Pacira BioSciences, Inc. (PCRX) Q1 2023 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Q1 2023 Pacira BioSciences Inc Earnings Conference Call. All participants are in a listen-only mode. After the speakers presentation there will be 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 your speaker today, Susan Mesco, Head of Investor Relations. Susan, please go ahead.

Thank you, Grace, and good morning, everyone. Welcome to today's conference call to discuss our first quarter 2023 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer; Ron Ellis, Chief Strategy Officer; and Charlie Reinhart, Chief Financial Officer. Roy Winston, Chief Medical Officer, is also here and will be joining us 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. The year is off to a positive start as EXPAREL continues to outpace the elective surgery market recovery as we expand utilization across key target markets and sites of care. We are focusing on three major objectives for 2023, growing revenues in a slowly recovering surgical procedure market, further advancing gross margins to the mid-to high 70% range and improving reimbursement across our portfolio with a specific focus on the NOPAIN Act and TRICARE. . First quarter revenues of $160 million include EXPAREL sales of $130 million, ZILRETTA also was a key contributor for the quarter with sales exceeding $24 million. These results are highlighted by solid growth in EXPAREL volumes as the rollout of our 340B program continues to expand volumes within both existing and naive businesses. I'd also note that the first quarter of 2022 was unseasonably stronger than Q1 historical trends. Our significant top line is driving strong and durable cash flows that allow us to self-fund growth opportunities and significantly improve our debt leverage ratio by recently retiring our Term Loan B using cash on hand and a new term loan A facility. This new highly flexible debt carries a significantly lower interest rate projected to reduce interest expense by at least $15 million in 2023. We are also pleased to report our 24th consecutive quarter of significantly positive adjusted EBITDA of $42 million. As we have said, improving gross margins is a top organizational priority. We have addressed different supply chain and manufacturing issues that negatively impacted margins for the last four quarters. As a testament to our commitment to excellence in manufacturing, we recently -- we are excited to welcome Chris Young as our new Chief Manufacturing Officer. Chris brings more than 25 years of experience to Pacira, and is responsible for overseeing all manufacturing activities and locations across our product portfolio. Additional progress on the manufacturing front includes our enhanced product release assay for EXPAREL. The FDA is reviewing our application for this new test, which we expect to benefit gross margins and support additional intellectual property protection. In parallel, we remain on track to submit a supplemental new drug application for our 200-liter facility in San Diego later this year. This will be another critical milestone towards improving EXPAREL gross margins. Turning now to more specifics on our EXPAREL franchise. We're pleased with our performance relative to the broader elective surgery market with EXPAREL volumes increasing by 6% year-over-year. To further illustrate this, let me highlight some key data points from our most recent site of care and procedural IQVIA data from October of 2022. These data show year-over-year growth for knee and hip procedures, while other orthopedic and soft tissue procedures decreased with inflationary pressures causing patients to delay health care due to costs. In outpatient settings, the procedure market was up 1.2% year-over-year while EXPAREL showed 13% growth with EXPAREL joint procedures up 20%, while EXPAREL showed 13% -- I'm sorry, breast procedures and gynecologic procedures up 16%, general surgery up 11% and shoulder procedures up 9%. The hospital inpatient market was down 6% versus EXPAREL, which was up 1%, with continued year-over-year growth in key markets such as spine with a 49% increase, shoulder with a 20% increase and C-section with a 16% increase. For your reference, these data points are summarized in our investor deck, which is available on our website. Turning to market access. We continue to expand our EXPAREL user base and added 180 first-time purchasing accounts during the first quarter. In addition, the rollout of our 340B pricing program for outpatient procedures increased both 340B and non-340B volumes in these accounts. We believe this program will drive significant volume expansion with an existing and naive 340B accounts representing nearly 10 million EXPAREL relevant market procedures. As expected, we are seeing growth in existing 340B accounts take place at a greater pace than new 340B business. This is resulting in a slightly lower gross to net, which remains at a highly favorable level for our industry at more than 86%. Importantly, 340B will pave the way for us to leverage the NOPAIN Act. This legislation currently mandates CMS reimbursement for non-opioid postsurgical pain treatments in outpatient settings beginning in 2025. We are actively monitoring efforts to accelerate implementation to 2024 and should know more about this when the preliminary CMS rules issue this summer. We believe policymakers in Washington appreciate the urgency for improving access to non-opioid options. NOPAIN will provide a reimbursement pathway for nearly 20 million EXPAREL-relevant market procedures with commercial and self-funded payers expected to follow the lead of CMS. Reimbursement in the hospital outpatient as well as the ambulatory surgery centers will cover more than 70% of the current total addressable market for EXPAREL. In parallel, we are seeing expanding access to non-opioids for government employees and our military and their families through efforts similar to NOPAIN. In October of this year, TRICARE will adopt CMS reimbursement methodology for ambulatory surgery and begin providing separate reimbursement for EXPAREL in this setting. We would expect TRICARE to also mirror CMS in the hospital outpatient setting with the implementation of the NOPAIN Act. There are roughly 10 million members enrolled in TRICARE for primary or secondary coverage. Importantly, NOPAIN, TRICARE and 340B are especially meaningful to the migration of lower-margin soft tissue procedures to hospital outpatient settings. These programs will assist in eligible