Thank you for standing by, and welcome to the Q1 2022 Pacira BioSciences Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentations, there'll be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would like to turn the conference over to your host, Ms. Susan Mesco, Head of Investor Relations. Please go ahead.

Thank you, Valerie, and good morning, everyone. Welcome to today's conference call to discuss our first quarter 2022 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer; and Charlie Reinhart, Chief Financial Officer. Additional members of our executive team are joining for today's question-and-answer session. Before we begin, let me remind you that this call will include forward-looking statements based on current expectations. Such statements represent our judgment as of today and may involve risks and uncertainties. For information concerning risk factors that could affect the company, please refer to our filings with the SEC, which are available on the SEC or our website. With that, I will now turn the call over to Dave Stack.

Thank you, Susan. Good morning, everyone. And thank you for joining us. We'll begin today's discussion with a few prepared remarks to cover recent business highlights before turning to your questions, where we'd like to devote most of our time today. Pacira continues to drive innovation and non-opioid pain management with of notable progress taking place across our entire portfolio in the first quarter of 2022. We are pleased to cap off the first quarter with record high EXPAREL sales that exceeded $51 million for the month of March. This is particularly impressive given the recent and ongoing pockets of persisting COVID-related operational disruptions in the elective surgery market, along with labor shortages, which continue across all surgical settings in the first quarter and especially around the Easter and Passover holidays in April. Strong top line sales coupled with our operational efficiency objectives continue to drive attractive adjusted EBITDA margins of over 34% for the first quarter, marking our 20th consecutive quarter of positive adjusted EBITDA. EXPAREL utilization continues to expand and support the market transition to outpatient sites of care. This is demonstrated within our latest available weekly data, which shows EXPAREL significantly and consistently outperforming the elective surgery market by a very healthy margin period over period, as well as sequentially when compared to pre-COVID baseline levels. Our most recent IQVIA data are available in the Investor Relations section of our website. EXPAREL based nerve blocks and field blocks are fueling a revolution in regional anesthesia so it is not surprising that this segment is our number one growth driver. Anesthesiologists are developing new blocks while protecting existing block techniques. In addition, anesthesiologists utilize imaging to ensure successful blocks and pain control to expedite recovery times and ensure best practice patient outcomes. A critically important element in ambulatory…

Thank you, Dave and good morning everyone. I’ll start with a quick update on sales and margin trends. Starting with EXPAREL. We remain very pleased with the ongoing success of EXPAREL as the clear market leader in non-opioid post-surgical pain management. We saw a year-over-year increase of 13% for the first quarter. And we exited the quarter on a high note with record high monthly sales for March, despite persistent regional disruptions and labor shortages resulting from the pandemic. We have seen no impact from new market entrance on our EXPAREL base business or our ability to generate new business, which is not surprising given the market’s ongoing shift to regional analgesia and outpatient sites care. Having treated more than 10 million patients in the U.S., we are confident that our well established efficacy, pristine safety profile and more than a decade of physician experience will continue to be key advantages for EXPAREL over other extended release bupivacaine formulations. As expected, ZILRETTA is a perfect fit within the Pacira product portfolio. The product is off to a great star and performing according to plan. We have successfully replenished commercial inventory with appropriate dating and implemented a simplified discounting program to better support our customers. We continue to expect improving ZILRETTA sales trends throughout the year, as we broaden education and awareness through our commercial expertise and established relationships. For iovera°, first quarter sales were impacted by a delay in the role of the Gen 2 device as Dave mentioned earlier, as well as, a short term variations in regional reimbursement policies. We expect the product to return to more robust year-over-year growth as the year progresses. We remain very optimistic in the iovera° opportunity within its current, as well as new indications, such as spasticity and stellate ganglion blocks, which…

Thanks. And I apologize if I missed this, but can you Dave, just frame how we should think about April and May for EXPAREL. I mean, seasonally typically is better in the elective surgery environment. But can you talk about what you’re seeing in terms of elective surgeries? How you should think about – how we should think about the – not just the pace of procedures, but how you’re thinking about the potential for uptick in overall volumes, as we go more into the spring months. And then secondly, on ZILRETTA can you just talk about how broadly you can get more out of the asset than your predecessors? And I’ll leave it there. Thanks.

