Good day and thank you for standing by. Welcome to the Q2, 2023 Pacira BioSciences Inc. Earnings Conference Call. At this time, all participants are in 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 your speaker today, Susan Mesco, Head of Investor Relations. Please go ahead.

Thank you, Gerald. And good morning, everyone. Welcome to today's conference call to discuss our second quarter 2023 financial results. Joining me on today's call, are David Stack, Chairman and Chief Executive Officer and Charlie Reinhart, Chief Financial Officer; Ron Ellis, Chief Strategy Officer and Roy Winston, Chief Medical Officer are also here for today's question-and-answer session. Before we begin, let me remind you that this call will include forward-looking statement 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 are entering the second half of the year with positive momentum after seeing a meaningfully -- a meaningful uptick in year-over-year EXPAREL growth in June and July. In addition, recent data indicate in improving elective surgery market that we believe will continue through the remainder of the year. As the economy moderates and soft tissue elective surgeries come back, we are well positioned to get back to more robust top-line growth rates. While we are encouraged by improving trends, today, we are adjusting the full year sales and gross margin guidance to reflect an updated view of market conditions and procedural cadence for the year. Charlie will discuss guidance in greater detail later in the call. In the second half of the year, we will continue to focus on three priorities: growing revenue, improving gross margins and expanding market access. Second quarter revenues of $169 million include EXPAREL sales of $135 million, driven by solid volume growth in a slowly recovering market. In addition, we continue to build awareness around ZILRETTA and iovera with our field-based team now promoting all three of our products. Second quarter ZILRETTA sales exceeded $29 million, and iovera sales grew to more than $4 million. Our significant top line combined with ongoing operating discipline is driving scrubs strong and durable cash flows that allow us to further solidify our financial condition by recently prepaying $25 million of outstanding principal under our term loan a facility. The second quarter also marks our 25th consecutive quarter of significantly positive adjusted EBITDA of $54 million. We continue to focus on improving gross margins, and we are moving in the right direction with second quarter margins improving to 73%. Our San Diego facility is now outperforming…

Thank you, Dave. 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 second quarter with net EXPAREL sales coming in at $135.1 million. Second quarter average daily volume growth of 4% was offset by the impacts of our investment in the 340B program and other contracting activities. As Dave mentioned, we were encouraged to see improved year-over-year growth in June and July. These data leave us optimistic the second half of the year will be stronger than the first half of the year. For ZILRETTA, second quarter sales were $29.3 million, with our 200-person field force now promoting education and awareness, we continue to see encouraging uptick in the first time customers and expects ZILRETTA growth will accelerate over time as the team continues to grow our user base. For iovera, their second quarter sales came in at $4.4 million. Here too, we are seeing strong growth in our customer base and expect demand and sales to gain momentum, with the full field-based team generating awareness around the advantages of a drug free nerve block with iovera. We also expect our sports initiatives with NFL Alumni, the PGA and the LPGA to drive awareness around iovera as an innovative opioid-free option for managing pain. Turning to gross margins. On a consolidated basis, our second quarter non-GAAP gross margin percent was 73%. This is comprised of non-GAAP gross margins of 72% for EXPAREL, 82% for ZILRETTA and 78% for iovera. As Dave mentioned, our San Diego facility is performing in line with expectations and achieved EXPAREL…

Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of David Amsellem from Piper Sandler. Line is now yours.

Hey, thanks. So just had a few questions. I know you talked about underlying electrosurgical dynamics. But with improvement, I guess I would have thought we would see more robust volume growth for EXPAREL, and it doesn't seem to be there. So I'm just wondering out loud, is there something else that we're missing on the volume side? Is there something regarding underlying commercial execution that we're missing and just help enlighten us as to what is happening here and why EXPAREL seems to be lagging in the overall recovery of the electrosurgical space. So that's number one. Number two, you talked about margin expansion and operating leverage for a number of years. Here you are guiding down for gross margins. I get your remarks on Swindon. But at what point can you take more aggressive measures to deliver on the operating leverage that you've talked about again for a number of years. And is there a sense of accountability that the margin expansion and operating leverage that you've cited in the past just hasn't come to pass yet. So I'm wondering if you can give us some thoughts on that. Thank you.

