Good day, ladies and gentlemen, and welcome to the Pacira Pharmaceuticals First Quarter 2017 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. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Susan Mesco, Head of the Investor Relations. Ma'am, you may begin.

Thank you, Danielle, and good morning, everyone. Welcome to today's conference call to discuss our first quarter 2017 financial results. Before we start, let me remind you that today's 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 from 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, 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 thanks for joining. 2017 is off to a great start. We reported solid top line growth and remain on track to deliver our financial guidance for the year. Our clinical investments are starting to bear fruit. We recently announced positive results from our Phase 4 study in total knee arthroplasty, or TKA, and results from our two Phase 3 nerve block studies are on the near-term horizon. Our Johnson & Johnson partnership is off and running with many upfront transitional activities either complete or approaching completion. We are rolling out our very exciting and unique collaboration with Trinity Health designed to raise awareness and decrease the use of opioids within their 22 state health system. We recently enhanced our IP estate with the new Orange Book listed patents that extends EXPAREL exclusivity to December 2021, and we significantly enhanced our balance sheet to a very successful private offering of convertible debt. The stage is set and we are now confident in the outlook for EXPAREL for the remainder of 2017 and beyond. As discussed in prior calls, we are advancing a growth strategy built on three pillars. First, driving education and awareness with patients, healthcare providers and payers around the need for opioid-sparing solutions. Second, generating level one clinical data. And third, forming strategic collaborations with partners who share our commitment to driving innovation in postsurgical pain management. I'd like to share some highlights within each of these areas. Yesterday, we reported new research from a national survey of more than 1,500 oral surgery patients or their parents. The results show that more than 7 out of 10 respondents would prefer to treat their postsurgical pain from a wisdom tooth extraction with a non-opioid medicine and 80% were willing to incur an additional cost…

Thanks, Dave, and good morning, everyone. It's been an exciting start of the year for the Pacira commercial team, highlighted by continued sales growth and the strong relationship with our J&J colleagues who we've been working closely with to build on our collaboration to reduce opioid use in the orthopedic setting. It's really important to emphasize that this co-promote deal not only allows us to access J& J's large and best-in-class sales organization to expand the orthopedic business, but it's also the catalyst for Pacira to pivot its commercial resources to the large and vastly untapped soft tissue opportunity. On the J&J front, let me first just delve into a few key highlights. Our joint commercial committee, which includes VP level sales, marketing, medical affairs and alliance management professionals, has defined the position of EXPAREL within each of the J&J orthopedic sales channels, namely joint reconstruction, spine, sports medicine and trauma. Our 2017 sales and marketing priorities include national conferences, sales force training, account targeting and prioritization and development of procedural videos for the customer targeted within each orthopedic sales force. We've made great progress on all fronts. I'll start with our presence at AOS which serves as the official launch of the collaboration. We kicked off the meeting with a key opinion leader reception, highlighting the top line data from our Phase 4 study in TKA as Dave referenced. Given the success of the study, there was a great deal of excitement around the event from orthopedic thought leaders. J&J's AOS booth prominently featured EXPAREL, including virtual reality and Touch Surgery experiences to demonstrate proper infiltration technique and a demonstration of their shared mission to provide an opioid alternative to as many patients as possible, to a series of talk-of-the-town events that feature the dangers of opioids and postsurgical…

Thank you, Jim, and good morning to everyone listening to the call this morning. From a financial perspective, Pacira continues to be in great shape. During the first quarter, we delivered year-over-year growth in EXPAREL sales of roughly 6% and we remain confident that the sales will continue to grow this year and we will achieve our full year EXPAREL revenue guidance. The first quarter was also highlighted by a very successful $345 million convertible debt financing which allowed us to both refinance our 3.25% convertible debt due in early 2019 at a lower interest rate and add over $200 million in additional capital to our balance sheet. I'll now walk through the first quarter financial results. 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 press release we issued this morning. Net product sales of EXPAREL were $67.7 million for the first quarter of this year compared to $63.8 million last year. As discussed on our 2016 year end call, we believe a number of key value drivers, including our J&J partnership, the publication of our Phase 4 TKA study results, our collaboration with Trinity Health and top line data from our Phase 4 spine study, will start to impact EXPAREL revenue in the second half of 2017 and become the foundation for sustained growth. Our non-GAAP gross margin for the first quarter of 2017 was 67% versus 71% for the first quarter of last year. Unit costs of the inventory sold in early 2017 were higher because they were manufactured in 2016 during a period of lower production volumes, and therefore, higher per unit fixed costs. Our first quarter 2017 gross margin percent was also unfavorably impacted by the…

Thank you. And our first question comes from the line of Randall Stanicky from RBC. Your line is open.

