Pacira BioSciences, Inc.
Q1 2013 Earnings Call Transcript

Published: 8 May 2013

[Operator:]

Thank you for joining us for Pacira Pharmaceuticals’ First Quarter 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the formal remarks, Pacira’s management team will open the lines for a question-and-answer period. Please be advised that this call is being recorded at the company’s request and will be archived on the company’s website for two weeks from today’s date. At this time, I would like to introduce Jessica Cho of Pacira Pharmaceuticals. Please go ahead.

[Jessica Cho:]

Thank you, and good morning, everyone. Welcome to Pacira’s first quarter 2013 financial results conference call. Joining me on the call today from Pacira are Dave Stack, President and Chief Executive Officer; and Jim Scibetta, Chief Financial Officer. Before I turn the call over to the management team for their prepared remarks, I would like to remind you that certain remarks made by management during this call about the company’s future expectations, plans and prospects constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements about the company’s future expectations, plans and prospects include statements regarding the company’s plans and expectations regarding EXPAREL, the success of our sales and manufacturing efforts in the part of the commercialization of EXPAREL, the rate and degree of market acceptance of EXPAREL, the size and growth of the potential markets for EXPAREL, and the company’s ability to serve those markets, Pacira’s plan to expand that indications of EXPAREL to include nerve block, serious plans to continue to manufacture and provide support services for commercial partners who have licensed DepoCyt(e), the company’s commercialization and marketing capabilities and other statements containing the words believes, anticipates, plans, expects, and similar expressions. Any such forward-looking statements are based on assumptions that the company believes are reasonable, but are subject to a wide range of risks and uncertainties. Actual results may differ materially from those expressed or implied by such forward-looking statements. Many of these and other risks and uncertainties are described in the Risk Factors section of Pacira’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and in other filings with the SEC, which are available through the Investors section of the Pacira website, at www.pacira.com or on the SEC website at www.sec.gov.

[Dave Stack:]