health care systems affording the opportunity to offer non-opioid pain control for these procedures and advance our mission to provide a non-opioid pain management solution to as many patients as possible. Earlier this year, we opened our second innovation and training center in Houston, which more than doubles our previous capacity to host meaningful educational programming. Our training centers are core to developing both physician champions and community-based clinicians, who want to stay at the forefront of opioid-sparing pain management, especially for nerve blocks and field block procedures. In the first quarter alone, our educational programs provided training to more than 1,700 health care providers at 63 on-site and in-field events. We believe this immense need for training around opioid-sparing pain management bodes well for our future growth as more physicians become familiar with best practice on how to incorporate our portfolio of safe and unique commercial products into their practice. Outside the United States, we continue to make steady progress. Our team has secured approval for EXPAREL access in key centers across the European Union and the United Kingdom. We are focusing our attention on regional analgesia for EXPAREL and we form partnerships with thought leaders who are now advocating for EXPAREL and iovera°. We will also have a presence at several key scientific meetings and society meetings. In Latin and South America, our partner, EuroPharma, is advancing the regulatory approval process for EXPAREL in Brazil, and we are on track for submissions in other South American countries in the coming months. On the regulatory front, we're making important progress. FDA review of our supplemental new drug application for EXPAREL is now underway with a PDUFA action date of November 13, 2023. To remind you, this application is seeking expansion of the EXPAREL label to include two key lower extremity nerve block indications that we expect will significantly extend our reach into surgeries of the knee, media lower leg, foot and ankle, representing more than 3 million annual procedures. In pediatrics, interest continues to grow as new data are generated. We look forward to building on this and initiating our regulatory study later this year to support the expansion of the EXPAREL label to include patients from birth to 6 years. Finally, our Phase I study of EXPAREL for intrathecal administration continues and is on track for completion later this year. Switching gears to ZILRETTA and iovera°, where our full 240-person field-based team is broadening education and awareness around these complementary and stand-alone non-opioid solutions for monitoring and managing osteoarthritis pain. In the first quarter, the team added 122 new ZILRETTA first-time purchasing customers and 55 new iovera° customers. Several value-creating milestones are on track for the next year and current and new indications for both products. For ZILRETTA, we expect to initiate two new label expansion studies. This includes a Phase IV diabetes safety study in knee osteoarthritis and a Phase III shoulder osteoarthritis study. Importantly, if our shoulder study is successful, ZILRETTA could become the first and only approved corticosteroid specifically for shoulder osteoarthritis. Both studies will evaluate ZILRETTA versus triamcinolone with the goal of adding a superiority claim to the ZILRETTA label. For iovera°, we recently launched a cash pay program and are seeing expanded utilization in knee applications. Clinicians are using iovera° as an additional offering to patients for pain management. In addition to the orthopedic practices, we are seeing success in regenerative medicine specialists, historically early adopters of new technology. Our clinical education team is working closely with KOLs on iovera° treatment for the pain of spasticity to provide a new treatment option for pain control in this patient population. We recently announced a year-long partnership with the PGA Tour Champions, naming iovera° as the official non-opioid pain management option of multiple 2023 tournaments. This partnership will raise awareness around drug-free pain control with iovera° as the product that will have a presence at several PGA Tour champion tournaments, with the first appearance recently taking place at the invited celebrity Classic. We also recently hosted various educational and awareness initiatives in the LPGA fitness trailer during the Chevron Championship, which is the tour's first major of the season. On the clinical front, we are preparing to launch a registration study for the treatment of spasticity later this year. In spasticity, iovera° has the potential to be a game changer. There are approximately 10.2 million patients in the United States currently diagnosed with spasticity. 2.6 million of those patients have moderate-to-severe spasticity and 42% of them have received at least one treatment modality, but only 150,000 are currently receiving a treatment with toxin. This underscores a highly dissatisfied market with inadequate treatment options like toxins and phenol. We have an iovera° smart tip for a medial branch block for low back pain, which we also expect to have on the market in 2024. Beyond our commercial portfolio, we have an exciting earlier-stage portfolio of new product development opportunities that include PCRX-201, a novel intra-articular gene therapy proud candidate that produces IL-1Ra for osteoarthritis. Our preliminary Phase I safety and efficacy findings were recently presented at the Osteoarthritis Research Society International World Congress in Denver. PCRX-201 was well tolerated with improvements in knee pain observed across all dose groups. Importantly, the greatest level of efficacy was observed at the lowest dose. Based on these encouraging data, we are planning to launch a second Phase I study of PCRX-201 in osteoarthritis of the knee. Ron Ellis will share some more details around the PCRX-201 development program shortly. We also to advance a Phase 1 readiness activities around our internal multivesicular liposome pipeline which include a multivesicular liposome dexamethasome formulation for low back pain and a multivesicular liposome bupivacaine formulation as a nerve block or a field block for longer-lasting chronic pain where patients are most at risk of becoming addictive to their pain medications. With that, I'd like to turn the call over to Ron to provide some more details on our investments in GQ Bio and PCRX-201. Ron?

