Good morning, ladies and gentlemen. And welcome to the Q3 2019 Pacira Biosciences Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the 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 turn the conference over to your host, Susan Mesco, Head of Investor Relations.

Thank you, Whitney, and good morning, everyone. Welcome to today’s conference call to discuss our third quarter 2019 financial results. Joining me on today’s call are Dave Stack, Chairman and Chief Executive Officer; Dr. Richard Scranton, Chief Medical Officer; and Charlie Reinhardt, Chief Financial Officer. 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. With that, I will now turn the call over to Dave Stack.

Thank you, Susan. Good morning, everyone, and thanks for joining. 2019 continues to be a terrific year led by significant growth in our core EXPAREL business along with an important asset acquisition in ioveraº. I will start by calling out a few key highlights. Broad EXPAREL adoption is accelerating with five consecutive quarters of 20% plus year-over-year growth, validating our trajectory and placing us on a clear plan -- path to achieve average annual topline growth rates in the high-teens for at least the next five years. Our significant partnership with Johnson & Johnson is solidifying the role of EXPAREL in painful orthopedic procedures and we expect this relationship to continue to deliver great value through the conclusion of the agreement in 2021. We are in a terrific position with EXPAREL plus ioveraº to offer providers and patients a multimodal solution for opioid-sparing pain management before, during and after TKA surgery. Our Phase 3 label expansion studies are on track and decide to add pediatrics and lower extremity nerve block procedures to our already broad label. Our Phase 4 opioid free C-section study which is known as CHOICE will read out topline results in January 2020. We are delighted to have Governor Chris Christie join our Board of Directors, his long-time unwavering commitment to the opioid crisis makes him a well-suited and valuable member of our Board. All-in-all, this is a strong forward momentum leads us well-positioned to achieve long-term market leadership in non-opioid pain management and regenerative health solutions. To achieve this goal, we remain focused on three global growth pillars. First, driving top line growth through the continued expansion of EXPAREL and key surgical settings and the rollout of ioveraº as a preferred procedural solution for opioid-free pain management throughout the osteoarthritis patient journey. Second, leveraging our deep…

Thanks, Dave, and good morning to all joining today’s call. I will start with a quick update on our EXPAREL Phase 4 studies. With the women’s health field, we are seeing significant and growing demand for anesthesia-driven regional field block approaches as these continue to take hold as institutional protocols or procedures such as C-section, mastectomy, breast reconstruction, abdominoplasty and gynecological oncology surgery. Opioid addiction in women is growing at an alarming rate and studies have shown women are 40% more likely to become newly persistent users of opioids following surgery. As such, we expect this field to play an important role in our five-year growth trajectory. Caesarian sections are one of our top growth drivers and we would expect demand to continue to accelerate as awareness mounts within the OB anesthesia community around the opioid sparing benefits of an EXPAREL TAP block. We believe EXPAREL administered with the TAP block will be a key component in transforming the standard of care for mothers undergoing C-section. We continue to expect our CHOICE study to complete enrollment later this year, which places us on track to report topline results in January 2020. This next-generation study is designed to be completely opioid free in the EXPAREL arm. We are awaiting publication of the results of our first C-section study. And to remind you, this study demonstrated the superiority of an EXPAREL TAP block to a bupivacaine TAP block in patients undergoing C-section. EXPAREL achieved a 52% reduction in opioid use, while also reducing pain scores through 72 hours. Importantly, the study also demonstrated a statistically significant higher percentages of opioid spared patients in the EXPAREL group, meaning they took no more than one opioid tablet and experience no opioid-related side effects through 72 hours. We are also investing in orthopedic space as…

