Pacira BioSciences, Inc. (PCRX) Q2 2022 Earnings Report, Transcript and Summary

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 further support EXPAREL top line growth and improve margins. Our new ZILRETTA line that aims to improve quality and yield and the successful transition of our iovera° activities from Fremont to our San Diego facility and a contract manufacturer. Turning now to an overview of our EXPAREL franchise. Regional analgesia remains our focus -- our number one top line growth driver as long-acting EXPAREL-based nerve and field blocks are enabling accelerated recovery times and same-day surgeries, which continue to drive paradigm changes in patient care. Our anesthesia and surgeon customers see the clear advantages of EXPAREL-based blocks as they continue to replace cumbersome antiquated pumps and catheters. Improved patient satisfaction and reduced economics of care utilizing the outpatient environment, allow for continued improvements in EXPAREL reimbursement. CMS recently issued proposed outpatient prospective payment system rule for 2023 with EXPAREL continuing to qualify for separate reimbursement for ambulatory surgery centers under reimbursement code C9290. The agency is also seeking comments and data on whether to expand the current ASC policy to hospital outpatient settings. In parallel to our CMS initiatives, we are also following legislative action, such as the NOPAIN Act, which would ensure equal access to all non-opioid opportunities in outpatient environments for medical -- or for Medicare beneficiaries. Our state-of-the-art PITT training and innovation center in Tampa continues to facilitate real-time best practice knowledge transfer and accelerate surgical migration to outpatient sites of care. In 2022 alone, we have received 142 inbound requests from institutions requesting training for their anesthesia and surgery teams on select blocks with the Erector spinae transverse abdominis plane and pectoralis blocks the most highly requested. Our training programs at PITT as well as our in-person medical society meetings are enabling us to directly engage with clinicians who remain eager for education and training around regional pain management approaches for EXPAREL. This is also a strong and growing interest in drug-free nerve blocks with iovera°. These educational programs for EXPAREL and iovera° also provide increased visibility to expand our ZILRETTA customer base. We are making real progress on the build-out of our second innovation and training facility in Houston, which remains on track to open later this year. we expect Houston will have an equally positive impact on expanding EXPAREL and iovera° expertise among clinicians, especially for field blocks and nerve block procedures. Importantly, we continue to advance our robust patent strategy around EXPAREL to fortify our intellectual property with new patents that extend protection to January 22, 2021. We now have 6 patents listed in the FDA Orange Book and recently received a notice of allowance for a 7th patent that we expect to issue very soon. We recently finalized a new agreement with one of the largest faith-based private health care systems in the United States. This national health system operates in 19 states with more than 140 hospitals and approximately 30 ambulatory surgery centers. We will work together to institutionalize EXPAREL-based opioid-sparing protocols across service lines with their sites of care through extensive localized training provided by our field-based clinical education teams. This agreement also provides an opportunity to expand iovera° utilization within this system. We are also launching a new partnership with a large group purchasing organization in the dental space, that will allow access to EXPAREL at one of the nation's largest dental support organizations serving over 600 affiliated dentists at approximately 400 practices in 42 states. Together, we will support training and education around best practice for optimizing patient recovery after oral maxillofacial surgery using an EXPAREL-based opioid-sparing approach. This partnership will also include working with the group purchasing organization to introduce EXPAREL to their network of more than 1,100 dental accounts, drilling down into a few key EXPAREL markets. Orthopedic procedures to continue to be a key growth driver with the most recent annualized IQVIA data from January, showing year-over-year utilization up 24%. EXPAREL-based regional protocols are safely and reliably enabling a shift to orthopedic procedures with EXPAREL utilization up 34% over the prior year and 23-hour sites of care. In pediatrics, our initiatives continue to make strong progress. Safety continues to be the mission-critical message and awareness around efficacy continues to mount as new data is generated. Investigators from Scottish Rite for children in hospital in Dallas, Texas, highlighted their experience in a study of children undergoing posterior spinal fusion surgery. The study compared EXPAREL infiltration to a continuous epidural infusion of ropivacaine. The EXPAREL group consumed significantly less opioid in from 24 to 48 hours and ambulated 6.8 hours sooner. The study authored by Doctors Macintosh and McLeod was published in the May issue of the Journal of Pediatric Orthopedic