Pacira BioSciences, Inc.
Q1 2021 Earnings Call Transcript

Published: 4 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Q1 2021 Pacira BioSciences Earnings Call. 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.

[Susan Mesco:]

Thank you, Tina, and good morning, everyone. Welcome to today's conference call to discuss our first quarter 2021 financial results. Joining me as speakers on today's call are Dave Stack, Chairman and Chief Executive Officer; and Charlie Reinhart, Chief Financial Officer. Additional members of the Pacira executive leadership team are also here for our question-and-answer session.

[Dave Stack:]

Thank you, Susan. Good morning, everyone. And thank you for joining us. One year ago when we reported our first quarter results, we were facing significant challenges in the face of an expanding pandemic. In the blink of an eye a moratorium was placed on hospitals performing elective procedures and the notion of COVID-19 treatments and vaccines seemed a long way off. I cannot tell you how proud I am of our entire Pacira team they have truly risen to the occasion over the past year to ensure that we continued our important work to provide non-opioid pain management to patients in need in a difficult and dynamic environment. Consequently, I am delighted to report the significant progress we have made thus far in 2021 highlight by the US approval and launch of EXPAREL and the pediatric setting and its growing utilization across a wide range of long acting regional blocks for low- or no-opioid pain control. Our first quarter financial performance was strong with a total sales of $119 million and EXPAREL average daily sales coming in at 115% of prior year levels, despite ongoing COVID related challenges with the elective surgery market. Today, we also reported adjusted EBITDA of $36.2 million, and we remain well positioned to deliver sustained and accelerating profitability. Before turning now to a more detailed strategic review of our business, I would like to quickly cover the recently filed lawsuit against the American Society of Anesthesiology, seeking damages and the retraction of three articles published in the February issue of their Journal Anesthesiology. These articles create a false and misleading impression that EXPAREL is not an effective analgesic. Not only were these articles scientifically and statistically unsound, but also failed to disclose that certain authors were accepting payments from competing pharmaceutical or drug device manufacturers, which is not only an ethical violation, but very likely instilled an apparent bias into this body of work. The decision was not one taken lightly. We reached out to the society and the editor multiple times to discuss the shortcomings of the articles and our concerns around lack of proper author disclosure.

[Charlie Reinhart:]

Thank you, David. Good morning, everyone. Before discussing our first quarter financial results, I'd like to remind you that I will be discussing non-GAAP financial measures this morning, which we believe more accurately reflect our business results. A description of these metrics along with our reconciliation to GAAP can be found in the press release we issued this morning. Let me begin by reiterating our confidence in what the future holds for our business. Market indicators remain strong with EXPAREL consistently outperforming the elective surgery market. This leaves us on track for accelerating top and bottom line growth as the COVID pandemic continues to subside and the elective surgery volumes begin to recover and normalize. We also continue to see EXPAREL enabling the shift of many procedures to outpatient settings. The COVID pandemic has only accelerated this shift, and we are confident that this surgical migration will remain embedded in healthcare practice going forward. We ended the first quarter with more than $625 million of cash and investments. This strong financial foundation and the cash generating nature of our business leave us well equipped to continue to invest in internal and external growth opportunities that align with our vision to become the global leader in innovative non-opioid pain management and regenerative Health Solutions. First quarter total revenues of $119 million were driven by $114.7 million in EXPAREL sales. On an average daily basis, this was 115% of the first quarter of 2020 due to the expanding utilization of long acting EXPAREL based regional approaches. For iovera, we reported net product sales of $3.3 million for the first quarter of 2021, an increase of 44% from the $2.3 million for the first quarter of 2020, primarily due to significant COVID related shutdowns last year. Importantly, we're also starting to see many of our new commercial initiatives start to kick in with the greatest demand for iovera coming from pain relief for patients in advance of a TKA procedure, as well as chronic pain management for those with mild to severe osteoarthritis of the knee. Our non-GAAP gross margin for the first quarter of 2021 improved to 75% versus 73% for the first quarter of 2020. This was due to sales of lower cost product manufactured at our custom suite in Swindon, UK, as well as the impacts of pricing in bio mix. We continue to expect adjusted gross margins to progress towards 85% as the 200 liter batch facility comes online, and our investment in the second generation iovera products is complete. Non-GAAP research and development expenses were $14.8 million in the first quarter of 2021 versus $14.6 million in 2020. Increases in clinical and regulatory costs were offset by reductions in manufacturing capacity expansion costs, with our Swindon based 200 liter manufacturing suite advancing from the development phase to the registration phase. Non-GAAP SG&A expenses were $41 million in the first quarter of 2021 versus $38.3 million in 2020, while sales and marketing expenses declined due to decreased sales commissions DPU synthes with the conclusion of the agreement in January 2021. Our G&A expenses increased on a year-over-year basis due to an insurance recovery of $2.1 million received in early 2020 related to legal expenses for the DOJ claims, all of which were fully resolved in 2020. With respect to taxes on a non-GAAP basis, the first quarter tax rate came in at approximately 25%, which is where we expect to land for the full year. To remind you, we expect to become a cash taxpayer during the second half of 2022. All of this resulted in non-GAAP adjusted EBITDA of $36.2 million in the first quarter of 2021 versus $26.9 million in the first quarter of 2020. While we are not currently providing 2021 guidance, given the continued uncertainty around COVID-19, and the pace of recovery for electives, the elective surgery market, we will continue to report preliminary monthly product sales to share inner quarter trends with you. We will consider changing this practice as we have more visibility post COVID. For April 2021, we continue to see strong sales, as we saw in March and expect to report a significant year-over-year increased when we report monthly sales next week. To remind you in 2020, we saw a precipitous drop in sales beginning in the second half of March, and continued through the end of April, with a decline in year-over-year EXPAREL sales of approximately 70% during this period. Lastly, we remain very bullish on our long-term expectations for robust top and bottom line growth. We believe that by the end of our five year planning period, revenues will be approaching $1 billion for EXPAREL and $200 million for iovera. Gross margins will have improved 1,000 basis points, and operating margins will exceed 50% for our current base business. With that financial overview, let me turn the call back to Dave for his closing remarks.