Thanks, Dave. And good morning to all joining us today. I'm excited to share some highlights on the progress we have made for PCRX-201, which we believe has the potential to be an important disease-modifying gene therapy for osteoarthritis. The product candidate was discovered by GQ Bio, a privately held biopharmaceutical company headquartered in Hamburg, Germany. GQ Bio's product candidates are next-generation gene transfer vehicles. These gene therapy vectors are highly efficient in entering joint cells to confer multiyear clinical benefit. In PCRX-201, these high capacities adenoviral gene therapy vectors express IL-1Ra when in the presence of inflammation. IL-1 is a cytokine inhibitor that plays a central role in inflammation in catabolic processes, many of which are associated with disease progression in osteoarthritis. Interrupting this cycle is likely essential to slowing disease progression. After intra-articular injection, the Vector enters join cells and turns them into factories to produce sustained therapeutic levels of IL-1Ra to manage pain and mitigate OA-related joint damage while remaining localized to the joint space. Our Phase I single ascending dose trial enrolled 72 patients in two cohorts, a co-administered steroid cohort and a cohort that did not receive a steroid. As Dave mentioned, 201 was well tolerated with efficacy observed at all doses. But what was particularly compelling was the level of efficacy achieved by the co-administered steroid group, which showed a significantly greater percentage of patients with the decline of WOMAC pain scores that exceeded 50%. The level of efficacy and duration of response will be an unexpected finding from steroids alone. The outcomes were so unique. We filed for patent protection around it and currently have a patent pending. Based on these data, we are initiating a second Phase I study that will help us to find the best administration regimen to take into the next stage of development. We expect to launch this study later this year. In parallel to the Phase I study, we will begin advancing our process development activity. To that end, we're expanding our relationship with GQ Bio to include process optimization and forming a new collaboration with Exothera, a Belgium-based clinical development, manufacturing organization, with a proven track record in customized process development and GMP manufacturing services for viral vector technology. These activities will ensure that we move forward with a commercially amenable process with a competitive cost of goods. Lastly, in April, we made an additional investment of EUR 2.5 million in GQ Bio in the form of a convertible note. We will make an additional investment of up to EUR 2.5 million upon the achievement of certain prespecified development and scale-based milestones. We look forward to providing you with additional updates on PCRX-201 on future calls. With that, I'll turn the call to Charlie for his financial review. Charlie?

