Ladies and gentlemen, thank you for standing by, and welcome to the Pacira BioScience's Second Quarter 2022 Earnings Call. [Operator Instructions] I would now like to turn the call over to Susan Mesco, Head of Investor Relations. Please go ahead.

Thank you, Paula, and good morning, everyone. Welcome to today's conference call to discuss our second 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 will join 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 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 Dave Stack.

Thank you, Susan. Good morning, everyone, and thank you for joining us. We'll begin today's discussion with brief prepared remarks to cover recent business highlights before turning to your questions. I continue to be proud of our team and its performance. We posted record revenue for the second quarter and continue to drive innovation in non-opioid pain management with notable progress across our portfolio throughout the first half of the year. Second quarter EXPAREL sales were $137 million, making it the second highest quarter ever for the product. ZILRETTA was also a key contributor for the quarter, with sales exceeding $27 million, underscoring the rationale for our Flexion acquisition last year and the success of our integration. Despite ongoing headwinds, including labor shortages, COVID intrusions, reduced hospital services decreased hours at ambulatory surgery centers and the impact of inflation on certain elective procedures, EXPAREL continues to outpace the elective surgery market recovery with expanded utilization across all target market in sites of care. I invite you to review our most recent IQVIA data in the Investor Relations section of our website. Strong sales combined with operating discipline allowed us to deliver significantly positive adjusted EBITDA of $44.9 million, marking our 21st consecutive quarter of positive adjusted EBITDA. We are proud of this record and our ability to manage our business across a variety of unpredictable market conditions. I can unequivocally say that Pacira has consistently delivered. In addition to our continued revenue growth, we continue to invest in key initiatives to further improve our gross margins, including our 200-liter EXPAREL suite in San Diego, which is now fully installed. We are currently commissioning the equipment and expect to submit our application for FDA approval of this new facility in 2023. This expansion provides significant scale that will allow us to…

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 postsurgical pain management. We saw a year-over-year increase of 5% for the second quarter and posted our second highest quarterly ever EXPAREL despite persisting regional labor shortages, other pandemic-related disruptions and impacts of worsening economic and inflationary trends. To date, we have not seen any impact from new market entrants on our EXPAREL base business or our ability to generate new business, which is not surprising given the ability of EXPAREL to help facilitate the market's ongoing shift to regional analgesia and outpatient sites of care. Having treated more than 10 million patients in the U.S., we are also 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. For ZILRETTA, we have completed the rollout of our new discounting program to normalize customer purchasing patterns and the product is performing according to plan. We continue to expect improving ZILRETTA sales trends through the year as we broaden education and awareness through our commercial expertise and established relationships. For iovera°, now that the rollout of Gen 2 device is underway, as Dave mentioned earlier, 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 block, where we are making new clinical investments. Turning to gross margins. On a consolidated basis, our second quarter non-GAAP gross margin percentage was 72%. This is comprised of non-GAAP gross margins…

[Operator Instructions] Your first question comes from David Amsellem.

So I just have a couple. So first, can you just walk me through your thought process on when market dynamics you think might improve vis-a-vis things like staffing shortages. So that's number one. Number two, as you look at the third quarter, 1 thing that sort of struck me about 2Q is that the comps were difficult year-over-year in 2Q. So can you talk to year-over-year comps in 3Q and how that would speak to the growth trajectory of EXPAREL irrespective of the headwinds that you've been talking about?

Yes. Thank you, David. And really, in our minds, the comments, your questions are interrelated actually. For number one, we do see things resolving modestly, slowly, I guess, is the better way to put it. Ironically, to some extent, inflation appears to be driving the labor market in a more positive direction than we had seen. And very simply put, when it costs $140 to fill your gas tank up, you realize that your your cash balance doesn't last as long as you were hoping it might. And so we do see that the labor market is easing, although slowly, it at least is positive for the first time in a few quarters. And so not a bad thing for sure. You are exactly correct relative to the comps in Q2. As a matter of fact, today, after 3 days, 3 selling days of August, you would see the impact of of a better comp for us on a year-on-year basis. And so we do expect to have the optics of our business changed quite significantly based on the third quarter of last year versus the third quarter of this year. And so far, we're seeing that in the first few days of August, David. So positive. We're making progress every day. Some of these big relationships that we announced today are adding real benefits, and we can see it in real time as we look at the numbers. And so we're excited about going forward with all the clinical programs we're doing as well. So thanks for the question.

