Good day, and thank you for standing by. Welcome to the Pacira Biosciences Q2 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Susan Mesco, Head of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to today's conference call to discuss our Second Quarter 2025 Financial Results. Joining me are Frank Lee, Chief Executive Officer; Brendan Teehan, Chief Commercial Officer; and Shawn Cross, Chief Financial Officer. Tony Malloy, Chief Legal and Compliance Officer is also here for today's question-and-answer session. Before we begin, let me remind you that this call will include forward-looking statements subject to the safe harbor provisions of federal securities laws. Such statements represent our judgment as of today and may involve risks and uncertainties. This may cause our actual results, performance or achievements to differ materially. For information concerning risk factors that could affect the company, please refer to our filings with the SEC. These are available from the SEC or the Pacira website. Lastly, as a reminder, we will be discussing non-GAAP financial measures on today's call. A description of these metrics, along with our reconciliation to GAAP, can be found in the news release issued earlier this afternoon. With that, I will now turn the call over to Frank Lee.

Thank you, Susan, and good afternoon, everyone. I'm pleased to report that the first half of 2025 was marked by solid execution across our corporate, clinical and commercial initiatives. The stage is set for accelerating top line growth in the second half of the year. And importantly, we delivered several key milestones to advance our 5x30 path to growth and value creation. To remind you, this plan supports 2 broad strategic imperatives. First, growing our strong commercial-based business, and second, advancing an innovative pipeline of potentially transformative assets such as PCRX-201. Notable second quarter accomplishments include the following: improving EXPAREL performance with 6% year-over-year volume growth, the highest in 8 quarters, strong commercial progress allowing us to reiterate and narrow our range for revenue guidance, favorable gross margins, supporting an increase in guidance, enhanced capital structure and liquidity with a new $300 million revolver and a significant reduction of debt. And finally, disciplined and strategic capital allocation with the repurchase of $50 million of common stock. Brendan and Shawn will share more specifics on the quarter shortly. I'll begin with a high-level overview of our commercial portfolio, where our 3 best-in- class products continue to generate significant cash flow. Our flagship product, EXPAREL, in the first half of 2025 was marked by solid execution across 3 priorities: market access; awareness; and utilization. We now have a strong base to build on, and we're seeing encouraging momentum across key leading indicators for export. On the market access front, we continue to advocate for expanded patient access to opioid-sparing pain therapies. To that end, we're pleased to see a new policy outlined by CMS and its preliminary rule for 2026. CMS is proposing to completely phase out an inpatient-only list over the next 3 years, starting with the removal of hundreds of…

Thank you, Frank, and good afternoon to all joining us today. I'm excited to share a few highlights of the strong progress we've been making on the commercial front. Significant second quarter revenues were driven by improving EXPAREL volume growth of 6%. This is a twofold increase over the 3% year-over-year growth in the first quarter of 2025 and the second quarter of 2024. As Frank mentioned, during the first half of the year, we were sharply focused on establishing a foundation to support sustainable top line growth. We made great strides expanding physician and payer awareness around NOPAIN. As you know, this is an important shift in reimbursement policy and represents a significant opportunity to broaden EXPAREL utilization in outpatient procedures. As expected, we are seeing robust momentum from leading indicators as we head further into the year. These data reinforce our confidence that EXPAREL is well-positioned for steadily improving year-over-year growth as the year progresses. I'll start with market access where we've made terrific progress that is driving change. In addition to clinical value, accounts consider market access for their specific patient population when making decisions. Here, we're focusing on highlighting EXPAREL's clinical and economic value to national, regional and local commercial plans with real-world evidence. We're excited to report we are tracking ahead of plan and are maintaining a strong pace expanding our commercial coverage map. We currently estimate more than 40 million commercial lives now have access to EXPAREL by a separate reimbursement outside the bundle. We'll continue our efforts to expand access, and we are on track to reach 60 million covered commercial lives by the end of this year. This positions us to exit the year with a total covered population of nearly 100 million lives across both commercial and government payers. As we…