Yes, sure. Thank you, David. First on elective surgeries, David, if we look at the first quarter, even I think it’s – I just can’t give you a really solid answer. I wish I could. We spent last weekend with a number of very high profile administrators and folks who run hospitals around the country. And our discussions were very much mere images of each other. I mean, if we think about the first quarter 4% in January, 16% in February and 17% in March is pretty much, what we think we’re going to see. We saw something in the 9% range, unaudited and early, but something like that in April. And we’ve only got a couple days in May, so far. So I don’t know what to tell you. But echoing in a more specific way, what Charlie said. I mean, day to day, David, it’s just all over the place. I mean, even this week, our daily sales for Tuesday were twice what they were for Monday, which is just highly, we haven’t seen that before and we relay most of that. Some of that is COVID, some of that is hospital systems that just don’t want to do soft tissue procedures because of the financials involved. And you saw some of that with some of the big hospital chains that reported. But we think most of it frankly, is labor, which is why we made the point around Easter and Passover. I mean, just inside the month of April, you had two really good weeks and two really bad weeks around the holidays. And so I just don’t know what to tell you. I think what we’re going to see is that orthopedic remains strong and it’s the basis of our ASC basis business. And in fact,…

Thank you. Our next question comes from Gregory Renza of RBC Capital Markets. Your line is open.

Good morning, Dave, Charlie, and team. Congrats on the progress, of course. And thanks for taking my question. Dave, maybe just following up on the previous question. Certainly, some color around, I think maybe the unpredictability and the turbulence that you’ve described. But maybe just from the angle of how the current environment aligns with? Where your expectations were at the start of the year? Certainly prior call I had been the optimism around exiting each month with some degree of comfort and a return to dare I say, normalcy. I’m just curious if you can comment on where you see this current lumpiness as it fits to where you thought we would be at this point in time. Thank you.

Yes. Thanks, Greg. And I think the easiest way to say it is, it’s – I mean, I guess the difference is we were thinking that largely labor would be at least more sorted out than it appears to be. And even when we came out of February and March with plus 16% plus 17%, we thought actually that we were seeing normalization in the marketplace. But when you spend time with the physicians and you really get into the nitty-gritty of what’s keeping them from doing more surgeries in all sites of care, but specifically in the ambulatory environment, it’s over and over again, it’s just a willingness of nurses and support staff in general. But we’re usually talking about nurse teams. And it’s probably a more difficult scenario Greg than it first appears because we just can’t get five PRNs on a Saturday and open an ambulatory surgery center and do six or eight needs that day. And so the issue is that we’re – the nurses after the COVID-19 experience just are taking vacations. And there’s not much we can do about that. And so, around holidays, around spring breaks that’s what we attribute the April discussion around is really it was more around spring break and the fact that while they were willing to defer in the COVID-19 experience, now they’re saying this is going to be here for a while. And I have to take care of myself. And so that’s one big piece of it. The other piece of it that’s got the hospitals in a difficult situation is nurses have left their traditional employment to become travel nurse and astonishingly, maybe for the purposes of this discussion, some of these travel nurses are getting north of $40,000 a month. And so the hospital cannot then do low margins soft tissue procedures with a nursing staff that’s making $40,000 a month. And some of the hospital system numbers that you’ve seen in the last two weeks are exactly that scenario. So, that’s why I focused on, I think we can take the majority of ortho procedures and do them in the ASCs, as the payers would largely expect. When we get to soft tissue, we don’t have the capacity and the low cost environment and the high cost environment can’t afford to do them. And so that’s where we think we see some of this forecastable, I don’t even know if that’s a word, right? But you know what I mean to say here, opportunity to look forward and see where this is going. I honestly don’t know. I mean, we’re going to be holding our breath around the next holiday. I can tell you that.

Got it. Very helpful. And maybe just if I may shift just quickly to the training center that’s standing up in Houston. Just with respect to that versus or in addition to Tampa, Dave, can you just talk a little bit how you’re going to get additional leverage or effectiveness out of really what is the important network effect as you message the best practices and the EXPAREL opportunity for physicians? I think simply put how that investment is really going to potentiate those opportunities even more so than just a single Houston facility. Thanks again, Dave.

Sure. Yes. Yes. No. Thanks, Greg. First, I mean, just to give everybody the understanding, we can’t satisfy the demand or even close the Tampa facility. And just this past weekend, the New York Society of Regional Anesthesia held their national meeting from our PITT facility here. And the fact that we had 84 requests for training in the first quarter alone would tell you – and most of these folks want to come on Friday, Saturday, Sunday morning. We just can’t even come close to satisfying the demand. So in addition to that there’s some things that we think we can add that will make this facility more appropriate even for some of this high end training that we’re doing, not only for EXPAREL, but for iovera° as well. And imaging has come a long way and we’re looking at imaging techniques for example, that when you run the cursor over the patient, the actual software identifies the nerve. So as a training tool, we can do a lot of things in an improved environment that weren’t even available two years ago when we opened this facility. And then I think maybe the most obvious thing, at least from our perspective, Greg, is that Texas some weeks is 20% of our business. And so it’s entirely appropriate that we go and support the folks that are within driving distance that don’t have to get on a plane to come here. And in fact, some of the hospitals in Texas have already asked us if they could take a weekend and brush up on their use of EXPAREL. And in many cases, I think it’ll help us have more direct impact on how we roll out iovera° in a state that’s by far the most important to us. And so a lot of tangential reasons that come together around a relatively modest investment, right? This is only a few million dollars to get this thing done. It’s not $10 million or $20 million.

