Good day and thank you for standing by. Welcome to the Quarter Four 2022 Pacira BioSciences, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Susan Mesco. Please go ahead.

Thank you, Chris, and good morning, everyone. Welcome to today's conference call to discuss our fourth quarter 2022 financial results. Joining me on the call are Dave Stack, Chairman and Chief Executive Officer; Roy Winston, Chief Medical Officer; and Charlie Reinhart, Chief Financial Officer. Additional members of our executive team are here 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 start today's call with prepared remarks covering recent business highlights before turning to your questions. 2022 was another strong year for Pacira as we continue to outperform the elective surgery market, operating from a position of financial strength. We posted record revenues of $667 million in 2022, a 23% increase over 2021. Our growing top line, combined with ongoing operating discipline drove significantly positive adjusted EBITDA of $213 million for the year and $59 million for the quarter, and adjusted diluted earnings per share of $2.59 for the year and $0.80 for the quarter. Our performance allows us to fund internal and external growth initiatives while also optimizing our balance sheet with the planned prepayment of our term loan B. This marks our ninth consecutive year of positive adjusted earnings and impressive records that we are proud of. Turning now to some specifics for our EXPAREL franchise, where I am pleased to report we have now treated more than 12 million patients in the United States. Regional analgesia techniques performed by surgeons and anesthesiologists continue to be a substantial growth driver. EXPAREL is fostering a significant paradigm shift in patient care by enabling same-day surgeries and accelerating recovery times. Surgical market procedures continue to migrate from inpatient to outpatient settings and increasing rates. The most recent rolling 12-month IQVIA procedural data from July 2022 further illustrates this shift. For hospital inpatient procedures, the market experienced a year-over-year decline of 7%. EXPAREL was flat year-over-year, but with growing interest in women's health, the use of EXPAREL for C-sections grew by 26% in the hospital inpatient setting. The outpatient procedure market demonstrated a year-over-year increase of 5%. EXPAREL continues to enable this growth and significantly outpace the market with…

Thanks, Dave. This is an exciting time, not only for us at Pacira, but for patients, providers and payers seeking safe and effective opioid-free options for pain management. I'll start with our lower extremity nerve block. As Dave mentioned, our supplemental new drug application has been submitted to the FDA, and we are awaiting official acceptance, which is expected to come by a standard 74-day letter which will include our PDUFA date. To remind you, the basis of the submission are two Phase 3 studies. The first study was a single dose femoral nerve block in the adductor canal for total knee arthroplasty, and the second was a single dose sciatic nerve block in the popliteal fossa for bunionectomy. Both utilize the 10 ml dose, which is 133 milligrams. Both studies achieved the primary and key secondary endpoints of statistical significant reductions in postsurgical pain and opioid consumption from zero through 96 hours when compared to the active comparator, bupivacaine. These data provide strong evidence for label expansion to include these two new indications and should support a superiority claim for EXPAREL over bupivacaine in the new label. We believe adding these two additional nerve block indications will significantly extend our reach into surgeries of the knee, media lower leg, foot and ankle, representing more than 3 million annual procedures. Working with key opinion leaders, we've begun to publish these data to deliver strong evidence in the literature and incorporate them into society practice guidelines to use EXPAREL as a nerve block in lower extremity procedures. We were also on track to begin the pediatric study later this year that is designed to support the expansion of our U.S. and EU label to include patients from zero to six years of age. We look forward to minimizing exposure to opioids…