Great. Thanks for the questions. Just going back to your commentary around DPS, and Dave, specifically the exceeding expectations. When does the actual handoff take place? And specifically, I guess number one, when are we passed the point of any potential disruption? And number two, when can we start to expect a possible lift in the ortho side of the business?

Can you give me some frame of reference, Randall, for your disruption question?

Well, I just – as you're handing that business off to the DPS sales force, how confident are you that we're going to see momentum in that ortho sales that we're not going to see disruption in that part of the business?

Yeah, it's – so thank you for the question. It will roll in phases. It will be completed in the third quarter and actually the end of the second quarter going into the third quarter, but this is not – we're not going to try to train several thousand reps all at the same time. There will be a region – so it'll be a region, one of our regions and one of their regions are married up and trained at the same time. I think of significance in answering your question is we will train all of the Johnson & Johnson sales forces in that region. So that when a region is complete, it will be finished. There will be no rolling training. It will be rolling by geography and we expect that to be done by the end of the summer, Randall.

Okay.

From the disruption perspective, that is one of the reasons why we're handling it that way. The reason – and Jim outlined it, and I had it mentioned in my call as well, that the focus on the very early stages of the handoff are in places where we already have significant collaboration in those centers because there are major places for both companies. And so the strategy is that anything that is possibly in the way of this going smoothly will be ironed out in places where we have a hiccup. It's places where we already have a lot of friends from both sides of the aisle, so we can easily take care of those things. And then rolling forward, it looked a lot more like what Jim talked about. So I don't see any strong disruption or any possibility for any meaningful disruption. The goal, of course, is to have both sales forces in place and with good knowledge about the PILLAR study and when we expect that PILLAR study to be published, so that we can take full advantage of that important manuscript coming out. So I think – I don't know if that answers your question specifically, but come back to me if it doesn't.

It does so. This is Jim. It's also kind of a fallacy of a notion that our sales team will have no knowledge of or interaction of what's happening on the ortho side, right. They're going to continue to be the quarterbacks of being the account manager in the hospital and the rep to surgeon relationship will shift to J&J, no doubt. But there'll be communication between our folks and the J&J folks as we move forward, not only during the transition but down the road too.

And I would tell you, Randall, there's meetings everyday here. And so the collaboration at the top is so strong now and the friendships forming around that and the personal relationships will be the basis of this collaboration. So if there are some hiccups and there always will be, as you roll out something that's this large, we've got all the personal relationships that will get us through any bumps in the road.

That's great. And obviously, the focus now shifts to nerve block. And if I can just squeeze one more. How do we think about nerve block? As we think about, obviously, the revenue opportunity from the procedures, but also I would assume there's a P&T push that that data would give you. So, as we look at Q1 2018 and beyond, how are you thinking about that opportunity?

Yeah, it does a whole bunch of things. And first of all, it allows us to have a more informative discussion with the anesthesiologists. We have many examples. For example, today, if you were going to get a knee replacement at Walter Reed, you would get a combination of an EXPAREL adductor block which is a nerve block for the interior of the knee. And then the surgeon would take over and use the remaining EXPAREL, dilute it more extensively and then do an infiltration, a periarticular infiltration. So, in the future, you can see where there's a number of very painful procedures where the multimodal design will actually move towards an EXPAREL nerve block combined with an EXPAREL infiltration. And right, today, we can't have those kinds of discussions through our commercial organization. And then as I mentioned in my script, there are a number of procedures where not only do we think that they will move to the ambulatory center, but from much of the data that's being developed, we expect that the likely dose will be a 10 cc or 133-milligram dose. So, if you strategically thought about the ability to provide a patient and a rotator cuff, for example, with several days of pain control for net $160 or something like that, you start to get a paradigm where we really are active participants in providing a standard of care that is not possible today in an ambulatory setting for a number of these very high volume. I mean there's 1,200,000 rotator cuffs alone in the United States, right? And so you start to see a very significant opportunity developing. And frankly, along with the spine data, I mean, if you think about each of these data sets each having more than 1 million patients who could participate in improving patient care, you really understand why we need Johnson & Johnson, right. We need that sales force. We need that spine team. We need all of those different resources in order to maximize this opportunity and then we can focus on soft tissue.

That's great. Thanks, guys.

Thanks.

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

So question on the TKA data. And I know you haven't gotten it published yet. But since the data has been released, what's the extent to which you're seeing potential for a less restrictive environment from a P&T perspective? Or maybe another way of asking the question is once you get the TKA data published, do you expect or should we expect the environment in hospital setting to improve significantly in terms of restrictions or lack thereof? Thanks.