Society of North America and will be featured at the annual Scoliosis Research Meeting taking place in St. Louis in September. This is a meaningful advance in treating these children who many times require multiple surgeries with multiple opioid exposures. Separately, our medical education platform continues to generate awareness through our monthly series, the Pediatric Exchange, which features thought leaders from leading pediatric centers such as Shriners Hospitals, Cleveland Clinic and Rady Children Hospital in San Diego. In women's health, we continue to see significant growth with success in C-section, driving expanded utilization in breast augmentation and gynecologic oncology procedures where there is a strong shift to 23-hour sites of care. Regarding our European launch, we are seeing slow but steady progress in our launches across several key countries. In the U.K., several important national health service trust hospitals have adopted EXPAREL and the value proposition is clear and relevant in the surgical backlog with EXPAREL enabling reduced length of stay and increased surgical throughput. New customer feedback has been positive with strong retention, and we've had several repeat orders from major influence hospitals. Moving forward, we continue to strengthen our team, confident that over time, Europe represents an important market opportunity for EXPAREL and Pacira. Moving to the EXPAREL pipeline. Both of our Phase III studies evaluating lower extremity nerve blocks are now fully enrolled. We expect to report top line results from the first study in early September with data from the second study to follow approximately 6 weeks later. If successful, these studies will support a supplemental NDA filing early next year. We believe the lower extremity nerve block label is at least as significant as the upper extremity market, with roughly 3 million procedures a year and an addressable market opportunity of approximately $100 million. Planning is also underway for a multicenter registration study of EXPAREL as a stellate ganglion block for treating refractory cardiac ventricular dysrhythmias and for use to prevent postoperative atrial fibrillation after open heart surgery. Dr. Shivkumar, Director of the UCLA Cardiac Arrhythmia Center and world renowned expert in mechanisms of cardiac dysrhythmias is collaborating with the team. We are working with a steering committee of key opinion leaders in regional anesthesia and stellate ganglion blocks who will convene this fall to help finalize study design. After an FDA meeting to align our regulatory strategy for expanding the EXPAREL label to include this indication, we will proceed with a registration trial. A stellate ganglion block utilizing EXPAREL, which lasts for several days, will address a significant unmet need in patients with ventricular and atrial dysrhythmias. Beyond our success with EXPAREL, our second quarter sales were augmented by strong ZILRETTA performance which underscores the successful integration and strong rationale for the acquisition. ZILRETTA remains at the early stage of its growth trajectory, and we remain confident it will be an important revenue and earnings contributor as the only FDA-approved extended-release corticosteroid for osteoarthritis pain in the knee. Currently, we are finalizing the designs for label expansion studies in shoulder osteoarthritis and type 2 diabetes. We have reanalyzed the Flexion diabetes data and believe there is a tremendous opportunity in providing the diabetic and prediabetic community and intra-articular steroid that improves efficacy and is significantly safer with reduced glycemic spikes. To that end, we are in the process of initiating a study in diabetes with osteoarthritis comparing ZILRETTA to an immediate release triamcinolone acetonide. We are also preparing to study ZILRETTA in shoulder osteoarthritis, which could make ZILRETTA the first and only approved steroid for use in shoulders. These studies also provide an incremental opportunity for ZILRETTA to enhance commercial reimbursement as we demonstrate superiority versus a media release of triamcinolone acetonide for diabetic patients and for shoulder surgery. Moving to iovera°, our novel handheld cryotherapy device, the rollout of the Generation 2 device to our broad customer base is underway, and the market feedback on the new and improved platform has been very positive with practitioners appreciating the more user-friendly design and increased efficiencies. We recently launched our -- an iovera° partnership with the Professional Golf Association of Americas Corporation Tour or the PGA Senior Tour through which we had a dedicated iovera° presence at 2 major tournaments in Q2. Our next event will be the Charles Schwab Cup Championship in November, where we will have a PGA Champions Tour player wearing the iovera° logo and an iovera° cool zone tent, which will allow spectators and guests of the PGA Champions Tour to make appointments with local providers for iovera° treatments. Our sports initiatives also include teaming up with the NFL Alumni Association to increase awareness of the availability and benefits of non-opioid pain management options. Together, we will focus on educating retired players, staff and use sports organizations about the importance of non-opioid