Thank you, Rich, and good morning, everyone. Before I walk through the third quarter financial results, I’d like to remind you that we will be discussing non-GAAP financial measures. The press release we issued this morning includes a description of these metrics and why we believe they provide additional insights into the financial aspects of our business. The press release also includes the reconciliation to GAAP for these measures. We ended the third quarter in very strong financial position with approximately $336 million in cash and investments, and significantly growing cash flow from operations. On the P&L side, we have significant operating leverage with a rapidly growing topline that we are supporting with only modest increases in expenses. This underscores the tremendous opportunity we have to capitalize on our business, while continuing to simultaneously ramp revenues and adjusted EBITDA. I will now turn to more specific financial highlights from the quarter. Total revenues increased by 25% to $104.7 million in the third quarter of 2019 versus $83.4 million in 2018. This growth was predominantly driven by net product sales of EXPAREL, which increased by 23% to $101.5 million in the third quarter of 2019, as compared to $82.2 million in 2018. For ioveraº, we reported net product sales of $2.6 million in the third quarter. Our non-GAAP gross margin for the third quarter of 2019 improved to 80% versus 79% in 2018. Non-GAAP research and development expenses were $19 million in the third quarter of 2019 versus $13.8 million in 2018. The increase in R&D was driven by the ongoing enrollment in our Phase 3 pediatric study or Phase 4 opioid-free C-section study, as well as the launch of our Phase 4 spine and hip fracture studies. For the third quarter of 2019, roughly 60% of our non-GAAP R&D expense…

[Operator Instructions] Your first question is from Randall Stanicky.

Hi. Good morning. This is Ashley Ryu for Randall. Dave, can you talk a little bit more about your five-year targets for EXPAREL and ioveraº, the $1 billion and the $200 million targets, while I realize it’s not guidance. Can you just talk about the moving pieces to kind of bridge you from today to those targets? For EXPAREL, how much of that is from geographic expansion versus kind of label expansions and for ioveraº, I know you have, of course, recently expanded manufacturing or adding more reps, better reimbursement, but can you just kind of talk about the growth target to get you there?

Sure. That’s a lot, Ashley.

Sorry about that.

Let me start and come back and pick me up for pieces that I don’t get the first time here. So, what we see is very strong support from anesthesia, especially regional anesthesia for EXPAREL and that is growing in not just in what we would call a classic nerve block, but in their use of the product in field blocks and we think we are very early in the adoption of these medical specialties using these regional approaches and getting rid of catheters and pumps, et cetera. So that’s one piece. The other piece is that we go into a single shot where we get rid of epidurals and pain pumps and all of the things that are required when you try to treat pain in an inpatient environment. The ability of an anesthesiologist to use EXPAREL as a single injection and achieve several days of pain control is a key element in moving those patients out of the hospital and into the ambulatory and HLPD setting, as we talked about during the script. So if you look just at that, you can see that you get the kind of growth that we have been talking about as the base of the high-teens that we have talked about when we were working with you guys. Add to that then, pediatrics, which we think is a very viable procedure opportunity, we see more than 1 million patients there. So, just to give you a home base, if you thought that we were going to get a 50% market share at $200, you are talking about $100 million over time. If you look at C-section, as Rich outlined, 1.2 million procedures, a market share 30, $300 is a $100 billion opportunity over time. If you look a lower extremity nerve block,…

I think that was everything. So -- no, I think, that was everything. Thank you so much.

All right. Thanks.

Your next question is from David Amsellem.

Thanks. So I just had a couple. First on the J&J partnership, can you just talk about where things stand, and I guess, more specifically, what your vision for that partnership is going forward and the how the role of J&J may or may not change? So that’s number one. Number two is on the gross margins. You have seen some margin expansion, and that makes sense, I guess, the question is how sustainable is that and I know there’s some fairly sizable fixed cost component for EXPAREL. So I just want to get a better sense from you as to the directionality of those margins as EXPAREL expands and just help us understand the moving parts there? Thank you.

Thanks, David. Thanks for the questions. We are -- the J&J relationship is in full effect and we are benefiting from their professional services and all their professional education programs. For example, OCA starts today, and for recon and all of the other things that would be orthopedic oriented. There is a huge presence for EXPAREL at OCAs at the American academy of hip and knee surgery, something way beyond anything that we could have done ourselves, David. And they are very much committed to their training programs, and Rayham, as well as the peak programs as they call them, which are regional education programs that are meetings, et cetera. So we think that as the world becomes more oriented around ambulatory care, the audiences that we call on in conjunction with Johnson & Johnson are going to be primary sponsors of that move and so we really see the benefit of having all of these resources in the field working with these customers. If you add to that as we said during the script, we expect to get a peds indication and fundamental in that peds indication is the scoliosis trial. So there are folks they have dedicated resources going to spine, as well as to sports medicine and to trauma and so we see them launching EXPAREL into all of those products during the term of this agreement. So we think it’s to our benefit to continue working with them aggressively until the end of this agreement in 2021. At the end of 2021, David, there is no sunset, there is no residual and the agreement would end. And doubling back on Ashley’s question, we are adding some people to the field. Ioveraº allows us to start to have relationships with the big orthopedic practices in this two-year…

No. There’s nothing. Dave, the only thing I would add is, obviously manufacturing capacity is a fixed investment. And so, we have doubled capacity, and therefore, we start to reduce the utilization of the total combined, and as we ramp up demand, that we will start to see improvement in those as well. So that’s all I would add.

