PIs on the trial, but without P values and all of the P values and all of the percentage reductions et cetera that you’ve asked about our specifically what the journal requires to be kept for the peer-reviewed publication. And so, what we focused on is the timing of that publication getting into the marketplace just rapidly as possible rather than disseminating information which would put us into a second-tier journal so.

So does that mean you'll be able to talk about whether or not EXPAREL improves discharge readiness without giving specific numbers behind that?

No, what we can talk about Corey is that these results were achieved with a very specific technique and that if you're using opioids pre-intra and post surgery that you are not going to be able to achieve these results and so it will be a lot around training in order to achieve this0.048 opioids sparing P value and that will give us the opportunity to open doors and get back in front of formulary committees and accelerate some of the sea level discussions that we're having in terms of the need to do to reduce opioids. And then, over the next few months we will fill in that data with the peer-reviewed journal but we really can't talk about, I mean we can't have it both ways, so and this is already a compromised in putting out what we put out this morning to some of the journals.

Okay, last question is, can you elaborate more on what that collaboration with the major hospital system is going to look like, is this a system that already allows the use of EXPAREL or is the deal that they will now put it on formulary and then return, there is going be more of an effort to do whatever it is, but you are going to collaborate on?

Yes, good question Corey. So these are significant systems there are generally, there are hospital mix is quite diverse. So you will have hospitals where they don't have EXPAREL on formulary, we’ve got hospitals were they are using a fair amount of EXPAREL, they’ve got procedures where they believe that they are in need of opioids sparing strategies and so answer to your specific question about how does it work? We worked together to identify where the opportunities are to reduce opioids where we get the biggest bang for the buff for the resources invested if you will. And we help them understand how you would address these different procedures from an enhanced recovery and pain minimize pain strategy in order to achieve the end point of reducing opioids. We then write and then any rash protocol and enhance recovery after surgery protocol with their line teams. So for example their orthopaedic team would work with our team to develop an year after would be specific to that health system. And then our medical affairs team roll back here as out to their hospitals and they give us the priority order of those hospitals. So, that’s the biggest one that’s under consideration right now, then there's a number of variations on the theme based on, the case mix of the different hospitals and where they are in terms of their ability to control opioids et cetera but there's things like you we had hospital systems that have had collaborative discussions with the American College of Surgeons and have drawn some information based on our relationship. We’ve had calls with the American Society of enhanced recovery where they were looking for specific protocol that didn't exist and we work with ACER in order to develop a protocol that was specific for the procedure that was being investigated. So there's all kinds of ways that will help in the health system get their hands around the opioid epidemic.

Corey this is Jim. Just a brief comment. I think, we think of it as our customer is starting to agree with us and potentially promulgate publicly that the opioid epidemic is the issue that then leads back to all of the cost issues that are making decisions for their multimodal pain management, so it's really kind of the potential to ship the culture of our customer base from our customer base.

Okay, thank you.

And our next question comes from the line of Gary Nachman with BMO. Your line is now open.

Good morning. Thanks for taking my questions. This is Nicole on for Gary. Just turning back to the 2017 EXPAREL guidance how is the benefit are you assuming this year from the J&J partnership on the ortho side and what sort of fact are you expecting from the ortho bundling and what are the type of surgeries are you expecting those to increase to use? And are there any assumptions for pricing? Are the price increases of potential discounts at some point this year, and also one question just to put in, how much of the contribution is expected from the ortho surgery?

Well, those are, it’s a heck of a mouthful of questions. Let me see if I can remember some of them. From an oral surgery perspective, obviously you know we launched last year and we will spend some more time this year from a commercial organization focusing on that. We think it's an additive market meaning that it will contribute to the top line, but it won’t be a major driver of the business and that's really the way we've describe that. From the DePuy J&J side, I think you asked what type of procedures we expect that to results in?

Yes, like what how much of a benefit are you assuming this year from the J&J partnership and also what type of surgeries are you expecting most increased status.