Thank you, Brendan. I'll start with an update on sales and margin trends. Second quarter EXPAREL sales increased to $142.9 million versus $136.9 million in 2024. Sales growth of 4% was driven by improving volume growth of 6%, which was partially offset by a shift in vial mix and discounting. Second quarter ZILRETTA sales were $31.3 million versus the $30.7 million reported in 2024. Looking ahead, with our new partnership with J&J MedTech and other programs, we believe the foundation is set for improving growth. For iovera°, second quarter sales were $5.6 million compared to $5.7 million in the second quarter of 2024. Turning to gross margins. On a consolidated basis, our second quarter non-GAAP gross margin improved to 82% versus 76% last year. Gross margins continue to benefit from the improved cost and efficiencies of our 2 large-scale manufacturing suites. With these suites now consistently producing commercial supply, we have ample capacity to meet the growing demand for EXPAREL. As a result, we have decommissioned our first-generation 45-liter suite located in San Diego and optimized our workforce accordingly. We expect these changes will benefit our income statement through a $13 million annual reduction in operating expenses that will begin in the third quarter. For non-GAAP R&D expense, the second quarter increased to $24.7 million from $18.4 million reported last year. This increase relates to the strong enrollment in Part A of our Phase II study of PCRX-201 and as well as expenses associated with the ZILRETTA, iovera° registrational studies. Non-GAAP SG&A expense came in at $77.2 million for the second quarter which is up from $59 million last year. This increase is largely due to investments in our commercial, medical and market access organization, targeted marketing initiatives and field force expansion. All of this resulted in another quarter of…

Thank you, Shawn. In closing, I want to thank our entire team for their strong execution and dedication throughout the first half of the year. We've already achieved meaningful milestones that advance our 5x30 strategy and position us for sustainable success. With this foundation in place, we're entering the second half of the year with strong momentum and a clear focus on further accelerating growth. Thank you again for joining us today and for your continued support and confidence in our mission. With that, operator, we're ready to open the call for questions.

[Operator Instructions] Our first question comes from Les Sulewski with Truist Securities.

I have a couple. First, maybe could you provide some commentary around the new partnership with J&J MedTech on ZILRETTA, and how does that compare to the previous co-promote with J&J on EXPAREL? And then as a follow-up, what are the economics on this partnership? And what assumptions can we derive from the strategy? Any figurative commentary would be helpful. My second question is around the third GPO. What are the expectations for impact to gross to net? And then a couple more just progress on the sales force expansion and maybe one for Shawn. I appreciate the commentary around the expected savings on the consolidation of plants. But how do we kind of view the gross margin outlook in the second half and then into next year?

Thanks, Les , for the question. It's Frank Lee here. First of all, let me just say before we jump into this, and I'll turn to Shawn and Brendan for some commentary here that I'm really proud of the team on executing on all fronts here across the entirety of the business, whether it's growth in revenue, it's margins, pipeline, IP, et cetera, there's a lot of activity that happened this year. And net-net, it's a strong foundation for growth going forward. So let me just comment a little bit about the J&J partnership, and then I'll turn to Shawn for gross to net and some commentary about gross margin and then maybe a little bit about the sales force. Just at a high level, just to remind everybody that the J&J partnership previously was for EXPAREL, and that was prior to COVID. And during COVID, as we all know, the dynamics change. So prior to that, it was a very successful partnership and so the events of COVID led to the discontinuation of that particular partnership, but we've always appreciated J&J's capabilities and the partnership there. So this particular partnership is now with ZILRETTA, which is a very different setting under different circumstances. So that as a high-level overview. Shawn, maybe you could speak to gross to net and gross margins as Les asked.

Sure. Happy to. So the gross to net is pretty simple. It's a low single digit impact, plus or minus 1% is a reasonable modeling, but that's pretty straightforward. And then with regard to gross margin outlook for second half and into next year, as we discussed the team is doing a great job, and we benefited from increased production efficiencies, favorable production volumes and I'm very proud of the team so that we could raise the full year margin guidance to a range of 78% to 80%. And we'll provide another update in Q3 as things progress. And just as a reminder, they're going to be pretty significant quarter-over-quarter variations. You won that batch in a quarter, you take a charge for that quarter. But based upon how the team is doing, we're confident that we'll -- in terms of raising the range of 70% to 80%. And then going into next year, there's a plan for just relentless continuous improvement at manufacturing sites. And so that's something, again, we'll provide an update later. But the goal is to a 5% improvement for our 5x30 plan, and that continuous improvement will continue into next year. Thanks, Shawn.

So Brendan, maybe you want to talk about sales force expansion.

Yes, sure. Thanks for the question. We are excited about the focus we're able to provide to all 3 of our assets. We have a team in ZILRETTA and iovera° that have now gotten more and more experience with their target audience. I think they're hitting their stride and beginning to improve our overall performance there. Equally excited about what we're seeing with EXPAREL, not only in terms of what we've seen for NOPAIN execution, but also significant formulary wins, both at IDNs and large health care systems. And I think we're also bolstered by improving commercial coverage, as you heard from my prepared comments.

Thanks, Brendan. So the last part of it, Les, you'd asked about the economics of J&J MedTech. We're not going to go into details here. But what we can say is, number one, is reflected in the guidance and we expect this to be beneficial in 2026.

Next question comes from Serge Belanger with Needham & Company.