Yeah.

Hey, Dave. Can I come back to your comments on J&J, are you discussing an extension of the relationship, I mean, from your comments and I was leaning that you don’t know where things will be after 2021, but is there a dialogue regarding life with J&J and the decencies beyond 2021?

I wouldn’t expect that we would be having a discussion with them David two-plus before. I think we will -- we wouldn’t, I mean, that wouldn’t be a good use of our time in my experience from now. The world is changing so fast that I think we want to use these next two years to get a view of the world of what 2022 looks like relative to AFCs and anesthesia and all the rest of the things that we are working on. So, I would say, I mean, you can take that is that there’s no discussions ongoing, but I would expect that there would be any this far ahead of the timeline of the relationship.

Okay. Thanks.

Thank you, David.

Your next question is from David Steinberg.

Thanks and good morning. I have a couple of questions. The first revolves around business development. The company obviously has a lot going on. You are going to launch in Europe next year. You are ramping up with ioveraº. There are some new indications. And so what sort of capacity you have for acquisitions? And if you do, how do we think about near-term versus long-term activity and what are the major buckets of potential acquisitions to in-licensing you are contemplating? And then, secondly, you have painted a pretty robust outlook for the next five years. I am curious what you thought about consensus estimates. EXPAREL growth next year is projected to be I think about 12% followed by 6% the following year. What do you think of those -- I know you haven’t given guidance, just some broad brush strokes into the future but what’s your view of that, those estimates and what do you -- if you think they are low, what do you see is the major disconnect? Thanks.

Yeah. Thank you, David. Let me start out with business development and capacity. Right now, we are growing into EXPAREL plus iovera° and I don’t think that would be anything that’s unexpected and the national meeting in early 2020 will be the kickoff of all of those things. So, I think, we are right-sized for those two opportunities today, David. Most of what we are looking at are not things that we would have to worry about launching immediately. And then the rare occasion where we are looking at commercial assets, they have a sales organization that comes with them. So you wouldn’t see any kind of a broad displacement across our organization or the J&J relationship in any case. What we are looking at really falls into a couple of buckets. One is, drugs, pharmaceutical -- typical pharmaceutical products. We mentioned a couple of DepoFoam products. There are some other API assets where folks have not been able to use them because of toxicity or sight of delivery or the requirement for a pump or things like that where we think that marrying that -- their technology with DepoFoam technology could actually lead to a viable clinical candidate. More likely, David, or from an M&A perspective, we are looking at things that block inflammation are somehow involved with non-opioid pain. It’s -- in many cases, it’s not acute pain as we are focused today. We have got a number of discussions ongoing talking about peripheral pains, neuropathic pain, chronic pain, there’s a number of opportunities where we not only use the commercial organization that you guys are all familiar with. But we have got a very viable clinical team here and which understands pain implicitly. So that is a very valuable asset to us. When people start to come…

Right. And just a couple of quick follow ups, speaking of the competition, Heron, says, they are going to run a head to head study of HTX-011 versus EXPAREL, any thoughts on that their protocols. And then, secondly, C-section, I think, there’s 1.2 million procedures a year. How are you thinking about market share there?

Yeah. We -- it would be higher than normal, David, largely because when we talk to these folks the interest in opioid free C-sections is way beyond anything that I would have anticipated. And the relationships we have with the anesthesia groups around the country confirms that this is really an area of intense interest to them. So as I said in an earlier response of 1.2 million procedures, if you had a 30% market share at $300 a patient as the median average cost of EXPAREL, it would be $100 million opportunity with time obviously, it’s not going to be $100 million opportunity next year. But over the five years of the plan, we don’t think that that’s an unreasonable expectation at all. Relative to Heron, they have had eight years to do a trial, head to head with EXPAREL trial, if they wanted to do it. If he was going to do it, why hasn’t he done it and I think we both know why, and I will just stop there.

