Good morning, ladies and gentlemen, and welcome to the Q3 2020 Pacira BioSciences Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Susan Mesco, Head of Investor Relations.

Thank you, Debra, and good morning everyone. Welcome to today's conference call to discuss our third quarter 2020 financial results. Joining me on today's call are David 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 concurrent 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 the Company's filings with the SEC, which are available from the SEC or our website. With that, I will now turn the call over to David Stack.

Thank you, Susan. Good morning, everyone and thank you for joining us to review our third quarter financial results and recent business highlights. The 2020 COVID-19 pandemic continues to escalate our nation's opioid crisis with the rising number of drug related fatalities, given the health, social and economic disruptions facing our nation. Never before has there been a more urgent need for opioid-sparing pain management. I'm incredibly proud of how Pacira -- the Pacira team has remained steadfast in advancing our mission to provide an opioid alternative to as many patients as possible. Our efforts to-date position us to deliver a solid rebound from the unanticipated interruptions of patient care during this ongoing pandemic. We remained nimble and have adapted by deploying digital and educational tools in order to meet the needs of our customers, including the recent grand opening of our state of the art Pacira Innovation and Training facility or the PITT, which I will cover in greater detail shortly. As Charlie will discuss later in this call, we reported net revenue of $117.5 million for the third quarter, an increase of 12% over last year. The overwhelming needs of the marketplace and the transformation underway in the ambulatory surgery center model have allowed EXPAREL average daily sales to return to year-over-year growth in June and attractive trends continue with average daily sales in July at 109%; August, 111%; September, 110% and October through this morning, over 111% of 2019 levels on a date worked basis. Today, we also reported $34.2 million in adjusted EBITDA for the third quarter, as we continue to grow our topline, while our margin simultaneously improves. We are in a very strong position to deliver accelerating profitability since we are supporting this robust growth with appropriate investments and operating expense. We are also…

Thank you, Dave, and good morning everyone. Before reviewing our third quarter results, I'd like to remind you that I will be discussing non-GAAP financial measures this morning, which we believe more accurately reflect our business results. A description of these metrics along with our reconciliation to GAAP can be found in the press release we issued this morning. I'll begin by briefly echoing Dave in saying, we remain very confident in the future of our business. The fundamentals are strong and we are on track for accelerating top and bottom line growth as states approach to normalize and growing levels of elective and emergent procedures in hospital inpatient, hospital outpatient and ASC sites of care. Furthermore, our organization is well positioned to capture the increasing number of procedures moving to the ASC setting and COVID-19 has only accelerated this shift. We ended September with more than $575 million of cash and investments. This strong foundation and the cash generating nature of our business leave us well equipped to both fund the repayment of the principal amount of the remaining April 2022 notes and continue to invest in internal and external growth opportunities that align with our mission. Third quarter total revenue of $117.5 million were approximately 112% of total revenues for the third quarter of 2019. Net product sales of EXPAREL were $113.7 million, which was approximately 112% of the third quarter of 2019 as well. For iovera, we reported net product sales of $2.7 million for the third quarter of 2020 as compared to $2.6 million for the third quarter of 2019. We kicked off the relaunch of iovera at our national meeting in February. However, the launch was interrupted in mid-March when TKAs in the hospital outpatient setting were postponed due to COVID-19. However, our focused effort…

Thank you for that review, Charlie. We have come through a difficult time and current market trends are indicating a positive rebound. We will continue to monitor COVID-19 and its impacts on the market, patient care and the safety of our employees will remain -- will always remain the number one priority. As we look ahead over the coming months, we have several value creating milestones we expect to achieve. We look forward to securing regulatory approval for EXPAREL in Europe, expanding our US label to include pediatrics and reporting top line results from our lower extremity nerve block study and taking full ownership of the EXPAREL franchise as we wind down the partnership with DePuy Synthes. On the iovera front, we have the completion of the prepared trial next year and data from the iovera registry becoming available to our customers. Importantly, we have a financial foundation from which to achieve our goals and we are well equipped to quickly transition into a powerful earnings story with top line year-over-year growth in the high teens, steadily improving margins from the mid-70s to the mid-80s percent and appropriately managed operating expenses. And with that, I will turn the call over to Deborah to begin our Q&A session. Deborah?

Thank you. [Operator Instructions] Your first question comes from Randall Stanicky with RBC Capital Markets.

Here you go. Okay.

Yes. Can you hear me.

We can Randall. Thanks.