[Dave Stack:]

Thank you for that review, Charlie. Looking back over the past year, we emerged from this unprecedented global pandemic and lockdown as a stronger company. We have become more resilient as a team and united around the shared sense of purpose for the important work that we are doing. At Pacira, the pandemic accelerated the transition to the ASC setting, and has opened the door for a variety of digital interfaces, from our meetings with some of you to medical meetings to training physicians and more. These changes are likely here to stay and we have embraced them. One thing that has not changed with the pandemic is the need for improved opioid, non-opioid pain management. The pandemic has had a devastating impact on our society with increased opioid adverse events. Here, Pacira continues to lead the way by expanding the use of EXPAREL and iovera and by investing in novel innovative technologies that are synergistic with our goal of bringing non- opioid pain management and regenerative Health Solutions to patients in need. With that, I'll turn the call over to Tina to begin our Q&A session. Tina?

[Operator:]

Our first question is from David Amsellem with Piper Sandler.

[DavidAmsellem:]

Hey, thanks. So just a couple. So first regarding the matter with the American Society of Anesthesiologists, I mean just looking ahead, and obviously, this is a core audience for you. So is there, should we be at all worried that this is something that could in any way have non unintended consequences of alienating the core constituency, particularly in the context of a competitor? That could be coming to market. I realized that product is not, cannot be used as a nerve block, but I just cringe in terms of creating noise and how do you -- how should we think about that? And what's your thought process? So that's number one, and then I joined late, so I apologize if I missed this, but can you just talked about cadence of recovery in elective procedure volumes as the year progresses. And I guess what I'm asking here is in the second half, are you expecting sort of fully normal pace of electric procedure volumes, particularly as we get into the back half of the year? Thanks.

[DaveStack:]