This is John on for Serge today. Just a quick one regarding surgery volumes. Can you just give us a little bit of color on what you saw in the second quarter than what you're seeing, I guess, to the first month of the third quarter and which section -- in which settings you think you're seeing most traction at this time?

Thanks, John. We can't go into specifics about how this quarter started, and so you'll have to wait till the next quarter about that. But I'm going to turn it to Brendan here to talk a little bit about kind of what we're seeing in volumes over the course of the first half year.

For sure. And actually, I'm encouraged by what we've seen for EXPAREL volumes in light of what the broader market has looked like. For us, at least the most recent data points we've seen would suggest that surgery outpatient case volumes are slightly down in the second quarter versus same time last year. And I see more inpatient surgery kind of flat comparatively speaking. That said, to have seen the progress that we have in the HOPD or the outpatient setting for community hospitals as well as in ambulatory surgery centers is very encouraging.

And if I could just have a quick follow-up. You mentioned having 40 million commercial lives under -- having EXPAREL access and looking to get to 60 million by the end of the year. And then 100 million of total lives covered across commercial and government providers. Just curious where the focus might be in terms of making gains throughout the remainder of this year and then into next year.

Sure. Thanks for the question, John. And I would say that we've been as strategic as we can be with especially regional plans, we're trying to align as best we possibly can our surgical volumes and opportunity with those large regional payer plans. Of course, we will be opportunistic, and I think we're also seeing a number of national plans start to really embrace NOPAIN, start to see reimbursement outside of the bundle. So we're encouraged with what we've seen through the first half of the year and a couple of very recent wins as well. So we'll continue to pursue that. We know that there's kind of a tipping point for our customers when they see not only reimbursement from CMS, but a preponderance of their commercial lives being covered as well.

John, let me just add to that, but I have to say that I'm very pleased with what progress we've made on the commercial payer front for market access. As we have talked about before, NOPAIN was actually enacted, getting commercial payers adopt sooner rather than later, it was important. And oftentimes, this can take years. And so really proud of the market access team for what they've accomplished. This is ahead of our plans. And I think to the extent that we get our target into the year of 100 million total, that will be a really great accomplishment.

Our next question from Gary Nachman with Raymond James.

This is Denis Reznik on for Gary Nachman. So first, you've previously talked about expanding the current suite of products ex U.S. as a partner. So can you provide an update on how those conversations are going? What are you looking for in a partner? When do you think a deal could materialize? And would you look for a partner for all 3 products at once? Or would you build one by one? And then I've got a couple of follow-ups.

Thanks, Denis. Really good questions. Indeed, we believe there are markets outside the U.S. with meaningful opportunity for all of our products. Of course, the initial focus certainly, our flagship product, EXPAREL, but ZILRETTA and iovera° potential there as well. So we're making good progress. And if you think about our 5x30 goal of having 5 partnerships in this time frame, we think we're well on track. So I can't give you any specific dates, but what I can tell you is that there's been very good interest. And as we think about potential strategic partners they would, of course, be leaders in their field, have meaningful penetration in the portfolio and values that are aligned with ours. So those are some of the things that we look for. And the good news is, and I think that there are meaningful partners out there. And so we'll keep you apprised of how things are progressing, but I can tell you now that we're active in the process and that we're pleased with the kind of dialogue we had.

And then if I may ask for some more color on PCRX-201 and the recent 3-year data. Kind of any color you can give about the significant of it in the feedback from the poster presentations. And then on the ongoing Phase II, it's nice to see the enrollment going so well. Can you just remind us how many total sites you plan on having and the split between how many are in the U.S. versus ex U.S.?

Yes. Thanks for the question. 201, I can tell you there's been very good excitement about 201. As we all know, there's been a lack of innovation in broadly the OA of the knee space. And a big reason why we have in essence, breakthrough status for gene therapies, the RMAT designation. So the data that we recently presented were 3-year data. And as I mentioned in my comments, there are very few studies that follow patients with OA of the knee up to 3 years. And we're seeing still very good response, very good safety profile and data that we've observed. Of course, this is an open-label study, and we'll know a lot more as we progress and report on our ASCEND study. So to answer your question about the response from investigators, thought leaders, et cetera, on 201 into, there's been a lot of great excitement about that one, number one. Number two is that as we think about the ASCEND study, we haven't provided all the specifics about number of sites, et cetera. But what we can tell you is that there are 3 arms. And one is the control -- is the steroid control and then 2 other arms that are in the steroid plus PCRX-201. And so we're more than pathway through our enrollment that's progressing very, very well. And so we expect to be completed by the end of this year for Part A and then Part B will start next year. So bottom line is we'll have some initial data, as we've talked about before from Part A sometime towards the end of '26 early '27 in that time frame.

Your next question comes from Douglas Miehm with RBC Capital Markets.