Okay, our next question is from Tim Chiang.

Hi. David, I want to get your thoughts on the brachial plexus nerve block indication, how is EXPAREL doing with that indication so far and how do you sort of see usage on the upper torso expanding heading into 2020?

It’s, it is the entire corporation took off, Tim, when we got the, I mean, it was sort of a -- it was a perfect storm of J&J being fully trained and up to speed in the marketplace. The ASC code and CMS paying for EXPAREL and then the brachial plexus nerve block was sort of the catalyst that took all of that and had it expand. It really is the reason that anesthesiologists have had an opportunity to use EXPAREL, the brachial plexus block was particularly interesting because as studied, it was a 10 ml dose with some free bupivacaine. And so the anesthesia, regional anesthesiologists got to see the efficacy and the ability to control pain in a very painful procedure for the price of a half a dose of our 20 ml bottle or nearly every vial or nearly so and that really convinced them that this drug had some real efficacy and safety advantages over everything else that they were doing. What we were surprised at in the early days is that that really led to anesthesia converting to 20 ml field blocks like PECS blocks and TAP blocks and fascia iliaca blocks, etcetera, way more quickly than we had any anticipation that it was going to do. So that led to a number of hospitals putting EXPAREL on formulary, because the anesthesiologist was so interested. It also led to a number of procedures like brachial plexus block being done with no opioids at all, which led to the physicians and the patients asking why they were in the hospital at all if they didn’t have any pain and they didn’t require any opioid. So it was really almost a front runner for moving these patients to an ambulatory environment. So from a strategic -- from a revenue perspective, it’s been very important. From a strategic perspective, it’s been way more important even than the revenue, and it really has led the way to where we are going here. And so, I think, it’s hard for us to over -- to say more about that than is actual in the marketplace. It’s been a fundamental change to our company. So nerve block we think is very important and that’s why we are so high on a lower extremity, which would give us the opportunity to do things like adductor canal blocks, et cetera.

And David, just one follow up, I mean, it looks like your iovera° peak sales potential basically doubled now with the CMS reimbursement rules. And I am sort of wondering do you put more resources behind it heading into next year?

No. We are still going to be bound, Tim, by our manufacturing capabilities. When we bought the asset, the company had never made more than 10,000 of these smart tips in a year. We have got to add up to 100,000 for next year. I don’t think we can do much better than that. And when a hospital goes to ioveraº plus EXPAREL for things like TKA, we really have to be careful that we don’t run out of stock because that’s a fundamental change in the way they do business. And so we could never put ourselves in a position where they had to somehow go back to an old paradigm of care, an protocol of care. So, I think, we are going to have to be very careful with how we approach this marketplace and make sure that we don’t run out of tips. But I don’t see that we need to put a lot more people out in the field. I think what we would rather do is work with a relatively small number of high-end health care providers and really figure out how this product is going to be used in ACL repair and a number of these peripheral nerve opportunities like shoulder and spine, et cetera. If we put more people out there, I’d just be afraid that we get too far afield and we would be doing our self any favor in the long-term.

Okay. Great. Thanks.

Thanks.

Your next question is from Serge Belanger.

Hi. Good morning. Just a couple of questions for me and I apologize if you covered this before. Can you just give us timelines on when we should see data from the pediatric trial, as well as I guess STRIDE 1, the lower extremity study and when they could generate a label expansion. And then, second question is related to the CMS changes, I think, you discussed some of the recent changes that will impact ioveraº. But do you foresee anything further impacting EXPAREL usage from recent CMS decisions?