Thanks, David. First, I don't see if anything, actually we think that the legal action against the society is having a positive benefit. The society is -- has done what it has done and we believe that we didn't have any option frankly, but to defend ourselves against what was clearly a well thought out attempt to defame EXPAREL. What we've gotten from the medical community is great support for there's some questions before people read the Trikalinos' declaration and before they read the declaration on CME and on conflict of interest, et cetera. But as soon as folks understand what the legal issues are here, we've had great support from the anesthesia community, up to an including several people wrote rebuttals to those articles, and asked for them to be published in the same journal. And they were told by the editor that he would not publish any of those because they didn't follow the scientific process. So given some of the ways that this has been positioned, I think the folks who are members of the society, who are using EXPAREL not only to enhance their practice by increasing the reliability and the viability of regional blocks, but also, EXPAREL is making this migration to ambulatory surgery center possible, which is really how high value to the anesthesiology community, I think we see a clear separation between the journal and the society and the folks who are actually practicing regional block in the marketplace. So, if you judge by April, in the first few days in May, we don't have anything to worry about in terms of any kind of a retributive action, actually, things are going very, very well, in addition to what we talked about this morning. On the second point. And I'll be consistent here, David with what we said in the past, and God knows if we're right, but we are starting to see some of this start to rectify itself. So what we said is Q1 will be pretty much a continuation of Q4. And I think that's pretty much what happened. We think in Q2, we're going to start to see these things start to modify. And at least in our models, we've got 5% of the 4 million procedures in our Tam that were not done in 2020, coming back to the marketplace, and those are almost entirely orthopedic procedures. And then as we go to the back half of the year, we think that something like half of those 4 million procedures will come back. Now this is just our Tam, by the way. But we think half of those procedures will come back to the marketplace. And so in our manufacturing forecasts, we have included the opportunity that we will treat the percentage of those patients, in addition to what's going on now, it's not quite as clear is a normalized market where people that have pain go and get their surgery. You've got these patients coming back to the marketplace and being prioritized in many cases. So there still is an expanded time lag even for new patients today. But I think that will resolve itself over the next year or so, just one extra piece of insight, because I think it is really valuable is we will benefit greatly from our strength in orthopedics. And the reason I say that is that the orthopedic community has an extended relationship with their customers, their patients. In many cases, it's decades long. And so those patients remain in contact with those surgeons and the waiting list for how you move those patients into an opportunity to do elective procedure is vibrant, very different than the soft tissue. We're talking about colorectal belly, where we've had a number of calls with primary care docs and ask them the simple question; would you refer a patient for surgery from a telehealth call? And there are some exceptions but generally speaking, the answer is no. And so that pathway has to rebuild itself, right? Where the patients live, go to see the physician, the physician wants to look at the blood work and see the patient and all of those things. And then you will see the primary care belly surgery start to go come back online. We think that will be more of a fourth quarter event. That's a long answer to a fairly simple question, David, but we think yes, not all of these patients will be able to come back because we just don't have the capacity. But we think the ambulatory surgery centers will prioritize the high profit, total joints, spine, rotator cuff, et cetera.

[Operator:]

Your next question is from Daniel Busby with RBC Capital Markets.

[DanielBusby:]

Good morning. Thank you. Two questions. First, we started to see more companies reintroduced full year financial guidance. Clearly, you've held off for now. Can you talk a little bit more about what you're waiting to see in the market before doing so and do uncertainty around a potential competitor approval later this month factor into that decision at all? Second, if we look at the weekly electives surgery data you provided in your slide deck, there's been a fairly tight correlation between weekly elective surgeries and EXPAREL usage over the last year or so. But that's actually diverged a bit in the last few weeks, elective surgeries have declined, while EXPAREL has held reasonably steady. Can you discuss what's driving those trends? Thank you.

[DaveStack:]

Sure. I, the first one is easy, a potential competitor has had no impact on anything that we're doing here specifically with guidance. I mean I think more of what we were seeing, as we went through the first quarter, Daniel was these spikes in COVID related closures and the marketplace moving around we had some weeks where some of our bigger states were not performing at the same level. There was no consistency in the marketplace, I guess, especially in the states that provide the majority of our business. And so that and really more waiting to see how the pediatric launch was going to go. What kind of reception we were going to get in the marketplace when we were talking to the general pediatric population, et cetera. I think with what we're seeing now, I think we will be in a much better position for the next call. But I think coming into this call, there were just too many unknowns for us to make a statement. And if we did, it would have been so modified with risk adjustments, that it wouldn't, nobody would have been happy with us. So it just made sense to keep presenting data on a monthly basis, which has had a really interesting impact, because it gives us a lot more opportunity and interact with the marketplace than only waiting for the Q call on a regular basis. So we probably, I wouldn't be surprised if we continue to do both. But right now you have to be determined. But as I said in to David's questions we've had a strong few weeks here. And so I think we're in a much different position when it comes to determining how we provide guidance going forward. On the iTIVA chart, we just have to be really careful with that data, Daniel, because that's claims based data. And so you will see that that modifies over week, right. And as more claims for that week, that's reported come online, you'll see this gap narrows between EXPAREL and the elective procedures, what we pay more attention to is how EXPAREL is always on the top of the line. And the elective procedures still remain generally modestly on the bottom of the line, which tells us that we are not only growing market our share. But as the elective procedures come back reference, the answer I just gave to David, that we will have a share of the market in these elective ASC procedures that is higher than what it is in the hospital marketplace and what it is in the hospital outpatient environment, which again goes back to providing guidance with some certainty that we're going to be in the right band.