My question just has to do with the guidance. I saw that you tightened it $730 million to $750 million. But what I'm curious about is back in Q1 when you were looking at these numbers and you had a wider range. What is it that's changed that's moved you away from, let's say, the upper end, the $750 million to $765 million. Is it more price? Or is it that NOPAIN and the discussions that you're having with payers a little slower than you anticipated? Just curious about that.

Thanks for the question, Douglas. Obviously, a launch of something like this, there are uncertainties. And of course, we provided a guidance range where we thought was reasonable. It all comes down to just some of the fundamentals that we talked about and Brendan addressed, which is market access. To what extent could we get commercial payers to come on board along with the new CMS reimbursement, enough so that we have tipping points in certain geographic areas where the majority of patients, let's say, are covered under this new approach to reimburse EXPAREL. That's when meaningful change really happens. And so without having some initial data, we had to provide that kind of a range. And now we have better certainty as we've now got half the year under our belt. And so that's why I think we can provide this more narrow range. So the midpoint hasn't changed, if that's question, of course. But I think it's really about market access, about tipping point where the majority of patients are covered on this kind of reimbursement. And then, of course, after that, we'll be driving awareness and utilization because access is available for the majority of patients.

Okay. And then just as a follow-up, the J&J deal does look good on ZILRETTA. And I'm curious, as we go into 2026 what in particular, where do you think that they're going to be able to add the greatest value to the product? And I'll leave it there.

I'm going to look over here to Brendan.

Yes. Just to reiterate, we're thrilled to have this opportunity. I spent the first half of my career at J&J, and it's wonderful to be partners with them again here. As Frank shared in his prepared comments, this essentially doubles our ability to reach our audience with a promotionally sensitive product like ZILRETTA. And beyond that, J&J has a great deal of experience in the space and a broader customer base than we were originally calling on with ZILRETTA. So coming into play in much more prominence are groups like sports medicine, some of the pain management centers and in particular, rheumatologists. All of that, I think, expands our messaging for ZILRETTA to an audience that needs to know that they have an option beyond the HAs, many of which are not able to give more than once or twice in a year. So it's really a nice complement to their portfolio and a very logical product to have in their bag for the OA treatment journey.

Our next question comes from Hardik Parikh with JPMorgan.

Thanks for the update, Frank and team. I had a couple of questions. First is just wondering, you mentioned that survey you guys had done and you're talking about organizations who plan to add EXPAREL to their formularies, they could take 6 to 12 months to start adopting. I was just wondering, did you get any more color from that survey in terms of what are the gating factors that kind of lead to that 6- to 12-month time frame? And then the second part is when your sales teams are pitching to various stakeholders, qualitatively, how much of a discussion is on educating on NOPAIN versus explaining the benefits of EXPAREL relative to alternatives?

So I'm going to look to Brendan here on here well. So Brendan. Thanks, Hardik.

Yes, for sure. If you go back to when NOPAIN went into effect, which is January, most of the time -- when you're asking your audience why it might take them a little bit of time to effect that change. A lot of it is to confirm they're going to get the reimbursement that they believe is coming. They also understand that CMS, while that accounts for a significant number of procedures, it's about 1/3 of the total. So they want to see, will commercial follow that plan? So as we've been updating every -- with every earnings call, we want to put increasing points on the board for commercial coverage outside of the bundle as that becomes reality in a variety of geographic areas. We see increasing numbers of payers come on board with EXPAREL reimbursement outside the bundle. And then just speaking about how we speak about EXPAREL. Let's be clear, we are obviously excited about what NOPAIN means in terms of the value proposition, the enhanced value proposition for EXPAREL, but the majority of our time is spent explaining what differentiates EXPAREL from alternatives and why it leads to the types of outcomes that our patients deserve. And I think you'll see more of that in the second half of the year as we look to amplify that message and make sure that patients, caregivers and physicians understand what makes EXPAREL the best choice for procedures for which it's approved.

Thanks, Brendan. And let me just add to that, with regard to the health economic value proposition so important in these settings, increasingly important as we go forward. And as we step back, I mentioned that we have 2,500 patients in this iGOR registry that follows patients through their OA of the knee journey. And we think that's going to provide some really great insights into not only the value of our products, but some other products that are used in this setting and give us, again, better confidence that we'll be able to provide more patients access to our medicines.

And this concludes the question-and-answer session. I would now like to turn it back to Susan for closing remarks.

Thank you, Shawn, and thanks to all on the call for your questions and time today. We're energized by the opportunities ahead and remain focused on executing our 5x30 growth strategy with discipline and purpose. As we move through the remainder of the year, we are confident in our ability to build on our momentum and position Pacira for long-term success. Thank you, again, for your continued support and be well.

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