Pacira BioSciences, Inc. (PCRX) Q4 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to the Q4 2019 Pacira BioSciences Inc. 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 hand the conference over to your host, Ms. Susan Mesco, Head of Investor Relations. Please go ahead.

Thank you, Tiffany, and good morning everyone. Welcome to today's conference call to discuss our fourth quarter and full year 2019 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer; and Charlie Reinhart, Chief Financial Officer. Before we begin, 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. For information concerning risk factors that could affect the company, please refer to our filings with the SEC, which are available from the SEC or on our website. With that, I will now turn the call over to Dave Stack.

Thank you, Susan. Good morning everyone and thanks for joining us. By every measure, 2019 was an outstanding year for Pacira. We are delighted to report record revenues for EXPAREL and have now delivered six consecutive quarters of greater than 20% year-over-year growth. Demand continues to broaden within the anesthesia community, as EXPAREL-based nerve blocks and field blocks take hold as institutional protocol for a variety of surgical procedures. Our relationship with J&J has solidified the role of EXPAREL as the cornerstone of opioid-sparing protocols for painful orthopedic procedures. In addition, we enhanced our leadership in non-opioid pain management with the acquisition of iovera°, a novel cryoanalgesia device that delivers immediate and long-term pain relief. Looking forward, our mission in 2020 remains steadfast as we continue to advance our leadership in non-opioid pain management and regenerative health solutions. As Charlie will discuss later in the call, we expect robust top line growth to drive substantial operating leverage and cash flow, providing significant financial flexibility to invest in future growth opportunities. To achieve our mission, we are executing across all three of our global growth pillars. First, delivering robust revenue growth by expanding the use of EXPAREL and iovera° for opioid-sparing pain management. Second, pursuing innovative acquisition targets to improve patients' journey in the neuro pain pathway. And third, advancing a pipeline of customer-focused non-opioid pain management and regenerative health solutions. I'll start with the top line and begin with EXPAREL where we achieved over 23% year-over-year growth in product sales in 2019. This was a result of a strong demand across all procedures and sites of care. Broad EXPAREL adoption is accelerating as we remain on a clear path to achieve annual revenue growth rates in the high teens for at least the next five years with total revenue expected to approach the $0.5 billion mark in 2020 and a five-year goal of $1 billion. With more than six million patients treated since launch, EXPAREL remains well positioned for long-term market leadership given its established efficacy and excellent safety profile. We continue to see strong and steady growth in the size of our active customer base, with a 21% year-over-year increase in ordering accounts. We are averaging 93 new customers every month and roughly two-thirds of these new customers come from non-hospital settings. Inpatient utilization continues to grow across important surgical segments, such as orthopedics, abdominal cardiothoracic and women's health with EXPAREL replacing pain pumps, catheters and thoracic epidurals. We also continue to see a robust uptick in both hospital outpatient and ambulatory surgery center procedures with EXPAREL-based protocols, enabling the migration of orthopedic and abdominal procedures to the 23-hour stay environment. In fact, roughly 60% of EXPAREL procedures are taking place outside of the hospital inpatient setting, with EXPAREL clinicians are providing low or no opioid pain management for large painful procedures, such as knee arthroplasty in spine in the 23-hour stay environment. Here anesthesiologists are paving the way by using long-acting EXPAREL peripheral nerve blocks as a cornerstone of multimodal opioid-sparing strategies that enable same-day discharge and avoid opioid-related side effects and expensive unplanned hospital admissions. We expect this momentum to continue as an increasing number of complex painful for surgeries are transferred out of the inpatient setting. In addition to enhanced patient care, the 23-hour stay environment affords substantial cost savings to patients and their policies continue to evolve to drive this change. For example, effective January 1 CMS removed total hip arthroplasty and six spine procedures from its inpatient-only list and are now covering these procedures in the hospital outpatient setting. The final CMS rule for 2020 also added total knee arthroplasty to its listing of ambulatory surgery center or ASC-covered procedures. Private payer policies are also driving procedures to the ASC setting. In November, UnitedHealthcare implemented a policy mandating 65 musculoskeletal procedures are performed in the ASC setting, unless there is prior authorization of medical necessity for the hospital outpatient setting. These are surgeries that commonly use EXPAREL and present another ASC growth opportunity. Our partnership with payers, such as Aetna are also critically important to enabling the use of EXPAREL as a platform for enhanced recovery protocols in the ambulatory surgery setting across the United States. Through our strong and growing network of partnerships, we are further supporting this transition by ensuring that key players across health care systems have access to and experience with EXPAREL. In January, we were particularly pleased to announce a collaboration with Envision Physician Services to train anesthesiologists on ultrasound-guided regional pain approaches with EXPAREL through a series of innovation workshops held across the country. The program focuses on high-quality patient-centered care. Envision Physician Services is comprised of more than 25,000 health care providers across the nation specializing in anesthesia, pain management, emergency medicine, hospital medicine, radiology, obstetrics, neonatology, trauma surgery and urgent care. These interactive training sessions will allow clinicians to enhance their skills with ultrasound-guided interscalene brachial plexus blocks as well as various field blocks, such as transverse abdominis plane or TAP blocks and pectoralis blocks. The curriculum will include the safe use of EXPAREL and regional techniques including volume expansion with saline for larger procedures and admixing with bupivacaine for immediate pain relief, so the pain management can be individualized for patients across a broad range of small and large procedures. We expect this and other partnerships, such as our programs with MEDNAX for cesarean surgery and Cancer Treatment Centers of America for cancer debulking procedures to be key EXPAREL growth drivers in the coming years. In tandem with our partnership efforts, we are advancing important clinical programs for EXPAREL. We recently reported the successful completion of our Phase 3 PLAY pediatric study. Overall, findings from the PLAY study were consistent with the pharmacokinetic and safety profiles for adult patients with no safety concerns identified at a dose of four milligrams per kilogram. We expect to submit a supplementary New Drug Application soon for this indication with anticipated PDUFA action date six months post-submission should we receive priority review and 10 months post-submission if we are designated for a standard review. From a strategic perspective, having pediatrics on our label is of critical importance to all key stakeholders parents, children, doctors and payers as there is an urgent need for non-opioid options for managing severe postsurgical pain in this vulnerable population. With all the opioids currently approved for postsurgical pain management, we believe it will be very difficult for a pharmacist to limit access to the only long-acting local analgesic approved for use in children. Beyond pediatrics, we are also working to expand the EXPAREL label with -- to include lower extremity nerve blocks. Our Phase 3 STRIDE study is underway to evaluate EXPAREL versus bupivacaine as a lower extremity nerve block in adult patients undergoing foot and ankle surgeries. We would expect to report top line results from STRIDE before the end of this year. To remind you, we believe that a lower extremity opportunity is at least as significant as the upper extremity market, where there are more than 1 million procedures each year. Another key area of focus is women's health, where we are seeing anesthesia-driven opioid sparing regional approaches, using EXPAREL-based field blocks take hold as institutional protocols for cesarean section, mastectomy, breast reconstruction, abdominoplasty and gynecologic oncology procedures. Here we believe EXPAREL will be a key component in transforming the standard of care for women's health. Opioid addiction in women is growing at an alarming rate and studies have shown that women are 40% more likely to become newly persistent users of opioids following surgery. Given that, we expect this field to play an important role in our five-year growth trajectory. We recently reported positive top line results for our Phase IV CHOICE study, which demonstrates that an opioid-free EXPAREL TAP block was superior to morphine-based spinal anesthesia and reducing opioids while maintaining a pain score for 72 hours. We expect to submit a full study results for publication in a peer-reviewed journal later this year. Cesarean sections are one of our top growth drivers and we would expect demand to accelerate as awareness amounts within the OB anesthesia community around the efficacy, safety and opioid sparing benefits of EXPAREL TAP blocks. To that end, we expect to have a presence at this year's meeting of the Society for Obstetric Anesthesia and Perinatology or SOAP through a series of EXPAREL and opioid related presentations. On the orthopedic front, enrollment is progressing in our Phase IV FUSION study in patients undergoing spine surgeries. This is a multi-center active control real-world study comparing an EXPAREL multimodal regimen with the standard of care, yet another example of where non-opioid pain management can change the standard of care in an addressable market with an estimated 1.6 million procedures per year in the United States. Spine is an important growth segment in our J&J relationship and we look forward to providing data to further our efforts here. Turning to ex-U.S. We are advancing the review process for our market authorization application in the EU and continue to expect approval in the second half of this year. Our regulatory activities in Canada also remain on track. Health Canada has validated our new drug submission and the review process is now officially underway. In China, we have completed a pharmacokinetic study in Hong Kong with our partner Nuance Biotech and we are preparing to meet with regulators soon to define next steps. Looking ahead, the Pacira team is highly confident that EXPAREL is well positioned for long-term market leadership as the only non-opioid single dose long-acting local analgesic that is currently FDA-approved for infiltration field block and brachial plexus block. There is a growing body of clinical evidence around flexible regional approaches that utilize ultrasound-guided EXPAREL blocks. The EXPAREL formulation allows for expansion with saline for larger procedures as well as admixture with bupivacaine, so that pain management can be tailored to the patient's need across a broad range of small and large procedures, as we are on track to expand the EXPAREL label to include pediatrics as well as lower extremity nerve blocks within the next two years. Pacira is the only FDA manufacturer of a marketed multivesicular-based liposome product. EXPAREL requires a complex sterile manufacturing and fill process and the assays required for product specification and validation are proprietary to Pacira. Turning now to iovera. We continue to be highly confident in the technology behind this innovative system and the significant commercial opportunity it represents. Consequently, we expect iovera to approach $200 million in net sales -- the $200 million net sales mark within our five-year planning horizon. As we discussed, our initial focus is on two broad patient categories. The first is a combination of iovera plus EXPAREL as a multimodal procedural solution for total knee arthroplasty procedures. In this setting, iovera would be administered before surgery and EXPAREL during surgery to provide patients with several months of opioid-free pain control. We have begun training initiatives at multiple integrated delivery networks, all of which are seasoned EXPAREL users. We are planning to use these networks to define protocols and workflow. As we generate proof of principal data, we will replicate these programs and roll them out nationally. Our second target market is osteoarthritis patients seeking drug-free opioid-free surgery-free pain management to last for several months. We are targeting those patients seeking an active lifestyle such as golf, tennis, hiking or simply walking with grandchildren, as well as those choosing to delay surgery for family events like vacations or weddings. With iovera we can provide surgeons and patients control over the timing of the surgery. As we outlined last year, we are increasing the base price per treatment to $450 for our best customers, with a list price of $600 to better reflect the value this technology delivers. We are making great progress on this front. Consistent with many other medical device businesses, Pacira is offering volume-based discounts to customers. We are encouraged by the sticky nature of this business and we continue to build a robust pipeline of new business with large health systems. On the manufacturing front, we've made considerable progress and expect to have an annual capacity of at least 120,000 iovera, Smart Tips by the end of this year. In addition, we will be developing clinical data to maximize this opportunity and position iovera and EXPAREL as the leading multimodal solution for opioid sparing pain management before, during and after surgery. Our initial clinical development focus will be TKA with iovera. We expect this study, which we are calling PREPARE [ph] to launch around the middle of this year. There's also great interest in the marketplace for using iovera for long-term non-opioid pain management across a number of areas of high unmet need, such as ACL repair, osteoarthritis of the ankle or shoulder, rib fracture spasticity and plantar fasciitis. Turning now to our second growth pillar, pursuing innovative products or technologies. Acquisitions that align with our mission, such as iovera, remain a key component of our growth strategy as they allow us to further leverage our established infrastructure and P&L. We are thoughtfully pursuing opportunities complementary to our existing offerings, but also -- that are also of interest to the surgical and anesthesia audiences we are calling on today. We see a significant opportunity to build a differentiated non-opioid portfolio focused on improving patient journeys along the neural pathway and have a number of robust opportunities to consider from our business development team. Sports medicine is one area of strategic focus. This rapidly growing market opportunity is driven by a continuous influx of new products, an increasing incidence of sports-related injuries and a significant advance in the field of regenerative medicine. Sports medicine also offers the prospect of engaging younger patients earlier in their journey with pain and degenerative conditions. This is also a well-defined physician specialist group that we are already engaged with, as ambulatory surgery centers are the typical site of care. Finally, let's discuss our third global pillar, advancing the pipeline of non-opioid opportunities for acute and chronic pain. Our in-house team is focused on leveraging the proven safety flexibility and customizability of our DepoFoam platform. Last year we announced two new DepoFoam programs that were selected for clinical development. First the intrathecal or subarachnoid delivery of a DepoFoam-based local anesthetic other than bupivacaine for acute and chronic pain. We recently met with the FDA to discuss this program and we are defining our next steps for a clinical study. Next, we are currently optimizing formulations for DepoDexmedetomidine and we will begin a pilot study later this year in healthy volunteers using a simulated release of dexmedetomidine that mimics the future DepoFoam-based product profile. We look forward to keeping you appraised of our progress with both of these important programs. With that, I'd like to turn the call over to Charlie who will review -- for a review of the financials. Charlie?