Thanks, Jessica. Good morning, everyone, and thank you for joining us today. Today we will primarily be talking about EXPAREL, our novel treatment for post-surgical pain management, which we launched commercially in the United States in April of 2012. The first and only multivesicular liposome local anesthetic for use in the peri or post-surgical settings, EXPAREL uses our proprietary DepoFoam technology to improve local analgesia for up to 72 hours with a reduced need for opioids. With the first full year of EXPAREL sales now complete, we continue to build momentum through both new accounts and expanded use within existing accounts. During this quarter, we reported net sales of $10.4 million for EXPAREL, up 33% from the $7.8 million in the previous quarter. As of the end of the first quarter, 1,065 distinct customers have ordered EXPAREL, an increase of over 30% from the fourth quarter. Of this total, 308 customers ordered six times or more, up 61% from the preceding quarter, while 175 customers ordered 10 times or more, up 59% from the fourth quarter of 2012. We also maintain an average of 22 new customers per week as of the first quarter and now have access in orders from over 90% of the top 100 target hospital accounts in the United States and 64% of the top 500 targeted hospital accounts. As you can see from the continued growth from new customers and expanded use from existing customers, we are very pleased with how the launch of EXPAREL has gone and the rapid adoption by a number of surgical specialties and anesthesia physicians. When you do what we do, hearing everyday from physicians and nurses how EXPAREL has improved the quality of patient care and patient satisfaction, we are energized to work with our customers on expanding the access to this important product and to educate healthcare providers on appropriate patient selection and infiltration technique. Our 1 January for the launch year was helpful in shedding light on ongoing market dynamics of seasonality. Plastic surgery, a significant driver of our December EXPAREL growth was slower in January. In addition, as has been reported by other companies working in the acute care hospital space, we saw pronounced growth in December as patients rushed through a surgery before increasing year-end insurance deductibles. This market acceleration did not carry into the first quarter, as many of these patients canceled elective procedures based on these increasing deductibles in the New Year and their inability to pay. Coupled with the seasonal impact of winter weather and the reports of the lack of hospital beds for elective procedures based on the flu epidemic, the net effect was a relatively soft January when compared to our very active December. It is key to point out though that we continue to report sales trend and acceleration in February and March and in the quarter on a strong note as expected. As many of you will know, this analysis does not conform to the monthly reports from the national tracking services, furthering our belief that at least at this point in the launch, data from tracking services are not reliable as forecasting tools. In the quarter, soft tissue continued to be the majority of EXPAREL sales, demonstrating the success of our launch strategy in abdominal surgery and plastic surgery procedures. Looking ahead, we are especially excited by the strong interest being shown in orthopedics and also by the Department of Defense for a wide range of EXPAREL indications. We see several key initiatives fueling the strong demand for EXPAREL in the second quarter. First, major hospital system and chain wins in the quarter rather than by individual hospitals as was the case at the time of commercial launch of EXPAREL. Second, the rapid adoption and significant market potential in the orthopedic space along with the exciting results from several major orthopedic influence centers on the use of EXPAREL. Third, the rapid rise in Department of Defense formulary access and adoption with full approval at major military institutions and the U.S. Navy, Army and the VA System. And last, the timely removal of formulary restrictions at hospitals, which approved EXPAREL early in the launch and have completed the necessary drug utilization evaluations and experienced positive results with EXPAREL, leading to removal of restrictions and improved physician access. In response to the positive reaction from the marketplace in orthopedics, we are currently exploring a regionally targeted pilot program, utilizing the variable cost resource to service our orthopedic customers. We intend to provide more information on this pilot program as the next several quarters unfold. In terms of EXPAREL manufacturing, we remain on track with our progress and expanding our manufacturing facility and overall capacity. As reported last quarter, we project to receive FDA approval for our newly installed manufacturing facility Suite C, sometime in early 2014. Combined with our current facility, we expect this facility to significantly increase our manufacturing capacity and ability to meet the growing demand for EXPAREL. To diverge from EXPAREL for a moment, we saw a little DepoCyt(e) revenue in Q1 as we completed the remediation of our manufacturing facility and restarted commercial manufacturing of DepoCyt(e). You can expect to see a full recovery of DepoCyt(e) revenue in Q2. Supporting the demand for EXPAREL is our focus in generating new data that shows both the clinical and economic benefits of EXPAREL, especially as the challenges and issues presented by an opioid-based pain management platform continue to be quantified. Last month, we announced the publication of two retrospective studies identifying the cost of opioid-related adverse events from an analysis of national and regional hospital systems respectively. Both showed not only that most hospitalized patients use opioids after undergoing common surgical procedures but also that these patients incurred significantly higher hospital cost, extended length of stay and readmission rates associated with opioid-related adverse events. We expect to publish a third and complimentary analysis from an integrated delivery network database in the next few months. In a market environment where we hear daily about the negative consequences of opioid-based pain control and where the regulatory bodies such as the Joint Commission on Hospital Accreditation as well as CMS through the HCAHPS or Hospital Consumer Assessment of Healthcare Providers and Systems initiative where pain is the important clinical consideration, we see regulatory influencers providing the impetus for clinicians and C Suite executives to continue to explore low opioid treatment strategies. We also expect three prospective studies, demonstrating the benefits of EXPAREL over current opioid-based platform for standard of care to be published over the next couple of months as part of our Phase 4 improved trials similar to the publication of open colectomy trial from Steve Collen from the Southern Regional Medical Center. These three studies, which include two ileostomy reversal studies and a laparoscopic colectomy study, will show that EXPAREL-based multimodal therapy reduced opioid consumption, reduced length of stay and lower hospital costs. In addition, we expect several publications supporting the clinical use of EXPAREL in the second quarter. A time to onset will show that EXPAREL performs similarly to traditional bupivacaine hydrochloride exhibiting local anesthetic effect within two minutes following administration. An article on program wide safety, which aggregates safety data from 10 wound infiltration studies will report no unexpected safety signals related to EXPAREL use and in fact a safety profile similar to regular bupivacaine hydrochloride. In a third article, we’ll examine program wide wound healing at 10 clinical trials, which demonstrated that EXPAREL had no impact on wound healing across a number of different surgical models. We also continue to investigate additional surgical models for EXPAREL as part of our reduced opioid strategy. Last month, we presented results from EXCLAIM, a Phase IV prospective study to assess the use of EXPAREL for post-surgical analgesia and patients undergoing four common plastic surgery procedures, abdominoplasty, breast augmentation, breast reduction and a combination of abdominoplasty in a breast procedure. Patients reported low pain scores as well as high satisfaction with pain control and minimal opioid use, which we presented during the hot topics session of this year’s the Aesthetics Meeting at the American Society for Aesthetic Plastic Surgery. This presentation was selected as best of hot topics and as a result was presented a second time. In addition, data was presented from a surgical practice in Houston describing nurse success utilizing EXPAREL versus pain balls in patients undergoing abdominoplasty, which we anticipate will be published in a leading plastics surgery journal in the coming months. As we expressed in our last earnings call, we continue to explore additional usage for EXPAREL such as infiltration into the Transversus Abdominis Plane or TAP. Last week, we announced data from two studies, the first study, a retrospective review of patients undergoing hand-assisted nephrectomies and colorectal procedures. On the EXPAREL administered via TAP infiltration was well-tolerated and provided up to 72 hours of post surgical pain control. This study was discussed at the 38 Annual Spring Meeting of the American Society of Regional Anesthesia and Pain Medicine in Boston. The second study was a prospective analysis examining TAP infiltration in patients undergoing opened abdominal hernia repair, patients reported low pain scores and high satisfaction with EXPAREL. This research was presented at the International Anesthesia Research Society. Over the next couple of months, we anticipate a publication of a Phase IV study examining TAP infiltration with EXPAREL, and robotic prostatectomy patients, a 100% of them were either satisfied or extremely satisfied with their pain control through the study. We are initiating our prospective TAP infiltration Phase IV program. The study of the use of EXPAREL for lower adnominal surgeries, laparoscopic hysterectomy, lap colectomy, ventral hernia repair etcetera. Studies are also currently underway as part of our Phase III nerve block program, comparing the effect of EXPAREL and motor and sensory function versus placebo. Femoral nerve block study for total knee arthroplasty and an intercostal block study in posterolateral thoracotomy procedures. We expect to complete these trials late 2013, early 2014 and we use these data to submit an sNDA for a new indication in the package insert for EXPAREL. We believe that this new indication will present an alternative long-term method of pain control with a single injection replacing the costly and cumbersome standard of care requiring a perineural catheter, drug reservoir and pump needed to continuously deliver bupivacaine. Overall, we are very happy with the progress we’ve made so far with EXPAREL and look forward to continuing to advance the program and our strategic initiatives. With a successful year of sales and important insights behind us, we have concluded our launch year with a better understanding of seasonality and sales performance and developing potential of EXPAREL in new areas through our continued growth in robust data collection and by responding to increasing marketplace demand. We continue to believe that EXPAREL represents a blockbuster platform for post surgical pain management. With that, I’ll turn the call over to Jim to review our first quarter financials for the year. Jim?