Great. So I'm not going to ask you for 2021 guidance, but if you look at consensus, it's still roughly at the same level as pre-COVID implying close to 30% growth built in for next year. I suspect, that's assumption for either normalization and/or some volume catch up, so I don't want this to become an issue for the stock. So can you provide some context as to how you're thinking about the recovery path under various scenarios, including a vaccine in the market next year. I mean, I guess, do you see normalization and can you quantify for us how much pent-up demand that could be going into 2021? That's the first question. And I know it's a big one. And secondly for David, Charlie. I'm getting a lot of questions around whether Pacira would do or is looking at a large transaction. If you could provide context as to your current thinking on business development, that would be helpful. Thanks.

Thanks, Randall. The first question is the wholly grail, I guess, in what we're thinking is that, we still believe that over 90% of the procedures that are being delayed will be done. So we are preparing for 2021 to be a substantial improvement over 2020. Whether that is 30% or not, it's going to depend a lot on how [Technical Difficulty].

Ladies and gentlemen, please standby. Okay. Our leaders disconnected. You may begin.

Thank you. Sorry, guys. We had a power failure in New Jersey. The power went out this entire building. So timing is everything, I guess. So Randall, the second part of your question is, as we follow this IQVIA data, there is between a 30% and a 40% delta of the performance of Pacira versus the performance of elective surgeries in the United States on a week-by-week basis. So from a manufacturing perspective and from a resource perspective, we're getting ready for, as you suggested, something like a 30% rebound. To answer your question more specifically and this is with some help from the folks that do this stuff for a living, we're expecting that the ambulatory surgery centers are going to remain the center of recovery here, especially for elective for surgeries through the Q1. What we're being told is that we can expect a more normalized opportunity as we get into the second quarter of next year and so it isn't a perfect answer to your question. But we see some sales from inpatient procedures like C-sections and things where the baby is just not going to wait. So we have to do those procedures. We see the elective surgeries being impacted by the spikes not so much because of surgery, but because of the tracing in the fact that so many patients become unavailable to surgery as a result of the spike in the tracing. And so we are getting ready to have enough inventory to cover any expected issues as we come forward, especially as we prepare for the continued growth of C-section and launching pads at the end of the first quarter. So come back at me on that, Randall, if that's not -- if you have a specific question inside that context. On the BD front, we have a number of opportunities that we're addressing. I don't know how exactly we would define a large opportunity or a transformational opportunity. We have no financial or philosophical issue with a large opportunity, if we find one that's appropriate for the business and would add real value to our shareholders. But as we sit here today, I can tell you that I don't have anything like that in hand or even in the pipeline that I'm aware of.

Great. Thanks, Dave.

Thanks, Randall. Deborah, are you there?

Yes. Your next question comes from David Amsellem with Piper Sandler.

Just a couple, first, Dave, you talked about at least qualitatively the cost structure, and I think the way you phrased it is appropriate management OpEx. So I wanted to dig a little deeper into that with the unwinding of the J&J partnership. Can you talk to what that means in 2021 and just generally for your sales and marketing spend. That's number one. And then unrelated to J&J, how we should think about the trajectory R&D spend in the absence, of course, of any -- of any transactions. So that's number two. And then lastly, can you just give us a sense of as we move into 2021, what portion of EXPAREL usage you think is going to be coming in -- coming from the ASC setting. I think you had said in the past, maybe early this year was something around 60% of volumes are coming out of ASCs. Where do you think that's going to be trending over say the next six months or so? Thanks.

Yes. Thanks, David. So on the OpEx question. Well, let me separate J&J from OpEx for one second. So we really haven't had any real benefit of the J&J partnership as a result of COVID since mid-March. So -- and if there is any anticipation of what the world were look like for Pacira without Johnson & Johnson, I would suggest that we've already seen that for six months and so everything we reported today really benefited very modestly if at all from the Johnson & Johnson partnership. So as we look forward, our strategy and what you will see in 2021, is that something in the mid-single digits would be the increase in operating expense that would accompany a 20% plus increase in revenues and we also expect to benefit modestly in 2021 but very substantially over the five-year planning period and operating margin -- gross margins as a result of the 200-liter facilities coming online, both in Swindon and in San Diego later in the planning period. So appropriate OpEx and as we talked about during the call, we've added approximately 15 people in the customer facing organization. As we exit this year and get into next year, there is a plan for a handful more than that. But that's really all required. And again I'll remind everybody that as we move from a surgical audience to an anesthesia audience, the ROI, in our update where it transforms itself to be very much higher and so we are in a very good spot in terms of being able to cover the marketplace. We're having a fairly substantial disconnect between our revenue increase and the need to cover that with an operating expense increase. Second is the R&D spend. The first thing, David, is to just remind everybody that…

Yes. We hear you just fine. And that's very helpful color. Thanks.