options that can reduce or even eliminate the need for opioids for pain management. Turning to the iovera° pipeline. As you may recall, Dr. Paul Winston, President of the Canadian Association of Physical Medicine and Rehabilitation has been conducting observational studies of iovera° in spasticity. The preliminary findings of Dr. Winston's research are highly encouraging, and we are now collaborating with our clinical and medical teams on publication strategies for these data. In parallel, we have submitted to the FDA our design for a registration study to evaluate iovera° as a treatment for spasticity in post-stroke patients. We have a meeting scheduled with the FDA for later this year and will then proceed with the registration trial for the treatment of spasticity with iovera°. In parallel with our EXPAREL stellate ganglion block study. Dr. Shivkumar is also initiating a study utilizing the iovera° cryo technology as a long-lasting approach to effectively address various cardiac dysrhythmia. We believe EXPAREL and iovera° have the potential to address both acute and persistent cardiac disease in a wide range of patients. Moving now to our earlier-stage pipeline opportunities where we continue to make progress. We expect to initiate the second half of our Phase I study of our multi-vesicular liposome, bupivacaine for subarachnoid analgesia later this year and move to Phase II next year. In addition, we are defining clinical programs for our proprietary multi-vesicular liposome formulations of dexamethasone for inflammation and lower back pain and high-dose bupivacaine for longer-acting pain management of 7 days or more. In closing, the progress we have made to date, along with our ambitious plans for the future are all converging to give us even greater confidence in our ability to achieve our corporate goals for delivering strong revenue and earnings growth. With a significant patient need for opioid-sparing options and limited commercial competition, we are more confident than ever in our ability to cement our leadership position in delivering patients innovative non-opioid solutions along the neuro pain pathway while building significant shareholder value. With that, I'll turn the call over to Charlie for his financial highlights. Charlie?

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 of 73% for EXPAREL, 82% for ZILRETTA and negative 28% for iovera°. EXPAREL and iovera° gross margins were negatively impacted by certain operational challenges specific to the second quarter that are now behind us, including for EXPAREL, based on supply chain disruption in the second quarter, we made the decision to manufacture using older on-hand raw materials to ensure that we could meet market demands. The majority of these batches were successful, but with a higher-than-normal batch failure rate, causing our second quarter margins to be lower than expected. This challenge is now behind us, and we believe we have a stable source of raw materials going forward to meet increased demand. EXPAREL manufacturing efficiencies are now operating in line with expectations, and we expect gross margins to improve in the second half of this year and continue to improve by 2 to 3 percentage points per year, ultimately reaching the mid-80% range. For iovera°, second quarter margins were impacted by activities to support the shift to our Generation 2 device, which included downtime for training at our contract manufacturer. We also incurred overlapping expenses from the transition of activities from Fremont to our San Diego facility for the handpieces hand pieces and to a new contract manufacturer for the Smart Tips. Importantly, these activities are now complete. The Fremont office is closed. The Gen 2 rollout is underway, and iovera° margins are now beginning to benefit from the reduced unit costs at the contract manufacturer. These investments are important to the short- and long-term opportunities for iovera° as a drug-free nerve block as well as additional opportunities in spasticity and stellate ganglia block. Looking ahead, we continue to expect to see gross margins improve for all 3 products and to reach the mid-80% range. While we are currently not providing 2022 revenue or gross margin guidance, given the continued uncertainty around labor shortages, other COVID-related disruptions, impacts from the recent worsening economic and inflationary trends and the pace of recovery for the elective surgery market we remain committed to the transparency of reporting preliminary monthly product sales to share inter-quarter trends with you. We will consider adjusting this practice for all 3 products as the year and visibility progresses. Turning to expenses. Second quarter non-GAAP R&D expense was $24.8 million, reflecting additional investments in our 2 lower extremity nerve block studies and ongoing investments in our proprietary multi-vesicular lipid pipeline. We continue to expect R&D expense to tail off in the second half of the year, with enrollment now complete in our lower extremity nerve flex studies. And today, we are reiterating our full year non-GAAP R&D expense guidance of $75 million to $85 million. Our second quarter non-GAAP SG&A expense was $56.5 million and tracking in line with our full year guided range of $220 million to $230 million, which