Thank you, Roy, and good morning, everyone. I'll start with some commentary on our 2022 results and then walk through our outlook for 2023. To remind you, I will be discussing non-GAAP financial measures this morning. A description of these metrics, along with our reconciliation to GAAP, can be found in the news release we issued this morning. Let's begin with an update on sales and margin trends. Starting with EXPAREL, where we continue to outperform a flat surgical market, with net EXPAREL sales coming in at $536.9 million for the year and $138 million for the quarter. Fourth quarter average daily volume growth of 6% was partially offset by a lower net selling price due to our implementation of 340B drug pricing in October 2022. ZILRETTA continues to be a highly meaningful and accretive addition to the Pacira portfolio, adding $105.5 million post-acquisition sales to our top line in 2022. We saw improving sales trends for ZILRETTA as we exited the year, which we expect to accelerate as we broaden education and awareness around its value in treating patients, especially those with unique care needs such as diabetic patients. For ioveraº, full year sales of $15.3 million. We expect demand and sales growth to gain momentum in 2023 and beyond, with the launch of new commercial initiatives in the cash pay and spasticity pain market, as well as education and awareness collaborations with professional sports organizations like the NFL Alumni Association, the PGA Tour Champions and the LPGA. We also remain optimistic in ioveraº within new indications such as the treatment of spasticity and media branch blocks where we are making new clinical investments. Turning to gross margins. On a consolidated basis, our total non-GAAP gross margin percent was 74% for the full year and 72% for the fourth…

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from David Amsellem of Piper Sandler. Your line is open. You may go ahead with your question.

I just had a few. Regarding the guidance, can you talk about what that implies? And I apologize if I missed this earlier, but talk about what that implies in terms of the direction of net pricing and just the overall impact of the 340B pricing program and the discounts you're providing? And then secondly, can you talk about what the guide implies regarding new customer adds? You're saying that you're expecting volume growth to drive top line accretion in '23 and beyond. So I'm trying to get a better sense of what you're baking in, in terms of new customer adds? And then the last question is on the surgical environment, with soft tissue in particular. What's your general view on when you think that's going to recover? Because as you look at the charts, I mean, obviously, it's markedly different. Do you think there will be some normalization on the soft tissue side in 2023, or are you thinking about it as normalization -- as a longer-term event?

Thanks, David. So first with guidance and the implications of guidance, what we have right now, David, well, our forecast was that we would have a 5% discount in gross to net. And I think you understand that perfectly. What we see is that as we gained new customers from 340B, that there is a mix of 340B purchases and non-340B purchases. We're actually modestly surprised by the fact that many of these hospitals split their purchases between the 340B program and regular ASP plus sales. So, we think that we weathered the worst of what we'll see. In terms of the 340B purchasers we started buying immediately at the end of October, we are just seeing increased action with more 340B -- non-340B -- previous to non-340B hospitals purchasing. And as I just said, many of those sales are actually not at the 340B pricing levels. So things are unrolling pretty much as we thought. And obviously, we've got work to do in terms of continuing that conversion. But we think that 5% is probably the worse than it will be if that's an appropriate way to present it. And it will improve as we widen the base of purchasers. And also, David, just to make the case again from the script, we also see 340B as a way for us to get more customers with hands-on experience, both for their surgeons, anesthesiologists and the patient experience so that when we get NOPAIN, we shorten the time line of these same folks having access to EXPAREL and going through the formulary process, et cetera. So, I hope that answers your question. If not, come back to me. Pretty much what I just talked about talks about the new customer adds. We do see -- we have a group of…

This question comes from Glen Santangelo of Jefferies. Your line is open.

Dave, I also want to follow up on some of the questions that David just asked with respect to EXPAREL and sort of your outlook. If I kind of go back to fourth quarter, you said in your prepared remarks, right, that you're continuing to outperform the elective surgery market. And then I think later in the remarks, you seem to suggest that volume grew 6% in the quarter in a flat surgical market. Did I hear that correctly with the offset in 4Q, maybe being some of the pricing differences on the 340B program, in particular, that you talked about? Is that a fair assessment of what happened in 4Q?

It is, Glen. Yes.

Okay, perfect. So then if we go to your guidance for 2023, you're sort of forecasting 7% growth at the midpoint, which would that imply sort of low double-digit, sort of volume growth, with a similar type of pricing impact? And I'm not sure embedded within those assumptions, what you're expecting for the overall surgical market based on that assumption.