Yeah. Thanks, Serge. So we expect to have top line data on peds by the end of the year. We would expect that that would lead to a sNDA because peds -- well, let me make a distinction here, peds in lower extremity nerve block, we want to extend the label. That will require sNDAs in both cases. Opioid-free C-section is a currently approved indication, so that we are just waiting on publications. So, I will go through the three. So, for peds, we will talk about top line data sometime in the next couple of months here. And then filing sNDA and then you will see the papers and all the other things that come out over the course of the probably midyear next year. If we get -- so we would expect -- I won’t go into all the gory details of all the different aspects of this. But I think what we are planning on is that we would expect to get an indication, a ped indication sometime before the end of next year. So with C-section, we expect that the first C-section trial, which has 0.001 p-values for a number of different primary and secondary endpoints will be published this month or early in December. We expect that we will have the topline data for the opioid-free C-section study sometime early next year, likely in the JPMorgan time frame and that that would lead to a publication probably around the SOAP, the Society meeting, which is scheduled for May of next year. And then, for lower extremity nerve block, we are doing a normal -- a healthy volunteer study. We expect that that will lead us to a formal trial in a lower extremity and lower extremity nerves. Assuming that that trial gets up and running early in late this year, early next year like we expect, we expect to finish sometime in the third quarter. You would put together an SNDA and you would have a six-month review cycle. So the plan would be sometime around the 2021 national meeting. You would train on lower extremity nerve block and expect that sometime in the second quarter of next year --2021. I am sorry. Yes?

Yes. Thank you.

Okay. And let me talk about -- I will talk about CMS surge as well. So we will continue to work with FDA on a HOPD reimbursement for EXPAREL. I think as EXPAREL continues to grow in that environment, I think our chances of actually getting reimbursement actually are not as good next year as they were this year, but that doesn’t mean we are not going to keep trying. And in the ASC setting and in the office setting for ioveraº, we will have a very formal campaign that looks a lot like what we did with ASC and EXPAREL a couple of years ago. So you can expect us to be very active in working with CMS on a -- especially in ambulatory care claim, but increasingly we are having more and more discussions in the marketplace with docs who don’t see any reason why they wouldn’t be able to use ioveraº in their office because if patient comes in pain, it acts immediately, there is no cutting, no opioids, no -- and there’s really -- it’s as safe as it could possibly be. So there’s a lot of interest in the use of the product in the office setting but we have to work on CMS with that as well. And I would say, by the way that, with EXPAREL, CMS affirmed use in 2020 and also increase the payment from a $1.22 a milligram to a $1.25 a milligrams, so that’s good news as well.

Okay. Thank you.

Thanks.

Your next question is from Gary Nachman.

Hi. Good morning. It’s Rob Fay on for Gary. In the past, you have talked about ASCs comprising 10% of revenues. Have that shift at all this year and where do you expect that to be over the next two years to three years? And regarding ioveraº, can you comment on how the product is differentiated from competing products like COOLIEF from Avanos and is there an international opportunity for ioveraº?

Yes. Thank you, Rob Fay. I am sorry, [inaudible], what was the first one.

ASC.

ASC.

Okay. Yeah. So, yeah, ASC. So let me give a little bit of background information there. So if we use 2018 numbers, the population folks tell us that about 30% of American procedures were done in an ambulatory surgery setting. And if you extend out to 2025, the expectation is that that number will change to 70% to 755. So, yes, this is a huge expectation that this will change quickly, not over the next three years, but probably for the next five years. What we see that’s just as interesting is that looking backwards, primary ASC procedures would have been relatively minor, relatively small, hernias and hysterectomies and things like that. What’s happening and especially with CMS approving TKAs, total knee arthroplasty, into the outpatient space is that the ambulatory facilities are now gearing up to do very substantial surgeries like spine surgeries, discectomies, laminectomies, do knees, is quite a departure from doing a hernia. So, we have not only moved a percentage of patients, but we moved patients who are -- have a much higher pain acuity to the ambulatory setting. And the reason that we are so excited about ambulatory surgery centers is we believe that it’s EXPAREL that enables that move in the hospital you can’t use a thoracic epidural, you can’t use a pain, you can’t use a PCA pump, I am sorry, in the hospital you can use all of these different modalities, right epidurals, thoracic epidurals, where the patient is immobile for several days, pain balls, pain pumps, et cetera. When you move that patient to an ambulatory environment, you don’t have access to a lot of other opportunities and you can’t use huge doses of opioids. So, we see the move to the ambulatory care as being fundamentally important and then we…

Thank you.

Thank you.

I am showing no further questions at this time. I would now like to turn the conference back to Dave Stack, Chairman and CEO for closing remarks.

Thank you, Whitney. Thanks for your questions and time this morning. We look forward to providing an additional updates in the future. Next up for us on the IR calendar is the Jefferies Conference in London, followed by the Piper Conference in New York. We look forward to seeing you also. Thanks.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation and have a wonderful day. You may all disconnect.