Good morning, David. And Thanks. First, on the first question, as we came into and out of Q2 of this year, April was very soft, David and actually, one of the worst months that we've seen in since the pandemic. And so we saw that, that increased as -- or the market conditions improved, at least related to EXPAREL as we got into June and July. So as we look at commercial execution, I don't believe that there's any issues in the marketplace related to how we're being viewed. I think the marketplace continues to be financially strained, especially in the hospital marketplace. And we do talk to folks regularly about the HOPD marketplace and these low-margin soft tissue procedures that are difficult for the providers to do because of the low margin aspects of what they're doing and the -- trying to move these procedures from the hospital inpatient to the hospital outpatient environment, which is helpful, but still doesn't provide the kind of return that would provide comfort to people who are using 30 minutes of their OR time for a very low return on investment. So what I'm trying to point out here is that the issue here really is that people are struggling to be able to provide their patients with a low opioid alternative, and we cure that with the institution of the NOPAIN Act. So I don't believe that this is a commercial execution story as much as it is a macro story with customers and patients who are being squeezed and the cost of a non-opioid treatment therapy is quite a bit different than the ability to use EXPAREL and opioids and many of our patients are being treated with bupivacaine and opioids purely because either the system or the patient can afford…

Okay, thanks. If I might just sneak in a follow-up, why are you continuing to invest further significantly in iovera?

That's an easy one for me, David. Iovera, to me, remains an opportunity to change patients' lives. When we see what we're doing on the market and we see the response to how the product is being used in the marketplace, it truly is a game changer. And again, we've got to be able to do the studies and provide the data that allows us to have a label that can turn the sales force on to these things. But we are seeing real growth in cash market opportunities. We're seeing physicians who are opening iovera only cash pay facilities on the outside of the organization, both in the U.S. and in Europe. We now have spasticity hospitals who are using iovera, many of these programs are quite nascent, but real. And as we do the spasticity trials, and we think that, that trial can be done reasonably quickly. And because it's a device, it can be approved reasonably quickly at the 510(k) that this product in spasticity will be a very important asset for EXPAREL and our share for iovera for the company and for our shareholders, and that is a '25 event. So it's not something that we have to wait a long period of time for, but we're seeing significant interest in the marketplace, not only from physicians, but from societies and people are starting to really understand the value of cryoneurolysis. And so, I think it's a fair question clearly on the amount that how long it's taken us to get going here. But I think that we're in a tipping point where iovera will start to really change lives and add significantly to the value of Pacira as a company.

Thank you.

Our next question comes from the line of Gregory Renza of RBC Capital Markets. Please proceed.

Great. Good morning, Dave and team, I appreciate all the color. Thanks for taking my question. Dave, just maybe for you and for Charlie, just on the revised guidance. I'm just curious, as you set the full year earlier in the year and leading to where we are now? I know you've acknowledged potentially this tale of two halves for the year. But are you entirely applying a more cautious methodology? Are there newer inputs that I think are informing the potential predictability? Just walk us through just that process and how you've really incorporated some of the new data points and how it sort of changed maybe your degree of confidence? And then just, Dave, maybe broadly for you as you're commenting on now that degree of optimism for the second half of the year. Just curious, if you could just build on that a little bit? Maybe just put the other way, what is your level of concern that the disconnect that was -- that you've covered earlier between EXPAREL in the broader market can persist or maybe more relevantly, that the gap can close and EXPAREL can sort of certainly outsized in growth here? Thanks so much for questions.

Yeah. No, thank you, Greg. So when we set out the annual goal, we were looking at the expectation that procedures would be a 6% to 8% growth analysis for the period of the year. What we saw, Greg, was 6% in the first quarter, 4% in the second quarter. And so the second quarter is where we start to take a look again. And it's largely an analysis around soft tissue procedures. We've got a lot of data now, Greg, on what the issues are related to patients getting these elective surgeries, especially soft tissue elective surgeries. And the impact of inflation is real, labor is real mortality as it relates to looking backwards at the patients who expired as a result of the COVID pandemic. So as we're looking forward here, we've taken that 6 to 8 number down to 4% for the third quarter. And then we make it up in the fourth quarter with something that approaches the high-end of what we originally thought at 8% or in the range of 8% plus. So as we move into the back half of the year, we do have a number of things that we think will help us close this gap. First is TRICARE. We've got 1 million patients -- we are increasingly strong at the military installations themselves. And so we do see VA business picking up. And the military year closes at the end of September. So for SSS and DoD, we should have a strong influence in the third quarter from the military accounts. We also have TRICARE kicking in on December 1 in the East that will largely be for EXPAREL. In the West, we expect to have a positive impact across the entire portfolio. So that is a relatively strong opportunity for us located in several states where we are the strongest. So there is an allocation of new business coming from those places. The new OMFS site that we or partnership that we cited in the script is a major player. And when we mirror that against the Sevaredent experience, we saw that Bell's organizations, those dental service organizations have the opportunity to move very quickly to have their members adopt this new strategy and be educated on this new non-opioid strategy and then a modest benefit, but a benefit nonetheless, from the 340B pricing, which provides a 1% tailwind for the year and a roughly 3% tailwind as we go into the second half of the year. So when we roll those things together, Greg, we are comfortable that we can meet the opportunity that we have to get into the 550 range that Charlie talked about between 550 and 560. So I hope that answers your question, but please come right back if it doesn't.