Thank you, Dave, and good morning everyone. I'll start by summarizing our 2019 financial results and then walk through our outlook for 2020. To remind you, I will be discussing non-GAAP financial measures this morning. A description of these metrics along with our reconciliation to GAAP can be found in the news release we issued this morning. 2019 was another outstanding year for Pacira with accelerating revenue growth supported by modest increases in operating expenses yielding an increase of more than 60% in non-GAAP net income. These results illustrate exactly why we are so bullish on the future of our business, which is on track for accelerating profitability. These trends also support significant growth in operating cash flows resulting in 2019 year-end cash and investments of $357 million. This financial strength leaves us well positioned to solidify our leadership in non-opioid pain management and regenerative health solutions. EXPAREL net product sales were $116.9 million for the fourth quarter and $407.9 million for the year. This was at the high-end of our guided 2019 range of $400 million to $410 million. For iovera, we recorded net product sales of $3.2 million for the fourth quarter and $7.9 million for the year. This was roughly in line with the low-end of our guided range of $8 million to $10 million. Our non-GAAP gross margin was 75% for the fourth quarter and 76% for the full year in line with our full year guidance of 75% to 76%. Non-GAAP research and development expenses were $18.3 million for the fourth quarter and $67 million for the year. As discussed on our last call, this came in at the high-end of our guided range of $60 million to $70 million. The main drivers of this increased R&D spend from prior year levels were our Phase III pediatric study, our Phase IV opioid-free C-section study and our Phase IV spine study. To remind you, in addition to traditional clinical and regulatory expenses, our R&D line also includes product development and manufacturing capacity expansion costs, including costs of the significant scale up in the U.K. In the fourth quarter of 2019, total R&D included $8.1 million of clinical costs and $8.7 million of product development and manufacturing capacity expansion costs. For the full year, R&D included $31.1 million of clinical costs and $29.7 million of product development and manufacturing capacity expansion costs. Our non-GAAP selling, general and administrative expenses were $47.6 million for the fourth quarter and $176.9 million for the year. This was just below our guided range of $180 million to $190 million. The main drivers for increased SG&A spend over 2018 levels were additional selling and promotion activities focused on the outpatient and ASC markets as well as commissions related to our J&J agreement that are directly linked to growth in EXPAREL sales. Our non-GAAP net income was $23.8 million or $0.56 per diluted share for the fourth quarter and $70.7 million or $1.67 per diluted share for the full year. Turning now to our financial expectations for 2020. For total revenues, we are guiding to a range of $485 million to $500 million representing a year-over-year midpoint growth rate of 17%. For EXPAREL, as Dave just outlined, all signs in the market point to another highly successful year of significant top line growth. And 2020 is already off to a great start with robust year-over-year growth rates. We are beginning the year with a guidance range of $465 million to $475 million for net EXPAREL product sales. This represents a year-over-year midpoint growth rate of 15%, which we view as a conservative starting point. It is still early days for a number of key growth drivers such as the market's migration to anesthesia-driven regional techniques and EXPAREL-based protocols that are enabling the shift to the 23-hour stay environment. The timing and growth trajectory of these drivers are somewhat undefined, so we will provide updates as the year progresses and we have more visibility. I would also remind you of the seasonality of EXPAREL with sales directly driven by procedure accounts. With the first quarter, typically the lightest and the fourth quarter the strongest, largely due to the timing of elective orthopedic procedures. As demand continues to grow in the soft tissue space, we would expect this seasonality to begin to moderate. For iovera, we are guiding to a range of $15 million to $20 million in net product sales. The remaining component of 2020 revenue is approximately $5 million in product sales and royalties attributable to liposomal bupivacaine for the animal health market via our third-party license agreement. We expect our 2020 non-GAAP gross margins to be between 67% and -- excuse me 76% and 78% as we begin to benefit from increasing volumes at our 45-liter suite in Swindon. The next key milestone will be when the second suite a 200-liter unit comes online, which will double current capacity. We expect to start making commercial product in this suite in 2021 with 80-plus percent gross margins to begin in 2022 and improve thereafter. For non-GAAP R&D expense, we expect to be in the range of $60 million to $70 million. This is consistent with 2019 and includes approximately 55% for clinical expense and 40% for product development and manufacturing capacity expansion costs. The remaining R&D is related to regulatory and medical science activities. For non-GAAP SG&A, we are guiding to a range of $180 million to $190 million which is also consistent with our 2019 guidance range. Looking ahead to the remainder of 2020 and beyond, we are very excited about our financial outlook. With a rapidly growing top line, steadily improving margins and appropriately managed operating expenses, we have a tremendous opportunity to invest in our business while simultaneously ramping the top and bottom lines. That concludes our prepared remarks. I'd now like to turn the call over to the operator to begin our Q&A session. Operator?