Close, Glen. The difference between what you just outlined in our guidance is the price increase. Remember in early January, we raised the price of the 10 ml by 8% and the 20 ml by 3%. And so, what you said is absolutely correct. If you understand that there is a roughly 3% net benefit to us as the price increase, then that comes back down into the 7% -- 7% to 8% range, which is what we were trying to do is guide to what actually happened in '22 thinking that the only thing that it would be conservative guidance, of course, based on the 2022 data. And if our assumption is that the primary reason that the market is -- the macro environment is negatively impacted by inflation. And if that changes, then this would be a conservative guide, which is what we were trying to accomplish.

Perfect, okay. And maybe just my last question regards -- it relates to the competitive landscape. And you sort of touched on bupivacaine and maybe some of the fact that some of the opioids are free to some of these surgery centers. And could you sort of comment on the pricing difference between EXPAREL? And if you think that's having any sort of impact on overall utilization, do you feel like it's a pricing issue? Or do you think it's just sort of a macroeconomic issue and just overall surgical volume issue?

Thank you, Glen. That's a three-credit course. So in the hospital, we're in the DRG environment, and that's not going to change. I mean, when I raised that issue in our Washington D.C. discussions that is the third rail of the Democrats as it relates to health care. And they won't even discuss providing anything for one-off reimbursement inside the surgical bundles. That's for inpatients. For outpatients where we had the ASC, as I commented with David, the benefit of that is largely muted by the fact that the insurance carriers saving 30% to 35% on the cost of a procedure are utilizing the vast majority of the ASC capacity with these high-margin procedures like joints and spine and things like that. In the middle there is the soft tissue procedures that are difficult to do given the reimbursement in the inpatient market and are more appropriately done in the outpatient market, given the improved cost structure of a hospital outpatient department. But there are many, many hospitals across the United States, especially in indigent areas and low economic areas, where they can't afford to use anything but the cheapest things that they can buy and there is no reimbursement. So -- and I talked to many of these folks myself. And so, the importance of 340B, Glen, is to start those folks down the -- to have an opportunity at a reduced price to be able to use EXPAREL in that environment to achieve our mission of providing an opioid alternative to as many patients as possible. There are still places, many of them here in rural Florida, where they still can't afford EXPAREL even at the 340 price. So, it is absolutely driven by price in this environment. And that's why the NOPAIN Act is so important. So, the NOPAIN Act will force CMS, and there is a convergence there of these poor patients being largely under some form of social services, so this is the right patient population. But when CMS is forced to reimburse for non-opioid pain medicines in these -- for these patients in these rural settings, we expect that you will see a very important inflection for EXPAREL. Because in that soft tissue rural market, it is absolutely cost that is a ceiling, basically, on surgeons' use of the product.

This question comes from Gregory Renza of RBC Capital Markets. Gregory, your line is open.

Congrats on the progress. Maybe just a few for me. Maybe building on the prior theme as well. Dave, I know you touched on this a little, but could you just comment about your approach to the organic price increases with respect to EXPAREL? How are you strategizing about that, especially with maybe more patients coming online? Do we kind of think about it as in line with historicals? Or are there other considerations that you and the team are considering?

Yes. Thanks, Greg. Well, I think we can go back to -- just to January, and I'll use that as the basis of an answer to your question. So, their 20 ml is the effective dose for many of the procedures that we've historically treated. And the trials that Roy outlined for lower extremity nerve block, where we expect to be launching that in late this year and early next year, both the 96-hour reduction in pain and opioid consumption for both of those trials was achieved at the 10 ml dose. One of our fastest-growing areas, frankly, in our current business is in oral maxillofacial surgery. And largely, that is 5 mls per tube and you end up with a lot of these extractions also being a 10 ml dose. And in many of the pediatric procedures that are being done, not these very large abdominal and orthopedic procedures, but many of the more soft tissue kinds of procedures, we also see a 10 ml dose. So, we see a basket of surgical procedures where 10 ml is the procedural dose. And we are getting several days of pain control and reduced opioids with 10 mls. And so, the first line of strategy here was to close the gap between the 20 ml and the 10 ml because, in different surgical procedures, you can achieve the same results with half the dose, right? So that was the broad strategy, if you will. Your question is a very interesting one as we go forward from here. As we achieve TRICARE, and as we achieve NOPAIN, our outlook is that something like 75% of our total addressable market will be reimbursed by 2025. And so, we've made the statement that we expect to be consistent with CPI targeted kinds of price…