No, that's very helpful, David. Appreciate the additional color.

Thank you. Our next question comes from the line of Glen Santangelo from Jefferies. Please proceed.

Good morning. Thanks for taking my question. Dave, not to beat this EXPAREL horse to death here, but when I look at the full six months sort of coming into this year, we thought we entered the year with you seemingly giving somewhat conservative guidance and now you're taking the guidance down midyear. And I appreciate the last couple of months seemingly looks better. But when you look at the first half of the year, I mean, what played out differently relative to less you relative to what you would have thought. Is it just that the pricing dynamic of EXPAREL versus bupivacaine and the opioids is just creating a much larger headwind than you thought? Is that the primary issue here? Because it sounds like 340B, the volumes there are playing out as expected and the pricing related to that is kind of as expected. So I'm just trying to really figure out what's gone different relative to what you thought at the beginning of the year?

It's really -- it's two things, Glen. And you're accurate in your assessment. I mean, 340B has been slightly heavier for the first six months of the year than we anticipated as we came into the year, although net impact on the bottom line is modest. It really is the discussions we have with customers and a lot of these are based on our discussions relative to TRICARE and NOPAIN, where -- there the pharmacy is being squeezed is not the right word, but it's the word that comes to mind. I mean there's demands being made in the hospitals and many of the treatment centers on cost savings and where can they save money relative to their budgets. And what we hear from these folks is that the CFO and the CEO are less aware of the issues of opioids and consider opioids to be free actually because the prescriptions that they write are filled outside the hospital under Part D. So there is really no cost to the use of opioids. And so our clinicians don't like the way that this is being done, but really have no choice but to use the lowest cost alternative. And so they're using bupivacaine in they're using and their supplementing that with opioids as the only treatment option that's available in many treatment centers. And so we've seen that in the past, of course, but I think the pressure on pharmacy and on hospital systems from a cost perspective has been intensified. And so again, another reason why we are so hopeful that when we get NOPAIN approved and as we roll TRICARE out there and as we put 340B in front of folks, that we've got solutions to this cost issue that will allow us to improve patient care and opioid and offer non-opioid alternatives. But we're not massively behind where we thought we were going to be. We're behind, and we're restating for sure to be conservative, but we think we're in a good spot. And relative to everything that's right in front of us with TRICARE low extremity nerve block and NOPAIN as we get into 2025.

I appreciate those comments. And so now sort of looking forward, it's, I guess, hard to think that anything changes in the next 18 months. So isn't this all kind of window addressing ahead of NOPAIN coming in 2025? And have you started to think about how much of an impact NOPAIN can have in 2025? And my follow-up, and then I'll hop off is with NOPAIN, less than 18 months away, does that change depending upon your view of the opportunity, does that change how you think about capital allocation priorities, maybe shifting away from business development and maybe focus on focusing on repurchasing some of your own stock here in the low to mid-30s, just given the seemingly large opportunity just 17 months away now. And I'll stop there.

Sure. No, fair enough, Glen. So we do -- we have a very significant product launch around a PDUFA date of lower extremity nerve block on November 13. That brings another 3 million patients to be under the protection, I guess, of a package insert. It is surprising to us that many of these situations that I just described to your first question, are a result of not having a direct package insert that allows our customers, our physician customers to show to a pharmacist or to a CFO that we have a direct label for a lower extremity nerve block. And that's the guys under which many of these access denial programs are built. So we cure that with a lower extremity nerve block, and we have some confidence that, that will happen in November. So that will be a very important launch later this year and into next year. We also do see that there are some early signs that there is recovery in some of the areas that have cost us some issue. Inflation modestly, labor modestly the restocking, if that's not an inappropriate word for the number of patients who are now acute or chronically ill and having acute soft tissue surgeries as a result of their chronic illness. And I raised that point because one of the issues that has caused the soft tissue market to be soft, is that the patients who would have done and would have had many of these soft tissue procedures that we're not seeing expired during the pandemic. And so we do believe that the market is slowly seeing the recovery of those things coming on, those patients coming back and will be getting more of these soft tissue procedures as we go forward through this year and next…

Thanks for the comments, Dave.