So the benefit we think will come as the transition occurs and as their sales force get educated and empowered to go out into the marketplace, that will happen within the next couple of quarters and frankly we haven't specified exactly what we think the financial ramifications and the…

Yes, and Nicole we’re not going to give procedures specific guidance. That's just not on the cards. We do expect a significant benefit of bundling. As I said during my presentation Johnson & Johnson does have a very concerted effort around episode of care and that's really an end to end teaching program and it is basically, they are bundled if you will of how you would use a series of products in order to improve patient care and economics around bundles. EXPAREL will be a prominent piece of those teaching programs and so you know really week we see a considerable opportunity to educate folks on a multimodal team strategy which is based around EXPAREL as forming the basis of addressing the CJR bundles. And so, it's only positive and it provides us a critical massive resource that we could never address by ourselves. In terms of procedures, EXPAREL has the broad label for postsurgical pain, so we expect over time to benefit from a number of the J&J sale force is, so for example, they have a dedicated sales force in spine. We will start training on the 409 protocols that Scott talked about for spine now and then in the fourth quarter when we expect to have data in spine we will have all of the existing relationships et cetera that will allow us to hit the ground running if you will rather than our organization having to develop all experiences and relationships with the spine marketplace. So it clearly accelerates everything were doing it also allows us to, to have a dedicated presence in sports medicine. I'll remind you that while - and Charlie's absolutely accurate that we won't have the nerve block indication in 2017 and we don't expect a material benefit from nerve block into the 2017 revenues but a positive nerve block trial will largely be represented in the marketplace with hand and wrist, foot and ankle, shoulders primarily sports medicine and ortho related opportunities until the Johnson & Johnson relationship is built around having fit for purpose relationships that can accelerate all of those additional procedure opportunities, and if you marry that with the program that Scott talked about where we have a very specific protocol and a virtual-reality training tool, we should be able to rapidly disseminate the educational opportunities in order to achieve the results that we're showing in these different procedures.

Great and can we expect any pricing changes either increases or potential discounts ?

So we - obviously know our history we are not a spec pharma company that leads by price. We are focused on building the business in a volume perspective and our pricing strategy has been very moderate in the past and at this point we haven’t made any comment about whether there would or wouldn’t be any changes near time.

If you are tying together the hospital system agreements with price discounts or the demand for price discount we're just not seeing that call. Most of the discussions that were having with the big systems are around services and helping them address the opioid epidemic they're not around significant price decreases, so I don't see a material change on the discount programs either.

Okay, great. Thank you so much.

Thanks.

And our next question comes from the line of David Steinberg with Jeffries. Your line is now open.

Yes. Thanks very much. I'm wondering if you could give us some more granularity on the Johnson & Johnson deal. I know you talked in the past about partnering [indiscernible] so I was just curious why not do a global transaction of J&J? Secondly, could you give us a little color on the genesis of the transaction? Were you talking to J&J exclusively, where you talking to other similar companies and if so what were the key factors and why you went with J&J? Just, I know it's all of the few weeks since you signed the collaboration, but perhaps a color from the field on how the teams are working together?

Thanks David. It's Scott. I’ve talked about this now with a lot of folks and thanks for asking the question on the call, but we when the crossing field ended, we had a lot of interest from several orthopedic players. I think their concept about looking, contributing to their customers in a way that includes an opioids sparing or an enhanced recovery educational piece was important to all of the major players and it’s become more important to all of them. I think DePuy was far and away the most engaged with us, eager to work with us in a way that we felt was most advantageous for our organization and without question had brought us depth and breadth across the orthopedic industry. And again we think that hip and knee is the beginning, spine, fracture, trauma, sports can be equally compelling markets and they've just been a great partner to work with. We were approached by their U.S. organization. We both felt it was critical that seven that we have this deal going into early 17 around this data, around AOS and we need that, we needed that education for 2017 and we felt that it was most straightforward, simplest to move forward in the US and it has created an extra level of complexity to our teams thinking about the global launch. But I think it's important to remember globally that we still have to treat EXPAREL as a drug. We have to ensure global pricing. We have to have a strong global pricing strategy and we need the insight of the pharmaceutical industry to successfully do that. However, we do recognize the value of a strong orthopedic partner and the educational piece in the orthopedic space specifically. So, it's certainly going to play into our thinking, as we move forward and it’s great to have lots of interest globally. We're incredibly excited about filing end of year in Europe, the clinical team has done a great job. We’ve gotten great feedback from the regulatory authorities in Europe. We haven't equally interesting set of options in other major regions and so stay tuned, you should hear more as the year progresses.

David, I’ll answer one of your questions from my perspective not being involved in this minute to minute like Jim and Scott are. The key factor for me was there dedication to patient care and replacing opioids. It really is very obvious that we are kindred spirits in that regard. I mean, I'll tell you what I said to the board when we were discussing the potential to do this, put a few of the men on the moon and you sat in room with three J&J folks and three Pacira folks after an hour you would have a great deal of difficulty determining who was who. So there is a, there is a cultural bond here that I think is going to make this work if and get us through any issues that we have in the marketplace. And I’ll answer your question about we're only a few weeks in. What I would tell you that is a factual statement but if we had a chance to do this deal again tonight we would do it in a minute.