[Operator Instructions] Your first question comes from the line of Randall Stanicky with RBC Capital Markets.

Great. Thanks guys. Dave, can you just talk through some of the upside drivers that could come throughout 2020 that would lead you to revisit the guidance that you provided? And then also one, talk about how you're thinking about competition which as we learned last night has been delayed again. And two confirm that you've seen no growth slowdown early in the year in the EXPAREL trends. And I have a follow-up for Charlie.

Sure. Thanks Randall. It's -- as you know we come out of a 23-year -- or 23% growth in 2019. And really what the gate is on that is only 10% to 15% of the anesthesia procedures in the United States are done as a regional approach today. And so the real key and the real excitement around MEDNAX and Cancer Treatment Centers of America and Envision is teaching these -- the anesthesia community how to use these regional approaches and how to make sure that they understand EXPAREL. So, what happens here is very much excitement in the anesthesia community thinking that EXPAREL really provides them opportunities that were not valuable -- not available to them before they had a long-acting local anesthetic. They use it generally in a brachial plexus block, they move to field blocks, they see that the patients don't require opioids, that opens up the door for them to then move those patients to an ambulatory environment and it's really the reason why we're able to do these large painful procedures in a 23-hour stay environment. Things that we used to keep in the hospital because they had to have a thoracic epidural or they had to have a pain pump or something that kept them from being outside. So, the basis of our business, Randall, is twofold really, it's the regional anesthesia programs driving an improved care profile and that impair -- profile of reduced opioids allows the payers to drive the patients to a different site of care where as we've said several times they say between 35% and 40%. The reason I answer with that first is that's not only an opportunity for 2020, but with 10% to 15% of the procedures now, it's a matter of training those folks not only on the use of EXPAREL, but on the appropriate use of ultrasound being involved with all the medical programs and the fellowship programs. And so we see that as a fundamental piece of the five-year plan. If you look then at what comes from the payers being able to move patients to another site of care, we're still very early in the trends and the migration of these patients. You see that CMS is driving the bus here, right? On an annual basis, they are moving more and more procedures to the HOPD environment and then the plan is to move them to the ambulatory environment as the migration pathway almost. And the real critical issue is for an ASC, we've moved from low-margin hernias and hysterectomies and things like that, right, where they had to do a lot of procedures in a day to actually make a goal of it from a financial perspective to now moving spine surgeries and knee surgeries very painful large procedures that are highly profitable for these same centers. And so the acceleration is not only the payers driving the patients out of the hospital for cost reasons, but a growing ambulatory environment where the quality of care is equal at least to a hospital setting. And so the patients want to go there, the docs want to practice there; the payers want them to go there. So, it's really a perfect storm. So, those two things are going to sustain us not only for 2020 and then beyond. I mean outside of that the short-term things that you would expect to see the spike from our -- you know an opportunity -- well first of all, we're waiting for the first C-section paper to come out in A&A and we expect that to happen any day now. Those -- we've trained over 500 hospital neonatology and C-section units on the use of EXPAREL. As soon as that journal comes out, that will trigger those activities going into execution mode. So, that's a very short-term driver. The desire to attend these innovation labs that we outlined in the script is intense. And so you can see an immediate reaction. We run these innovation labs, guys learn how to use these and you can see the hospital response to that training program is very short-term. So, you'll continue to see those as we go around the country and perform these labs. I would also say we're having this call in Tampa because we're building a training and education center here in Tampa. We're about half a mile from the airport and it will give us another place where we can train folks very effectively on all of these different ways to use regional anesthesia to improve patient care and get them out of the hospital. So, I'll stop Randall on that point and I hope that that covers both of what we're talking about so far. You had a question for Charlie?

Yes. No, before we move to Charlie, is it fair to say that you've seen no change in the near-term growth trend with EXPAREL?

Yes. I'm looking around the room here at all my lawyers and stuff to make sure. Guidance is a funny thing, right? So, it's relative. So, I'm going to say yes and I'll get beat up later.

Randall early 2020 results have been pleasing to us. We're happy.