Thank you, Ron, and good morning, everyone. 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. I'll start with an update on sales and margin trends. Starting with EXPAREL. We had a solid quarter with net EXPAREL sales coming in at $130.4 million for the first quarter. First quarter average daily volume growth of 6% yielded average daily revenue growth of 1%, primarily due contracting activities. With the first quarter historically representing 22% to 23% full year sales, we believe we're off to a positive start to 2023, especially given several growth initiatives that we expect to kick in as the year progresses. These include ongoing growth in volume from both existing and new 340B customers, new initiatives with OMFS, plastics, outpatient, sports management and pain management and rehabilitation health care providers and our ongoing expansion in European markets. For ZILRETTA, first quarter sales were $24.3 million. With our 240-person field force now promoting education and awareness, we expect ZILRETTA growth will accelerate as the year progresses, and the team gains traction. As Dave mentioned, we are already seeing an encouraging uptick in new first-time ZILRETTA customers. For iovera°, first quarter sales came in at $4 million. Here, too, we are seeing strong growth in our customer base and expect demand and sales will gain momentum with a full field-based team generating awareness around the advantages of a drug-free nerve block with iovera°. We also expect to benefit from new commercial initiatives. Our sports initiatives with NFL Alumni, the PGA and the LPGA were off to a strong start and cash pay market is gaining real traction with orthopedic health care providers. Turning to gross margins. On a consolidated basis, our first quarter total non-GAAP gross margin percentage was 72%. This is comprised of non-GAAP gross margins of 71% for EXPAREL, 83% for ZILRETTA and 58% for iovera°. As discussed on our fourth quarter call in February, the tail end of the manufacturing challenges experienced in late 2022 were seen in our first quarter 2023 operations. Based upon action that Chris and the team are taking, we expect to report sequential improvements in quarterly margins for the remainder of the year and that we are on the path to reaching our goal of achieving sustaining margins in the mid-80% range over time. Turning to expenses. Non-GAAP R&D expense was $15.3 million, reflecting ongoing investments in our clinical programs. we expect R&D expenditures to be more heavily weighted to the second half of the year as several new clinical studies get underway. Non-GAAP SG&A expense came in at $62.5 million. We expect that SG&A expenses will be more heavily weighted to the first half of the year with the launch of new commercial initiatives. First quarter interest expense was $9.6 million. Importantly, the remainder of the year will benefit from $15 million or more of interest expense savings with the retirement of our Term Loan B on March 31, 2023 using a new term loan A and cash on hand. The new term loan A carries an interest rate that is 400 basis points lower than the previous term loan B debt and has enhanced flexibility that meets our operational needs. And lastly, despite several challenges, we delivered another quarter of significantly positive adjusted EBITDA of $41.9 million. As for guidance, today, we are reiterating our 2023 full year guidance as follows: EXPAREL net sales of $570 million to $580 million. ZILRETTA net sales of $115 million to $125 million, iovera° net sales of $17 million to $20 million; non-GAAP gross margins of 76% to 78%, non-GAAP R&D expenses of $70 million to $80 million, non-GAAP SG&A expense of $220 million to $230 million; and stock-based compensation of $51 million to $54 million. In summary, we remain bullish on our 5-year plan year-over-year top line growth returning to the teens once inflation eases and the elective surgery market normalizes. Gross margins improving, 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 I'll turn the call over to the operator to begin our Q&A session. Operator?

[Operator Instructions] Our first question comes from the line of David Amsellem of Piper Sandler. David, you’re live.

Just had some questions on margins and spend. Can you provide more color on the gross margin headwinds, I think you talked about pricing, but just wanted to drill down on the extent to which just manufacturing has been problematic in terms of getting the EXPAREL margins up? I know you had some issues periodically last year. So can you talk about that. And how to think about cadence of gross margins as the year progresses? And then secondly, when do you think you'll get to the AVs? You said over time, but what's your thinking on timing there longer term? And then lastly, on R&D spend, how should we think about that generally? I mean I know there's a number of things you listed in the slides. Should we think about that as kind of growing over time, flat, getting some leverage in the model. Just help us understand that.

On margins, gross margin for manufacturing and we've talked about this, I mean, over the last four quarters, we've had quality issues with some of our APIs, and we believe that, that's now behind us. And we've had some issues with some sterile filters that we think we've got our hands around but is not totally behind us. And so we think that we've got the folks in place that can handle these things, and we're working in a very aggressive manner with our suppliers to make sure that we can solve those problems. I remind everybody that we've been -- we've had a gross margin of 79% before. So we're not trying to break into new territory here. We're just trying to fix some of these issues that appear mostly to be COVID related in one way or another so that we can get back to those kinds of numbers. And you just heard Charlie reaffirm 76% to 78% for this year. So I think we're well on our way to get there. I mean there are a couple of inflection points right in front of us here. We will submit the sNDA for the 200-liter facility in San Diego as we get into the third quarter. We expect that, that facility will be making commercial material in the beginning of 2024. So on the relative short term, we're building out a another fill line for ZILRETTA at our contract manufacturer. And that's important because the yield needs to be improved from the yield of the fill line and the product that we bought from Flexion last year. So -- and we've moved the production of the smart tips for iovera° to a contract manufacturer with a much better margin profile as we go forward. So really, we need to get back to that 79, 80 plus percent. We think we'll do that with the 200-liter facility. Just as important, David, is that, that will allow us the opportunity to decommission at least one of the 45-liter skids, save the other for Europe and for some of the smaller countries in Latin and South America. And we should get back into the 80s here over the next 2 or 3 years. That's the plan. On the R&D spend, we're nearly done with EXPAREL. I mean there really isn't much more to do. We've got infiltration for all uses in all indications in adults. We've got peds, 6 to 17, now for infiltration again. We have agreement with the FDA on what the clinical trial looks like to go from neonates to 6s. So with the approval of the lower extremity nerve block, there's really nothing else to study for EXPAREL unless there's some specific indication that comes to light that we haven't really anticipated yet. You'll see the move go over to the pipeline products. There's a lot to be done with ZILRETTA as it relates to safety and use in the diabetic population, which we've highlighted a couple of times and that trial will start this year. We have a protocol for a shoulder study. And we have our eye on a superiority claim versus triamcinolone acetonide, which I think will be a real marketing advantage. And there is some discussion, especially in the PM and our doctor world that we should develop ZILRETTA ZILRETTA for hips, not much for revenue but more for proof of principle and showing that we can actually have a long-term impact on this procedure group. So there's a lot of things we can do with ZILRETTA as we go forward from here. And then iovera°, we're currently working on the pain of spasticity as well as the broad label that we have for peripheral pain. I would say, David, that this is not a direct answer to your R&D question, but we now have folks in the marketplace asking us if they can use the iovera° trade name for cash pay clinics in local markets, several of them around the country, especially for sports. And so you see a lot of traction there and iovera° for spasticity is probably as big an opportunity from a patient care perspective as well as from a revenue perspective, as I've had in my career. And the results are dramatic. We've met with the FDA. We think we have a line of sight on a clinical trial that we'll do later -- we expect to start later this year. And so we're training up many of the KOLs in spasticity by using the pain of spasticity, where those are both apparent in certain patient populations. And then spasticity really has the potential to be a game changer for the spasticity population as well as for Pacira. You just heard Ron talk about 201. I think we need to get another look at not only the Phase I study, but what the protocols look like from our discussions with the FDA going forward. These trials have, in the past, had a propensity to be pretty expensive. So we have to decide whether we want to do this by ourselves or whether we want to take on a partner. And then we've got the portfolio of dexamethasone and a higher potency bupivacaine product that will mimic EXPAREL but will last for a longer period of time. So when you look at all of those things together, I mean, our plan is that R&D expense should be relatively consistent over time with EXPAREL moderating backwards and the other two commercial products being front and center for the next couple of years while we work through the Phase I studies with the intrathecal EXPAREL with 201 with dexamethasone and bupivacaine. So there's a lot to be done here, David. I don't think you're going to see any spikes. I think we're in a position where we can take the most important things from a revenue and patient care perspective and move them forward and then QS that with some of the other things that we've got in the multivesicular liposome pipeline. So that's the plan.