we are reiterating today. As discussed in today's release, today, we are revising our guidance for stock-based compensation expense to the range of $47 million to $50 million to more accurately reflect this year's equity grants including our annual midyear equity grant. Interest expense was $8.8 million for the second quarter. Most of this interest expense relates to our Term Loan B financing for $375 million with a floating interest rate of SOFR plus 700 basis points. The remainder of this interest expense relates to our convertible notes. For modeling purposes going forward, based on current interest rates, interest expense will be approximately $10 million per quarter. As a reminder, the Term Loan B is a partially amortizing loan with principal repayments due quarterly beginning at the annual rate of 10% of the original principal balance and increasing to 15% in the later stages of the loan. Our first quarterly principal repayment of $9.4 million was made at the end of Q2. In addition to the scheduled quarterly principal repayments, the Term Loan B also provides further reduction of principal with set percentages of annual excess free cash flow with no prepayment penalties and the ability for us to expand upon these repayments further at very modest prepayment penalties that are eliminated altogether after year 3. Our original forecast indicated that the Term Loan B would be completely repaid during year 4 of this 5-year loan. Based on today's interest rate environment, however, we are exploring ways to reduce the total interest cost of this loan more quickly. Our GAAP P&L reflects a second quarter effective tax rate of 10%, which benefited from the impact of a discrete tax deduction related to equity compensation transactions, often referred to as an equity windfall deduction, and acquisition-related benefits. For non-GAAP purposes, our adjusted results reflected an effective tax rate of 26% for the second quarter and 25% year-to-date, which we continue to believe is an appropriate effective tax rate for our full year adjusted net income for 2022. And lastly, despite challenging market conditions, we delivered another quarter of significantly positive adjusted EBITDA of $44.9 million. In summary, Pacira continues to operate from a position of financial strength. Despite ongoing headwinds, including labor shortages, continued COVID intrusions, reduced hospital services decreased hours at ambulatory centers and the impact of inflation on certain elective procedures, we continue to deliver impressive financial results and remain bullish in our 5-year plan for year-over-year top line growth in the mid- to high teens in 2023 and beyond. Gross margin improvements to the mid-80% range modest year-over-year increases in operating expenses and adjusted EBITDA margins that exceed 50%. That concludes our prepared remarks. I'd like to now turn the call over to the operator to begin our Q&A session. Operator? Operator?

[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 it's 1 surgery 4 days a week. And so you can see how the combination of these things has a fairly dramatic impact on our business and we do start to see some of these PACU hours coming back and some of these places being able to add these second surgeries for these protracted cases on an ambulatory basis. Your question on the backlog is an interesting one because you're -- the thoughts that we had in the beginning days of COVID have changed. And frankly, the market is much more difficult to predict than we thought it was going to be a couple of years ago. What we see in the marketplace actually is that the high acuity pain procedures, largely orthopedics, specifically total joints, shoulder and spine are continuing to be done and they are continuing to be done largely in ambulatory surgery centers because these are high acuity profitable procedures and especially in environments where the surgeons own part of the ambulatory surgery center, those procedures are getting done on a relatively routine basis. The ones that are more difficult to get done are the soft tissue procedures, right? The hernias and the colorectal procedures. And the scenario there is the hospitals are struggling to get those procedures done given the reimbursement that's being offered by the payers and the hospital outpatient environment, which would be the normal place where those procedures might get done, lower acuity lower-margin procedures. We just don't have enough of the capacity to be able to do those procedures at a price that the centers are able to perform the surgeries at. So you've got a fairly complex market where most of the ASC space is being taken up by ortho procedures and the reimbursement that's being offered for these less acuity soft tissue procedures is just not appropriate for many centers to be doing them in an inpatient basis. And even struggling to do them on an outpatient basis. So we see the marketplace is resolving a lot of those things. There are discussions going on with the payers in order to facilitate these procedures being done in the hospital outpatient department, and we think that, that will continue as we go through the year. Our own expectation is that Q3 will resolve slowly and will be closer to a pre-COVID normalized environment as we get into fourth quarter this year.