Okay, that's helpful. And then Charlie, it looks like you're containing OpEx spend. And a big part of the story that hasn't gotten a lot of attention is the operating margin or operating leverage opportunity. Can you talk about that? And maybe give us directional or specific color. Where can margins go to over the next three years?

From an operating margin perspective, so obviously, as revenues keep going up and as margins get into the mid-80s or high 80% range, we don't think that that is -- we're not going to have a lot of OpEx increases. I think from a sales and marketing perspective, we'll probably grow but we're going to start to reallocate what we do from an R&D perspective as we wind down spending on EXPAREL, we wind up spending on ioveraº, and the DepoFoam pipeline that Dave was describing those things. But we don't see that total budget changing that much. So, we really think that there is a huge -- hugely exciting story in the operating margin as you point out and that could be into the 40%-plus range over the five-year planning process.

Okay, that's great. Thanks guys.

Thanks Randall.

Your next question comes from the line of David Amsellem with Piper Jaffrey.

Thanks. Just have a couple of questions. First, Dave, you alluded to the J&J relationship early in your remarks and I wanted to get your latest thoughts on the future of that relationship and specifically how you're feeling about the economic structure of that relationship given where the growth of EXPAREL is coming from primarily? That's number one. And then number two is can you talk to the mix for EXPAREL in terms of the portion of volumes that are ultimately being used as a block versus infiltration? Just give us some metrics around that if you can? And then lastly on ioveraº, that $200 million target, does that include any of the osteoarthritis opportunities? Thanks.

Yes. Thank you, David. J&J remains a very important strategic partner for us. I mean just as a high point, it provides the opportunity for our folks to have an increased focus on the anesthesia community and on all of the things that are really driving our business. And I'll get that to the answer in your block question. J&J still owns spine, which is one of the fastest growing outpatient procedures. They still own sports medicine and we talked during the script about the pediatric indication and the strategic importance of that. J&J owns the pediatric -- just went right out of my head. The spine procedure for scoliosis, thank you Susan. Sorry guys. J&J owns the scoliosis marketplace. And so in addition to working with the ASC folks or with the orthopedic folks on moving TKAs and other orthopedic procedures through the outpatient environment, sports medicine and spine we have every intention of keeping that relationship in place and we are assuming that they will as well by the way through the conclusion at the end of 2021. We're preparing David like that's -- we're going to be on our own after that. Never say never. We'll just see how this all evolves over the next couple of years. But right now both parties are contributing materially to the growth that you're seeing on an annual basis here. So it still works in our favor. The blocks versus infiltration David, I think probably the easiest thing to say is that the vast majority of our growth on an annual basis is blocks. I think that was probably fairly apparent. The infiltration business is still there and it will always be there. For example, most of the pediatric use of the product and the studied indications are for infiltration. There are simply procedures that you just can't block because there's just no way that you can get to a nerve that would provide appropriate pain control without having to worry about motor blockade and some of the other things that the clinicians have to worry about. So I mean the best example probably is peds itself where we have -- we're having discussions with the FDA on a pediatric nerve block, but you can't figure out which one you want to do, right it's very difficult to figure out what nerve you're going to block in a ped. All of the normal things that we would do for an adult from a peripheral nerve perspective other than maybe an open compound fracture of the ulnar or the femur are just not apparent in children. Very much the situation we were in with bunions and hemorrhoids. I mean, we don't have either one in a ped so we're trying to figure out exactly what we're going to study. And then I would lastly say that the practice of medicine in many cases is driving folks to use both a block and an infiltration. And so you run the risk of double counting when you start to parse this out too specifically right? So, if you went to Walter Reed, for example, you would see them use a nerve block an adductor nerve block off-label. And then they would do a periarticular injection with what was left, one vial of EXPAREL but use both for a nerve block and an infiltration. So it makes it very difficult to tell you that it's 50/50. I would say that 80% plus of the growth anticipated this year is going to be associated with a nerve block. And as you -- I'll just make one other point David, before I move over to ioveraº. The point here is that when you -- not only can an anesthesiologist use all of their training and knowledge of the neuroanatomy, but when they do that procedure under ultrasound guidance, our confidence that we've got an effective block goes way up. So if you're going to do a knee in an ambulatory surgery center and I'm going to have mine done tomorrow by the way, so this is very relevant to me. You have to know that that nerve block whatever you've done for pain control is going to be effective because the patient is going to be there for a couple of hours. And you're not going to see them again. And so they can't rise in pain, all night. And so when an anesthesiologist does an ultrasound guided nerve block, our QA on that procedure is substantially better than when a surgeon is doing an infiltration without the guidance of ultrasound and all of the other things that the anesthesiologists know about. So it's hard to disconnect nerve block from ASC. Those two things are both driving outpatient growth. For ioveraº, we're still defining exactly how big the osteoarthritis market is. I would tell you that the early response from the marketplace is actually a little more positive actually than we would hope in some cases. We've had to put a muffler around the sales force to keep them from running all over the place because the doctors are -- their customers are so excited about being able to control pain for several months without opioids and without surgical intervention. And so we are starting with a relative soft launch coming out of our national meeting last year and we expect that that will ramp up over the next few years. The majority of this year's ioveraº revenue is from hospitals and you will see the osteoarthritis piece of that growth likely substantially materially over the next two or three years.

Okay. Thanks.

Thanks, David.

Your next question comes from the line of David Steinberg with Jefferies.

Yeah. Thanks. I was wondering if you could give us some more color on the rollout for C-sections. I know that EXPAREL is already approved for using C-sections as a nerve block indication. As such what, sort of, revenues have you actually generated in C-section? And if it's de minimis, what are the key factors that are going to drive the timing and the key factors that are going to drive usage? Is it this paper you indicated it will be completion of Phase IV studies? And then secondly, are there any situations that you've seen where some hospitals or purchasing groups might be delaying a purchase of EXPAREL as they wait for a competitive product and want to play off the two companies against each other to get a lower price point? And then along the same lines, Heron is making some news is that when they do get approved or if they get approved, when they launch their product they're going to come in at a lower price point than EXPAREL. And if they do so and some purchasing groups say something to the effect of, I know you're on the formulary, but there's a lower-priced product. You need to play ball with us coming with a lower price point. What would be your response? Thanks.