Okay, just a couple of quick follow ons, you have did a high-class problem now that you, I think Charlie said you have $170 million cash and fairly you’re going to be building cash. Just curious how you think about possibly redeploying that money is just burning a hole in your pocket with – zero percent interest rate. Are you with the buyback makes sense and I know you’re growing fast or probably not but are you going to are you seriously, considering some acquisitions. You are just going to let the cash flow on your balance sheet.

We are, there is not much chance we'll dive. I have got a face on sarcastic. There is not much chance that we're going to do a buy back. I don’t think anybody is investing in Pacira hope that we get a buyback. We've got and we've talked about this a couple of times. Our customers have provided us with some business development opportunities that we think are quite interesting. We continue to look at those opportunities and right now we've sort of got a mouthful with the J&J deal and with all the data that we’ve got and getting ready AOS. But we do continue to look at opportunities that are of interest to the surgery audiences in the anesthesia audiences and I'll remind everyone that we don't consider ourselves to be a pain company at all. We consider ourselves to be a company that’s dedicated to surgery and to anesthesia. So there are a number of opportunities that are attractive to us and to them. And I don’t know if Scott has anything to tuck in around that, but…

Yes, I think the only thing I would add Dave, both Daves, is that the business development team has had some sense that the J&J deal was moving forward and so we as an organization have been incrementally focused on soft-tissue opportunities. Once the transition happens within the commercial organization, we think we have a very well sized organization to manage the hospital space to really optimize opportunities in the soft-tissue world. And so we will continue to focus on opportunities that make sense for our organization and our current and future focus.

All right and then just last question coming back to J&J it sounds like the collaboration is going great, assuming it continues to go well and they like the product so well they want to own it rather than license it. Will they have first right of refusal based on your current terms?

No.

Thank you.

And our next question comes from the line of Donald Ellis with JMP Securities. Your line is now open.

Thank you and good morning guys. First question is for Dave, is the opioid message really getting to the C-suite executives or do you still need to make a cost of care argument for EXPAREL? And then the next question is regarding the high single digit commissions paid to J&J on EXPAREL sales where are you going to book that in your P&L? And then last question is regarding gross margins, I see the guidance for this year, thanks for that, but I thought I heard a comment about kind of a long term goal for gross margins and I didn’t get that number?

Yes, let me talk about the overall message and then I think Charlie can talk about the guidance and then if you want more information Don, Jim can talk to you about you know what we're doing with Swindon and how that impacts everything relative to the gross margin. It is a funny thing and I don't know exactly what the tipping point was, but you know we've been talking to folks for several years now about the opioid epidemic and it is clear now that a reduced opioid strategy is critically important to the major hospital systems. I think the tipping point actually was when we were able to demonstrate to these folks that the gateway to the operator to the opioid epidemic was actually the OR. And these patients were actually extending a cute surgical exposure to opioids and still on drugs six months after therapy. I think that has really resonated in the C-suite and now you would expect that doesn't replace an economic analysis right, and we still have to do the right kinds of clinical programs to demonstrate that when you reduce opioids you in fact doing pre-patient care and actually save money. The bundles were actually helping that because they are shining the bright light of day if you will on not only length of stay but discharge status and it shows the difference between a patient that has to be discharged to a skilled nursing facility versus a patient who was discharged to home. So there are a number of things that are working in our favor. But the argument has really shifted from just a frank economics dollars and cents to opioids being the primary interest and that really is the basis of the vast majority of my discussions with the C-suite folks.

Don this is Charlie. So I think the number that you missed the forward-looking target for gross margins continues to be 85%.

Okay and where will you book the commission to J&J for EXPAREL sales?

That's booked in SG&A.

Okay. And then one additional question on the bundling, remind us when is it that the hospital systems will actually be penalized financially after going over the cap [indiscernible] rates?

Under BPCI there have been folks that have been in a bundle since 2013. The President delayed the bundles for DRG 469 and 470 hips and knees from the 1st of April to the 1st of June. So it still is right around the corner. We still expect and actually that gives us some time to actually work with folks as well as with our J&J partner to get folks ready to address that requirement and that is really an opportunity if you do it well, because the bundle is actually built on data that when the marketplace was still largely using femoral nerve blocks and because of that they were sending patients to skilled nursing facilities. So if we can use a low opioid treatment strategy, reduce the length of stay and send patients home, the bundle actually creates a short-term revenue opportunity around knees and hips. And then later in the year around tibial fractures and a couple of other things that have been added to the bundle list. So I hope that answers your question Don.