Thanks, Glen.

Our next call comes from [indiscernible] from Truist Securities. Please proceed.

Good morning. Thank you for taking my questions. Just to go back to EXPAREL on the 4% volume growth -- can you just give us a little bit of a dynamic to what portion of that was on 340B and then the existing channels, how do they perform? And then also on trends from 20 mil to the 10 lower dosage -- any impact on the margin side there? And then perhaps give us the latest on the Paragraph IV filer -- and then I have a follow-up on ZILRETTA. Thank you.

Good. Thanks, Les. So for 340B, we were running at something that was approaching 25%. And then over the last I guess, probably month and half now, we've seen that come back to something that's closer to 20%. So we think some of the activities that are going on externally outside the company and some of our own internal activities on appropriateness of 340B pricing are having some impact in the marketplace. And so I think we're on top of that list. I don't think that it's going to get higher than what we've seen in the past. And I think we have some reason to believe based on our specific discussions with many of the people in the marketplace about 340B pricing and some of the activities that are going on in Washington that 20% our initial belief of conversion was appropriate. We also -- it's been slower than we thought -- but we are seeing new customers, meaning 340B hospitals who never purchased EXPAREL before buying EXPAREL or purchasing EXPAREL now. And when you look at those accounts, there is a material portion of those purchases that are not being purchased under 340B. So there is some benefit to the overall franchise of selling the drug at a discount for a portion of those patients and also having the benefit of those sales outside of 340B pricing. So that would be number one. Margins on 10 ml versus 20 ml less, they're about the same. We've taken a couple of price increases on the 10 to try to normalize the procedure value of four days of pain control. So the 10 ml, obviously, the revenue is lower for a 10 ml versus a 20 ml but the margin associated with the 10 ml actually works out to be slightly higher than the 20 ml. So it's not half. It's better than the 20 ml on the same procedure but the total revenue is materially less, if that's an answer to your question. I think that's what you were asking. And then last, Paragraph IV update, is pretty easy. There really is not much. I mean, since we had the Waxman hearings, we really don't have anything new to report to the marketplace on any activities here. It's just slow going in terms of what's required in order to meet the demands of a 340B filer are slow to progress. And so if things are sliding backwards as time lines are not met. Not by us.

Got it. Very helpful. Thank you. On the ZILRETTA front, what is the latest progress on moving into specialty pharmacies? And what have been some of the adoption trends from naive patients versus those on repeat dosing and I'll stop there. Thank you.

Yes. Thanks again, Les. So we are moving towards specialty pharmacy. There's a number of reasons to adopt this. The HA market continues to be unsettled and especially what we saw in June, where one of the more popular HAs from an ability to generate profit perspective took a pretty good hit on pricing. So the market is really cautious, I guess, is the best way to put it, about buying a lot of stock because the price changes every quarter and if they've got a lot of inventory, they have to try to use it up while they still have the old price, and they don't have a lot of time associated with that. So there are some drivers in the marketplace that frankly didn't exist before these HA issues have taken hold. And so what we see is physicians would tell us that they have a lot of resource tied up in prior authorizations and cash tied up in inventory and moving to the specialty pharmacy leaves both of those issues, and we can work with them then in some things around customers who would like to be buy and build. But when you have a product acquisition cost over $500, that's a difficult task for these, especially these small orthopedic procedures. So we can operate in a different way with the specialty pharmacies than we can with the physician accounts themselves on being able to address the customer needs in this marketplace. So that's -- this is in progress less I don't think we haven't fully optimized where we're going with already yet, but we expect to achieve that as we get into the later parts of this quarter.

Thank you. Our next question comes from the line of Balaji Prasad from Barclays. Please proceed.

Hi, good morning. This is [Indiscernible] on for Balaji. Thanks for taking our question. In our recent conversation with you back in June, you mentioned that there was a positive structural change in the demand for volumes. And how do we reconcile that with the low volume for EXPAREL with those comments? Thank you.