Great. That's really helpful. Maybe just one last quick one and helpful to have you and lay out the lower extremity and sNDA. I'm just curious how you're thinking about prospects for an AdCom? Are you preparing for one? What is the likelihood there?

Yes. No, and I'll comment and see if Roy has any different idea. Now the p-value here, Greg, there's no -- I mean the data is, I should say, astonishingly positive. But in my mind, the data is astonishingly positive given it's a 10 ml dose and the comparator was bupivacaine. So 0.007 for both pain control and opioids with a 10 ml dose for the adductor canal and 0.001 for the foot and ankle that was on bunionectomy trial, but it's a popliteal block in the -- I'm sorry, it's sciatic block in the popliteal portion. And that also was a 10 ml dose and the 0.00001 was both for opioids and pain control. So, I don't -- not getting [indiscernible] share here at all, but we filed this in January. We're moving along in the regulatory process. We'll get our 74-day letter here relatively soon. I don't see why there would be anybody that would say that they need help from the medical community, providing guidance on whether this is a useful agent in the marketplace or not. Roy, if you have any different ideas?

And I'll just add one thing to that, Gregory. The other studies that we've always submitted for NDA, sNDA with EXPAREL have always been against a placebo comparator, right? And this time, we went against bupivacaine, and we demonstrated superiority to bupivacaine in two studies. So, we're actually asking for a superiority claim in the label. And I think that one of the criticisms we've had -- and keep in mind, the FDA originally asked us to go against placebo when we first started. But people say, well, how come you don't go against an active comparator? Well, here, these -- both of these studies went against an active comparator. And like Dave said, it was only a 10 ml dose instead of the 20, and it demonstrated such meaningful clinically, meaningful reductions and statistical significance. I think we're always prepared for an AdCom, but I do feel like the chances of it are extremely low.

This question comes from the line of Oren Livnat of H.C. Wainwright. Your line is open.

Really appreciate you returning to guidance. A couple for me. Firstly, on the EXPAREL guidance, I noticed you said global sales for that. And I'm wondering if you can help quantify sort of the significance of ex-U.S. sales in 2023. And then on 340B, I appreciate your commentary about the, I guess, neutral to slight revenue accretion by end 2023. And I just want to understand that, does that reflect sort of steady uptake already that's begun eventually sort of surpassing that effective price decrease by year-end? Or is there a lag that we're still seeing and as expected, between the initial price increase and even beginning to see uptake in new customers or uptake in existing customers such that maybe in 2024, do you expect acceleration on that front with 340B? Or do we have to wait for NOPAIN to kick in, in 2025 ostensibly to see that acceleration?

Yes. So, the EXPAREL sales ex-U.S. are not significant in 2023. It is -- we are doing well and it is increasing quite rapidly on a percentage basis, but it is not anything that's going to be material to the 2023 numbers. Important as we go forward, but in 2023, we're still putting the pieces in place and going through the formulary process and teaching people how to use the products effectively. Interestingly, there is a great deal of interest in ioveraº in Europe, and we're training many of the high-end spasticity folks across Europe. Paul Winston is going over there regularly now and training these folks. So Europe will be important, but 2023 is not material. You've got all of the pieces for 340B. So, we have a list of people who are currently purchasing EXPAREL, and we forecasted off of that list how much of that business would convert to 340B pricing, and that's where the 5% comes from. And then as these new places come on board, we see that the volume, the total volume increases, which will help gross margin, especially as we bring new places online, but the ability to address these folks and have folks in these -- these are 340B hospitals that never purchased EXPAREL before, and they are just starting to come online in a material way. And so we expect that, that will grow as we go through 2023. And so most of the action moving from 5% to something that approaches neutrality will be back-end loaded as we get into the second half of the year.