Thanks, David.

Your next question comes from David Steinberg with Jefferies.

Thanks. And some of your new near term growth opportunities, specifically C-section, pediatrics, first for the cesarean piece. It's been on the market for a while, not too long. I was just curious if you could comment on the growth trajectory or perhaps even more granular what percent of the opportunity have you already captured. And then in terms of the slope of the trajectory, on the one hand some of the KOLs we've talked were very positive. They're seeing patients in non-opioid solution, patients getting out of the hospital more quickly and lower costs because of that. On the other hand, it's not an ASC targeted indications. So you're still facing some of the issues you had. Historically the hospitals where you have hospital pharmacies pushing back because of the differential in price versus generic bupivacaine. So, could you comment on the trajectory and then similarly with pediatrics. It's not yet approved in the market, the first part of that is, do you think some of the uses already off label. And also, could you comment on the potential trajectory once you get approval. Thanks.

Thanks, David. First on C-section, maybe I'll start with the end and say that the, our ability to address the opportunity is still very small, right, I mean more nascent as it relates to C-section now. We are also in a very good position. Remember, we had a -- we have a relationship with MEDNAX where we train the maternal fetal MEDNAX group that represent maternal fetal services in over 500 hospitals in the United States. So we see C-section is growing quite rapidly. Although still a modest percentage of our $400 million plus in revenue. We expect that the slope will continue and your question is insightful, David. We've got a number -- we know of a number of places where private equity groups and OB/GYN groups are building birthing centers. To me it sounds like what we saw in the early days of the excimer laser where these centers are being built fairly quickly. We know a couple are going to actually open in November. We are based on the fact that mom can stay for one night or in some specific cases, no nights, replacing 3.3 days to 3.5 days, which is a standard of care when opioids are used for pain control, allows this procedure to move to an ambulatory environment and move away from the COVID exposure for mom and baby. There is a number of things that we've had to tackle as we've gone through that from an operational perspective. How do we get the pediatrician to discharge the baby even when the OB/GYN is available to discharge mom, et cetera. So there is a number of tactical things that we're working on. So I think as you see more non-hospital facilities open for as bursting centers, you're going to see the velocity of…

Your next question comes from Balaji Prasad with Barclays.

Hi, good morning and thanks for taking the question. Dave and Charlie, couple of questions from me. Firstly, your comment about the role of EXPAREL in non-elective procedures, could you expand further on this as to what percentage or what segment of procedures in cardiothoracic our oncology is non-elective and how could that be a growth driver? Secondly, as your transition to supporting ortho patients for iovera, again how should we factor this in terms of numbers and what does this shift in strategy imply? And maybe last one, can you speak a bit more about the focus on regenerative medicine, either in the context of sports medicine or beyond that and how do you envisage this business complementing the pain management component? Thank you.

Yes. Thank you. So for non-elective procedures, the obvious one is C-section, of course, but if you went to a place like MD Anderson, you would see that there is a pain protocol written for virtually every major procedure that they do, so lung resections, OB/GYN, cancer resections, et cetera. It's a bulking procedures EXPAREL as a standard of care. So you would see the same at the Cleveland Clinic. You'd see the same at Mayo, especially in the Arizona facility. So there is a base of business that is growing on an annual basis that is -- that it will be unlikely that that would move to the ambulatory environment. Pretty much the same with some of the cardiovascular stuff that you referenced. You don't see a bypass machine being anything that's going to be used routinely in an ambulatory center. So there is a stable of procedures that we think will remain in the hospital environment as we go forward. And if that's 25% of a very rapidly growing revenue number, that's an important piece of our business and when we want to pay attention to and keep, keep working with the customers on. When we -- your second question was around iovera and ortho, and -- so there is two things here really. One is the, what we basically purchased and that was a, the use of iovera in a total knee arthroplasty to try to provide a prolonged pain control opportunity, so that patients could have a more appropriate physical therapy opportunity and that's why we've focused on functional recovery. And by the way as we talk to self-insured employers like the labor unions and a lot of the big companies, what they are interested in is, how do I get this patient back to work…

Thank you.

Thanks.