Great. Thanks for taking my questions.

Thank you for the questions. Thanks.

Our next question comes from Greg Fraser with Truist Securities. Your line is now open.

Good morning folks. Thanks for taking the questions. On iovera° you said, increasingly bullish on the potential of the technology. I think there are numerous reasons for that, including new indications that you’ve talked about. But the commercial performances, the sales down in the first quarter, you mentioned the transition of Gen 2 and variations and reimbursement policies. Can you just expand on what happened with reimbursement in the first quarter? And can you also talk about your initiatives to expand the use of iovera° for the current indications and the hurdles that you had to overcome to broaden adoption? Thank you.

Sure. There was a letter that was up on a certain max website, Greg that said that iovera° was not paid for, this is a CMS – one of the CMS member organizations. And that has now been taken down from that website, but it had a negative impact when it was up there. And folks thought that there had been a change in policy and that CMS was no longer paying for hospital outpatient use of iovera°. So that was a short-term issue. The other issue that we’re on the other side of now is that when we started to roll out Gen 2 there were some operational issues, some mechanical software issues with Gen 2 that we never – we didn’t see with Gen 1. And so we were in a position where we didn’t want to send a lot of Gen 1 units to folks knowing that we were transitioning to Gen 2 in the short-term future. And we didn’t want to send a Gen 2 unit that we thought could be optimized over the next couple of months. And so we went through the first quarter, frankly, addressing a number of issues that we think are largely behind us. So going forward, we now have a Gen 2 device that is at least on all the reports from our super users is doing extremely well. As a matter of fact, one of the folks we were with last weekend made the comment to me that it was ninth day from Gen 1. So you’ll see us now be in a position to be able to ship those to new users. And one of those – one of the users is the U.S. government, frankly, that we didn’t want to ship anything there. We didn’t want to…

Great. Thanks for the color.

Thanks, Greg.

Thank you. Our next question comes from Anita Dushyanth of Berenberg Capital. Your line is open.

Hi, good morning. Congrats on the progress and thanks for taking my question. Just wanted to focus and get some clarity on ZILRETTA use. I know the study – I’m sorry, I know using type 2 patients has been somewhat not entirely adopted. So I was wondering if there’s, what steps you are looking into to kind of increase the overdose adoption in this population. Maybe some conversations with the FDA or some efforts to kind of change language on the label? Thank you.

Thank you, Anita. Flexion positions ZILRETTA as a downstream option for the treatment of these patients. And I’m sure you’re aware, but only 75% of OA patients respond to a corticosteroid. So, fair enough that you’re going to want to use an immediate release product to establish that the patient is a responder before you go to a longer-term therapy. But discussion around after that single like or immediate release product, why would you go back to using something other than a corticosteroid and why would you only have a single administration of ZILRETTA in a patient population where we know there are regular issues in the marketplace around glycemic spikes and patients being ending up in the intensive care unit because they're not stable. So and I want to be really clear, Anita, we haven't had a meeting with the FDA yet. It's not easy to get a meeting, even a phone call with the FDA right now. But the plan is to discuss Type 2 diabetics and how we make an accommodation in the package insert that discusses the fact that these patients should be treated separately from a more generic kind of approach to just patients with osteoarthritic disease. This is a special group of patients that have special needs that are not addressed by either hyaluronic acid or a short-acting corticosteroid. And that's sort of in lockstep then with a discussion with the FDA on what their requirement would be for a second dose. Now in the package insert in the clinical development section, they do have wording around the advantages of a long-acting corticosteroid for glycemic control but it's not in the indication section. And so we can have a clinical discussion with a physician that really stretches a reimbursement discussion with a payer. And so those two things really are adjacent to each other in terms of how we'll discuss this with the FDA, but it starts with patient care and improving patient care. And it ends up with a more practical mechanism of what do you actually want the physicians to do, right. If you're only going to pay for an administration of one of these products every three months, then you have to have some type of an algorithm of care that directs them to how that is actually affected in the marketplace. And to say that you're going to give something an immediate-release corticosteroid that you know, it doesn't last three months, but that you're only going to pay for an administration every three months. And you're forcing everybody through that care paradigm that just doesn't make any sense. And the docs on the marketplace just shake their head and say, we don't know what the heck to do, but it's difficult for us to act in this environment if we're not going to pay for using a product with a WACC acquisition cost of something in the neighborhood of $500. Does that make sense?