Very well, thank you very much.

And our next question comes from the line of Irina Koffler with Mizuho. Your line is now open.

Hi, thanks for taking the question. I was just wondering with J&J some of the reps are probably mapped to hospitals that are not using EXPAREL or may not have it on formulary. So in those cases what do those reps do for your franchise, maybe you could talk about that?

Yes, this is Jim. Remember there is four different sales forces within J&J and based on our early work with them there are in virtually every hospital with the level of presence, somewhere they've got relationships that we can leverage overnight and that is some of the account targeting and somewhere this is an opportunity for them to have another product to bring to their customer that they want to work with in the future. So we're very comfortable that the broad reach of them is frankly we have a great sales force that has been doing everything they can, but this just gives us tremendous reach beyond where we are today.

Okay and then on the hospital collaborations you've kind of outlined it before, but in terms of just broad strokes, it sounds like hospitals are already using the product and longer-term they may use more product and maybe this will occur over a year or two time period. Is that kind of a fair assumption or is it more de novo hospitals that are fresh to the product that want to get sort of educated and start using right away?

Yes, on the collaboration front, we don't want to create the impression that these are large hospital systems who have never seen EXPAREL we are going to by themselves drive revenue overnight with something very significant. It's working with these customers and us being a trusted partner with them which we think is very important for us to have our product to be used properly, deliver value to them, have it be the kind of sticky business that we all think our hospital product should be. And then as I said earlier, kind of market hospital to hospital and system to system that we have a solution to help them through not as much as the opioid endemic but the bundled payment environment and all the economic pressures that they have.

Okay, thank you.

And our next question comes from the line of Ken Trbovich of Janney. Your line is now open.

Hi guys, this is Brendan on for Ken. So I don’t mean to belabor this point, but I was just hoping if you can maybe give us details on modeling on the J&J impact, just to think about that second half impact being heavily weighted or more of a slow gradual incremental growth quarter to quarter?

So we really haven’t provided that level of color, but I think it is - what we have said is that the education process that the ability to get the few sales folks out there is starting now and will take a quarter or two to implement. So that we don't and as it gets implemented they will be able to have an impact. So it's going to evolve throughout the year, but it is going to be focused we think probably on the second half of the year.

Yes Brendan, this is a major effort, you know I'm sure you will appreciate by the nature of your question, the enormity of the task of training the J&J sales force is so, just so everybody gets a sense that we are going to train all of the J&J sales forces in a specific region and that will roll out through the summer. So you will have regions, you will have sections, you will have geographies in each section of the United States, they will be trained on a rolling basis. And so that will allow us a number of opportunities to fix anything that we might not be fully up to speed on and so is really difficult for us to say that we know what the impact is going to be in any month during the quarter. We're just going to have to see how this goes forward. And you also, I mean I'm not trying to make any kind of excuses, but you guys have to understand that we've only had to teach for a few days and frankly I've only talked about it with J&J for the last couple of days. So to tell you that we understand what the impact of the 331 data is going to have on the Johnson & Johnson opportunity frankly would be rushing the fence in a major way. I mean we just don't know what is the answer.

Okay great, I appreciate that.

I think the best thing about it Brendan is it is all positive. We just don’t know how positive.

Okay and then I know there had been some issues with the prescription data coming in from Symphony. I just don’t know if you had any further comments on that, if it has been cleared out and what to moving forward as far as the accuracy of that data?

This is Jim Scibetta's domain, but I can't help myself. The data is just unbelievably poorly done. The excuse that we've heard is that we've put new SKUs out into the marketplace and that's why they missed half of the business in the month of December. The only thing I can tell you is that that's complete nonsense and I don't know, Charlie or Jim if they want to give any further guidance, but there is no explanation that we can come up with for the way that they've not been able to categorize the EXPAREL sales appropriately and it is getting worse not better.

Yes and the only thing I would say is we're kind of back - workup years ago and we would really caution the investment community month by month to have any reliance on them until they reestablish that they can figure out what we're doing.

Okay, all right great. Thank you guys.

And our next question comes from the line of Jason Gerberry with Leerink Partners. Your line is now open.

Sorry I was on mute, hey good morning, thanks for taking my questions. First just I realized the trade offs in terms of waiting for a level one period republication, but I was curious can you comment at all on what's the minimal FX size was for the TKA study for the trial to be considered positive? And second to that, can you just comment on how many milligrams of bupivacaine did the patient in the cocktail arm get? Thanks.