[Operator:]

Your next question is from Gregory Fraser with Truist Securities.

[GregoryFraser:]

Good morning, folks. Thanks for taking the question. Just want to follow up on the anesthesiology matter. Are you aware of any proposed changes to protocols or reimbursements stemming from those articles? And can you also comment on whether there have been any discussions between the company and the ASA since you filed a complaint?

[DaveStack:]

There -- we have some examples, Greg, where and especially remember, we're launching PIT. And so folks are looking for formulary approvals and things like that. There are some a modest number, not material to our total business. But you can see that there were some folks who were asking questions about why you would want access to a drug that is not superior to playing bupivacaine, et cetera. A number of things reason that you would want to do that. So we did have a couple of surgeons who stopped using it, they have now returned to using a given Trikalinos declaration and the appearance that there's more to that story than was published in the Anesthesia Journal. More to the point is, our field force was being asked a lot of questions about that, and obviously didn't have a lot of things that they could say about it given the stature of the Anesthesia Journal. So having the Trikalinos declaration that they can provide to their patients and having all of this stuff on our website where folks who want to know what's going on, can find out the other side of the story, if you will, I think most pertinent to us is that we couldn't have other articles referencing this as truth. When immediately after these articles came out, we had folks do their own meta-analysis on the same data sets and come to a very different conclusion. So you can't if you are Pacira, you can't let this be referenced as fact, when we know that it's deeply flawed and came to a negative conclusion. Well, there's a whole raft of reasons why that might have happened not to be gotten into here. Part of your second question, Greg, and I know this will be no surprise to you. I mean, we're not in any position where we're going to negotiate this in the public domain. So there's going to be notifications that come out between the law firms that are in the public domain, I think that'll be breadth of what we want to share with anybody other than the discussions that we're having are have to be held private.

[GregoryFraser:]

Got it, totally understand. And then, on Europe, I was just wondering if you could put some numbers around the EXPAREL opportunity and how you see the launch evolving over the next few years? Thank you.

[DaveStack:]

Yes. So it's very much a specific launch, we're going to launch EXPAREL in something on the order of eight countries, and iovera on eight or nine countries. As stated in the script, we really are only going to launch in places where the value that's being created by EXPAREL is recognized in the price that we're able to get. And so we have, well, I guess in a world, I would say that the opportunity appears to be to be at least as big as we thought it was a couple of months ago. And I say that because we talked to a surgeon in the UK two weeks ago, Friday, that actually said he had 5,000 patients on his waiting list. And so there is a, it'll take us several years to work through that opportunity. And iovera, while patients are waiting for years in order to get their surgery, and then EXPAREL and we're working with a number of different hospitals now and a number of different anesthesia and surgery groups who are interested in the model. It's been established here in the United States and driven by ERAS protocols, where we can move these patients to a shorter timeframe. And the idea of addressing this backlog by being way more aggressive with something that approaches an ambulatory surgery center. These groups with the NHS, the National Health System, are forming their own ways and their own throughput programs and their own opportunities to address this backlog. So I think where we where we go, we will be very successful. What the model says, what our model says is that we get into 2025, that between the two products, we're pushing the $100 million around in Europe. And on the current model, at least Greg somewhere in the back half of year three, we become profitable in Europe. So it's not massive in terms of what we are, what our expectations are for in the United States, but it's profitable, and it supports our mission of providing an opiate alternative to as many patients as possible. So we're happy to be going there.

[Operator:]

And your next question is from David Steinberg with Jefferies.