Yeah, I think what you're going to see, David, is – let me go back to the strategy of the trial itself. So the strategy was to show that if you use bupivacaine, and in many forms, the different bupivacaine cocktails that folks try to make into EXPAREL, while under the Warning Letter, it was a question whether we were – whether we could promote in total knees and in joints in particular. Folks trying to use cocktails that were bupivacaine based. And pretty well known now that the only way you can make that happen is if you use a lot of opioids, which of course, we don't think anybody is looking to do, given the state of the opioid epidemic. So that was the primary design of the trial was to compare EXPAREL with bupivacaine to bupivacaine alone. In answering your question very specifically, the only people who know the data other than the press release that we put out are the investigators themselves, so there really is no broad knowledge or understanding yet of the TKA trial. We are expecting a publication in a major journal and that will certainly provide the opportunity to folks to understand how little you need opioids if you're using a multimodal EXPAREL strategy. So it won't be universally accepted. I don't think anything ever is in these different environments, but there are a number of places who have stated opioid-sparing and opioid minimization strategies. And I think as Jim outlined in his call, there will be very specific interest in the p-value for opioid-free patients. And so we do expect that access formula, anybody that's got restrictions around formularies, I think we are going to put a document into the hands of our supporters in the marketplace that provides them unequivocal data on the value of EXPAREL in not only minimizing but eliminating opioids in a very serious surgical procedure. And again, training up the Johnson & Johnson sales force so that we have a greater presence in each of the operating rooms, so that we can answer questions in real-time, I think, is going to be critically important as well.

So, as a follow-up, and this is sort of tangentially related, but do you see any event or events whether it's from state legislators, congress, medical bodies, et cetera, that would force hospital's hands in terms of using less opioid? And you've alluded to many, many times about to the opioid epidemic and how the genesis of addiction is often the surgical or hospital setting. So what do you see on the horizon that could force the hospital's hands in terms of curbing their usage of opioids?

We are, as you might expect, David, we are appropriately active in working with all of those different organizations. We've been asked very specifically what the ask would be, and in a perfect world, how we might address the operating room as the gateway to the opioid epidemic and what our specific tactical programs would look like. I mean, clearly, the world is moving in that direction with restrictions on the number of days that you can prescribe opioids. I don't think that's perfect because I think we all acknowledge that there are patient populations who actually require opioid therapies. And so we do have to be mindful that there are scenarios where opioid-free is not actually the desired endpoint. We are working with policymakers around joint commission approvals and how hospitals would be accredited and how an opioid strategy would be required in order to achieve that. We're talking to a number of different folks who are – who have now been tasked with addressing the opioid epidemic, not only at the state level but at the national level. And probably more importantly than anything, David, is the surgical collaboration and the Trinity collaboration have brought a whole host of opportunities to us from medical societies, from additional health systems. And so we've really sort of ripped the top off of this, if you will, and we've got a number of opportunities that didn't exist even two or three months ago. And so I think all this, all the background work that's been done here is actually paying off in terms of our strategic opportunities going forward to really address this opioid epidemic in a meaningful way.

Thank you.

Thank you. And our next question comes from the line of Corey Davis from Wainwright. Your line is open.

Thanks very much. I wanted to ask about the spine data and how analogous do you think it is to the PILLAR study in terms of its importance, especially with regard to the technique that you've highlighted in the past was so important to teach physicians the proper injection technique for a knee replacement that was so important. Is that equally important in the spine data set that's coming up?

Thanks, Cory. I'm going to ask Scott to – this has been Scott's baby and he's run all the efforts (36:15) and stuff, so he's the appropriate guy to answer that question.

Good morning, Corey. A few things about spine, I would say, soon after I joined the organization, it was pretty clear from the work the organization was doing that spinal surgeons were just getting up the learning curve in terms of enhanced recovery. And you can now look in the literature and see those enhanced recovery programs starting to evolve. So, from a trial design standpoint, it was very easy to incorporate an enhanced recovery protocol, a multimodal strategy into a spine study. Spinal surgeons won't use epidurals, and so patients typically – well, vast majority don't use epidurals. So patients have pain pretty quickly postoperatively and that's one of the reasons PCA pumps have been so prevalent in terms of their usage. And so moving the spine community away from a PCA pump was just beginning to happen and probably, I would say, two years ago would have been a much harder starting point for us to do a study. I think now that's relatively easy, again, very much in line with that multimodal strategy. The other piece here to remember is that spinal surgeons, very different than recon surgeons, won't use a lot of cocktails. They won't use products that are off-label to treat postoperative pain. And so we also think there's a very clean opportunity here in terms of differentiation. Trial design is more similar than different. We will allow patients to go home, again, now that we've achieved our goal in this first study to show that EXPAREL clearly works for 48 hours and beyond. Here, our goal is to not only replicate the pain and outcome scores that we saw on the PILLAR study, but allow patients to go home after 24 hours and look very carefully at other health outcome measures in that study. So other than that change, the study designs are very similar. In terms of infiltration itself, this is actually a much simpler infiltration technique. What we have to work with a spine surgeon specifically is getting them comfortable with volume and getting them comfortable with using smaller gauge needles. But the actual technique is relatively straightforward, our basic infiltration technique, one or two minor adjustments or protocol standardizations that we're doing just to ensure infiltration of deep muscles and superficial muscles, but otherwise quite straightforward, a little bit of an ability, given whether or not it's a single-level procedure or a two-level procedure. And remember, these are patients that are, many of them have high opioid burden or being very careful about selection into the study in terms of prior opioid utilization. And we think that will maximize our odds of success. So I'll stop there.