On gross margins. I guess some of these issues have persisted a little longer than at least I had modeled through year-end. And I guess you mentioned a little bit of spillover. Can you just characterize how conservative your 2023 gross margin guidance is on that front? Are you leaving a little room for continued batch failures that may be now that you've had to be a little more conservative? Or are you assuming totally smooth sailing in that guidance and it's entirely sort of sales and volume based?

Yes. No, we are not forecasting total sale, for sure. What we see, there's a couple of things here. We mentioned this new in vitro test that we will get approved. We've had some issues where the current test in the soon-to-be removed test or replace test was actually causing us to reject lots that were good based on some variabilities in the test method. And then all of the things that we're associated with our inability to access supply are not currently -- we're in good shape. We've got everything we need to make EXPAREL. So remember, Oren, that we bet in the late 70s before. So in our view, without some of these one-off things that were driven largely by the pandemic and the supply issues, we're really talking about going back to something that looks more normal to where we were before the pandemic. So we've been in the late 79% to 80% range before. We're thinking that we get partway there as we go through this year and then we pick up the rest of it once we get more volume coming online.

This question comes from the line of Andreas Argyrides of Wedbush. Your line is open.

Congrats on the progress. Just on -- a couple on the NOPAIN Act here. So what are some of the ways that the implementation of the NOPAIN Act would be pushed up to 2024 from '25? Just trying to get a sense of the likelihood that this would occur. And then how are you thinking about this -- EXPAREL being included in the act into perpetuity measures for the three years. And then I have some follow-ups.

Yes. So, the original bill as it was going through Congress had a 2024 start date. And so, we've got patient advocacy groups that we've got folks that represent us on the lobby side of the aisle. And we are actively working with a number of patient advocacy groups who are the -- would be the primary beneficiaries of non-opioid treatment therapy for the low socioeconomic ladder and the disadvantaged and working hard going to Congress. Now, it is possible that the House could have a technical amendment and would push the start date forward to 2024. It's also possible that CMS, in their normal rule-making process, would take everything that has currently been approved for 2025 and move it forward to 2024, and we are actively involved in those discussions. In fact, we will be in Washington next week. And so the starting point, Andreas, is the 107,000 folks who died of a drug overdose. There's different ways that this can be established. We're talking to folks about -- can we think about approving a 2024 start for folks who currently have a C code or a J code and approving them for 2024. And then if you need more time for new folks who might be reimbursed make that a 2025. But those -- those are the things that we're working on right now in real time. I don't know how to handicap that, other than the chance there's a better than a zero chance that we're going to have a positive outcome here, but that's the best I can tell you as we sit here in February. On the extension, I mean, you guys probably know Chris Christie is on our Board. And what Chris said to me when we were talking about the timing here is that the government never takes anything that's working back. So, we have a -- what was in the bill was a five-year horizon. It was trimmed back to a three-year horizon. I would tell you that we're pretty comfortable with that, given the fact that we think that this is going to be a major change and improvement in health care, and that will be very, very difficult for the government to take this back after three years, but we'll find out. We're pretty good at working with them too, to show them the benefits. We've been able to maintain the ASC reimbursement now since 2018. So, I think we know how to do all these things with the right people representing us in Washington.

Okay, great. And then just a follow-up on lower extremities. To what extent would the results from the STRIDE study be factored into the FDA here?

The data is included. The question is, yes, it's a compilation of both, Chris. The STRIDE study, while it missed its 24-hour endpoint, was the first indication that we had, that we had a p-value of 96 hours. So the difference here in demonstrating even a larger data set to the regulators is that if you take care of the front end, and you use the standard of care that addresses pain in the first 12 to 24 hours, that we can extend the duration here. And that's what the whole strategy was around the clinical program. So, we will include both of these data sets and the package that goes to the FDA.