[Operator Instructions] Our next question comes from Glen Santangelo of Jefferies. Glen, you’re live.

Dave, I wanted to talk to you about the revenues a little bit because I think last quarter, you said you expected EXPAREL sales in 1Q to be roughly 20% in the full year, and you clearly did better than expected there. But conversely, if you look at ZILRETTA, it seems like you're happy with the new accounts that you signed up, but revenue sort of declined almost mid-teens on a sequential quarter basis. So what's interesting is you did better at EXPAREL, maybe a little bit worse relative to what we were thinking in ZILRETTA, but yet you maintained the guidance for both of them. And intuitively, you would think you might have raised one and lower the other. And so I'm wondering if you could just sort of reconcile what happened in 1Q relative to your expectations.

A couple of things. I'll start with EXPAREL. I mean we did slightly better than the historical trends would suggest. We also have the outlier of 2022 when the first quarter was one of the strongest quarters. And so I think it's entirely prudent for us to wait for another couple of quarters of data before we start increasing off of what would have been the smallest number in the quarterly progression of the year. So we're happy to have a little bit of cushion there. I don't think it's time yet to raise the revenue until we start to see the procedures start to come back in the fold. And we think that, that's going to happen over the next couple of quarters and couple of years, but let's let that happen before we raise guidance from where we are. On the ZILRETTA front, there's a couple of things. First, the field force only started promoting ZILRETTA to the wider base on the reach and frequency strategy in the back half of January. So you're talking about a very small sampling here in terms of letting that opportunity mature. There's also the issue, Glen, that we had a couple of significant users of ZILRETTA that were -- that came over from Flexion. The issue that we were facing was that they were giving what we thought were inappropriately high discounts. And it took a while to straighten all that out until in the middle of February, we were able to come to agreement with those large purchasers and they are now buying ZILRETTA. So when you add that to the safety story that we've got in the marketplace, again, didn't start until the back half of January relative to keeping the patients in range and eliminating these glycemic spikes. I think that ZILRETTA is a little light on an annual basis, but with a number of levers that we think will get us back to the number that Charlie just reiterated. So I don't think we're uncomfortable with either one. I think it would be a little early to lower or raise either one of them.

Maybe if I could just ask one quick follow-up on the margin side. With respect to gross margin, I heard your comments that you hope to get to the 80s over the next kind of couple of years. But if you look at the result in 1Q with the 71.8% gross margin, I want to almost match your low watermark last year. And I wanted to get to the midpoint of the guidance it almost needs -- it seems like you need 78% to 80% for the next three quarters, and it seems like a pretty sizable ramp. And so I was wondering if you could comment on that. And then lastly, with respect to SG&A, it certainly seems like you're running hot relative to your full year guidance in 1Q. And you seem to suggest it was more heavily weighted in the first half. I just wasn't clear why. And I'll stop there.