Your next question comes from Greg Fraser with Truist Securities.

Good morning, folks. Thanks for taking the questions.

Hey, Greg.

I'm curious if you're seeing more commercial payers whether national or regional implement policies like what United did last year or if you're aware of payers considering similar policies and then on the European part...

I'm sorry, go ahead, Greg.

Yes. Second question is on the European markets that you plan to enter. If you could just speak to the dynamics in those markets and whether they are parallels with the US in terms of the shifting of procedures from hospitals to outpatient, that really drive the need for our product like EXPAREL.

Yes. Thank you. So on the first question, absolutely, is the answer. And we see, for example, Aetna is now paying for HOPD in several states. So in addition to following CMS we see 92, 90 and paying for ambulatory surgery. They have now seen that they can actually move these patients to these less expensive environments and so many of the national payers are paying for EXPAREL in the hospital outpatient department as well as the ASC. We also see many of the self-insured employers and just as a frame of reference, 85% of all the companies in the United States who have more than 5,000 employees, are self-insured. And we're working with those self-insured payers to demand that they have an opioid-sparing platform in their policies. And so working backwards essentially in saying, if you're a police union, if you have bus drivers, if you have people at the United Auto Workers, the last thing you want is folks in your facility who are on heavy doses of opioids and who are handling heavy machinery, et cetera. So we're working with those folks to demand that they have opioid or low or no opioid opportunities. So stay tuned, but we've got dedicated resources now Greg. They don't do anything but work with self-insured employers. Don't do anything but work with many of the concierge services that are popping up, that have got to find expertise, orthopedic surgeons generally by zip code, who are low opioid or no opioid users, who are treating their patients in the ambulatory surgery center. So many of these big self-insured employers are signing up with folks who have already defined where they're going to send their total joint patients and their spine patients in each zip code around the United States. That's all…

Great, thanks for the color.

Thanks, Greg.

Your last question comes from the line of great Gary Nachman with BMO.

Hi, guys.

Hey, Gary, can I interrupt for one second? Deborah, we don't want this to be the last question. Okay, so...

Okay. Thank you.

Go ahead, Gary, sorry.

Okay, no problem. So just a few follow-ups. First on the ASC ramp, are you offering a discount on EXPAREL and is that helped increase used in that setting. So how does net revenue per procedure in that setting differ from the inpatient setting. And then talk about the evolving dynamics. The efforts going after the anesthesiologist versus the orthopedics, how the sales force is changing there and how much more will the future growth be from the anesthesiologists? And then just one last one. Are you expecting that a generic will file at some point when the IP runs out next year or the barrier is still too high and are you planning to have any additional IP that could hit over the next couple of years? Thanks.

Yes, thanks Gary. So in the ASC, we do not offer any discounts or rebates of any kind. So I haven't actually thought about it this way, Gary. But I guess our ASP in that environment is actually modestly higher than it would be in an inpatient environment where you have big hospital chains, et cetera. And the basic difference there is that in a hospital, a pharmacist looks at us is a cost. In the ambulatory center, the folks who manage the ambulatory center look at EXPAREL as the reason that they were able to treat patients with low or no opioid treatment strategies. They can't use PCA pumps. They can't use thoracic epidurals et cetera. So we are not the bad guy in the ASC. We are the person who actually made the ASC transition possible. So a much more appropriate environment for us and as we go forward, I don't see that changing any. The only difference in the ASC environment and this probably would not be a surprise, is when you're using peripheral nerve blocks and this would be the case with lower or with brachial plexus nerve block, it's a 10-ml dose, right. So by definition and the ASP per case is modestly lower. But the WAC price of EXPAREL on a vial basis is actually modestly higher. So then the second question was around anesthesia and surgery and the dynamics, I guess I'd start out Gary, by saying everybody is interested in pain control, everybody is interested in reducing the use of opioids. The surgeons are -- would struggle in both the inpatient and the outpatient environment with adding a few minutes to the case by having to do an infiltration at the end of the case. And they are surgeons, right. They're not…

Okay, great. Thank you.

Thanks, Gary.

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

Hi, good morning. Thanks for squeezing me in. First question is around recent monthly sales trends and seasonality. I think in the past or historically third quarter has seen softer external sales growth followed up by strong fourth quarters. Did you see any of that seasonality in the third quarter and should we expect, I guess historical strong fourth quarters to continue in this environment?