[Jim Scibetta:]

Thanks Dave and good morning everyone. For the quarter ended March 31, our total revenues were $11.6 million and most important as Dave discussed EXPAREL revenue what was the fourth quarter of the launch was $10.4 million. I’ll note that the EXPAREL revenue for the first four quarters of launch was $25 million. Those results along with the growth rates we are experiencing and the still deminimis market share we have achieved overall would suggest EXPAREL maybe on a path to becoming a major pharmaceutical brand. I feel responsibility to reiterate once again that we continue to caution relying on the monthly numbers reported by the sales data tracking services. It’s not our intend to report monthly revenue numbers either historically or going forward, but to make the point I do want to convey that within the three-month period ended March 31 both services reported a capture rate in a given month that was in excess of 100%. And further even though the symphony numbers may have arrived to a random walk to match our full quarter number, they arrived there through a very misleading month over month trend. So we’ll continue to make every effort to provide prospective on actual sales and sales trends on these quarterly calls. With respect to our other product, DepoCyt(e), which you’ll recall, is marketed by separate partners in Europe and U.S. Q1 revenue was minimal as we finalized the remediation efforts in our DepoCyt(e) manufacturing line that we committed to the EU inspectors. As Dave noted, we expect DepoCyt(e) revenue both from lots sold to partners as well as royalty revenue from patient usage to pick up significantly in Q2 as we resupply the market. Operating expenses were pretty much in line with our year-end commentary regarding what to expect for 2013. Q1 cost of goods sold, which pertain to both EXPAREL and DepoCyt(e) was $11.4 million, we spend $5.9 million on R&D in the quarter, most of which was for the EXPAREL pivotal nerve block studies and to a lesser extend the development of our new spray manufacturing process. SG&A expenses were $12.9 million in total in the quarter, with about two-thirds of that for selling and marketing costs. CapEx for the quarter was $2.9 million, most of the Q1 CapEx related to Suite C and there will be additional Suite C CapEx in Q2 as we complete that project, which as Dave mentioned remains on schedule. Net loss for the quarter was $23.1 million which amounts to $0.71 per share based on $32.7 million weighted average shares outstanding. Note that a significant compound of net loss per share I estimate from $0.20 to $0.25 per share was attributable to the combination of four unanticipated or non-recurring events. One, a non-recurring expense related to the early extinguishment of debt in the quarter as a result of the January convertible debt financing; two, a non-cash interest expense associated with the accounting for that new debt; three, stock-based comp expense specifically attributable to our stock price increase in the quarter; and four, the absence of DepoCyt(e) revenue during the remediation period I discussed previously. I should also point out that none of those factors have anything to do with the revenue or operating expense lines pertaining to new EXPAREL, which of course is the primary value driver for the company at this point. As of March 31, 2013 the company had 33 million shares of common stock outstanding. We ended the quarter with approximately $110 million of cash, which we believe is more than sufficient to get us to cash flow positive. And as noted in previous calls we expect to be cash flow positive at some point in 2014. As we have completed our first full year of the EXPAREL launch, it’s an appropriate time to reflect on where we are, try to see where we might be going forward. In the first year, we have either exceeded or are tracking very nicely with the other hospital based products that proceeded to become major brands with greater than $500 million of annual sales, and distinct from those brands we achieved our first-year of launch results in a more challenging macro environment amidst economic uncertainty and in a hospital environment well prepared to challenge the value proposition in new and innovative therapies. We believe our progress today really speaks to the uniquely compelling value proposition of EXPAREL in the marketplace and the tailwinds of the macro environment we are operating in, where medical professionals, hospital leadership, patients and patient advocates and government regulatory bodies are all very eager to find pain treatment alternatives to opioids. Because of our solid conventional IP rights and our proprietary capabilities and manufacturing multi bupivacaine liposomes that enable Pacira to become the only success story in the pharmaceutical industry’s long – decade-long quest to satisfy market demand for an extended release bupivacaine product, we believe we have the unique franchise protection position that allows us to build this major brand without any foreseeable generic threat for competition. We own 100% of the global rights for the EXPAREL brand and enjoy a very minimal royalty burden of only 5.5%. This by contract reduced to a maximum of 2.5% in 2018, and our combination of the scalable fixed costs manufacturing infrastructure we use to manufacture EXPAREL along with the need for only a manageable size specialty sales force to resource the significant commercial opportunity, should position us to drive considerable profitability for Pacira as we grow the EXPAREL brand. So with that, I’ll now turn the call back to Dave.

[Dave Stack:]

Hi, Catherine, hi, we are ready to open the call to questions.

[Operator:]

Thank you. (Operator Instructions) Please standby for your first question, which is from the line of Richard Lau from Wedbush Securities. Please go ahead, Richard.

[Richard Lau:]

Hi, good morning guys. Thanks for taking my questions. I was wondering if you could maybe comment a little bit even early about the average order size, as if they have been creeping up or these hospitals typically place larger orders or just more frequent at this point?

