Q2 2019 Earnings Call

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Hello May have your conference I'd number please.

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3455 zero to seven.

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First name are a C H E L. Rachel.

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The last name SM I T E Smit.

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For Apple I for Indigo easy for Echo.

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In and answer session and instructions will follow at that time, if anyone should require operator's assistance Today's conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference is being recorded.

I would like to introduce your host for today's conference Ms., Susan Mesko head of Investor Relations Ma'am. Please go ahead.

Thank you Michelle and good morning, everyone. Welcome to today's conference call to discuss our second quarter 2019 financial results.

Joining me on today's call are dates back chairman and Chief Executive Officer, Max Reinhardt, who recently joined US as President and Charlie Reinhart, Chief Financial Officer, Dr. Rich Scranton Chief Medical Officer is also here and will be available for questions. Following our formal remarks before we start let me remind you that today's call will include forward looking statements based on current expectations such statements represent our judgment as of today and may involve risks and uncertainties. Please refer to our filings with the SEC, which are available from the SEC or our website for information concerning the risk factors that could affect the company with that I will now turn the call over to Dave stack.

Thank you Susan good morning, everyone and thanks for joining before we review the progress made over the last quarter I'd like to begin by welcoming Max room. Reinhard is our recently appointed President Max brings extensive global device experience to Pacira any shares our passion for bringing non opioid options to patients.

He hit the ground running making a terrific impact leading our JNJ joint steering committee and integrating over into the Pacira commercial offerings, Max will share some and some updates on both fronts later in the call. We are particularly excited by the exceptional second quarter. We've posted we reported topline revenue growth of 22%, which was largely driven by x. broke penetration in existing and expansion into new procedures. We continue to see strong growth for both the 10 ml and 20 ml vials.

Enthusiasm among anesthesiologists continues to grow as EXPAREL based regional approach has become a mainstay of enhanced recovery after surgery or eras protocols that enable reduction in length of stay and shifting of many painful procedures to 23 hours environments, such as hospital outpatient and ambulatory surgery centers.

Our customer base continues to expand with a 24% year over year increase in ordering accounts and finally, we have made significant progress integrating io Vera into our commercial offerings and we are confident that it has the potential to cross the $100 million net sales mark within our five year plan.

With EXPAREL now firmly position for long term market leadership, and the addition of Io Vera to our portfolio, we are well on our way to realizing our vision to become the global leader in innovative non opioid pain management and regenerative health solutions.

To achieve this we are advancing three global pillars to improve patient journey, along the neural pain pathway.

First enabling EXPAREL to as the foundation of opioid sparing protocols across key inpatient and outpatient surgical settings.

Second advancing our clinical pipeline. This includes leveraging our proven depofoam platform to efficiently advance new product candidates and third pursuing innovative assets that complement our commercial infrastructure and meet the needs of our surgical and anesthesia audiences in the United States and select global markets.

I'll start with our first pillar expanding the use of EXPAREL. We are very pleased with the strong trends, we are seeing and remain on track to deliver full year net EXPAREL sales of $400 million to $410 million. This represents a growth of more than 20% over 2018.

In June we were delighted to have a marketing authorization application for EXPAREL validated by the European Medicines agency with this validation our application is complete and the review process is underway with an opinion expected in the second half of two to 2020.

This is a major step forward.

In our geographic expansion effort to provide an opioid alternative to as many patients as possible. We believe select European markets offer significant revenue opportunity as there is great interest in the economic benefits of an opioid sparing regimens.

For the rest of the World, we anticipate submitting our new drug submission to health, Canada soon and launching a pharmacokinetic study in Hong Kong with our partner newest biotech in China. Later this year to remind you. We are advancing go alone strategy in Europe , and Canada, rather than pursuing a commercial partnership.

The team is also making great progress advancing to phase III trials intended to broaden the X. pro package insert first our pediatric study, which is progressing according to plan and actively enrolling patients. This study known as play as a top priority to pacira given the urgent need for non opioid alternatives for managing severe postsurgical pain. In this vulnerable population, we have seen considerable interest from our academic institutions looking to get involved in the trial further underscoring the urgent need here we remain on track to complete. This trial later there later this year.