[DavidSteinberg:]

Okay, thanks. And sorry, if this question has been asked as I just enter the call but I have two questions. First is, I know that you indicated beginning of the year Dave that you're looking to be active in business development, and M&A and you've done a few smaller type in licensing or acquisitions. And I'm just curious what your appetite might be for something larger. I know, last year around this time, the company with a pandemic, just hitting indicated that they're going to their cash and not really do much in business development, for obvious reasons. But that's obviously changed. Are you looking I guess, how active are you currently in EU? Would you be disappointed if you didn't do a few transactions this year? And I guess how big of a transaction could you do given your cash and debt capacity? That's first question. And then secondly this is round three, waiting for -- PDUFA date. It's hard to find a lot of doctors who can talk about 011. We've recently held a doctor panel and they were somewhat knowledgeable and viewed the products more as complimentary versus competitive, small surface areas, versus large surface areas and the fact that they can't do nerve blocks and things like that. Would you agree with that? And then the related question is, there's some discussion that they get approved, they're going to come in at a much lower price point than yours. And I was wondering if you could comment on what your competitive response might be if that the case. Thanks.

[DaveStack:]

Thanks, David. First, on the M&A question, we've I mean, if you include the gene therapy company that we've most recently made an investment in, we've now made three investments in the last couple of months. I think given the opportunities that we have, and Ron and his team are exhaustively looking at opportunities in the marketplace, we don't have any emotional or financial reason, we wouldn't do a transformative larger deal, we just don't have one, that we have confidence in David that would meet the objectives of the organization in terms of finances and all the rest of that stuff. So there's no reason why we wouldn't do it, there's no state of strategy that we won't do it, it's that most of the things that are coming to us are relatively early gene therapy and cell therapy and things like that. And the best way for us to have a number of shots on goal is to make these financial investments take an observer role, or in some cases, taking a board seat, with the prescribed opportunity to invest or acquire, and in a future date, based on clinical milestones being met during the development process. So I think that that model makes a lot of sense to us, we expect that we will announce several more of these over the next couple of quarters. And so we're in a good spot, if you or anybody else has a transformative transaction that they think makes sense for us, please don't keep it a secret, we've got a lot of cash this would be our slowest quarter for EBITDA, and we still had $36 million. And so we think we're going to accelerate significantly as we go through the next three quarters. And so I think we're in a very strong position, it's just that we don't have anything that makes strategic sense that we're aware of today. So I think if that doesn't cover the first point, come back to me. On the second point, as usual, David, a number of mirages created here, right? If we follow the EU label and for everything that I've ever done in my career, the EU label is strongly suggestive of what you're going to get in the United States. There really is no market for this product. It's the first time in my career that I've ever seen a package insert that says this medicine should not be used for serious surgeries. They don't define serious surgeries, of course, but if you ask the patient, I think you're going to find that all serious, all surgeries are serious. And so on your specific topic or question around price, the European label is very clear that this drug has to be used on small wounds. If you use a small wound, then you would use the 10 ml dose of EXPAREL. And the WAC cost for that is around $180. The 011 company has actually said that they're going to come in a low $200. So if you compare our small vial to their price that they've talked about in the marketplace, we're still cheaper. So the only way that our argument makes any sense is if you use 20 ml vial for EXPAREL to do a small wound. And nobody would do that in the marketplace. In fact, I think you've seen the steady growth of our 10 ml, as we continue to expand, and you'll see a fair amount of 10 ml as we get into the peds market, especially in the younger children as well. So the argument as with everything doesn't make any sense. So I hope that they get approved. I mean, we can't lose. If they get a CR, hopefully they're finally dead. If they get approval, and it's a bad label and it's for sure will be then they can't sell it to anybody and that would be our preferred option, frankly, as we sit here today.

[Operator:]

Our next question is from Serge Belanger with Needham & Company.

[SergeBelanger:]

Hey, good morning. Thanks for taking my question. First one is on the pediatric label expansion. Dave, you consistently talked about the pediatric opportunity consisting of about a million procedures. Does your pediatric label allow you to capture or target that whole one procedure or just segments of it? And then on the European opportunity, maybe just talk about the dynamics of the opportunity? Is there similar movements to the ASC setting and how familiar are the Europeans with cryo analgesia?