[Dave Stack:]

Yeah, what we are seeing Richard is – well, there is two things going on here. One is that, when you continue to have between 80 and 100 new customers every month, typically a customer starts out with a one-box order. And so it’s really hard to move the needle when you have that quantity of new customers every month and we are still this early in the launch. But I think probably more compelling frankly is hospitals really are just in time inventory artists. And so we do see more small box ordering one, two, four boxes, and it appears at least based on the size of the box and lack of refrigeration. And the fact that they really don’t want to have a lot of inventory on hand that the strategic preference would be in more small orders. Now, I would also tell you though that, with that said Richard, we do see many more 8, 10, and even 20 box orders now things that we wouldn’t have seen at all six months ago. So, we do see places where there are sizable orders, but if I was going to tell you that the average order size has gone up significantly based on everything we discussed about that would not be the case.

[Richard Lau:]

Okay, got it. And then hospitals had times at this point to do a product review and is there any sort of anecdotal feedback you can get there?

[Dave Stack:]

No. What we are seeing is especially early adopters who have used a lot of the product and where there has been an active review under a TUV for whatever reason they might be doing it. We have been very successful in those scenarios. And frankly, what happened as a result of most of those TUVs and the feedback from the physicians and the nurses is that the TUVs rather than being a negative, which is always the way they start out that they are going to be the basis of some type of control mechanism, that work out just the opposite way, and the TUVs would have been completed have largely lead to a removal of restrictions and increased physician access.

[Richard Lau:]

Got it. And then you guys have recently released some good data in TAP infiltration. So, I just want to drill down a little bit more into it, are physicians performing the TAP technique in a similar fashion as with regular bupivacaine, or is there adjustment to volume and dilution and things like that they need to do, just trying to get a sense on how quickly docs might jump on board?

[Dave Stack:]

Well, there is no – like with everything else that we have done so far, Richard, there is no one way that everybody does it. But one of the reasons that we are kicking off our Phase 4 prospective trial in these lower abdominal surgeries is to provide some guidance to the marketplace as to the use of EXPAREL. I mean, a couple of victims that were following here is that in everything we see, more volume is always better. And so what we are going to recommend is a 40 milliliter injection, 20 milliliters on each side. We think that’s the right way to use it. You see in the marketplace anywhere from 50 on each side to 30 on each side. So, I don’t think what we are doing is going to be anything unusual, but we would like to be able to report some results with a specific regimen that the docs can follow. These will all be done under ultrasound guidance, which is the common practice in the marketplace. I think the only thing that would change as a result of our work is that currently in the majority of cases at least, Richard. Well, so we have places where as the procedure is starting they will do a TAP infiltration and then extend the duration as long as they can. There is other situations probably more common, where the physicians perform whhat’s called a rescue TAP, and so because of the short duration of action of bupivacaine, they do the TAP when the patient awakens from whatever general anesthesia or regional anesthesia that they are doing. And so they awaken in pain and then they do the TAP to provide their 12 to 14 hours of relief, because our early data demonstrates several days of relief with EXPAREL, we are going to do these procedures before the patients ever go into the OR. So, the patient in the EXPAREL program will receive their post-surgical pain control before there is ever an incision. And we think that will be a fairly significant advance in how TAPs are used. But this product has been very carefully engineered, so that whatever you’re doing with bupivacaine today, you can do with EXPAREL tomorrow, so there is no change in the technique. It’s more looking at volume and timing.

[Richard Lau:]

Alright and how much would hospitals, I guess, on average, say by not having to deal with the rescue TAP?

[Dave Stack:]

It’s more of the same story. So, it’s more – well, there is two sides again, I guess one is, reduced opioids leading to reduced adverse events, leading to earlier discharges. So, one – that’s the hospital saving side, if you will, we are hearing more and more as a result of HCAHPS and patient satisfaction being a driver of hospital reimbursement through the CMS systems etcetera that hospitals are increasingly interested frankly in patient satisfaction just as much as they are in saving money. But, it’s the same story, Richard it doesn’t change a lot from the infiltration. Actually, the way to think about TAPs in my view is, generally folks who are doing an infiltration will not do an infiltration and will do a TAP. So, there is really two sides for the TAP strategy. One is that when folks start doing TAPs aggressively, they are generally doing those in the app and replacing infiltration, so there is a defensive portion to our strategy. But we also think that by providing several days of pain control with the same basic procedure and the same use of diagnostic equipment in the same time, etcetera that when people start doing TAPs, we will be the only obvious choice and so that’s the offensive part of the strategy if you will.

[Richard Lau:]

Got it. Thanks guys and congrats on a good quarter.

[Jim Scibetta:]

Thanks Rich.

[Dave Stack:]

Thanks.

[Operator:]

Thank you. The next question is from the line of David Amsellem from Piper Jaffray. Please go ahead.

[David Amsellem:]

Thanks. Just a couple, so starting on the topic of formulary access, hospital formulary access, for hospitals that I guess are not buying in, can you give us some color on what kind of pushback you’re getting or what the gating factors are to getting the holdouts to buying in on EXPAREL?