Thanks, David. First, for the rollout of C-section is the first two pieces of that are -- we referred already to the MEDNAX relationship where we've trained something in the order of 4,000 health care providers on C-sections and on OB anesthesia regional approaches. Again that relationship has been gated by the paper that we expect to come out any day from anesthesia and analgesia. So there's always some forward thinkers who are using the product because they've been to training sessions and because it's approved for plane blocks. And so it's an on-label indication. We would expect that the vast majority of the growth will come in as a future directed response to the first paper that showed a 52% reduction in opioids and that the vast majority of the patients in that took one or fewer opioids and shows the benefits of reduced opioids. These -- so that's sort of stage one and we expect that to be in the very near term days to weeks. The second piece will be as the CHOICE data. So CHOICE is the opioid-free program where we compared EXPAREL to a spinal morphine-based initiative. With a third arm where it was an EXPAREL TAP plus a very low dose of opioids and showed that you indeed can do an opioid-free C-section that you can have equal or improve pain control and without any of the side effects of opioids. The patients stay in the hospital for a shorter period of time or have the opportunity at least to stay in the hospital for a shorter period of time. The SOAP meeting is in May. We expect to have a series of abstracts and presentations there. And then that publication will come out sometime later in the year. So, we see all of those as acceleration points. I would also point out that C-section is an integral part of everything we're doing with the Envision relationship too. So Envision is also very interested in having a C-section or an OB anesthesia component to the training programs that we're going through with them. So, there are a number of critical accelerators as we go through the year, but it also is something that's going to extend beyond 2020. We wouldn't be able to train 25,000 healthcare providers all in 2020. So, that's sort of the C-section data. On the competitive piece, I don't believe -- I think it will be very difficult for a hospital to stock more than one product when you have such a clear differentiation for the safety profile of a product that the drug with the huge safety opportunity is also the product that's got all of the experience in the marketplace, all the protocols and the ERAS programs, all of the anesthesiologists train on the product, a vastly different label and all of these years of experience. So, do we have folks tell us that they're hoping that there's some pricing tension in the marketplace almost always pharmacists? Of course, we do. Our answer to that frankly is, you're going to have a product that has some safety issues, that's why it's going to have a black box. We have no intentions of having any pricing considerations as a result of a product that we don't think is anywhere near the equal of EXPAREL. So, from a pricing perspective on an ongoing basis, I don't expect any implications for EXPAREL at all. That’s all I got David.

Okay. Thank you.

Thanks.

Your next question comes from the line of Greg Fraser with SunTrust.

Good morning folks. Thanks for taking the question. In terms of competition to the extent that 011 can eat in to EXPAREL use, what are the settings or procedures where EXPAREL is used now that you think could be more at risk than others? And then, on C-section you mentioned a number of health care providers that you've trained on the use of EXPAREL. Can you put that into context in terms of the number of C-sections they represent or the proportion of the U.S. market they account for? Thank you.

Yes. It's -- they're all a moment in time when it comes to how many people have been trained for. When you start -- well, maybe I'll answer the question in one very broad way. There is no data source that tells you exactly how many C-sections each of the different anesthesia groups around the country do. You can extrapolate it from hospitals, but it's using different data sets and extrapolating them into a median of some sort. So, it gets a little bit sloppy. We're pretty comfortable that we've already trained OB anesthesiologists who would do more than 10% of the C-sections in the United States. If you look at anesthesia and CRNAs as a group, the folks who would be the largest providers of anesthesia there's roughly 110,000 of those folks in the United States. By the end of 2020, we would expect that we would have treated roughly 50% of all of those folks. So, if you said then that there were 1.2 million or 1.3 million C-sections in the United States and you just use the raw number that we've trained half of them on regional approaches, you would expect then that we would have treated or we would have the opportunity to be involved in 650,000 C-sections as we exit 2020. It's sort of a piece together approach, but it's the only data that we have. Does that makes sense?

Yes that makes sense.

And then -- yes and I mean you've got a small volume product that you can't dilute, you can't add pre-bupivacaine. I mean, I think they -- some significant issues about NSAIDs and neurotoxicity and a number of different issues that they're going to have to address. I think it's actually quite a good drug for bunions. I don't -- I think that's about the end of it as far as we're concerned.

Okay. Thanks for the color.

Thanks, Greg.

Your next question comes from the line of Liana Moussatos with Wedbush Securities.

Congratulations on a great quarter, great year. Can you give us an idea of what you think peak sales could be for pediatrics and for veterinary applications? And then for Charlie, any guidance on manufacturing expansion costs this year?

Let me make sure I got the question. You're asking about peds and vet, Liana?

Yes. Yes.

Okay. So, well, so let me give you a little bit of background at least. So, there's nothing approved other than opioids for peds. The enthusiasm in the marketplace frankly it's the first time I've ever had people get mad at me because it's -- it takes so long to get an FDA approval for something. I mean they just can't understand what's taking so long. When we look at the business ourselves, we have something like 1.1 million procedures. Remember, that we've done the work in scoliosis and cardiac surgery. So we've picked off the very top of the pain and difficulty and where patients might get opioids over and over again. And we project roughly a 50% market share at peak and -- but we lower the value of each of those patients not to be crass about it, but they would use less than a full vial of EXPAREL because of the milligram per kilogram dosing. And so we put that through at $200 a patient and you get roughly $100 million at peak. In fact, for all of these procedures, you get roughly $100 million in peak. On the vet side, you see consistent growth, but we don't have anything to do with it other than manufacturing Liana. So, we get a relatively modest royalty. The company that we sold it's called NOCITA. We -- they named it NOCITA. It was an Aratana product that's been purchased by Elanco. I know Elanco has some very specific growth thoughts around EXPAREL but it would be -- or NOCITA but it would be inappropriate for me to tell you to try to quantify that in any way other than the fact that, it is now in the hands of a much bigger organization that's thinking about outside the U.S. etcetera.

For pediatrics are you thinking about a smaller volume vial in the future?

Probably not. And I'll tell you why. One thing, we've learned in spades from the 10 ml and the 20 ml is that people usually start with the lower volume. Oral/maxillofacial surgery would be emblematic here. So they would start with a 10 ml dose, but in a very short time they would batch their patients so that they would take 4, 5 ml doses out of a 20 ml vial for cost reasons. And so the business aspect of this is that there's very little difference in the manufacturing cost of a 5 ml or a 10 ml vial. And so it's very hard to make the price materially different. It's never going to be approaching half. And so the anticipation in the marketplace is that, it might be the first purchase of somebody in a small volume facility, but almost immediately they would go to the less expensive larger SKU and divide it and that's okay within our package insert for four hours. So they're much more likely to batch the patients and pull all the doses in the morning and then use them as they go through the day. So it's -- the cost of a new line Liana is $3 million to $4 million and it takes 3 years 4 years to validate it. It's just not worth it at the end of the day. So I doubt that we'll have a smaller dosage form. Now we are looking at a prefilled syringe. We're building out a prefilled syringe line in our new facility out in San Diego for some of the pipeline stuff. If it turns out that we need it, we could very easily go to a 3 or a 5 ml prefilled syringe for another product. But right now that's not anticipated.

Got it. And then for Charlie any guidance on manufacturing expansion costs this year?

Yes as you can imagine those numbers fluctuate from year-to-year based on the actual projects. But in 2020, it's a little bit under $10 million of the total, is what we're anticipating. And I'll acknowledge that as a research and development those numbers can go up and down a little bit but that's what we're thinking at this point.

Thank you very much.

Thanks Liana.

Your next question comes from the line of Chris Schott with JPMorgan.

Great, thanks very much. Just a couple of quick ones here. Firstly when you think about acquisitions in biz dev should we be thinking about deals in the size range of what we saw with iovera? Or does the cash flow generation of the company you're expecting over the next few years allow you to look at larger transactions? And I guess a follow-up to that so if we're thinking about more smaller deals, how do you think about deploying that cash flow that's going to simply build up pretty quickly over time?