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 appropriate for the hospital resource considerations. And so there are many areas around the country where the ASCs are taking off the higher volume, higher profit margin procedures. And in fact, a demonstration of that is we know of several dozen orthopedic and spine hospitals that are being built around the company or around the country, specifically to address this need, given the lack of capacity in the ASCs to take on more and more spine and joint procedures. So then these lower acuity, lower margin procedures fall into the more traditional hospital network. And given the cost opportunities around an outpatient hospital procedure versus an inpatient hospital procedure, hospitals really are in a position where they have to figure out how to do these because surgeries really are the revenue engine of many of the medical centers around the country. And so you see people aggressively pursuing how to transfer inpatient beds to outpatient opportunities and how to work with the payers in order to provide the opportunity to have a soft tissue procedure done in a local environment rather than having to go to a different environment in order to get these surgeries done. So it's a complex problem. It's something that's going to take some time. It already has taken some time and we see that things are starting to loosen up in the actual marketplaces around the country. The new agreements are an important aspect of all of this. We are making progress with folks who understand that opioid sparing is a very important consideration for patients, especially for moms. And we see that in these -- in this faith-based opportunity that we discussed and it's not only a revenue opportunity, Balaji, but it's an opportunity for us to be able to work with these folks and to let patients in their -- in the states where they operate, understand that there are opioid-free opportunities remembering that there are 20 million Americans in recovery and we hear literally daily from patients who are interested in an opioid-free opportunity and are searching for a place where those kinds of opportunities to have an opioid presurgery are available. This strategic partnership allows us to be able to billboard that and let folks know that these opportunities are indeed available, and you're not going to get 90 Percocet when you leave the operating room. The dental is just as important. The first interaction of most teens with opioids is when they have a third molar extraction. So we've been working with this organization and providing protocols. We are educating them and providing EXPAREL for their first few cases so that they can have real-time experience with our folks there to be able to understand how we provide an opioid-free third molar extraction and keep these kids from getting opioids in their teens. And so really important things for us, both on a revenue basis, but also on demonstrating the opportunity for opioid-free surgeries and hopefully taking advantage of that.

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, the pulls and the pressures are slightly different as we go through the year. But you see people trying to manage a hernia, for example, in a very different way than they would manage a knee or a shoulder where they can't work and they can't ambulate and those kinds of things. So that's really what we see in the marketplace, and that's what the customers that's what our patients tell us in terms of how the work is being brought to the marketplace. For the Gen 2 device, this is -- we didn't exactly cover ourselves in glory here, Greg, with how this thing was rolled out. We -- what we bought was not a perfect device, but we knew that. But then we made some errors in the translation of the software, frankly, was overengineered for what was required. And that cost us a couple of months and ending Gen 1 and rolling out Gen 2. And so there was a several-month gap there when we didn't want to start people on Gen 1 because we were going to replace it right away with Gen 2 and there was no point in starting people on an inferior device. And so what we see starting to happen again, and this is where some of the things we called out in the call are is there's great interest in a nondrug nerve block. We have a basis of people who are using the product who basically didn't use the product in a lot of patients because of some of the issues that we were facing with our ability to deliver a device that was actually our best effort, and it was appropriate for the procedures that were being done. We've now -- on the other side of that, we have a device that works. We have -- we think you'll see a number of new users, and we've had a couple of high-profile users come forward with press releases saying that they are doing drug-free nerve blocks, some national news reports on local physicians who are doing drug-free nerve blocks. The PGA that I talked about is an interesting model for us going forward in terms of a cash market. Literally, when we run these tournaments, we've run out of what our marketing folks would call collateral, right? There's great interest in people who are at these golf tournaments and how they can