Sure. So as it relates to the gross margin, we noted on the Q4 call that there was some overlap from Q4 into Q1 that was going to depress the Q1 margins. Some of that was related to EXPAREL and some of that was related to ZILRETTA. We believe that we've cured both of those, and I'll remind you, again, Glen, that we were running at 79% in the first quarter of last year. So we've made some structural changes from a personnel perspective. . And right now, Science Center is running as planned. So we're not uncomfortable with reassuring the guidance of 76% to 78%, noting that what we've got is $130 million of the $570 million to $580 million guide. So the majority of the business for the year is in front of us at the higher margin. So the math doesn't exactly work that it's a quarter of the year that's gone. As a matter of fact, it doesn't work at all. So we're not uncomfortable with where we are with the manufacturing goal, especially with some of the personnel changes that have been made and some of the ways that we're now working with the 200-liter in both places. On the SG&A, we reconfigured the sales force at the national meeting this year. And we put folks out there with the idea that we were going to have 3 times the frequency and the reach for both iovera° and ZILRETTA. We think that, that's working in terms of new users. And it's not a direct comparison from Q1 when somebody has -- is getting started using these compounds to the way their product will grow as they get used to using the product and they expand their utilization. So SG&A is according to plan, but it's a little higher than in previous years for the same quarter because we've added some folks. And we've got a 3-product portfolio now that these folks are working in the marketplace with. We've also added PM&R guys to the call pattern, and we've got a separate sales force out there that is small but still an added expense. It's focused just on OMFS and peds. So there's some structural changes that we made that support the SG&A. We watch that carefully, of course. And every quarter, we look at all of those territories to determine where the growth is and where the growth is in. But right now, same comment for the year, I think we've got the right folks in the right place.

[Operator Instructions] Our next question comes from Gregory Renza of RBC Capital Markets. Gregory, you’re live.

And Dave, maybe just on the 340B pricing program. I just wanted to ask you to perhaps expand a little bit on your commentary. Maybe just give us maybe a state of where you are now, certainly, with respect to the mix of the existing and naive businesses that you've represented or that you've discussed and how that has fared with your expectations thus far and really where you see that going?

Yes. No, thanks, Greg. It's doing what it was supposed to do. Just to reiterate, we wanted to open up those additional procedures where EXPAREL wasn't being used, understanding that there was going to be some purchases from current users that was going to modify the benefit of that. I think generally, Greg, we're exactly where we thought we were going to be. The numbers that we see are basically flat week-to-week, a little bit higher than what we projected when we talked about this in the Q4 call, but understand that the price increase of 2023, this year's price increase, we've not seen any of that yet in for the 340B customers, and that will take effect in in July. So there's a 6-month lag in any pricing action that will fall over to the 340B customers. So we expect that the majority of that 3.5% will come and have an impact on 340B that will take it right back to where we thought we were going to be and what we guided to as we came out of the year. So we're not disappointed. It's running, I would say, Greg, we're probably a point higher than we thought we were going to be. So it's slightly higher than we thought it might be. But we also see that the new users are increasing their use, and we continue to have 7 to 10, 12 new users every week, which are all positives. And so if you look at this in the short term and you want to train the health care providers and you want to offer the opportunity for non-opioid pain control for the patients, I think we're doing exactly the right thing while we work on TRICARE and NOPAIN, which will give us yet another alternative way to provide these patients and maybe not have to discount the product according to the 340B calculations that we were just talking about if that makes sense.

And maybe just a question on the pipeline, perhaps more broadly. It's nice to see you talk about 201 and others in the hopper. I think you alluded to just certainly the investment and maybe the differentiation of capabilities when it comes to taking a gene therapy or some of the novel approaches forward. Could you just touch a little bit upon where you see those decisions coming to bear, at what stage of development certainly as you're proceeding in early stage with the Phase I. Just curious how you're thinking about really changing the complexion of your capabilities and R&D approach should you want to move forward with this approach?

The approach is different for sure. I mean I think the first thing that Ron just talked about, right, is the process, and as you guys know well, the product is -- the process is the product as we go forward here. So right now, Greg, where we are is, we're going to look at some additional Phase I work. It's really around the timing and what type of steroid, whether it's oral or injectable, the timing of that steroid and how to best prepare ourselves for a protocol. We will have a -- as we get closer to when we have the process determined for doing the actual pivotal trials, we've had some interest. We've had some inbound interest in 201 already from potential partners. And I don't think you'll see us make any radical changes to our R&D organization. We've been fortunate enough to bring the people that we're working on 201 at Flexion, have joined Pacira. So we have a cadre of gene therapy experts in our organization now and that have helped us a lot with the discussions with the FDA on that topic. It will really be driven by the the protocol that's agreed to, and I think we're there. And we'll see how this eventuates with trials over the next 1.5 years. And then the cost that's projected versus the commercial costs in addition to the clinical costs. So I think we'll -- our desire would be to keep as much of this asset as we can at least early on as we create value. And then if it turns out that there's a partner that can add more value and can share the expense with us, we've got a lot of interest in being able to do that, and that would be an approach we would probably take. We're not looking to double the size of our R&D organization to be a gene therapy company for sure if that's the nature of your question. Ron, I don't know -- Ron is here with us, Greg, we should ask him. He works on this every day.