That's the equivalent of Randall's question, I mean that's the question you do it, right. I mean so, in the third quarter, we were not disappointed with between 10% and 12% growth on 2019, given the pandemic and all the other issues that we have in the marketplace. Q4 is generally driven by elective procedures and the fact that patients have satisfied their deductible or it's really driven by insurance. Should there be a modest impact in the fourth quarter, is not as many patients have insurance, given the unemployment rate, probably, but we haven't gotten far enough into the quarter yet to fully understand that. But I would also say at the same time that the impact of COVID and the spikes of COVID, I think lay over any impact. We're going to see of patients not satisfying their deductibles in the year. I think having a patient, it's afraid to go out of their house or a patient who can contact trace, so that they're not available for surgery. Those are much bigger issues than patient insurance and having paid their co-pay so far. So, I think Serge, it's one big question that we're trying to answer and I think it's largely related to the patients psyche and on a state by state basis whether they're willing to actually go out and get the surgery, if the capacity is there.

Okay. And second question was about EXPAREL use in hospitals and it was a big movement towards ASCs and HOPDs, but has there been any change with this movement for Experal access or EXPAREL usage?

In the hospitals, no?

Yes.

No. The change actually is in the availability of the hospital beds for elective procedures. But what's happened in many states is, the governors have sequester, the hospital beds for COVID-19 patients and so by virtue then of those Edex, the pay at those beds have not been available for electric procedures. And so in the states where we have a vibrant ambulatory surgery environment, it's been relatively easy to move those procedures to the ambulatory center. And keep in mind, I mean, last year we grew by 23%. So when we say that ASCs are growing fast, the fastest of all, that does not mean in any way that hospitals are not also growing, but they're not growing by 23%.

Got it. Thank you.

Thanks.

Your next question comes from Ami Fadia with SVB Leerink.

Great, thank you for squeezing me in. Two questions, firstly, I want to continue on kind of the theme of how do we anticipate growth for 2021? How much of that is dependent on a vaccine being available such that institutions start to increase the surgical volumes? It seems that currently your growth is masked by kind of just the underlying year-over-year reduction in surgical volumes, but what needs to happen next year for that to change and do you think that we have enough visibility that the overall surgical volumes will actually flip to growth?

Well, in the elective environment -- in the elective surgery environment, it's growing now relative to last year. And it's hindered in the as you suggest, it's hindered in the inpatient environment by the COVID experience. And so I think on the positive side, Ami, I can tell you that we have a lot more capacity. We continue to add ambulatory surgery centers and we continue to move more high resource, more difficult surgeries to the ambulatory surgery environment. And for example, we saw a tremendous spike in total knee arthroplasty move into the ambulatory environment when CMS started paying for TKAs and the ASC. And the CMS is going to start paying for total hip arthroplasty on January 1, 2021. And we also see a major push from the payers to move their patients to the marks -- to the lower cost environment of an ASC versus an inpatient procedure. So the environment is heavily favoring, moving patients out of the hospital environment when possible. Do we have enough visibility on and how fast that's going to change? I'm sure we're using many of the same resources that you guys are. Do we need a vaccine? I think we need, we need to have and this is what we're seeing, right. We have a greater understanding of how to do elective surgeries in a COVID environment, especially when patients don't appear to be a seriously ill and don't require ICU stays to the same extent that they did before. So our expectation is that as we continue to stockpile these elective procedures that are not been done, many of those are going to need to be done more urgently because the pain profiles will continue to extend, right. And somebody who maybe wasn't ready for surgery or could delay…

Thank you, that very helpful. My second question was just with regards to the up margin expansion that we should see with the J&J agreement going away. What's your commitment to maintaining that margin expansion as you think about R&D investments into the pipeline as well as business development.

So, well, two different questions there, right. One is what we -- what we have prepared in our five-year plan of the assets that we currently have. The margin expansion is extraordinary. And I think you're starting to see that and we expect that that would be further elucidated as we go through next year. It's clear that, and most of the BD opportunities we have, there will be some investment that's required in order to increase the value of those assets. But I would tell you, I mean anything that we have currently on the books, the investment is very modest, capital V very modest, relative to the margin expansion that we expect to see over the next three or four years.

Got it. Thank you.

At this time, I would like to turn the call back over to David Stack, Chairman and CEO for closing remarks.

Thank you, Deborah, I'd like to thank you all for participating and listening to today's conference call. We look forward to keeping you updated on our progress. Next up for us is the Jefferies London Conference in November, followed by the Piper Conference in December. Thank you all, and stay well. Good bye.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.