Okay. And second question. There's been a lot of talk about percent of patients being opioid-free as an endpoint rising in importance. I think part of the answer to this question will never be in a world where it's completely opioid-free for these surgeries, but what else do you see is contributing to improving the percent of patients that are opioid-free other than EXPAREL? Is it increased (39:53) just increased use of better techniques, tramadol, although you might count that as an opioid, et cetera?

Yeah, I'll go first and then ask Scott to provide color. It's like everything else in medicine, Corey. I mean, as Jim mentioned in his commentary, three, four years ago, if we said we were going to do opioid-free, folks would have thought we were nuts. So you got to start somewhere. And we've demonstrated now that opioid-free is possible. It is clearly related to multimodal care to being very specific with your pre, peri, and postsurgical care. All of the patients in 331 received pregabalin and celecoxib and acetaminophen as well as tranexamic acid. So this is not just EXPAREL. This is EXPAREL as the base platform that moves opioids to a scenario where they're only used if the rest of this therapy doesn't work. So I think what you're seeing is a continued opportunity to reduce the amount of opioids, and thus, the p-value of 0.0048. And you have to get into the physician's mind that it is possible to have a opioid-free surgery. And then where the rubber actually meets the road is when you've got a patient who is in recovery, a patient who has some known significant medical problem around the use of opioids. The AP article that came out this week out of D.C. was around a patient who had, or in Maryland, who was a patient who had a car accident and actually went into the recovery room yelling, I'm a former addict, don't anybody give me opioids, right. And so we had to prove to people that it actually is possible to provide an opioid-free scenario with that patient if it's required. That's where we'll start. And then I think once people see that you actually can do it, then it will spread to more and more clinical opportunities where it's desired, but who's going to go first basically. So I'll ask Scott to comment if there's anything I left out.

The only piece I'd add is we're going to take a very close look at the PACU. I think it's always important to provide PACU nurses with an IV therapy. I think we've seen in our studies and other pain studies, sometimes PACU narcotics are excluded from opioid-free analyses. But nurses need a solution, I think, in the PACU. And I think now that PILLAR is completed and once we roll forward with other clinical studies, we are having investigators reach out to us and say, what else can we add to your regimen? And that's an active discussion and I would say, stay tuned, I think we will continue to work in the area to drive opioid-free numbers higher over time.

And I would tell you, Corey, it's much more prevalent than you think. I mean, this morning, I got a call from a physician in Boston who has a son who's in recovery, who requires hand surgery from a motorcycle accident and is required – is asking about who do I talk to? Who is the best guy in the world if I need to do to have my son taken care of? And so that's how these things start, right. And I think we're well started.

Okay. Great. Thank you.

Thank you. And our next question comes from the line of Douglas Tsao from Barclays. Your line is now open.

Hi, good morning. Thanks for the questions. Maybe as a starting point, Dave, if you could help us think a little bit about the commercial impact or the timing of the commercial impact of the Trinity collaboration. I mean, do you see that as something that can meaningfully sort of affect your revenue trajectory over the course of 2017? Or do you see that much more as a means of generating protocols, data, best use practices, et cetera, that over time, you'll be able to roll out to the broader customer base?

Yeah, it's a little bit of both, Doug, as you would expect. I think the upfront importance is more around opioid-sparing. And just to be clear, the collaboration with Trinity is total opioid-sparing. It's not just postsurgical pain. So we're looking at all the places where they're utilizing opioids and talking about appropriate strategies to address that. I'll tell you, the major benefit right to today, Doug, honestly, has been I had a meeting yesterday afternoon with a very large health system and all they wanted to talk about was Trinity. And how that's happening and why can't we do the same thing with them, etcetera. So the American College of Surgeons and the Trinity relationship and the J&J relationships have fostered a different way of the C-suite to think about working with Pacira and that would be the first big benefit. I think what you'll see relatively soon as you talked about is the ERAS protocols and the opportunity in specific procedures to address opioids in a way that will be very meaningful to their health system. And then look, there's 93 hospitals in this system, but there's really, I think, something like 65 significant ORs in that system. And as the year rolls on, we do expect that there will be an increased utilization of opioid-sparing strategies in that system and the vast majority of those will include EXPAREL. So it's a little bit of all of those things, but the upfront value actually has been almost an unintended consequence of the opportunities that this relationship has offered us have been extraordinary.