Yes, Greg, thank you for the question. Just to add what Dave said, we're a couple of years away from having a defined dose and process, and that really opens up the next milestone where we can take a look at opportunities to partnership.

[Operator Instructions] Our next question comes from Greg Fraser of Truist Securities. Greg, you’re live.

Can you comment on the export net in the quarter is gross net stable now? Or would you anticipate some additional pressure in the coming quarters as volume to the 340B hospitals grows? It sounds like you have some offset from the price increase in the second half. . And then I had a question on pediatrics. How much demand do you think is being driven by pediatric use? And what inning do you think you're in with respect to the pediatric opportunity?

It is stable at the current percentage use. And as you said, we do expect to benefit by several points as we enjoy the price action of the beginning of the year against the 340B account. So I think our thought process is that we are probably at or very near the low point and without any price increase, and we will get back to where we thought we were going to be initially with the price increase. And so I think it is stable and it doesn't move much at all from week to week now. And so I think we're in a stable position and can improve from here with more purchasing from the non-stored 340B accounts outside of 340B. I think also, Greg, there's also a bit of a shadow here as more -- there's activity, significant activity in the whole 340B arena. And I think folks are taking the idea that they have to use 340B purchases, for 340B customers very seriously. So I don't think that there's any risk of any additional use out in a 340B -- in an inappropriate 340B program going forward. So we feel pretty good about that. Peds is still in the early innings. I mean if I said it was -- the lady hasn't sung yet for sure. It's probably the third, it is a slower group to adopt in terms of just making a significant move in a short period of time. I would tell you, it's good to see, though, that with the people have adopted EXPAREL impedes that their growth is quite explosive and they get to be significant purchasers of the drug in a very short period of time. I mean Roy is with us, and this is Roy's baby. So I'll ask Roy to see if there's anything additional he would say to that for pediatrics.

Yes. And I think it's a very good question. The thing about pediatrics, it always lags behind what you see in the adults. So it's probably 5 years on the curve still to go with peds to get it to get to where EXPAREL is today. And with that, we have a lot of data that's about to come out pretty much from from collaboratives and from some investigator initiated. So for instance, as an example, scoliosis, which is one of the really big, painful procedures you see in pediatrics. We now have two large centers. One is the Shriner’s system and one is Cleveland Clinic doing studies in scoliosis with EXPAREL, and we should have that data, I would hope, within the next 6 months. And once that's out there and really objective from two big places like that, I think it will be something that people can latch on to. We have calls every day dealing with pediatric centers looking to get started. But again, the process is longer because they want very strict protocols. They want all the details. And just like you do any time with kids, the threshold is always higher to adoption. So I don't -- hopefully, that helps.

[Operator Instructions] Our next question comes from [Makela Francheskina] of Barclays. You’re live.

This is [Makela] on for Balaji Prasad. Just following up on the 340B. Could you just provide a bit more detail on this impact on gross margins and operating margins this quarter? Or really just any further color you can provide on volumes index?

When we started down the road of 340B, it was really mediated by the fact that we had to either get in or get out because we purchased ZILRETTA that was a 340B participant. And so our hand was forced to some level. But at the same time, we saw 340B and the expected decrease in the gross to net as a way to get additional clinicians using the product outside the hospital, especially as we anticipated the NOPAIN Act coming. So there was a clear understanding that roughly 20% of the business that we currently enjoy. This is October of '22 now that 20% of that business would likely move to 340B and that, that would cause roughly a 5%, 5.5% reduction in the gross to net. Now that was without the benefit of the price increase, right? And so we are just very modestly ahead of that. Interestingly, it's because we -- the greatest benefit so far has actually been more purchases of 340B active accounts. And so the fastest-growing section of our business actually is the 340B participating accounts, both non- and 340B. So it has worked to some level. Our anticipated growth into non-340B accounts who would not -- who would order both 340B and non-340B has been slightly slower than we thought. And so that's what brings us back to this 25.5%, 26%. And then the focus then is on the 6-month delay in the 340B pricing reflecting the price increase of January 1. So when you lay that on top for the rest of our business, the net-net of that was about 3.5%. The government has all of the CPI calculations, and we go through all of that with this too. So we're not calculating that we would enjoy the full 3.5%, but that there will be a 2%, 2.5% improvement in the gross to net on July 1 as we start to enjoy the benefit of the price increase. So that brings us right back to the 24% -- that 23%, 24% that we thought we were going to get in the first place. So it's pretty much where we thought it was going to be. And I think we did the right thing, especially given the progress on NOPAIN and some of the other things that are coming down the pike that will open up the opportunity to have reimbursement in these same outpatient populations.