The protocol is up on clinical trials that got, so it is easy to answer the second part of the question. It was 100 mg on both arms. We're not going to talk about minimum FX sizes or any more specific information as it relates to the trial. I mean that will be up to the investigators PIs and the steering committee as we go forward. That's not anything that we're going to announce on a conference call.

Okay, and if I could just squeeze in a followup. So the timing of the gross margin benefit with the manufacturing benefit, can you provide a little more color on that? Thanks.

Are you referring to the - how did we get from 70 to 85 is that what you are asking?

Yes, more on the timing of that?

So I think it will evolve over the next three or four years, kind of a slow progression.

Okay, great, thanks.

And our last question today comes from Boris Peaker with Cowen & Co. Your line is now open.

Great, thanks for squeezing me in. I was wondering on the TKA study how long did it take for the physicians to actually administer EXPAREL given the – with the very detailed procedure that you provided them versus just administration of bupivacaine?

If you are doing it right and you are actually injecting bupivacaine into the posterior capsule and the periosteum there is no time difference. The product comes to the OR premixed in the syringes. It is not only a very prescribed protocol for where to put it, but once you get into the cadence of how the product should be used you know you inject, the syringe the syringes are very, is it easy to establish the peri-articular injection. Remember they were doing a peri-articular injection anyway. What we've had to show is the benefit of the multilevel injection techniques, but for example, we used to stand around and talk about things while the glue dried after the prosthesis was inserted and now we use that time to inject the periosteum and we've already injected the posterior capsule. But I would say net-net if you were using bupivacaine before then there would be no difference and in this trial if you talk to the docs the difference between the peri-articular injection of 120 mL with bupivacaine and with EXPAREL mixed with bupivacaine there is no difference in the OR time.

Got you, and for the series of Phase 4 studies that you mentioned and plan to start in soft tissues later in the year, will those be against placebo or active control or mixed, what are your thoughts on those?

Everything is going to be active comparator and in fact the additional nerve block trials that are being done, the MP [ph] that I talked about during the call are also all active comparatives. So the nerve block trial was done as a placebo at the request of the agency and so then when we were asked to redo the femoral nerve block trial it was done as a redo rather than as a de novo trial and so all of the trials were competitive and followed basically the same strategy as what was deployed in 331.

Yes, and the only other comment I would make Scott is that not only are they all active control, but just like 331 they have an active oral inexpensive convenient multimodal, state of the art and we think that's critical in terms of real-world data.

And this is my last question, when it comes to active control, I mean how much bupivacaine will patients be getting generally in the treatment arm versus the control arm in total?

Well, every stage won't be specific and every stage going to correlate with what historical procedures recommend. So we chose the TKA dose not only consistent with our label, but our review of all prior TKA studies in terms of infiltration, we had lots of input from our steering committee and that will be the case in every study that we run. There are some specifics. As an example in the C-section trial there was incrementally more concern about bupivacaine toxicity postpartum. So we're using appropriate doses in that study. So every dose that we choose has buy-in from steering committee standpoint, safety standpoint, a label standpoint, and a best practice standpoint.

So remember Boris what so I agree with Scott totally. They will all be procedure specific and they will be driven by people who are experienced in the art and have used EXPAREL in these different procedures. But remember the strategy here is that we've got physicians in the marketplace that believe that they can make bupivacaine into EXPAREL. And so the major output of these trials is that the only way you can do that is if you use large doses of opioids. And you see some of the papers have been very cleverly constructed to either not give you that information or present it in such a way that it is not possible to discern. And so we want to make it very obvious that bupivacaine has a short duration of action and the only way you can use bupivacaine is if you are willing to use large doses of opioids and we don't think that's an appropriate treatment strategy for patients.

Great, thank you very much for taking my questions.

Thank you.

And that does conclude today's Q&A session. I would now like to return the call to Mr. Dave Stack for any further remarks.

Thank you. Thanks for your questions this morning. In closing we're very pleased with where we stand. Important progress in 2016 has set the stage for this very exciting year ahead. We're up to a terrific start. The newly formed collaboration with J&J is getting momentum every day and our pace for study of EXPAREL TKA has now successfully crossed the finish line with statistically significant results. With many more key milestones on track for this year, long term growth prospects for EXPAREL continue to be extremely positive. We appreciate your time and interest and look forward to providing you with future updates. We're also excited to meet with investors in New York City this Friday and Jim and Scott and Susan will be presenting at the Cowen conference on Monday the 6th. Thanks again 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 great day.