Yes. Thanks Chris. I'm laughing because it's the topic of conversation all day yesterday here. So we -- I think there's two aspects to that. We have the opportunity to do larger deals and as time goes on we are looking at larger deals. I don't think we still approached anything that would be considered transformative given the size of the EXPAREL opportunity and what we think the subarachnoid opportunity is for levobupivacaine. But we are looking at larger opportunities than we would have two years ago for sure. I think the other aspect of it is a deal that we just absolutely could not have looked at a couple of years ago because of a risk profile, now come into view as well because we do have the opportunity to have cash transactions. We are more open-minded about some things that might be a really big opportunity that might benefit from our expertise in clinical development and commercial development that would have been out of bounds a couple of years ago that might actually be in play now. So we're looking at all of those things. We are keenly aware of a combination of Randall's question and your question of what the cash starts to look like here over time? Maybe the most appropriate way for me to answer your question is, we've got a lot of BD opportunities. Ron and his team are very active. We've got them in both the pain space and in the regenerative medicine space. And so our plan in the 5-year plan is not to let that cash pile get high enough that we have to start to consider what are we going to do in terms of pressure from the other side because we've got too much money.

And Chris recall that at this point at least we have a convert that's due in April of 2022 amounting to $345 million from a principal perspective and our current position has been that we will have cash to pay that off if we choose to do that.

I think Chris, you're going to see a couple of transactions. We hope at least. We'll see a couple of transactions this year for sure.

Okay very helpful. And just a last quick one for me. As we think about the mix of business I think you talked a lot about outpatient. But sorry if I missed this, but what percent of your business right now comes from ASCs in terms of the EXPAREL business overall?

Yes. The only way we really get good data there is in and out. So we can tell you who was treated as an inpatient and who was treated as an outpatient. As we have this call, our inpatient business is about 40%. Our outpatient business and that includes HOPD and ASC and plastic surgeons in their office and oral/maxillofacial surgeons in their office, so again it gets a little bit messy. The market share in ASC is still modest single digits. The big part of that is HOPD looking for a home basically. I mean in a lot of places where we haven't had a full extension to ambulatory care is in states where for certificate of need reasons there aren't a lot of ambulatory opportunities. So another growth driver as we go forward is insurance carriers who are insisting on this ambulatory care that we referenced in the call. And so we continue -- we still expect that by 2025, 70% of the procedures in America will be done in an ASC setting. And that will afford about 2 million patients a year that fall within our TAM. So it's not a perfect answer to your question, Chris, but we are already an outpatient-levered company and we expect that trend to continue a lot. And just to put the final touch on that, because it's not always obvious to folks is a number of the tools that especially anesthesiologists would use in an inpatient setting like doing a thoracic epidural where the patient has to lay on their belly for two days just by definition, that's not possible in an ambulatory environment. So we not only see the patients moving out but we see the opportunity to have EXPAREL enable that transition or that migration are greatly enhanced. So that's why it's such a big part of our program going forward.

Thanks so much.

Thanks Chris.

Your next question comes from the line of Serge Belanger with Needham & Company.

Hi good morning. Just to follow-up on the prior question. I think in the past you said about 55% of EXPAREL use was outside the hospital. Where do you expect that number to be in 2020? And then I guess a follow-up to that is what would unbundling in the hospital outpatient setting mean as a growth driver?

Well, we are unbundled outside of the hospital setting. I mean there is a payment -- a CMS payment for EXPAREL outside of the hospital and the ASC setting today. So we have the answer to that. And CMS is paying $1.25 a milligram. Most of the commercial payers are paying 15% to 20% more than that. For -- we're talking about EXPAREL I assume. And so you continue to see -- well let me go back to your first question. So we said on the call that 60% of our patients now are outside the hospital. If we stick only to postsurgical pain as it would traditionally have been treated in the hospital setting it's probably in the 55% range, again. And that's going to continue to grow by 5%, 8%, 10% a year depending on which part of the country you're in and whether they actually have access to ambulatory care. So you can add over the next five years that that grows by something in the neighborhood of 5% on an annual basis. But remember it's a combination of hospital outpatient and ASCs. And in different parts of the country you will have a very high percentage of that in an ASC environment. And in certain parts of the country you will have a very high percentage of that in the hospital outpatient department. And I think the real interest here is that the payers, especially, the big payers are driving this transition because of the cost of care and the acceptance of patients to be treated in an ambulatory environment. So again it's not a perfect -- the data that you're asking for just doesn't exist in a way that I can just provide it to you or give you a reference. It's piecing together a number of different things. But today it's 55%. I think over this planning period it's going to be 75%. And I mean I can give you one reference. There was a paper written by the Campbell Clinic where they referenced by 2025 they expected that 17% of the surgeries in the United States would be done in an inpatient environment. And we agree with that by the way. And that those patients would either be medically indigent or they would have five or more comorbidities. So you get a pretty clear picture from that as to where the world is going here.

Okay. And then just on the ex-U.S. strategy. With the expectations of a European approval later this year can you just talk about how you plan -- your commercial plans there? And maybe just the market dynamics?

Sure. So we're there now. We've got a small team of people on the ground in Europe. We're going to do it ourselves largely because we can't find anybody like ourselves that does regional training and education and those kinds of things right? We're -- well the device companies don't train in the nursing staff and all the other places that you need to go with EXPAREL. They're more or less home in the OR. And the drug companies just don't do what we do in terms of day-to-day physical activities of training and education for EXPAREL. I would tell you that ioveraº is approved in Europe today so we have a place to start. And we expect our group to be going alongside the regulatory process and making sure that we're engaged in key markets. We have -- we don't intend to launch on a Pan-European basis. We have five or six countries that we will launch with where there's a definition of a need for an opioid-sparing alternative and we can get a pricing profile that's appropriate for the pricing strata that's been established in the United States. And we will hire -- on the current plan we hire a couple of dozen people. It would be a mix of reps and medical science liaisons. We would focus five or six countries and we are already there working with the KOLs and most of those KOLs have learned a lot about EXPAREL by coming to these in the United States. And so we're well downstream in terms of do some clinical work and being ready to launch in Europe. In Canada, we've got a very similar situation, but even more exposure to EXPAREL. At ASA at the anesthesia meetings, for example, we have a lot of interaction with the folks from Canada from the anesthesia community. And so you can expect that we would launch in a different place there than we did here. We won't go through all of the issues associated with trying to come up with a different best practice technique for hundreds of different kinds of surgical procedures. We will more than likely work on the high end of the spectrum with anesthesia using ultrasound guidance and doing nerve blocks. And that's the way the dossiers work. Hopefully that will be the approval process and that's the way we'll go. And China -- look the Chinese sent us to a very specific place to do a PK program in Hong Kong. That trial has been done. The data looks good. We're on hold waiting for the -- all of the issues with the coronavirus to clear up so that we can go back and have a meeting with their regulators on what the next step is going to be. Anything else Serge?

No. Thank you.

Okay. Thank you.

Your next question comes from the line of Gary Nachman with BMO Capital Markets.

Hi. Good morning. Dave, just describe the training program with Envision a little more in terms of how many anesthesiologists you could reach and what sort of impact it might have? It's early but have you seen any pull-through from that program yet? And then just talk about ioveraº in the near-term how you plan to expand the use with promotional efforts and additional clinical data? The guidance $15 million to $20 million. It's still a long way to go to the $200 million. So I just want to have a better sense of when you think you'll start to get better traction with that?