Yes. Yes. Thanks for that clarity. That was helpful. And then just one more question relates to the growth opportunity for this year. And you have about the pediatric indication and also the soft tissue procedures growing potentially. So among those, which sort of do you anticipate growth coming from at a higher rate than the others?

That's – I'm going to give you two different answers to that because I think there really are two. I mean, we have things that we can depend on because they're either not being deferred or they can't be deferred. So you don't see anybody in PD pediatric deformity, for example, or scoliosis saying that they're deferring those patients because of anything, right. COVID would be one thing, but nursing staffs would be the other thing. So on the other side of the aisle, you've got C-sections and those can't be deferred either, right, those kids are coming one way or the other. It's just a matter of how we're going to treat them and where we're going to treat them. So I think we can predict peds pretty well and peds is going well. We can predict women's health pretty well. The vast majority of soft tissue procedures actually are abdominal colorectal hernias, hemorrhoidectomies, those kinds of procedures. And those are the ones that there's patients who require those surgeries. If there's an ASC in the area or an HOPD in the area, the insurance carriers or the payers, whoever they are, CMS is trying to move patients towards these lower cost environments. There's large places around the country. And some states even where there just aren't any ambulatory surgery centers. And so the hospitals are trying to look like ASCs in the way that they're going to handle some of these patients, but we're just not there yet. And so we're just going to have to see how this market evolves. Now there's a number of big ambulatory surgery, sport, spine facilities being built and that will help a lot in terms of freeing up capacity for non-ortho procedures. I don't know what to tell you about hospitals…

That was very helpful. Thank you.

Thanks, Anita.

Thank you. Our next question comes from Serge Belanger of Needham & Company. Your line is open.

Hey, good morning.

Hey, Serge.

First question is around your plans for stellate ganglion block. I think you talked about a potential application for cardiac dysrhythmia, seems like a departure from your current target focus but maybe just talk about the market opportunity and whether it can have a halo effect of other procedures beyond that one?

Yes. So the target indication is stellate ganglia and I'm glad you asked the question. I probably should have been more clear in the workup here. This will be a anesthesia administered procedure, Serge, under ultrasound guidance. So if you think about a stellate ganglia block, it has broad applications in a number of different areas and is being used currently in an anecdotal way in case report studies for scleroderma and Raynaud's disease. And if you think about any place that you want increase the blood flow and plastic surgery flaps and in some more extravagant applications it's being used in chronic pain syndrome and PTSD and a whole bunch of things. So think of at the base of the thought process, think about the brain sending an inappropriate action to the body, just the opposite of what we've been doing for the last 15 years, right. We've been trying to turn the pain signal off from the body to the brain. Now with both stellate and with spasticity, we're talking about how the brain and the body interact around basically what it turns out to be sympathetic nervous responses. And so turning off the stellate ganglia will turn off the reaction to manipulation of the cardiovascular system that leads to the catecholamine storm that is so destructive to these patients around VTEC and longer term AF and all of these different things that these patients go through. Dr. Shivkumar actually is an expert in sodium channel impulse transmission. And so he's the ideal person to help us through these. So it's actually not as far a field as it would appear. This is not going to be a cardiovascular use and the trials will all be around an anesthesiologist administering this drug. So if you think about somebody who's treating patients in a block room, this won't be that application around an elective surgery, like a TAP or a PAC or anything like that. But it's a very simple procedure to do. And the impact of on patient’s lives could be profound in terms of a number of the actions we've had. And many of us here have spent considerable time with these clinicians reviewing patient charts and actually looking at animal labs in terms of how this actually transpires. And so it's pretty exciting. And it's another reason, frankly, along with peds and a lot of these different places where if a pharmacist is pushing back against us for orthopedics and for soft tissue, there is no way that you can use some of these pretender products for anything like this, because you're putting this drug in close proximity to the brain and it has to be absolutely safe. And so none of the other things that folks are trying to use the marketplace with adjuvants and things like that are going to work so there's a couple of things that play here from a strategic perspective.

Great. Thanks for the clarification. Just one more and apologies if I missed this. Any update on the deflection early stage program FX-301, I think it was in a proof-of-concept bunionectomy trial.