Second we are launching a lower extremity nerve block study that will compare EXPAREL with be picky in patients undergoing lower extremity surgeries, we expect the market opportunity for lower extremity nerve block to be at least as meaningful as the brick you'll plexus nerve block with anesthesia driven protocol regional protocol approaches using the nerve block and fuel blocks continuing to take hold in institutional protocols.

As we look closer we are seeing three key drivers working synergistically to advance espresso within and across a wide range of procedures. One the ongoing integration of EXPAREL as a foundation of opioid sparing eureste protocols to the growing level of engagement and enthusiasm from anesthesiologists and three increasing penetration on the orthopedic side of the business through our partnership with Johnson and Johnson, which has provided focused effort through with was procedures such as shoulder hip fracture and spine surgeries.

We are working every day to maximize the value of this partnership.

With respect to your EPS protocols Pacira is recognized as the go to partner of choice. The retro duress protocols are becoming the accepted standard strategy I am sorry to optimize care and many healthcare systems as a means to standardized protocols by procedure to shift surgeries from inpatient to outpatient environments.

These patient centered opioid sparing approaches improve patient recovery, while reducing complications and costs. They typically involve a multi disciplinary team that is often led by regional anesthesiologists.

We recently further strengthened our high caliber partnership network through a new educational and Nash initiative with here at USA. This is the U.S chapter of the International Ers Society. The Eros International was founded to improve perioperative care and enhance post surgery Postsurgical recovery and provides our collaboration with more than a decade of best practice procedure based guidelines.

Our collaboration is dedicated to improving postsurgical patient outcomes and reducing reliance on opioids. The initiative will utilize us based hospitals that are accreted accredited by Eros International is centers of excellence to train healthcare institutions across the country on the implementation of eras programs to reduce opioid utilization.

Using multi disciplinary training teams, who are actually will say centers of excellence will deliver formal onsite training seminars curricular will include the most current information about ers protocols, including opioid sparing multimodal pain management strategies, and best practices and abdominal wall and other fuel blocks. Upon completion participating hospitals will be designated and listed as qualified centers of excellence for opioid sparing by year end.

By Eros International this will be an important competitive differentiator that hospitals can use you given the growing number of patients seeking non opioid approaches to postsurgical pain management.

It is also a great interest to payers and self insured employers who prefer to send their members and employees to centers with established expertise as opioid minimization centers of excellence, we look forward to launching this program this quarter.

Now, let me turn to our second growth driver expanding interest and engagement. We are seeing from the anesthesia community. We continue to see one anesthesiologists successful break your plexus nerve block drive expanded use within an institution.

Anesthesia is taking a lead and non opioid postsurgical pain management through EXPAREL based regional approach as the utilized peripheral nerve blocks and fuel blocks as the core of a multimodal approach for a wide range of procedures. The enthusiasm within the anesthesia community is driving strong and steady growth in the size of our active customer base, we are leveraging more than 90 customers and new customers every month with over two thirds of these new customers coming from non opioid hospital accounts.

We see great upside ahead of regional anesthesia approach is becoming more widely accepted and institutional protocols driving a shift to a 23, our ambulatory setting which is now a separate unbundled reimbursement for EXPAREL.

Our phase III study of EXPAREL as a break you'll plexus nerve block has now published in the peer reviewed journal pain Medicine. In this study EXPAREL demonstrated highly statistically significant results versus placebo with a 78% reduction in opioids, while providing significantly better pain control and 13% of patients opioid free in short. This study showed improved pain control with a reduction in opioid use without the need for cumbersome pumps are catheters.

Notably Syrian sections remain an important growth driver as awareness grows.

Within the Ob anesthesia community around the opioid sparing benefits of EXPAREL tap block.

Earlier this year, we reported topline results from our phase four study that demonstrated the superiority of an EXPAREL tap block two a bit to the cane tap block in patients undergoing Syrian sections.

EXPAREL achieved statistically significant reductions in opioids and pain scores through 72 hours importantly, the study also demonstrated a statistically significant higher percentage of opioid spared patients and in the X. grow group, meaning they took no more than one opioid tablet and experienced no opioid related side effects through 72 hours, we have been invited to submit this study.

For publication to a prestigious peer reviewed journal and development of the manuscript is underway.