[Dave Stack:]

Sure. I would say – there are and it runs the gamut again David. There are places where they won’t even look at a new product launch until year one. And so we do have places that are just starting to call just now about the use of EXPAREL. We have got other places where the soft tissue launch whether it was colorectal surgeons or plastic surgeons just didn’t provide enough impudence for a hospital to go through the formulary approval process and make the product available. One of the things that we see as the audiences expand to other surgery groups and to anesthesia it is that there is a fewer – let’s – I’ll give you an example. If you are a Center of Excellence for Orthopedics or if you are a Centre of Excellence for Spine, etcetera, once those surgical audiences start using the drug, you have a lot more critical mass inside the hospital in terms of making a formulary approval happen. I don’t want to give you only the good side. I mean there are places where we are just never going to be on preliminary because they just don’t use any new products. And so if you go back and if that was a year-ago and we said we were going to have over 90% access in the top 100 and over 60% access in the top 500, I would tell you that I would be thrilled. And we have way more access now than we need to get this year’s numbers and next year’s numbers. So, the focus of the commercial organization and the field organization frankly is on working with places who understand the low opioid story and have seen the benefit of reducing opioids and patient satisfaction improving, hospital costs going down and working with those people rather than fighting with those. I think we’ve got way more than we need to be successful. But I would tell you just on the first of May, we had two major hospital groups in the United States, who approved the drug in late March early April. And we use that five or six weeks to educate these centers and have to commit more than one corporate FTEs and going through those organizations and educating all the nurses and the healthcare practitioners, etcetera and they both came online May 1. So – and we’ve got other major centers now who are queued up. I don’t want to give you the impression we don’t have continue to do formulary wins. We do, but the focus of the organization now is on making sure that we are making this product available to as many patients as we can and that is a lot easier and an expansion strategy where you are already available than it is inflating wind mills like I said.

[David Amsellem:]

Okay, that’s helpful. Second question is as it relates to seasonality. And I may have missed the commentary earlier in the call, but as we get further into 2013, should we expect to see some seasonality in the summer months and maybe just layout for us, how we should think about the potential for lumpiness during the given calendar year, bearing in mind of course that we’re early in the lifecycle, but how should we think about that?

[Dave Stack:]

Yeah, I’m – we have one doc in each of these monthly trend lines. So, take this with the way we think about it, but things are going well. We expect that things will continue to go well. We have a less of an increase in July and August, but the product is still increasing on a month-by-month basis. And then as we get into the fall, similarly to what we saw last year, we don’t think that we’ll have the dramatic issue in September that we had last year, because we have so many places where EXPAREL is now the standard of care and is written into the protocols and nursing notes and the way they do practice. And then all signs indicate David that the patients who did not get elective procedures in January because frankly in some cases they were just stunned by the increase in the (court case) that were being levied against them are now are getting those procedures just on a different timeline. So, and then everything that we’ve heard and seen whether it’s related to a flexible spending account that needs to be allocated in that year or any of the uncertainties about our insurance system and where that’s headed on an annual basis, everything points to the fourth quarter being very strong again and that’s what we are getting ready for.

[David Amsellem:]

Okay. And then one last one if I may this is relates – as it relates to Suite C, can you give us some color as to whether or not both Suite A and Suite C are going to be running concurrently at some point next year. How long there maybe some overlap and then maybe an overall sense of what your expectations are for that new suite to come online or in other words what’s the timing for that in 2014? Thanks.

[Dave Stack:]

It’s, I will get the last piece out of the way first. I mean it should be early in ’14 and you guys know well but when you’re dealing with regulators and regulatory approvals, and stuff, it’s always best to give yourself a little bit of room now. But we think it will happen early in first quarter. Suite A and Suite C will be valuable to be run together David. But you also would understand that we can make a significant amount of material in Suite C before it’s approved. And when it’s approved that material would all be available for sale. So, that is our intention. And so by strategy then we will make the primary source of commercial material once we see it’s approved, will be Suite C. Occasionally, we will make a batch in Suite A just to keep that suite running and working properly. But we favor the cost of goods advantages and the fact that we don’t have a semi-automated system that we got a fully automated system etcetera. So, we will make as much as we can and see key bay available until we have clear visibility on the spray process and then make our decisions with A really more around C or around Spray and the new process around C.

[David Amsellem:]

Great. Thank you.

[Dave Stack:]

Thanks, David. Catherine?

[Operator:]

Sorry. Yes, the next question is from Douglas Tsao. Please go ahead.

[Douglas Tsao:]

Hi, good morning, guys. Just trying to understand a little bit around sort of some the sequential trend that you saw from December to January and at the beginning of the year, in terms of – on the order of magnitude between, I guess, sort of the plastic surgeons sort of stepping away in the early part of January and to the extent that they came back as well as sort of as you referred to sort of some of the procedures, sort of soft tissue procedures seeing a slowdown sort of related more to the macro issue that we’ve seen in hospital volumes.

[Dave Stack:]

Yeah, anything specific or just general comments, Doug?

[Douglas Tsao:]

Sort of just general comments in terms of sort of the order of magnitude, was it one versus the other, was it a combination of both?