Your next question comes from the line of Chris Neyor.

Great. So first 1 is on expectations for electric procedure market. So you've talked about -- you've seen a more gradual recovery in the procedure market in the first half of 2022. So maybe you could talk about labor shortages and what impact you're seeing that have on volumes? And maybe a time line for where we see greater normalization? And then -- in the past, you've talked about kind of a backlog of deferred procedures. It seems like that's less and less likely to really see flow through into volumes. Any color perspective you have there, that would be helpful.

Yes. Thank you, Chris. We see the labor shortage actually is having tentacles in a number of different ways in the marketplace. I'll give you a couple of specific examples. I mean, the big one is the Mondays for us are still the lowest revenue day of the week for EXPAREL. And that is largely related to the fact that ambulatory surgery centers still are not open as a general rule on weekends. The inability to be able to get a nursing team to work a 12- or a 14-hour day on a Saturday has really limited the opportunity for the ambulatory surgery centers to open at all in terms of the revenue required to cover costs, et cetera. And so that to us would be a major opportunity when we start to see Saturday work in the ambulatory surgery centers to address these backlogs. Some of the more -- some of the less obvious ways that the labor shortage is impacting is the inability of hospitals and again, ASCs to be able to cover PACUs for the period of time that we saw in the pre-COVID environment. So for example, it would be routine for PACUs to be open till 10:00 at night or in some cases, midnight, which allowed surgeries to go on into the early evening hours and still be able to release patients on a same-day basis. The impact of the fact that they've shortened these PACU hours, in some cases to 6:00 at night has meant that in spine cases, for example, spine surgeons that were routinely doing 2 surgeries 3 days a week, were forced to not have a surgery start after 2:00. And so these folks went to 1 surgery 5 days a week and now in many cases, have been told that…

And then a second one, if I could. On capital allocation priorities, could you talk about how you see capital allocation specifically the balance between business development and the opportunity for additional debt paydown. And I think more broadly speaking about kind of the business development market, what are you seeing out there? I think you've seen a push -- a pullback in terms of valuations for commercial stage companies -- has that really translated to earlier stage companies? And in particular, I guess what kind of assets are you looking at? And what would be the ideal fit for Pacira's portfolio today?

Yes, we'd love to find another flection, Chris, if we found one. We don't have anything on the immediate term for a commercial asset that would be fit for purpose, the way the way ZILRETTA was. You are correct that there's a lot more interest in private companies as well as some of the smaller public companies, the inability to raise financing is leading to some more aggressive activity on that front relative to the opportunity for M&A or licensing or even partnerships in some cases. So we've got a lot of things that we're looking at. Our focus has been on the knee and the patient journey to a total knee arthroplasty. And so we're looking at a number of pain opportunities in the gene therapy and cell therapy space. A number of compounds that are available for us to take through clinical development, but most of these are earlier, Chris, and we don't have a lot of stuff that's commercially viable in the next 2 or 3 years. The second place that we're aggressively looking is in the vertebral space. We have a number of opportunities for products that would be in the degenerative disc disease space and low back pain, big opportunities in places where we're already working with folks on degenerative disc disease for pain management that regenerative medicine, things like spine biopharma with a 7 amino acid peptide for that would be used in conjunction with a pain injection for low back pain. So we're actively looking at these things where we would love to do a a commercial transaction if we can find an appropriate asset. We're wide open to larger agreements, and some of those are starting to percolate to the top, but nothing that really would be of interest in the next couple of years. And so most of the stuff we're working on takes advantage of our commercial and clinical expertise to develop earlier assets for organizations that are either struggling financially or just plain don't want to be a commercial company.