The other thing too is in the STRIDE study that those patients all had a general anesthetic. So when they woke up and actual takes a little longer to set up than the bupivacaine comparator they had. And we never positioned EXPAREL ever as something to help you during the surgery, right? It's really for postoperative pain management. So that's why we evolve the next two studies to be patients having regional anesthesia for the surgery, which is really the standard of what's practice out there today. If you're having bunionectomy, ankle or a total knee, most of those patients are being done with regional anesthesia for the anesthetic, little sedation along with it and not a general anesthetic. So, I think when you look at the STRIDE study days two, three, four, we demonstrated, again, not the primary endpoint, but we did demonstrate really meaningful pain reduction that was superior to the active comparative bupivacaine for 24 to 96 hours, if that makes sense.

Our final question today comes from Greg Fraser of Truist Securities. Your line is open. Please go ahead.

On spasticity, can you talk a bit more about the design and size of the registration study? Will that study include [indiscernible] or will that not come until the later study? And then on the gross margin, can you quantify the impact this year on the guidance from 340B pricing or discounting program? And how much growth do you need to see in volume over time to get to your longer-term target of mid-80s?

I'll start, and ask Greg or ask Roy to pick up the spasticity issue. So on the gross margin, the -- so I mean, we've given the answer in a different sort of positioning. So the -- well, the 340B has no impact on gross margin at all. It's on net margin, right? And so, what we see over time is more volume from 340B and more volume from NOPAIN. And the ability to get the 200-liter facility in San Diego approved for commercial scale at -- sale at the end of this year, Greg, gives us the opportunity to have two 200 liters. And the gross margin from those two facilities is significantly better than the gross margin opportunity longer term with the 45-liter facilities that we're currently making the product on. So best in Swindon in the U.K. with a variable cost environment, improved, but not as great an improvement when we go to San Diego where we have a fixed cost environment. But both 200 liters will allow us to improve gross margins. So that is a piece of it. It's both the volume and the gross margin enhancement that allows 340B to be a viable opportunity for us. And if you look at the procedures, about 20% of the 340B procedures have flipped [two] 340B from current customers. So the new customers that the 340B helps us with the gross margin and the increased capacity once we can make $2 billion worth of EXPAREL, the price increases on an annual basis allow us to offset these discounts. And so, that's why as you look towards the end of next year, the new business from these 340B customers and the expansion in volume at the gross margin line allows us to start to address -- to come up on neutrality as we come to the end of the year. It's a very complex formula that we used in order to assimilate all of these different pieces, but also don't lose sight of the fact that having all of these additional surgeons using EXPAREL and these previously naive EXPAREL accounts is a really important aspect of our NOPAIN strategy. You could probably assume from this that when we did 340B, we had some pretty good feelings that we were going to be successful with NOPAIN. So, this is one big opportunity for us to increase margins by increasing capacity and then increasing the number of patients who have an opportunity to get these no-opioid treatment strategies.

Thank you. That concludes our Q&A segment. I'll now turn the call back over to Dave Stack, Chairman and CEO, for closing remarks.

Thank you, Chris, and thanks to everyone on the call for your questions and time today. As you can see, we're making steady progress and expect to deliver on a variety of value-driving milestones over the next 12 to 24 months as we grow product revenue, advance our clinical pipeline to expand product offerings, improve gross margins, increase cash flow and strengthen our balance sheet. The need for non-opioid pain management remains a global imperative. And as Pacira further solidifies its leadership role in this important work, we expect to have significant market opportunities and growth in the years ahead. We look forward to keeping you updated on our progress. Next up for us is the Barclays Conference in Miami. Thanks all, and stay well. Goodbye.

And thank you for your participation in today's conference. This does conclude the program. You may now disconnect. The conference will begin shortly.