Yes. So we signed the Envision deal two weeks ago, Gary. So I can't tell you that we have anything that I can point to. So how does it work? So these innovation labs we've got a group inside our organization that does this. And we have a very strong relationship with the KOL. So if I give you a really quick snapshot so there would be a didactic portion where we would talk to them about all of the aspects of multivesicular liposomes why they stay where they put it. We are one of the few companies in America that has access to a virtual cadaver. So we can put on the funny glasses and we can look and we can strip out the muscle, we can strip out all the blood vessels, we can look just at the nervesm we can put the arteries back on so that people can see how close the artery's to the nerve so they can understand how to put the drug in different places. So there's a section there that would be more or less almost a mini course and run by one of the KOLS by the way most of these -- the vast majority of these are CME. And then typically, there would be five stations each manned by an anesthesiologist KOL. And the group would break-up and they would go with live models. And they would see, again using ultrasound guidance, exactly how to pick out, where the different nerves of interest are. And so that's pretty much a freewheeling session about – I know this guy that's doing this block can you tell me, if you were going to do that block what would you do? How much do you use? What's the volume? What are your safety considerations? Am I worried about hitting an artery? If you're doing a brachial plexus block am I worried about hitting the phrenic nerve? All of those different kinds of things and those go on Gary for hours. As a matter of fact, we've had them that were scheduled to go for 90 minutes and they've gone for three or four hours. And so we'll run those in places that has already been agreed with Envision around the country through the year. The first one, and I won't give you the specific numbers but I would tell you the first one we did we were prepared for x number of folks and more than two times that number of folks showed up. So that will give you an idea of how much interest, there is in learning this. And so as we go through the year, we'll continue to do them. And then like I said, this is the primary activity of this innovation team that we have. In each Envision center, there is – there are also resources that are dedicated to this endeavor and they have all of the ERAS protocols. And most of what's been done in terms of the training sessions are on video. So they can watch videos, they can actually pull up these protocols and then they can use our proctor palavers, if you will to have one of the KOLs go into their center and teach them how to do one or two specific blocks, if that's what they're looking for. It's less of an open book, if you will. It's more we need to learn how to do TAP blocks, or we need to learn how to do pec blocks or we need to learn how to do something specific, right? It might be an OB anesthesia group that's generally in a different wing of the hospital just for C-sections, but I think you get the idea of what we're doing and why you'd be so excited about it if you could treat half of the health care providers in America by the end of this year. It truly is a big opportunity for us. Is that okay for that one for Envision?

Yeah. Yeah. That was very helpful. Thanks.

And then iovera fair enough. Fair enough. And these are – this is not a linear progression, right? This is a – this is more – this compounds itself as you grow in the marketplace. So I fully understand your comment and your question. So on the on the hospital front, we've got a bunch of people out there who are working on iovera plus EXPAREL and as we've said a couple of times we've got some big IDNs that have already signed up. We think that that's probably the majority of the $15 million to $20 million this year. And I think – I don't think Charlie didn't pull out iovera specifically. But I think everything that was said about EXPAREL in terms of trying to provide a conservative guidance so that we don't have many of the issues that we went through in 2019 also applies to iovera. On the other side, Gary for OA, other than me and a couple of other people that have been going out and talking to folks and just sitting in doctor's office and talking to patients and stuff like that we really have done very little. In MyoScience, we just didn't have the resources to do that. So we've got 15 regions. Our commercial organization is made up of 15 regions. We now have a dedicated iovera person in each of those 15 regions. So they own the iovera goal and we'll work with their EXPAREL counterpart to – on the EXPAREL plus iovera piece of this, right? In five of our regions, we are also putting out a person who is an iovera OA person. So they will only work with orthopedic groups and spine medicine groups and CRNA groups just as a point of interest. We've got several CRNA groups that are looking to open 24 hour a day seven day a week non-opioid clinics around the country. And of course EXPAREL and iovera are both a big piece of that. And so we're working with folks. We were out a couple of weeks ago with a book of different posters, right? Do you want – for your treatment room what do you want? And just to give you a sense the docs say I want a poster of how iovera works. And what freezing the nerve actually means. I want a poster of TKA, so that I can show them how I can use the two of them together eventually. And then I'd like a poster of – as a matter of fact this is an actual case. Can you get me four or five posters because I'd like to go around and put them in the locker room at all the big golf clubs in the area that you can get – without any drugs without any surgery you can get plenty of relief from this that will take you through the golf season if we do it in May, June in upstate New York for example. So that is much more of a nascent opportunity, but we think it may actually be bigger than the hospital opportunity when it's fully implemented. And so we're just starting here. So you can think about $15 million to $20 million and almost as ante to get us in the game and to pay for all of the resources. But as we've said with the new pricing system, we still believe that we will break even on a P&L basis during the back half of this year and then from there on you can see that it will be off to the races.

Okay. And then just one quick follow-up. You addressed the BD questions earlier. But in terms of your pipeline do you think you have a lot more opportunities to develop products internally? That's been an area where it's been fits and starts over the years. So is that something that you think over time we'll see more coming out of your pipeline? Thank you.

Yeah, no, thanks Gary. We think that the subarachnoid anesthetic local anesthetic – we've talked about levobupivacaine being the actual API – is the only thing in our pipeline including BD or our own pipeline that has the potential to be as big as EXPAREL. So that's really exciting. We've got a few others that look at where opioids are the standard of care and where we think we can replace opioids and dexmedetomidine is one of those. We've just finished a very formal review Gary of using an outside resource to look at actually over 3,500 different assets. And we do have two or three more that we're going to examine here over the next couple of months to see, if we want to commit to the resources that do them. We're looking at those alongside everything that Ron has got going on and in many cases we have to be – you look at a $100 million product that we can develop in DepoFoam versus something that we think could be much larger, where we could use the same clinical resources for a merger or an acquisition candidate. So we're in the middle of that evaluation now and I would say there are other opportunities. They're small. And I don't know – I would expect fully that you'd see a couple more but probably not, there's not 10 more, if that's an appropriate answer to your question.

Okay. Yeah. That’s great. Thank you.

Thanks, Gary.

Your last question will come from the line of Ami Fadia with SVB Leerink.

Hi. Good morning. Thanks for squeezing me in. You gave us some good color on kind of how EXPAREL being used in the inpatient versus outpatient setting. A couple of follow-ups on that. Do you think that there is a trend from HOPD to ASC? Or is it -- is the bigger trend from inpatient to outpatient? And then, if you could sort of talk about -- in your current sort of base business, which is basically, let's just say, 2019 revenues of EXPAREL. What is the mix of views across infiltration and then all other blocks whether it's TAP blocks, region blocks, nerve blocks? That would be helpful. And then I have a follow-up. Thanks.