[DaveStack:]

Yes, thanks Serge. First on peds, so this label is for infiltration, which, via the Janet Woodcock letter from the legal settlement with the FDA is the same as a field block. So the million surgeries that we reference are what are available to us as a result of that label, right. We also are in discussions with the FDA on patients 0 to 6; it'll probably be done in two tranches, 2 to 6 and then 0 to 2, neonates to 2. And we're also in discussions with the FDA on a nerve block indication. And interestingly, since we've had the launch, we've talked to a number of major hospitals who do, well, we've got one hospital in particular that does 2,000, peripheral nerve blocks in children, itself. So we think that we now have a lot more understanding of the market and opportunity to go back to the FDA with these folks who are doing these nerve blocks every day who are using EXPAREL now, in order to achieve those. And so the million, direct answer to your question is the million is the current opportunity with the current label, and would be expanded if we get and never block label or as we go below 6. In Europe. Yes, they are understanding of cryoanalgesia. In many markets, especially the Nordic markets, for example, they actually have more exposure to cryoanalgesia than we do here in the United States. So this is not a zero base launch, right, there are folks there who have been asking for EXPAREL or iovera now for several months. And so, we will address those same markets with many of the materials we have here in the United States. It's interesting, every country is different. There are some countries where ASCs and outpatient is favored. It is more than norm to have patients stay in the hospital for an extraordinarily long length of time. Five days plus for a total knee arthroplasty, which, of course, is a major problem if you've been locked down for two years? And so what's happened specifically in the UK is you have folks who are getting together and approaching the National Health Service with their own models for how they can address this backlog. So we're working with groups of surgeons and anesthesiologists who have said to the NHS, we're going to go with the ERAS protocols, they might still be done in the hospital, because they don't have the ASC facilities that we have, right, the freestanding facilities, but you would still set up a model where you could do knees and hips on a same day basis. And so think about it not quite as COVID resilient because it's actually a separate building. But using the same approaches, similar to what we're seeing, frankly, in some cases in spine in the United States, when we talk about same day spine, and a number of cases, those are actually being done in the hospital. But the patients are still being discharged without an overnight stay. Think about that same kind of a model with an ERAS protocol. And we've got a lot of friends in Europe. There are a lot of folks that have been trained in the United States. We're very strong in the international ERAS society. And a lot of our educational programs benefit greatly from some of the folks that are now active in Europe. So I think we're, it's going to be slow. Europe is slower to adapt than the US is. So this year will be modest at the revenue line. But as we said to the earlier question, I think over the next three years, it'll become profitable. And over the next five years this turns out to be a $90 million to $100 billion market as well, we're doing.

[Operator:]

And your next question is from Anita Dushyanth with Berenberg Capital.

[AnitaDushyanth:]

Hi, good morning. Thanks for taking my questions, just a couple here. Just in terms of the iovera sales guidance that you have been mentioned in the past about $200 million. Can you sort of talk about what drives your confidence of achieving these numbers, despite the reimbursement being better in the HOPD versus the ASC? And the next question is just regarding the patents that you have filed for the new manufacturing process related to EXPAREL. Are we likely to see anything related to that in 2021 or is it yet to be our work still a little bit slower and we're likely to see it maybe next year? Thank you.

[DaveStack:]

No, thank you. So you know in terms of iovera, the guidance, the $200 million really comes largely from what we bought thinking about total knees and the ability to freeze the patient in a cash marketplace for osteoarthritis, right, the more of a lifestyle, kind of a sale in an orthopedic surgeon's office for somebody that wants to play golf or walk on the beach with their grandkids, or we hear a lot about I want to go on vacation, my daughter's getting married, all of those kinds of things. So that's primarily where the $200 billion comes from, as we get into the marketplace, and we start to talk to people about rib fracture, and spasticity and spine and shoulder and all the other things, I think our expectations as this product matures, and as we develop smart tips, specifically for opportunities for low back pain and spine procedures and things like that, I think you're going to see that number grow. So I would say to date, $200 million over a five year plan actually is turned out to be a minimum expectation. And as we get into these different marketplaces, I think you'll see that grow. On the IP issue, we filed over a dozen additional patents, and there is some reason to believe that a couple of those will prosecuted this year or early next year, as you say, it's impossible to say there is no PDUFA data on IP, right? So we don't have a date. But there's enough interest in this market. And some of these things have been structured in such a way that we do expect to have some activity in the back half of this year. Actually, it's not -- it's actually in the fourth quarter of this year.

[AnitaDushyanth:]

Great, thank you. And just one more question. Have you considered using the DepoFoam technology for other drugs besides EXPAREL?