Okay. And then just, if I might, two follow-ups. First, Dave, should we expect to see some additional collaborationships, partnerships with health systems signed during 2017? And then also, maybe this one's better answered by Jim, but just in terms of sort of transitioning to the J&J relationship and the focus in soft tissue for the Pacira sales force, maybe provide a framework. Is that going to be sort of focused on particular procedures? Is it going to be about sort of formulary position or sort of hitting accounts where you don't necessarily have as much access on the soft tissue side? Just maybe some sort of context or – of how you expect to sort of implement or how we should think about that sort of refocusing on the soft tissue opportunity? Thank you.

Yeah, thanks, Doug. And I mean, the answer to the first question is absolutely yes. We will have additional relationships. They're all a little bit different. They're all different flavors of vanilla, if you will. We're very active. We've got half a dozen that are very active in the rollout phase. It's a matter – the public announcement end of it is a slightly different issue than how they're proceeding in terms of improving patient care. And, Jim, can you please comment on the soft tissue? So...

Yeah, I mean, I think the partnership with J&J is kind of transforming our marketing department in the way that we think about sales channels, not only within the four that we talk about within orthopedics but on the soft tissue side as well. And that each of those different types of surgeons has a slightly different need and a use to get rid of opioids. And so we're developing separate videos, separate marketing materials for each of the C-section, bariatrics, colectomies, and so forth. So that'll best position our sales force to communicate with those audiences. We go back to the launch, where we – up until recently, all we had was hemorrhoidectomy and bunionectomy data. And so targeting these sales channels, but then also developing the data. And eventually, we're not going to develop data in every one of those, but we will – Scott's putting ad boards together and focusing on the proper technique in each of those. So it really is transforming our efforts in soft tissue.

So I would say, Doug, also keep in mind we're not just doing the orthopedic trials. I mean, the C-section trial and the colectomy trial are going to be TAP procedures that are generally done by an anesthesiologist. So we continue to develop those TAP relationships. The breast recon is going to be an infiltration of the PAC 1/ 2, so that's a slightly different procedure. So picking up on what Jim was talking about, it's not -- it's different because it's ultrasound guidance in many cases and each physician has their own medical needs when it comes to replacing opioids and how to use EXPAREL appropriately. But this will allow us to focus on these groups where, again, they're very large procedures. Every one of these is well over 1 million procedures in the United States. And so they deserve their own focus, if you will, and this will allow us the opportunity to do that. But I would also tell you that it is an interesting -- I mean, the collaboration, and going back to Randall's question, our sales force will have the in-depth understanding and we've got the medical affairs group and the HOVA group and all the rest of these folks who live and breathe EXPAREL. And so we will own the anesthesiologist relationship. Interestingly, the procedures that will benefit greatly from a nerve block application will be procedures that are covered by the J&J spine and sports medicine and all of the rest of those. So we will be in close collaboration. But the kinds of questions that an anesthesiologist ask you about PK/PD and about where the lipid particles go and about neurotoxicity and myelotoxicity are something that are well beyond anything that we've had to deal within the surgery audience. So it's important that we're prepared for that.

Okay. Great. Thank you.

Thanks, Doug.

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

Thank you for taking my questions. Were there any sales in Q1 for oral surgery? And what's the outlook for Q2 for oral surgery sales?

Hey, Liana, how are you? Yeah, we – I mean some. Our sales force is struggling to get the appropriate amount of time to put aside, given everything else that we're asking them to do. We are working with the society and we're working directly with them to put some educational materials and some programs with them on exactly on how appropriate the use goes, so that we're not 100% dependent on our sales organization to be able to be the nidus of these start-ups. And as Jim mentioned, we are going to put a dedicated variable cost field force out there that goes just after oral maxillofacial, so we can understand the kinds of things that they're going to require of us as we go forward. So I don't know if it's appropriate to say that it's an embarrassment of Richard (51:26) But given all the procedures, it's just been difficult to pull our field force out of the hospital and having them go to a number of oral maxillofacial surgeons. We thought we could do it. It turns out we probably can't. And so we're going to go in a slightly different direction, but it's a dramatic need. It is interesting to me that the early payer discussions have actually focused more on that than you would have thought they would. So it is clearly on the top-of-mind of the payers as well that it is that young audience that they want to keep from going on opioids because they clearly have a frame of reference from their data sets that these young folks who are becoming addicted to opioids are getting them through oral maxillofacial facial surgery, and so their interest has to be our interest.

Okay. And were there any sales for oral surgery in Q1 or negligible?