Our second C. section study, which is known as choice remains on track for completion this year.

To remind you. This next generation study is designed to be completely opioid free and the EXPAREL arm. We believe EXPAREL administered as a tap block will be a key component in transforming the standard of care for undergoing for mothers undergoing C sections on the reimbursement front, we continue to see growth drivers take hold.

CMS has now reimbursing for EXPAREL use in the sea under a specific.

Bob billing code at a $1.22 per milligram.

Likewise, the American Dental Association is recognize the critical need for non opioid options by introducing a new reimbursement code for the infiltration of sustained release therapeutic drugs in oral surgery procedures. Both coats took effect on January onest and our team is working closely with the ambulatory and oral surgery centers.

As well as.

Commercial payors to overcome upfront administrative hurdles and facilitate reimbursement on a payer by payer basis.

Our assay program is delivering strong results and the national expansion is underway with proactive carve out agreements that we expect will be delivered to asses in the next few weeks.

Cigna's now covering EXPAREL nationally and we and several of the large blues have also included it in their fee schedule and are now working through the mechanics of adjusting AMC contracts.

From our discussions with other major national commercial payers, we expect ex pro coverage to continue to expand for the remainder of this year.

In the dental community interested and in EXPAREL remains high and healthcare providers and patients recognizing the need for non opioid options for young adults undergoing wisdom tooth extractions, leading indicators around reimbursement remain highly favorable and we're now seeing large self insured employers, calling their third party administrators and instructing them to add EXPAREL to their lives. So their listing of covered medications.

The final item to discuss on EXPAREL front is orthopedics, where we are seeing expanded use of EXPAREL and shoulders spine and it fracture surgeries.

Here are JNJ partnership. This further solidify the role of X brew EXPAREL through their substantial commercial presence in world class educational programs.

These have enabled thousands of health care practitioners to learn about the benefits of EXPAREL and reducing or even eliminating opioids for painful orthopedic procedures like total knee replacement and shoulder surgeries Max who is now the point on the Pacira side for the JNJ steering Committee will share some additional color shortly.

Turning now to the second pillar of growth advancing our clinical pipeline and leveraging leveraging the proven safety flexibility and customize ability of our depofoam platform for acute sub acute and chronic pain applications.

Here our strategy is built around a global pain epidemic, which has fueled the current opioid crisis in the United States, eliminating opioids will not address a significant unmet need for new tools and strategic approaches for managing pain.

Consequently, our pipeline is focused on addressing areas of significant unmet need for opioid options for managing pain or opioids are the current standard of care.

For Depofoam, we are advancing initiatives that take to take two new programs into the clinic.

First the intrathecal or subtract no delivery of Depofoam based leabo be pivot Kane.

Here, we have an opportunity to provide an alternative to the use of intrathecal or sub veracode opioids typically delivered by pumps or catheters of note. We have substantial experience here as the Depofoam technology was used successfully in the interest equal setting for more than 15 years with our previously marketed product depocyt or cytarabine for some feminists meningitis.

The second clinical candidate is double decks, but attempting text, but attempting as complimentary analgesic instead of the properties with fewer neuro cognitive effects versus other sedatives that also has demonstrated opioid sparing effects and reduced delirium in the elderly we believe a long acting therapeutic dose has the potential to offer patients mental acuity and quality of life, while also providing adequate pain control.

As Max will discuss shortly our clinical team is designing studies that we believe will greatly add to the commercial value of bio Vera.

Our clinical development strategy will demonstrate the synergy of EXPAREL and I are very used together to successfully manage pain, while significantly reducing or eliminating opioids. We will also investigate additional clinical utility for aldeyra cryoanalgesia as a component of opioid sparing eras protocols to support the development of health of messaging.

This brings to our third brings me to our third growth pillar pursuing innovative product technologies that align with our strategy and our complimentary to EXPAREL here I would like to highlight our increasing confidence in the technology behind the recently acquired IR Veris system.

Hi, Vera as highly complimentary to EXPAREL as a non opioid therapy to deliver cryoanalgesia via handheld device to alleviate pain by disrupting pain signals being transmitted to the brain from the site of injury or surgery.