[DaveStack:]

Oh, sure. Yes, we, I mean, we're looking at another local anesthetic actually levobupivacaine is an epidural opportunity now especially after having discussions with the pediatric burn folks, they would like to see a procedure where you're not identifying a specific nerve. And it's not actually a field block and the classic definition of the term; it would be more opportunity to address a more broad spanned, broader and extended need for pain control, right? When you're taking the skin off of a patient's scalp and transferring it to the patient's face for example, how do you address that marketplace? If we could does that in a broader spectrum way with something like an epidural application that would be the way to go. Yes, we've continued to look at a number of things. We're looking at anti inflammatories and DepoFoam now. We've got a number of things against the strategy of any place that you use a catheter for a subarachnoid use can we replace that catheter with EXPAREL? And any place that you use an opioid as a standard of care? Can you replace those with EXPAREL? So our group continues, we have an R&D group out in San Diego, they continue to investigate these things. And the hope is that we're going to be able to supplement the products that are coming in from outside with products that are going to be developed with our DepoFoam technology here. But it's so far it's -- we've looked at antibiotics, it's very difficult. You've got an infection rate of 0.025%. And if you've got a 30% delta benefit is your threshold for an efficacy trial, you're talking about 30,000 patients that those kinds of hurdles make it very difficult to develop in some of the markets that we're currently in.

[Operator:]

And we have time for one last question from Christopher Neyor with JP Morgan.

[ChristopherNeyor:]

Great, thanks for the questions. First one is for the regional anesthesia market. You've talked about fairly low penetration rates for overall surgery at 20%. When we think about the tailwinds for your business, including the shifts to the ASC setting, how should we think about where that number going to go over time and the pace of that change? And then second one, as we think about the recovery of elective procedure market through 2021, what does that mean for your margins near term? And should we think about certain expenses coming back into the P&L with the recovery?

[DaveStack:]

Yes, Thanks, Chris. So we've said a couple of times that if you look at all of the procedures that are being done by anesthesiologists, only about 20% of them are regional. Remember that before EXPAREL had the claims, the doc had an intense interest in how they make these procedures last longer, they had an intense interest in all of these different blocks that we're investigating now. But because they only work for a few hours, there was no way to make to have a justification for the time and resources invested in those blocks. I mean, I'll just give you a quick example, four or five years ago; the anesthesiologist would have done what they call the rescue tap, where they waited for the patient to wake up in pain. And then they gave him a tap block, hoping that they were going to extend the duration of pain control through the first post surgical night. Now when we're doing these blocks into these vascular environments, these blocks are lasting for several days. And so our own internal thinking is that with the PIT, and with our strategic relationships with a number of the big anesthesia groups, that over the next 12 to 15 months, we can double that to 40%. And the reimbursement for these regional blocks, because they allow patients to be moved to the outpatient environment, et cetera, are significantly higher they are than when an anesthesiologist performs a traditional procedure. So the regional anesthesia groups themselves are interested in moving this along. And so to the point where probably the most dramatic example I can give you is the anesthesia groups, I have tied a significant part of the physicians' bonuses to their understanding and moving towards regional blocks. And one of the main places that they're learning how to do that is in our facility, the PIT and from our manuscripts that are coming out of the PIT on what's the volume? How many dermatomes do you hit with different volumes ultrasound, nerve stimulation, all of those things that are required? So I, it'll never get to 100%. But I think the guys that are coming in the gals that are coming out of their residency and fellowships are all ultrasound savvy. And so they very much migrate towards regional programs. And so you're going to see an increase into something that's over 70% for sure, over the next four or five years. And then I think it's going to be a generational thing where the older guys just sort of stops practicing. And it grows from there. Elective procedures in the back half of the year, it doesn't mean I mean, so the budget is -- the budget is pretty much, we don't anticipate having any additional expenses to what's currently budgeted for 2021. So one of the beauties of regional programs and our move away from a surgical audience where there were 1,500 different procedures that they were doing to a regional approach where a single block can cover a whole bunch of different procedures is that the ROI per rep day work from our field forest goes up dramatically. And so we don't see any additional expenses coming back to the market to our P&L in 2021. And so beyond the budget and expenses and just the COGS and the costs associated with producing additional medicines, everything will fall to the bottom line for both products.

[Operator:]

And I'll now hand the call back over to Dave Stack, Chairman and CEO for closing remarks.

[Dave Stack:]

Thanks, Tina. I'd like to thank you all for participating and listening to today's conference call. We look forward to keeping you updated on our progress. Next up for us is the RBC Conference later this month. Thanks to you all. Stay well. Bye-bye.

[Operator:]

Thank you again for joining us today. This does conclude today's presentation. You may now disconnect.