Yeah, yeah, yeah. No, we're selling it. We're just not aggressively being able to get to as many places as we'd like, given resource restraints. Actually, yeah, never mind. It's an interesting paradigm. Yes, we are selling it. And in some cases, we're selling a lot of it. We just aren't able to get to as many places as we would like to be able to get.

And about what percent of the sales in Q1 were for oral surgery?

I don't think we have or intend to break that out, but I think if the question gets toward IMS and numbers, I think we'll say the same thing that we've said previously, which is it's not significant enough right now to be a missed channel that is going to affect somebody's estimates of what we've done.

Thank you.

Thanks, Liana.

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

Yeah, thanks and good morning. Just wanted to expand the oral surgery conversation a little bit. I know before you talked about your hospital reps in the morning, focusing on the surgeons and then there's free time in the afternoon, they would then focus on the oral surgeons. Sounds like there's a change, and as such with a – I'm assuming you have a smaller – you're putting out there a smaller dedicated sales force now for the oral surgeons. With the number of surgeons you're calling on, would it now be a smaller list? What deciles are you hitting? And then when do you think there could be a reasonable pickup in EXPAREL in oral surgery, is it 2018, 2019? I know you have a lot of other things going on, but just some sense of when we might see a pickup.

Yeah, I think in terms of – thank you, David, for the question. I think in terms of opioid-sparing and especially first use of opioids, it's become increasingly important that we provide an opioid alternative to folks in their late teens and 20s around that first exposure. So there are different ways that we can do it. If you thought about some societal relationships that might lead the society to be more involved in the education and training of their constituents and we can do that with some e-learning centers and some direct relationships with them, especially if they're interested in partnering as part of a payer collaboration. So that is the big approach and that will get to everybody, no matter what their decile is, David. You are absolutely correct that the variable cost sales force will not be, at least in the pilot phase here, will not cover all of the opportunities in the United States, but will give us an opportunity to look at the major markets and to understand what the economics are associated with a sales force that addresses just this opportunity or probably more likely a retail sales opportunity looking at plastic surgeons and oral maxillofacial surgeons as a combined opportunity in the retail space. But if you have somebody that only has that, we would be less sensitive to deciles because they will have a couple of orthopedic – or they will have plastics. In OMFS, they ought to be able to call on virtually everybody that's writing prescriptions.

Just once quick question. Looking back to the Trinity Hospital (sic) [Trinity Health] discussion, you said there's a lot of interest and there are different flavors of vanilla and the types of institutions you're talking to. Any possibility of a collaboration with a really large organization that has pharma or hospital or something like that run that aren't administration? Is that a type you're thinking about [indiscernible] (56:16)

Yeah, we do very, very well with the DOD, not so much with the VA. It's just the way it is. I don't – I can't tell you that I fully understand what their resistance is. But I think what we're focusing on right now, David, is organizations where the C-suite is totally aligned around opioid-sparing and the need to get a handle on opioids in their geographies, whatever that is, and places where they know EXPAREL. They use it in some specific procedures, but they don't use it broadly to address the opioid epidemic. And those are the places where we can send in our medical affairs team and our HOVA team and Scott and his group to teach them how to do things like we've got one specific situation where TAP blocks are seen as the way to get rid of epidural catheters and to increase the opportunity to use EXPAREL, not only to address the opioid epidemic but to shorten the length of stay in some procedures that they've got their eye on. Are we addressing the VA? Yeah. Is that something that I think is going to progress to a meaningful sales profile during my career? I have absolutely no idea. But there are a number of opportunities where groups have come to us and some of these are 11, 12, 13 hospitals. Some of them are much bigger than that and look more like Trinity. And so I think the place for us to lay our chips, if you will, is in a place where they've got a stated strategy on opioid-sparing and we're working aggressively with them to achieve that endpoint rather than Don Quixote kind of thing that sound great, but I don't know whether we're ever going to get them done or not.

Okay. Thanks.

Thank you.

Thank you. And our next question comes from the line of Tazeen Ahmad from Bank of America. Your line is open.

Hi, good morning, guys. Thanks for taking my questions. Just maybe to elaborate on all of the indications that you're looking at now beyond orthopedic, all of which seems to have a lot of potential whether they be C-section, CRC, breast reconstruction. Can you kind of give us an idea of how you plan on deploying your sales force to focus on each? Because some of these surgeries might be conducted by certain types of physicians and others by different ones. And so on top of all of the online outreach that you've been talking about, how do you envision overlaying your sales force for each of these newer indications? Do you think that you'll be doing all of them at the same time? Or are they going to be rolling out sort of one behind the other? And do you have any idea on which ones you'll be focusing on first? And then I have a couple of follow-ups.