[Dave Stack:]

Yes, it was, I wouldn’t say that we probably wouldn’t be talking about it at all if there was any one, it’s the combination of all, really, I mean, the most obvious, frankly was in the early days of the month was plastics and it really largely because it was so strong in December. And again we don’t have a lot of trend information here, but what we saw was that these were folks who were getting these procedures during the break that in many cases they were gifts that were associated with a holiday period and the patients were making their schedules and getting them done, especially strong in that week between Christmas and New Years and then as a result of the fact that most of those offices were working every minute that they could during that period. They took a couple of weeks off in early January. And so, you really saw a very distinct difference on New Year’s Day and we went from, holy cow, this is unbelievable to what happened so, that would be my first comment. We also saw and you have seen others comment on this that there were pockets in the country where you were getting reports from docs that their elective cases were being taken off the schedule, because there were no beds because of the flu epidemic. I wouldn’t say that that was strong enough to have any material impact on the month, but when you added into a number of other things there were pockets where we saw softness in January. And then, we’re nowhere near strong enough in the orthopedic marketplace yet to say that we had a material impact on Q1 from orthopedic procedures being delayed, but we did have a number of calls from anesthesia folks and from orthopedic surgeons who were talking about patients who were thinking that they had a $500 co-pay and they would get a note from the hospital saying that their co-pay have been increased to $2,000 and patients who were planning on having a (indiscernible) are still planning to have the (indiscernible), but didn’t have another $1,500 to go to the hospital next week to have that procedure done and we absolutely saw some of that too. So when you roll that up January becomes on the soft side, and then as we said during the call script, February was right where you wanted it to be and March was strong enough that we actually made up for the soft January.

[Douglas Tsao:]

Okay. And then in terms of the orthopedic opportunity obviously it’s a small base. It seems that perhaps it’s coming together still a little more quickly than you anticipated and certainly, we have gotten independent feedbacks from – on both orthopedic surgeons as well as spin surgeons in terms of how much they like the product, just curious if that has changed and perhaps you referenced there in terms of the variable sort of infrastructure that you perhaps thinking and bringing on. Change your sort of thoughts in terms of your marketing strategy and sort of an acceleration in terms of trying to build awareness in that community more quickly than you perhaps anticipated away from sort of the focus on the original sort of core market of soft tissue procedures.

[Dave Stack:]

Yeah, we’re going to – a little bit different than what you outlined so, I didn’t answer to the question. There is nothing going on in orthopedics that leaves us with anything but bullish thoughts on not only the way the physician see the product being used, but the response from patients and nurses is just extraordinary so, everything there is going well. We have a dedicated team here in Medical Affairs that just works on orthopedics and so they’re largely responsible for getting us where we are. The strategy, Doug is do we distract our soft tissue folks from continuing to grow the product in abdominal soft tissue and plastic etcetera where we think that there is roughly 20 million surgical opportunities in order to address what we believe is a more rapidly adopting and frankly growing orthopedic opportunity. And, so what we’re doing is we’re increasing the size of our - which by the way the orthopedics, but numbers are probably in the 4 billion to 5 billion range. So, it’s a more aggressive audience, but it is a smaller net opportunity if you had a market share of 50 in both. So what we’re doing is, we continue to dedicate internal resources to both opportunities, we’re focusing our field force, largely our soft tissue and we are working with some folks who are in the OR everyday, working with orthopedic customers to determine if an appropriate strategy with those customers is the use their variable cost resources to address our needs and the needs of our customers, does that make sense?

[Douglas Tsao:]

Yeah, it does - no, no, and I guess sort of two follow-ups would be that because the teams within the orthopedic community, a lot of it - the sort of awareness has been viral if you will.

[Dave Stack:]

Right.

[Douglas Tsao:]

And so sort of to the extend that you’re trying to facilitate that and then I guess the follow-up question would also be in terms of your clinical support focus, or helping facilitating adoption amongst the orthopedic community. Are they right, I mean, do they have a backlog and is there sort of a bottleneck in terms of more docs wanting to try out the product and having to wait a little bit right now, in sort of how should we think or how are you thinking about that?

[Dave Stack:]

Yeah. So you are right and then we’re focused on the key opinion leaders and on the influence and our strength which is what you would expect us to do. And so we are starting to see care pathways and the first initiation of people putting their protocols up on websites and providing their protocols for how they’re using EXPAREL to different orthopedic specialties et cetera. So that’s all happening. There is a combination here of orthopedic guys who want to use the drug immediately where there is access because we have been successful in the same institution for soft tissue surgeries and we’ve got all the folks we need to support that activity. They’re also on a number of places were orthopedics is the primary driver of formulary approval and we’re working our way through those processes and I think you’ll see that largely taking place between now and summer, Doug. So it’s a little bit of both and the formulary process there does stage these guys in such a way that they can’t just start using the drug tomorrow unless it’s been available in an institutional for some other purpose.

[Douglas Tsao:]

Okay, great. Thank you.

[Dave Stack:]

Thank you.

[Operator:]

Thank you. The next question is from Corey Davis from Jefferies. Please go ahead.

[Corey Davis:]

Thanks. Dave, I wanted to go back to the quarterly progression and a couple of comments you made at different points in the call, and so if you were to plot January, February, March and April. In your prepared remarks you used the term acceleration and then later I think you just said, there is steady growth month over month. So, the question is, is that line linear and just acceleration was the wrong choice of words. And if so, at some point do you expect that line to truly accelerate the rate at which sales are increasing on a monthly basis.

[Dave Stack:]

So, obviously you know trends overall, we’re not commenting on April specifically.

[Jim Scibetta:]

Well, I think if you’re talking about some type of an inflection point, Corey, where the product just takes off from the linear trend line and...

[Corey Davis:]

Yeah, that’s probably a better way to put it.