Yes. So let me go back for both, Serge. So on 201, we've got some pretty good data, but the cost of good is really high and so our plan is to move 201 from an intra-articular injection in the knee. And we have a couple of other shots on goal in that environment and to move it to a degenerative disc disease product that would be used at 100th of the dose in the knee. So the cost of goods we think is manageable at that level. And 301, we have recently received the data and we haven't formally made a decision yet is to what we're going to do around 301. But there are a number of commercial issues around temperature and as well as some of the clinical evidence that we see. But we're still in the process of talking to the investigators on understanding any exactly what we're dealing with before we make a formal decision there.

Got it. Thank you.

Thanks, Serge.

Thank you. Our next question comes from Gary Nachman of BMO Capital. Your line is open.

Hi. This is Evan Hua on for Gary Nachman. Thanks for taking our question. So first, I just wanted to get back on the labor shortage, staffing shortage issue. Based on your conversations with physicians and from your perspective, what are some of the potential factors or solutions to help the labor shortages to recover? And is there any sense on how long that could take?

Yes, it's really multifactorial, it's the labor shortage, but it's also which site of care the labor shortages are in. You come to different conclusions, right. When we talk to folks in the ambulatory environments, what we're trying to do is establish efficiencies so that you need fewer arms and legs in the OR and one of those solutions are robots. Last weekend there was some extensive discussion around do robots help or hurt in terms of labor. And can we get by with fewer folks if we organize in a slightly different way during the course of a procedure. So you're seeing people ramp up and ancillary activities, the kinds of things that nurses are doing today, say in the PACU or when you go in, the charge nurse is there and I mean, is could somebody else be doing those kinds of things. Those are all the things that the outpatient providers are trying to do. And the inpatient, frankly, there isn't a heck of a lot they can do except or find more nurses or – and send nurses to actually come back to the marketplace because an awful lot of them have just stopped working because of the COVID environment. Because of the pay discrepancy actually, when you talk to these people and again, you saw it in some of the numbers from some of the hospital chains, a number of the big time good nurses, the folks that people really covet have actually gone to be travelers, and they're going into these different situations and ZIP codes where they might be able to interact with a specific surgeon or a specific group of surgeons and procedures that are very high profit margin procedures, where you can actually afford a $40,000 a month nurse. The issue…

Got it. And my second question in terms – for iovera°, would you be able to share some more color of what the feedback has been for the Gen 2 device versus Gen 1?

I would say it's a whole another thing. The TIP is brand new and handheld is brand new, frankly it starts with what we acquired that was not – it was the best MyoScience could do, but it was not anything that a more significant company from a financial perspective would have developed. And it started with ergonomics, when you understand that almost all of MyoScience’s business was with orthopedic surgeons, the majority of our growth is actually with anesthesiologist. And so some of the things are relatively simple, can you have an ultrasound probe in your left hand and be able to use the iovera° device with one hand and with the Gen 1 device, the answer to that was no. With the Gen 2 device, the answer to that is yes, right. All of the buttons that they need to push, they could do with one hand. The more complex kinds of things that are done is, we've been able to make them significantly less expensively, which gives us a lot of options in the marketplace in terms of pricing. But also the NO2 cartridge is able to do at least twice as many procedures now as the old one could. So it's a series of more modest things like that, that make it just a night and day opportunity. And then in the new device, we are – we have a special or a new TIP for medial branch block for low back pain. We will have a TIP that's more appropriate for things like digit, utility, et cetera, you may have seen or you probably didn't see yet, but there was a paper that came out on Wednesday from a physician in Los Angeles who treat many of the pro athletes, treating three major league baseball players with iovera° and their ability to begin playing again when they couldn't hold back because of a thumb injury. So we're looking at a – we'll reintroduce a TIP that is just for these more focal kinds of applications where you couldn't use a spinal needle in a thumb, for example, that would be very difficult given the flexibility of the needle, et cetera. So a number of different modifications in the new device is the Gen 2 stuff. We can make a newer model, a newer TIP, much more easily than we could have with the Gen 1 programs, the way MyoScience developed the technology. So a whole series of little things that lead to a big thing in the end from a user perspective.

Great. Thank you.

Thanks.

Thank you. Showing no further questions at this time, I'll have to turn the call back over to Dave Stack, Chairman and CEO for closing remarks.

I'd like to thank all of you for participating and listening to today's conference call. We look forward to keeping you up-to-date on our progress. Next up is the RBC Conference later this month followed by the Jefferies Conference in June. Thank you all and stay well. Goodbye.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all participating. You may now disconnect. Have a great day.