Sure. And I'll ask Scott against to color -- to provide any color here. First of all, Tazeen, we have significant use in all of these procedures. As a matter of fact, there was a recent paper that came out that was highlighted yesterday again in breast recon and the primary author was from Memorial Sloan Kettering and secondary authors were from MD Anderson, et cetera. So we have data. We have data and we have use in all of these opportunities. What we're doing with the clinical program, all Phase 4, so these are all covered under the current package insert, is to – very much the way we did TKA, to work with KOLs to define exactly what the best practice use of EXPAREL is. Volume, use of free bupivacaine, how you mix in the same syringe, exactly where you put it and when you put it, where you put it, and each of those trials will provide a very specific data set with a specific KOL video and the specifications around exactly how to use EXPAREL. So it's not probably as complex as you think. Each of these will lead to enhanced recovery after protocol or after surgery protocol. And then it's working within health systems and working within geographies with each of the reps to go where the business is. And so if you've got MD Anderson, obviously, you start there and then you go to the other hospitals in Houston and share the experiences with Baylor Scott & White and the Tenet/Baptist system and all the rest of that stuff. And so they will be rolled out as the data becomes available. And in a – the way we develop these markets is the folks who are the current experts, we've got a number of guys that have got very large data sets in C-section, for example. At the same time, they become your board for best practice use and what these protocols should look like. As we put these clinical programs together, they also become the spokespersons for everybody who is looking to adopt that, the use of the product in that procedure, pre the data becoming available. And I'll ask Scott to comment since he and his group are running most of these efforts (01:01:37) in developing these markets independently.

Thanks, Dave. And, Tazeen, I think you asked a great question. When we look at our utilization of EXPAREL today in colorectal, breast cancer, probably less so in C-section, those are markets that are more dominated by surgeons today infiltrating, or in the case of colorectal, they do it typically, what's called a lap TAP where they're laparoscopically visualizing the area of a TAP block and infiltrating EXPAREL via that laparoscopic procedure. But we feel particularly in colorectal and breast cancer and certainly C-section, it's a great opportunity to engage the regional anesthesiologist. We've talked a lot about the growth in TAP. The growth in TAP is generally a regional anesthesiologist, embracing EXPAREL TAP procedures, PEC procedures and getting involved in the enhanced recovery platform. So these trials are really designed to capture that growing audience. It's actually a way to embrace the regional anesthesiologist a year before or month before our nerve block launch. It's a very complementary procedure to what anesthesiologist do nerve block. And I think you bring up a good point in all these studies, the clinical team has to find partnerships out there where there's a good working relationship with regional anesthesia and surgery. And I will tell you for the clinical team, that's been a very simple task, much easier in a lot of ways than some of our other studies. So we're confident that those studies, they're getting a huge amount of interest. We feel very confident about great centers being involved, that great working relationship. And we really think as a leader in the pain space, these studies are going to dramatically advance the field of regional anesthesia in two-point TAP for C-section, four-point TAP for colorectal and PEC 1 and PEC 2 blocks for breast cancer. So we're hoping this really unifies the regional community in front of TAP block. And the surgeons always find a regional block if done well as an equally important solution. Many surgeons don't have a great regional team and we've got to help with those trading. Many surgeons like to infiltrate at the end of the case. And we're not in any way going to discourage that. We're really just adding another level and another group of users to expand the market.

Just real quick, add something to at the ground level too. Some of our top growing reps from last year are heavily weighted towards soft tissue. So we're taking their learnings, not academic but real on the ground learnings of successes that we've already had and exporting that through the rest of the sales force.

Yes. MD Anderson would be a great example. There's no orthopedics there unless it's removal of osteo tumor or something like that. And that's one of our major accounts in the United States. And the same thing with the DOD. The vast majority of DOD business is actually soft tissue. So...

Okay. Thanks for the color. And then do you expect to, over time, be doing additional studies beyond the ones that you are already focused in on? And these are obviously strategic studies that you've chosen. My question is really about helping me model out some of the expenses going forward. So do you think that your run rate on R&D that you have this year might be directionally in the same ballpark, let's say, next year but then moderate afterward? Or do you foresee running all sorts of different types of studies to help increase penetration over the next several years?

I think we're addressing the bulk of the EXPAREL market this year and next year. And we continue to learn some things. And we continue to find people in the marketplace that have had extensive experience in procedures that we would not have addressed previously. But I think the bulk of the EXPAREL work will be done in 2017 and 2018. I think what you'll see then, Tazeen, is that we will move to the pipeline, both the tranexamic acid product and the meloxicam product will be ready for prime time Phase 3 studies by then. And so I don't expect that the clinical budget will go up in a material way. It's not impossible that it could go down slightly. But I think for modeling purposes, if you model the numbers that you have now, you'd be more right than wrong.

Okay. Thanks, Dave.