[Dave Stack:]

We have not seen that yet. So the growth is as we would have expected quarter-on-quarter, what I was trying to point out is that the numbers on a month-by-month basis are very different than you would have expected and what you saw was the quarterly number. And so there is an slight increase in the linearization of the month-by-month growth so far and the reason that we expect that to change and I do absolutely believe that there is an inflection point in the near-term future is the acceptance of this product by the orthopedic surgeons and by the – and then these TAP procedures, where to-date we see aggressive growth, but as a percentage of the total procedures being done in those two marketplaces were still tiny. And so we are doing a bunch of orthopedic work now and we are starting a TAP study and you saw some of the data last week from TAPs and so those will be the two accelerators when we get to an inflection point, one in orthopedics or what we are terming hard tissue surgeries and one in Transversus Abdominis Procedures in what we consider to be a soft tissue surgery.

[Corey Davis:]

Okay. To my second question, you described in awful lot of studies that you are doing, and I didn’t follow every single line of them, but could you be clear about which of the studies you are conducting will ultimately lead to a label change versus just studies to the increased awareness in application?

[Dave Stack:]

Yeah, let me group the studies in four quick pockets, Corey. I hope I can remember to do it in four. One is the hospital studies where the big hospital groups prove to themselves that there is a $4,000 to $6,000 cost and a three-day length of stay difference in a patient that has an opioid-related adverse event. I mean, that’s sort of a first leg if you will. The second leg was all of the improved studies and demonstrating that if you lowered the amount of opioid that was being used by between 50% and 80% that you saw at least a one day reduction in length of stay and you say its several thousand dollars again. And remember in this prospective payment environment, what we were trying to do there is offset the $285 cost of the drug. And we have done that times 10x in virtually all of the improved trials. Then we did, I’ll add to that a series of trials, explain those basically the same thing that improved us, but does it in cosmetic plastic surgery. And then the TAP program, we are replacing bupivacaine with EXPAREL and extending the duration of action from something like 12 hours to three to four days. We believe that every one of those is in the current package insert, where we have an indication for single-dose administration into the surgical site to produce post-surgical analgesia. So, that’s sort of absolute class, if you will. The only trials that we are doing for inclusion into the package insert are the nerve block trials, and that’s the femoral nerve block trial and total knee arthroplasty and the intercostal block trial as part of the posterolateral thoracotomy procedure.

[Jim Scibetta:]

And just to pickup on that, similarly the R&D line is driven, as I talked about, by the nerve block studies that Dave talked about, which is the only label change focused studies. Everything else is in the selling line of SG&A, because it’s supporting the already approved indication.

[Corey Davis:]

Right. And so that actually will lead to my last question which is, how are you feeling about expenses, both SG&A and R&D at the current rate disc orders, is this something that will be flattish going forward or you envision the need for any kind of increase in SG&A if revenue starts to accelerate that would warrant a high investment prior to profitability?

[Jim Scibetta:]

Yes, I think, overall, the picture for 2013 is fairly stable expense lines by OpEx category. I think that we will be doing some work in the latter half of the year running manufacturing 24x7, which has an increase of costs a little bit there. And then as we have talked about we will increase – we’ll continue to increase the field force sort of moderately, and I don’t know if Dave wants to elaborate on this, but continuing to add scientific affairs and particularly clinical nurses, but nothing that sort of dramatically will change that line.

[Dave Stack:]

Now the only comment, I would make Cory is as we have talked about several times, when we get into these orthopedic procedures, especially in the knee and in the spine, the surgical technique is really important. And so we will continue to add a couple of nurses on a quarterly basis, so that we can make sure that we can meet the needs of these customers when it comes to the adoption of the product and making sure that they get started correctly in terms of injection technique.

[Corey Davis:]

So, slight increases in SG&A on a quarterly basis for the rest of the year?

[Dave Stack:]

Yeah, that’s fair. And then the R&D volume is sort of the opposite where it’s front-loaded with the nerve block studies and in the back half of the year, we’ll reduce to a sort of more of a steady state.

[Corey Davis:]

So, that will drop back down throughout course of the year.

[Dave Stack:]

Right.

[Corey Davis:]

Okay, I got it. Thanks.

[Jim Scibetta:]

Thanks Cory.

[Dave Stack:]

Thanks Cory.

[Operator:]

Thank you. The next question is from Patti Bank from DISCERN Securities. Please go ahead.

[Patti Bank:]

Yes, good morning. I jumped on a little bit late, so I apologize if you answered this, but can you talk to us any other factors in the first quarter that may have helped a little bit and kind of the outlook for the full year in terms of the compounding issue, I had heard from some doctors that helped EXPAREL, and also we saw some of the recent manufacturing costs from some of the competitors?

[Dave Stack:]

I am not sure, what you – can you just be make sure I answer the right question, Patti compounding issues.

[Patti Bank:]

Yes, with so many other jobs that need to be compounded that I guess some of the doctors were using in the OR and they had said that once that kind of all hit with the FDA...

[Dave Stack:]

Oh, I see, what you mean, yes...

[Patti Bank:]

Well, it helps drugs like EXPAREL which were easy to open the bottle and use.