Your next question comes from the line of Balaji Prasad.

Question. Dave, could you provide some incremental clarity around the recent CMS reimbursement and what was incremental to EXPAREL? Also, the time lines and impact around the expansion to the hospital outpatient setting and what it means to? Secondly, you commented on called out a couple of new agreements, including with the NHS, if I got it right. So I want to understand the impact of this, what were 140 hospitals and 30 ASCs partnering with exit Pacira mean in the longer run? And when could we start seeing the impact of this in the P&L?

Thanks, Balaji. First, the clarity around CMS reimbursement. So important for us to keep C9290 for ASCs as a minimum. We have been very active with CMS in discussing the availability of non-opioid opportunities for some of the economically distressed areas of the United States and areas where there are no ASCs and the only real access that these folks would have would be in the HOPD. While it wasn't a specific win CMS asking for comments on -- with both data and discussion points in the marketplace around HOPD and the need for reimbursement in the HOPD, we think, in many ways, goes back to the question that Chris just asked that non-opioid alternatives in the HOPD would be really important to lower socioeconomic populations and the fact that many of these places do not have any access to opioid-free opportunities at all. Ironically, when the -- when CMS approved C9290 for EXPAREL and the ASC, many counties around the country actually took EXPAREL off formulary in the HOPD because they wanted folks to go to the ASC right? Then you got yourself in a scenario where there was no ASC. And in fact, what happened is these lower socioeconomic counties actually lost all opportunities to avail themselves of a low opioid or for a no opioid opportunity for surgical platform. So it's really important that we stay on top of this. We are actively working with CMS on the HOPD opportunity, and we expect that to continue as we get into through this comment period that goes into September. The expansion of the HOPD is really 2 things. It's the hospital is requiring to do surgeries. And so if they are searching for opportunities to be able to do surgeries in a way that are economically possible and…

Your next question comes from the line of Gregory Renza.

Congrats on the progress. Dave, I just wanted to revisit some of those macro themes that you commented on earlier, just more specifically, I think there's just an emerging increase investor interest in understanding potential impacts on -- from a recession and even job losses that perhaps relate to coverage loss in live. I'm just curious if you had any thoughts on how that potentially could impact surgical volumes your mix and what you're seeing with EXPAREL in the marketplace. And of course, I know the data aren't even it is speculative, but just your higher level thoughts on recession impacts to EXPAREL performance would be very helpful.

Thanks, Greg. It's a really interesting question, and we spent a fair amount of time trying to determine exactly what the different drivers are here, as you would expect. We have consumer surveys of our own as well as the history of both inflationary markets, Greg, as well as recessionary markets. And it's pretty clear that patients' ability to pay co-pays and to be able to afford insurances that would pay for especially soft tissue and lower acuity kinds of surgical procedures are impacted. If we balance that against where we are, we think that, that will have a modest dampening effect on the rebound of procedures. But we also know that the backlog of procedures that's out there and the fact that some of these patients have continued to have issues associated with the fact that they didn't have surgeries over the last 24 to 30 months. In many cases are a powerful motivator in the opposite direction. So we're watching it closely, Greg, neither high inflation or a recession are going to be good for us in terms of the rebound in procedures, but we also think that there is a strong motivation from these high acuity procedures that are continuing to be done, and we don't see any change there or very little change there and the increased opportunities to be able to do soft tissue procedures at a cost that's appropriate for the hospitals. We think that CMS and the ability of these folks that are covered by Medicare, hopefully would dampen the effect of both recession and a high inflation environment. Other than that, it's more of a balancing act in terms of how fast some of these things come back and we just go from there. I don't know how to give you very specific data. Our own internal consumer kinds of things were more dramatic in terms of inflation having a negative impact 60 days ago than they are now. So -- but I don't know how to measure that in terms of something quantifiable that I can tell you there's x percentage or anything like that. But it does appear that people are less sensitive to inflation today than they were 60 days ago.