Yeah, thank you, Tazeen. Good to hear from you.

Thank you. And our last question comes from the line of Gary Nachman from BMW Capital Market (sic) [BMO Capital Markets] Your line is open.

Okay. Good morning. What's your confidence level with the likelihood of success in the nerve block Phase 3 study? Just comment on how this have been going in terms of site, enrollment and how you set them up in both shoulder and femoral?

It's a clinical study, so never say never. We have the luxury, Gary, of people that had a lot of experience with EXPAREL. And so that makes things a lot easier in terms of your confidence level. These are generally anesthesiologists who are using the product under ultrasound guidance. So that increases your confidence that we are not going to have any issues associated with technique. And the application that we've – that we are addressing are extremely painful. So having the opportunity to do a placebo trial for the FDA would give you a pretty high level of confidence that with everything we know about this product and about the ability of small amount of bupivacaine to have a fairly profound effect on pain control at the local level, we feel pretty good. But they are all powered to some number and that always suggests that it's not 100%. And so I would tell you, you always hold your breath when you get that phone call no matter how confident you are. But we're in very good shape.

And I think you understand what Dave is saying, but just to contextualize it too. I mean the TKA study was against an active comparator and had two primary endpoints. I mean this has a single primary endpoint of pain. That's what the FDA wants and they want it to be a placebo-controlled trial. So, given everything that Dave said, the hurdle is a lot lower to be successful here.

Okay. That's helpful. And then when the J&J reps are fully trained, how much of their time interacting with the ortho surgeons will be spent highlighting EXPAREL versus the full J&J portfolio? Is that something that's quantifiable in any way?

Well, there's two aspects, Gary. I would tell you that we are just as interested in their Needham facility and their training programs. They train several thousand surgeons every year in a very elaborate training program and we are also participating in their J&J bundled program, the Episode of Care program. So I don't think – I mean the relationship is way more than just the reps at the bed side. I think the rep question is really more related to where they are. And so, when the 331 paper comes out, my guess is that you're going to have a bolus of interest and probably get a great deal of their time. I think the same will happen when the spine paper comes out for the spine reps, but I think we're going to see different levels of customer activity that's going to guide the amount of rep activity that's associated with the use of EXPAREL. But it is a meaningful component of their promotional program and we expect that we're going to get the appropriate amount of care. I mean they really and I – we put this in my script. They really understand the differentiation opportunity here around EXPAREL. As a matter of fact, we were talking about it on a call yesterday. And so I don't think that that will be our issue. They are fully engaged. They all have their own stable of stories around what opioid epidemic, what the opioid epidemic has done to their families and to their friends. And I think this is a very high profile opportunity for them as well.

Dave, if I were to chime in. Gary, I wouldn't see this relationship as static at all. I mean, Jim talked about in his remarks about where the organization is going to start, but you should also expect in 2018 that we as a team will tackle new markets. Example, broader trauma is very important, near and dear to Johnson & Johnson's heart. Foot and ankle is very near and dear to their organization's heart as we get nerve block. How we integrate nerve block in the upper and lower extremity will be important for both organizations in terms of thought and critical markets. So the flow of the agreement of our partnership will start and change over time as we can expand into markets. And I think, very frankly, we just never would've gotten there to some very keen critical markets and goes back to our initial discussions of this is not a partnership around recon in hip and knees. This is a partnership in a very broad orthopedic market and we're not going to forget that.

Okay. That's great color. And since I have you, Scott, just lastly, given that you guys just raised some money, are you being more aggressive looking at PD opportunities? Do you think you're close to signing something? And if you do, would it be something in the pipeline or another market or product to better leverage the sales force?

Thanks, Gary. We, as a team, are trying to shift as the organization is shifting. So our major focus is thinking about where our customers are and will be in the future. So anesthesia, colorectal surgeons, breast surgeons, GYN/OB surgeons, all important end users, plastic surgeons, and so our focus continues to be in areas that overlap naturally with that surgeon base and physician base, product base. We continue to feel really excited about the opportunities that are out there. The team's working hard. Ron Ellis, as many of you know, have joined the team and he's really leading the effort and doing a great job. And so we're really excited about Charlie's work in terms of the balance sheet, and we have a lot of activity continuing. And we're excited about our ability to compete on some very interesting products. I said on earlier calls, we focused a little bit more on private companies with products on the market today or near the market. But we look at early stage opportunities as well, particularly ones that we think are critically important as a strategic fit.

Okay. Thank you very much.

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Dave Stack for closing remarks.

Thank you, Danielle. Thank you for the questions this morning. We appreciate your time and look forward to providing additional updates in the future. Next up for us is the Bank of America Merrill Lynch Conference in May followed by the Jefferies and JMP meetings in June. We look forward to seeing you soon. Thanks, everybody.

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