[Dave Stack:]

Yeah. I think it is interesting by the way and those of you that have been with us in this orthopedic environment have actually seen this firsthand. One of the first things you see when you get into the OR is generally a way for telling you all the products that they can get. And what they are recommending you use as an alternative. I don’t think honestly that that had a huge impact on us. What we hear from hospital pharmacist is going through all this effort to make sure that we get this drug used appropriately and we are going through all these programs on injection technique etcetera and don’t should be a run out. I mean that we hear all the time. The only place that I can tell you that I see a material advantage to EXPAREL is with the elastomeric pumps. And that’s in two places really. One is they can’t get the bupivacaine and when you marry that with the thought process that they use a lot of bupivacaine in one of those pumps relative to how much they would use with EXPAREL. The pharmacist just doesn’t want to use all of their short supply bupivacaine to fill up an elastomeric bag. That’s one piece. The other piece that really has started to just push people to EXPAREL, if they were at all hesitant is there have been a number of recalls, not only the market leader, which we have talked about on this call before, but now some of the generic manufacturers of these elastomeric pumps of that class one recalls for safety issues. The PRN buttons are getting stuck, really material issues. And there is one major center – actually it’s a nine hospital chain that just in the last month said, we are done, no more elastomeric pumps, they are going through the process right now, teaching everybody how to replace an elastomeric pump with EXPAREL. And so we are just starting to see the real material impact of all of those things that you are asking about, but in terms of the compounding from a hospital pharmacy in Boston for example that led to a number of those issues, I can’t tell you that I have seen anything really significant come our way as a result of that.

[Patti Bank:]

Okay. And then just one second question to follow-up on your comments on TAP, is there a way to give us a better idea of what that market opportunity is, I mean, as you say I know it’s increasing, but I still don’t think it’s standard of care in most hospitals, but can you quantify that in terms of number of procedures or rate of growth?

[Dave Stack:]

We are doing some work in an anesthesia meeting, this week actually, Patti. And so I hope I will know a little bit more in the next couple of weeks, but the short answer if you want a real number is no, and part of the issue is that hospitals as you state either do it or they don’t generally. The real interesting component of this is when they do it, it spreads like wildfire and you will actually hear nurses say, well, how come this patient didn’t get a TAP and it happens very quickly like in six months. They will replace half of their infiltrations. And so there is two things there, one is it’s not universally accepted, because handheld ultrasound isn’t available everywhere. And two when it does happen, it happens quickly and those two dynamics make it virtually impossible for us to say that I know this month or next month what the total TAP market is likely to be. I mean, I will give you a number, but it’s what we get from you guys frankly. So, I have got from several folks in the financial community that their number is 3 million procedures. Every time, I ask for that background, I don’t get anything. So, it’s really a soft number for all the reasons that we just talked about. It’s not insignificant, but it’s not $20 million.

[Jim Scibetta:]

It appears that it’s a very effective procedure with EXPAREL. And so we are really happy with how we are positioned in its future growth, not only in the short-term, but in the real long-term here.

[Dave Stack:]

Yeah, there are some (indiscernible) wells too in the space and so we could always think about going forward about having somebody to really knows what they are talking about on a call as well.

[Patti Bank:]

Alright, thank you.

[Dave Stack:]

Thanks Patti.

[Operator:]

Thank you. The next question is from the line of (indiscernible). Please go ahead.

[Unidentified Analyst:]

Thanks. Dave, regarding the orthopedics space, where is it being used most aggressively within that space and just by contrast how it’s been used soft tissue?

[Dave Stack:]

Yeah, that’s a great question, Jonathan. I would say that it is, it’s initial take off was in knees and largely because physicians were able to control pain, but they had to do with either with a femoral nerve block which caused quite weakness and then balls are a never event meaning that if somebody falls in the hospital, the hospital gets no payment for that hospital stay as a result of that they were using leg races which ironically cost more than EXPAREL does, they were delaying ambulation protocols et cetera, so there were a lot of issues with the use of femoral nerve blocks and so that was the obvious place for the docs to look. As they become more comfortable with the product they also start looking then in places where they currently do neither an epidural or a spinal and then once we have success in those areas then they start to think about a strategy well, why am I using any perineural catheters with a drug reservoir and a pump while effectively pumping bupivacaine in and going through all of that entails. And so the progression generally is knees and then hips and then you start to know when people are moving into different areas, we get a lot of request now for a 10ml vial because of a risk. We can tell you exactly where the spine guys are doing procedures and where we’re being very careful there. Everybody has referred then to very small team of very high end KOL spine surgeons who want to be absolutely sure that they are doing that right. So I would say that the normal progression is look where you’re doing a femoral nerve block and a knee, when you have success there, then you start to talk to other surgeons who might not be using femoral nerve blocks and talk about do we need to do epidurals, we might just be able to do a spinal and an EXPAREL infiltration and then what’s your successful there you start to think about shoulders, wrists, ankles and somewhere in there the spine guys get interested and start doing laminectomy and discectomy things like that.

[Unidentified Analyst:]

Alright, thanks David.

[Dave Stack:]

Thanks.

[Operator:]

Thank you. I would now like to turn the call over to Dave Stack for closing remarks.

[Dave Stack:]

Thanks everybody for joining us today. We’d like to note that coming up we will be presenting at the Bank of America Conference in Las Vegas next week and at the Jefferies conference in New York City on June 3. We look forward to updating you all on our progress here over the next several quarters. Thanks a lot for joining.

[Operator:]

Thank you for joining in today’s conference. This concludes the presentation. You may now disconnect and have a very good day.