And just 1 last one, if I may. I believe at the top of the call, in your remarks, just mentioned that perhaps competition drivers were at a minimum. I'm just curious, is that something that we could see as more of a base case going forward that is a driver to EXPAREL pressure, less so being thrown off from competitive options and the landscape?

Yes, for sure, Greg. I think the ability to do nerve blocks and field blocks with an FDA-approved product is really an advantage to us. And I don't see that changing over the immediate planning period of a couple of years. The reason that we're building the second innovation and training center in Tampa, is to handle all of these requests we're getting for training around regional approaches and being able to move different patient populations to the less costly outpatient environment. And so I don't see that that's going to change over the next years.

Your next question comes from the line of Greg Fraser.

I'm not sure if I missed this, it, but did you comment on EXPAREL growth in July? And you mentioned inflation impacting certain electric procedures, or what types of procedures are you seeing an impact? And then just on a question on iovera°, you introduced the Gen 2 devices. You've seen a positive reception. You talked about the various initiatives to drive awareness. When do you think that product might start gaining more traction and seeing more use for the current indications?

Yes. Thank you, Greg. So in July, we grew by between 5% and 6%. And so we continue to grow very modest improvements, but against a difficult comp for us. So that's not an excuse. That's just a fact, right? And so we continue to see that the product is growing. When we look at inflation impacting, it goes right back to this. When you've got a patient who can't go get the mail and just having a devastating impact on their ability to ambulate and to get around, going to church is always high on the list, going to the grocery store is always high on the list. We find that people find a way to get those procedures done and the insurance companies and the reimbursers continue to drive those patients back to the ambulatory environment based on economics, but also based on patient satisfaction, right? And so that's -- those are the procedures that are getting done. The less acute where the pain profile is not as profound and where patients who can manage the pain in a way that they think is relatively appropriate given the other demands on their resources for fuel and food and all the things that we talk about every day, all day, then you see that patients choose to try to hold off as long as they can for those kinds of procedures. And especially as we get into different times of the year, in the beginning of the year, obviously, you have the pressure that nobody has paid off their co-pays and all of the annual expenses that are part of their reimbursement portfolio. As we get into the later part of the year, we see people are hoping that they have better insurance next year. And so the pressures,…

Your next question comes from the line of Serge Belanger.

Just a couple of questions. A couple of questions for me. First, on the NopainAct. It’s been a little more in the news lately. It seems to be gaining momentum. I don’t know if you want to comment on whether it gets to the finish line or not, but – maybe if you can talk about what impact it could have on the coverage of EXPAREL? And then secondly, I wanted to go back to the not so expel-friendly editorial that was published in the ASA journal last year. I assume it’s been widely disseminated now. So what impact if it has had any either practice guidelines or have hospitals curtailed the access of Exparel because of this editorial? A –Dave Stack: Good. So first, Serge, we now have over 100 members of the house that have -- that are supporting NOPAIN. And we are coming up on half of the Senate. We need a couple of more members to have half of the Senate. So we also have over 50 affiliated organizations, both from the insurance industry as well as the AMA and the orthopedic societies, et cetera. So we're in as good a position as we can be in. Right now, we're -- we thought that we might have some action during the summer. That was actually went in a different direction as a result of some of the gun legislation that was approved and some of the different mental health things that didn't appear to be appropriate for what we were looking for in terms of coverage in a -- for all non-opioid therapies. The best I can tell you is we continue to be involved with the folks and the decision makers in Washington. We are looking at something that would take place in the reconciliation…

This concludes the question-and-answer session of today's call. I will now turn the floor back over to Dave Stack, Chairman and CEO, for closing remarks.

Thank you, Paula. 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 Wedbush Conference later this month and Citi in September. Thank you all. Stay well.

Thank you. This does conclude today's call. Thank you for your participation in today's event. You may now disconnect.