[Operator Instructions] Our next question comes from Rohit Bhasin from Needham & Co. Rohit, you’re live.

This is Rohit on for Serge. Can you talk about your expectations for the remainder of 2023 for surgery trends? And then secondly, how do you think having the lower extremity nerve block indication label for EXPAREL changes [indiscernible] opportunity.

Yes. Thank you, Rohit. Let me start in reverse. So when we look at lower extremity nerve block and just to remind everybody, this data will be specifically for knee and foot and ankle. Those two procedures encompass about 3 million additional procedures. I always caution everyone that we are already being used in about 300,000 of the knee procedures. It's not necessarily for an adductor canal block but in the same procedure. So the delta is about 2.7 million procedures, clearly meaningful. We think that we'll get some of those knees relatively quickly because it is just a matter of not being in the package insert, especially with a number of the younger anesthesiologists. Foot and ankle will be a more linear approach. I think there's interest in many of the foot and ankle surgeons, but they don't have a lot of experience with EXPAREL yet, and so that will be a bit of a longer-term opportunity. But clearly, one that should take -- we should take advantage of pretty quickly. Just to be clear, Rohit, we will more than likely -- unless there's some type of an early approval, which we do not expect we will start doing some immediate targeting on approval, but the big launch for this would be at a national meeting in January of 2024. For the rest of this year, there's a whole bunch of stuff going on. And so that's a very complex question, but I'll give you what we think. So first, the -- well, we thought that the big issue in 2022 was labor until we saw that the peak of the 2022 procedure volume was in the second week in April. So if that was true, then it couldn't have been labor because we had enough labor to meet those peaks early, very early in Q2. So -- and all the procedures, by the way, except knee and knee, and knee and hip went down at the same time. Knee and hip normalized as we got into the second month of Q4. But just as you know, knee and hip were the only 2 procedures that grew in 2022 over 2021, knee by 5% and hip by 3%. The other orthopedic procedures were down just like the soft tissue procedures. And actually, orthopedics overall was actually down '22 over '21. So that's how we got into this year. And so as we go through the rest of this year, what we think is going to happen is that there's a number of impacts here. Inflation clearly is the major driver. As we look at food prices, you see that food was 7% of a family's budget last year. It's over 9% now as we get into this year. So as inflation moderates, we expect that elective surgeries will also moderate. There's something new that we've been investigating that it's not something that we really thought about a lot before, but it appears that especially in the socioeconomic strata that depends heavily on income tax returns that there is a correlation between the patients getting their refund and having the free cash to be able to get -- to be able to pay the co-pays and some of the co-insurances associated with procedures. I'm not sure we ever really understood that before, but the refunds are late and smaller this year. And when we talk to folks in the marketplace, we hear that they are delaying until they get their refund. And in many cases, they're surprised that the refund isn't as much as they thought it was going to be, neither of those are helping us. On the other side of the coin, we know that the mortality associated with the pandemic has really taken the bottom of the procedure market out, especially for things like debridements and those kinds of procedures. And there is some evidence that those procedures are starting to come back to the marketplace and replace the folks who would have been here if they didn't pass away as a result of the pandemic. So we do think that no matter what the scenario is with inflation and the possibility of a recession that elective procedures will continue to move modestly as we go through the third and fourth quarter of this year. We do expect that they will continue to favor the outpatient procedure. And we expect that by the end of the year, the outpatient, this is HOPD and ambulatory surgery, will be in the mid-70s, in the 73%, 74% range overall, which, again shines lay down TRICARE and NOPAIN and our ability to get reimbursement for these patients who are moving to where -- the procedures are moving to the outpatient environment. If we can achieve reimbursement in that marketplace, we would have reimbursement for nearly 50% of our covered procedures in our TAM. And then with CMS or with commercial payers generally following CMS in terms of the roadway, the paradigm for how you get reimbursement. So we're working hard on 2024. We'll know that sometime probably in July when the new rule comes out, and we'll see where we get. But the possibility -- everything is trending very modestly in the right direction. I don't think you're going to see any hockey sticks over the next couple of quarters, but I think we've survived the worst of it.

I would now like to turn it back to Dave Stack, Chairman and CEO, for closing remarks.

Thank you, and thanks to all on the call for questions and time today. 2023 is off to a positive start, and we're energized about the opportunities that lie ahead of us. Throughout the balance of the year, we continue to work to transform the lives of patients in need of non-opioid pain management, which is an ongoing play throughout the country and around the world. Next up for us is the RBC and Jefferies conferences in New York. Thanks. Stay well. We'll see you all soon. Bye-bye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.