control pain, so they can actually play golf, right? So we admittedly, we have a strong sub-patient or sub selection bias of the people who are at that tournament and going through that tent. But that's great. To the point where in the future, we are working with local orthopedic and PM&R docs to actually staff that trailer with us so that the folks that are there can actually make an appointment from the golf tournament for an iovera° treatment. And hopefully, by doing that, over time, we will generate a lot of geographic interest and how this happens. So same with the NFL. You'll see the President of the NFL making a very strong statement about opioid-free pain control and the devastation of opioids to many professional athletes later in their lives, et cetera. So I think we're in the right place. We're going to work hard on a cash business. Think about the PRP business, where patients are willing to accept a product that has no data and on a cash basis, we think what we know from our market research that there's a strong opportunity there. So we're generating what we're calling iovera° days, very much analogous to a PRP day, PM&R docs officer in an orthopedic office. So we have to get many, many more users locally, Greg. We are -- I mean personally, people get to me to say who's doing these different procedures in this local -- in my local market so that I can go to them and have a discussion with them about a drug-free nerve block. And what we're doing really is getting ready for these bigger opportunities, especially the spasticity opportunity where we think we can make a dramatic impact on the standard of care for these patients who have post stroke spasticity and a number of other spastic indications. So there's a lot of stake here for us, and we're working hard on it.

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 bills that come out as we get later into the year. And we are in the best position we've ever been in, in order to get the NOPAIN Act approved. To answer your question, the NOPAIN Act would require that CMS pay for products that had -- that had an indication for postsurgical pain for 5 years, all non-opioid products that have an indication for a postsurgical pain for 5 years. So that would allow us to cover over 70% of the procedure marketplace for EXPAREL. So that would be a huge opportunity for us to be able to have reimbursement that would be -- that would eliminate any encumbrance that the institutions are having around the cost of being able to provide a non-opioid alternative versus generics. And we think that would be a huge advance. Relative to the ASA, it's what it is, Serge. The article we've stated our case that the article was completely misguided. If you read the declarations that are on our website relative to a meta-analysis the way that the numbers were calculated and the procedures that were embedded in that report are just totally misguided in terms of the way the product is used in the marketplace. The best point I can make is that the number one procedure that was used in that meta-analysis and I have quotes on meta-analysis, air quotes on meta-analysis, was a penile transplant procedure that we've never presented to anybody, to my knowledge, and so it really is a bit of a made-up translation of how a meta-analysis should be done. Has it had an impact? Sure, it has. It's had some impact in the marketplace. Most folks who have used EXPAREL and understand the benefits of EXPAREL, find it interesting that their society would try to limit the use of a product that is really the only product that's available that allows them to do regional anesthesia and provide better patient care and allow them to move patients to an outpatient environment. And so it's a discussion point that we continue to have with the society. And we are trying to move forward with the ASA, and -- but it hasn't had much of an impact on anything that we've done in terms of how we're working with the anesthesiologists who are in the trenches and who use EXPAREL every day for regional pain management for new blocks and field blocks. And I would also draw your attention Serge to the recent article in the ASA Journal where they published a shoulder article. And just to give you a sense of where the journal itself sits and how research is done. They reported that the trial was negative for EXPAREL in shoulders and made a -- I don't even know -- difficult to understand air in the statistical profile that they used. And they reported that there was no difference with a p-value of 0.098 when, in fact, the p-value they had it reversed and the p-value for EXPAREL was 0.02. So it just gives you an idea that what's going on here is misguided for a reason, frankly, that we don't understand. But it is what it is, and EXPAREL continues to grow every month, and we've got a lot of good things going on. And we expect STRIDE and approval for lower extremity nerve block will basically continue to position this misguided information that's coming out in a way that is appropriate for patients to benefit from EXPAREL rather than opioids and ketamine, which seems to be the alternative that's being positioned here.

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.