Okay. So, the medical community and the payer community, considers HOPD and ASCs to be not inpatients, right? So, it is a backwards thought process I'll have to admit, right? But, you see inpatients and generally you have a DRG and a prospective payment that covers that procedure and that's what defines a patient who is a traditional inpatient from an HOPD where they still have the cover of being close to a hospital if anything happened, but they are treated primarily as a patient that will be in a 23-hour patient environment. And the only way you can define that, I mean in terms of how the payers are thinking about it, is you will see TKA, for example, CMS. So, hips and knees were on an inpatient-only list and spine frankly until very recently. And then, you see CMS move things to the HOPD environment. And so the community is given a couple of years to define how do they do that? Could they do that? Were they successful enough that there could be a progression then from an HOPD to an ASC? And in fact you saw TKA move from an inpatient-only to an HOPD now to an ASC. And you can see the price or the reimbursement for those different procedures follow that line of thinking, right? And you can see that a knee, for example, is several thousand dollars less expensive in the ASC environment than it is in an inpatient environment for a CMS patient for example. So, that is -- that's not a trend. I mean that trend has already happened. And what's keeping it from being more aggressively instituted frankly are people who can provide regional anesthesia under ultrasound guidance because it is really a nerve block world, right? You can't -- you need to know that the drug is working, and you are on a much more strict time line. So, you would much rather have the anesthesiologist give the pain control before the surgery than you would have the surgeon give the pain control after the surgery, because you are moving -- you are a slave to throughput in an ambulatory environment. And so, you have to be able to have some confidence that you can actually do four, five, six knees in a day using one room in an ambulatory center if that makes sense. So, in your question on what's happening now. I think in the inpatient environment, it's not an infiltration in many cases or a nerve block. It's how do you provide a completely different level of pain control? So, in an inpatient environment where you have the luxury if you will of using large doses of opioids, because the patient was going to be in the hospital for three days, four days anyway and you’re torturing the nursing staff because they have to do vitals every time they hit the pain pump for example, but that's an option in a hospital. You can do a -- you can put them on a pain pump, and let them dose themselves every few hours or you can do a thoracic epidural. All of those things would provide pain control. They would also keep you from moving that patient to a 23-hour stay environment. And so the art form here if you will, and we just did a 600-patient study with Cleveland Clinic that you'll be reading fairly soon where we looked at the ability in large abdominal wounds to replace a thoracic epidural with an EXPAREL TAP. And the data is quite intriguing. The pain control opportunity is there. And so, add large epidurals to an area where an EXPAREL TAP allows you to move that patient to an environment that doesn't require a pain management technique that requires that you stay in the hospital. So, it's not really infiltration or nerve block, it's more replacing other modalities with a regional nerve block which is the EXPAREL TAP in the situation. Does that make sense?

Yeah. That's helpful. And what's the mix of how EXPAREL is being used today, whether across infiltration versus TAP -- irrespective of the setting where it gets used?

Yeah. It's -- there's no real answer to that question. I mean I'll give you what we -- how we plan against it. It's very clear that there's more nerve block than there is infiltration and that almost over 80% of the growth is in nerve block, and I include field blocks in that right? So if you said pure infiltration, I would say it's less than 40% and decreasing as a percentage of the total. Now, it's not growing so it's going to be decreasing in a market that's growing by 20-ish percent just by definition, right? And then nerve blocks and field blocks are virtually all of the growth going forward. But you always have to be a little bit careful, because as we've already said pediatrics is going to be infiltration again. So, you're going to have a dynamic a year from now when we're going to be launching into pediatrics and that one million patients are going to be almost all infiltrations because there's nothing to block, right? It's just very difficult to block something in a four-month old going into cardiac surgery.

Okay. And then the other follow-up was about...

That's a black and white world for sure.

Yeah, yeah. No. The other question was about kind of how you think about the sort of peak revenue potential of kind of the five-year plan for EXPAREL. We've seen the products use -- or sort of growth accelerate actually more in the recent years, and it seems like it's driven by the nerve block or the regional block use. Are you seeing a sort of a greater open-mindedness from these institutions to pay for a product that's a couple of hundred dollars as opposed to using bupivacaine for these nerve blocks and regional blocks? And how do you come up with that billion-dollar opportunity? If you could sort of help us think about how you think about the sizing there? That would be helpful.

Sure. So, when we find somebody who's trying to do regional blocks with bupivacaine, that's actually a best case scenario for us because they're getting eight, 10, 12 hours depending on which block you're talking about and how much volume they use and how much free bupivacaine if any they use for example. But in most cases -- and in most cases, when you switch from bupivacaine to EXPAREL, you move that from a few hours to a few days. So, I'll give you probably the best case example that I can give you. The docs used to do what they called rescue TAP blocks. And so you would have surgery. And then after the surgery the patient would wake up in pain and they would do a TAP block and the reason that they did that is because they were trying to extend the duration of that TAP block as long as they could. And generally, they would be trying to add dexamethasone, they would try to add a whole bunch of things to get in the 14 to 16-hour range because the last thing you wanted to do was to do a TAP block with bupivacaine at 3 o'clock in the afternoon. That meant that the patient was going to get 10 to 12 hours activity which meant they were going to wake up at 1 o'clock or 2 o'clock in the morning in pain again and then somebody had to do another TAP block because the drug didn't last long enough. And in fact, Ami, a lot of places stopped doing TAP blocks because of what was required to train the staff and actually do the procedure when you were only getting 10 to 12 hours of relief. Juxtapose that against EXPAREL where now because you're getting several days, you actually do it before the procedure. So, today if you were going to get a brachial plexus block and you were in a forward-thinking institution and that list is growing by the way, people who are focusing on regional approaches that's the whole Envision MEDNAX. That's the basis of all of these partnerships we have. If you were going to get a brachial plexus block, you would go into a block room and they would say, Ami, -- I don't know how old you are you're going to get a left brachial plexus because you're having a rotator cuff. We're going to give you 10 cc of EXPAREL and five cc 0.25% bupivacaine. The fellow would have you up on an ultrasound machine. The anesthesiologist would give you that dose of EXPAREL. Now, you would have three or four days of pain control on board. You haven't had an incision yet. You haven't had anything. And these patients are -- and that's why you can move that patient to an ambulatory environment and the majority of those cases today are reported to us as being discharged on Tylenol. And so it changes the basic foundation of how we practice pain management. And so that's why TAP blocks -- people say TAP blocks have exploded. No, TAP blocks have been around for a very long time. A technology that allows the TAP block to be effective for several days is the beauty of EXPAREL. I'm not paying us a compliment, I'm just saying, that's just a fact, right? And so you can see why then an anesthesia group who gets paid for these regional approaches who can actually charge for moving a patient to a less expensive environment and actually have a partnership with the payer. If you were from a big payer group, Ami and we came to you and said, hey we can take all of these patients and we can shorten their length of stay by a day or day and a half, by going to a regional block program versus keeping them as an inpatient. That's what's happening. And that's why these people are coming to us and saying, can you train us on how to do all these different things?

Got it.

Makes sense?

Yes. Thank you. That was helpful.

And so your $1 billion. So, your $1 billion question then is. So you -- so as we started out with Randall's question, you can project out over the next five years the growth of regional anesthesia. And we said early on, that only 15% of the cases in the best case scenario are being done regional now. And so you can project out the growth of what we just talked about expanding and then you can talk about the growth of folks going to an ambulatory center where you can't use all these different modalities and you have to use something where the patient doesn't get huge doses of opioids, et cetera. And if you marry those two things together you get a percentage growth on annual basis. And then if you add to that peds, we've already talked about we think that's $100 million; C-section, we think that's a $100 million; lower extremity nerve block, we think that's $100 million; rest of world, we think that's a $100 million. You could be yelling at me three or four years from now telling me that I was really conservative.

Okay, that was helpful. Thank you so much.

Thanks.

I would now like to turn the conference back -- Yes sir, I would now like to turn the call over back over to Dave Stack, Chairman and CEO for closing remarks.

Good. Thanks for your questions and for your time this morning. We look forward to providing additional updates in the near future. Next up for us is the Barclays Meeting in Miami. We look forward to seeing you soon. Thanks everybody.

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