Yeah. What we saw is I think what we were talking about was that we were seeing strength in the back half of June, and that's accurate. We were -- unfortunately, we were coming off a -- well, not unfortunately, I mean the fact is that April was very soft. And as we got into May, we saw some normalization back to what we thought was going to be the case for them every month in the quarter. And then we saw strengthening in the back half of June. And I think that was the reference. And so when you blend those things together, you get to what we reported as a 4% procedure increase. And that's the cadence. And so both things are true. We did see strengthening in the back half of June, and we had 4% volume growth, but it was a recovery from what was really a very soft April and then recovery in May and then increasing strength as we went into the back half of June.

Got it. Very helpful. Thank you.

Thanks.

Our next question comes from the line of Rohit Bhasin from Needham & Co. Please proceed.

Hi, this is Rohit on for Serge. Thanks for taking our questions. Why do you think we haven't seen EXPAREL benefit from the improved procedure volumes that we've seen with medtech companies and hospital companies report in the first half in '23? And then also, can you provide an update on the European launch of EXPAREL and how that's going?

Sure, sure. Thank you. I'm sorry, I didn't catch your first name. Sorry about that. So I mean the answer is -- I'm glad you asked actually. So the only two procedures that are growing, and this is true of 2022, and it's also true of the first six months of 2023, our foot and ankle. I'm sorry, sorry, it's knees and hips. And we have participated in that and our knees and hips as a growth driver are in line with what you would have heard from the medtech companies. The issue for us and relative to other ortho procedures like rotator cough and foot and ankle and hand and wrist and things like that. Those procedures are also soft enough that actually ortho overall is down. The marketplace for '22 in the first six months of '23 is actually down year-on-year using IQVIA data. And that is especially true of soft tissue. So the answer to your question, the specific answer to your question is we are participating in hips and knees mostly knees, by the way. Knees are the primary driver. Hips are growing, and those are the only two, as I said earlier. And we have a presence in all of the rest of ortho, which is not growing in line with hips and knees. And 45%-plus of our business is actually in soft tissue which is not growing at all, in fact, is -- has brackets around it for all of '22. And again, we only have data -- our data for IQVIA is on a six-month lag. We only have January as it comes to this full report of site of care and procedures by site of care. But in that report, you can see very clearly that hospital procedures are down and soft…

Thank you.

Thank you.

Thank you. Our last question comes from the line of Boris Peaker from TD Cowen. Please proceed.

Great. Thanks for taking my question. First, I just want to know cadence has been on the FDA drug shortage list, I think, for a while now. Curious what you're seeing in terms of bupivacaine availability and how that may be impacting EXPAREL? And my second question in terms of the lower extremity nerve block, have you discussed with the FDA if you should be expecting an advisory panel on this or not? Thank you.

Yeah. Thank you, Boris. Our experience with bupivacaine is that it had a much greater impact on the pumps that it had on EXPAREL. And the issue is we see it in our major EXPAREL institutions is not a bupivacaine shortage it's a bupivacaine shortage of certain package sizes and certain dosage and certain strengths. And what I mean by that is if they have a protocol, for example, that says that they use 10 ccs of 0.25%, but they don't have 0.25%. And than what they're concerned about is that there's going to be inappropriate administration when somebody just grabs bupivacaine and doesn't really take the time to understand that all of the dosage strengths that were previously available are now available. So the net of that is that I can't tell you that I think there's any material benefit to EXPAREL because of bupivacaine shortage because the -- in a pharmacy, obviously, they would just drive a different dosage strengths. And frankly, if there is anything they're making under 797 in a sterile environment, they would use the cheapest available form in any case, right? So it's more the floor stock and when people are taking stuff out of the on-site machines that they're worried about whether the nursing staff and the physicians are going to be able to follow the protocols that are written because all of the dosage strengths aren't available. On the second piece, we've had some extensive discussions with the FDA, and we do not expect that there was going to be an AdCom.

Great. Thanks for taking my question.

Thanks, Boris.

Thank you. At this time, I'm showing no further questions, and I would like to turn the conference back to Dave Stack, Chairman and CEO, for closing remarks.

Thank you, Gerald, and thanks to all on the call today for your questions and time. We are starting the second half of the year and a positive momentum, and we are excited about the opportunities that are ahead of us. Throughout the balance of the year, we will continue to work to transform the lives of patients who need non-opioid pain management which is an ongoing plate throughout this country and around the world. Next up for us is the Wedbush Conference in New York. Thank you all, and stay well. Goodbye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.