We believe Io Vera will benefit greatly from our financial strength established commercial infrastructure glowing partnership network and deep domain experience and opioid sparing strategies that transaction closed in the second quarter and integration is well underway Max is leading the charge and I will let him share the details Matt.

Thank you Dave.

It's being just seven weeks since I joined Pacira and I am delighted to lead a commercial team who is dedicated to delivering solutions that improve clinical and economic outcomes and reduce our nation's reliance on opioids is the primary solution Postsurgical pain.

Additionally, as the Pacira lead for the joining Jay partnership I'm committed to building on the historic success with this alliance and I'm confident that together, we will continue to bring opioid sparing solutions to patients in need.

As leaders in the field of pain management, we recognize that the market is evolving.

And we are well positioned to advance our product offering to align to those changes.

In this context, we will adapt the focus of our joint J. partnership as necessary to reflect the markets transition from inpatient surgery to the ASV sites of care.

With anesthesiologists, having an increasing ROE and administering pain management solutions.

We are confident that we can lead in this market transformation by leveraging both our JNJ relationship and Pacira commercial infrastructure.

Turning now to on a zero.

The technology that takes advantage of the Bodys natural response to cold.

To provide safe effect to immediate long lasting pain relief without the need for any and all conflicts.

Hi, Shannon our teams infusion ASM around the addition of this innovative product to the pursuit of a commercial offerings.

We believe the combination of our Avaira and EXPAREL will become the preferred procedural solution that will empower patients and their healthcare providers to take control of the pace patients osteoarthritis, Germany, while minimizing the need for narcotics.

Onvia is a perfect strategic fit with X grow the further solidifies our leadership position in non opioid pain management by offering health care providers, an effective multi modal procedural solution for T.K. procedures.

As you know our initial go to market strategy will focus on two broad patient categories.

Our first priority is I have era, an espresso opioid sparing pain management for the total knee arthroplasty patients.

We also have a retreatment being administered before surgery and espresso during surgery.

As many as 30% of pre surgical patients with end stage knee osteoarthritis U.S prescription opioids.

We don't have era, our goal is to provide patients with several months of opioid free pain control to allow them to prepare for surgery with an appropriate pre have regimen.

EXPAREL for surgical pain control and EXPAREL, plus I've arrow to control post surgical pain provide an environment for rapid functional recovery and return to daily activities, including normal sleep.

In assessing we have an existing reimbursement pathway using a CPT code and key opinion leaders are already using unfair in combination with EXPAREL to achieve near opioid free results the total knee replacements.

In fact training is underway as a major integrated delivery network for the use of EXPAREL, plus however, with the goal of opioid free surgery.

The second target market would be osteoarthritis patients, who have failed conservative treatments, such as and say its autoscope supplementation.

Who are seeking drug free opioid free surgery free pain management for several months.

Clearly we are targeting those patients who are seeking an active lifestyle, such as gold tennis, hiking or simply voting with their grandchildren.

As well as patients who desire to delay surgery for family events, such as vacations weddings.

There were 14 million individuals in the U.S., who have some dramatic me osteoarthritis and when we look at the market potential for osteoarthritis. We believe this is a billion dollar opportunity where on avaira can capture a meaningful share.

With Vera healthcare providers can control came well delivering precise controlled doses of cold temperature to the targeted.

Through a handheld device.

The extreme cold has delivered using smart tips or closed and needles. So no fluid chemical or drug is injected into the body during the procedure.

Results can be felt immediately and pain relief can lost three or more months as the nerve regenerates over time.

Historic unfair pricing has not reflected the value this technology delivers.

In this context, we are executing a new price volume discount matrix.

That will increase our average selling price above $450 per smart fit within 12 months.

We are reinvesting in key clinical studies to demonstrate the value proposition of era.

Our initial focus will be T.K., and Hcl repair with IHOP era in combination with EXPAREL.

Our clinical strategy will focus on enhancing these data with new studies that highlight the complementary effects of oil Vera EXPAREL.

Our clinical initiatives are focused on enhancing the commercial value and competitive positioning of IOF era EXPAREL as the leading multi modal solution for opioid sparing pain management before during and after surgery.

These studies will also be designed to demonstrate health economics and value to facilitate broader market access and reimbursement.

Looking more closely at Hcl tear one of the most common injuries to the me.

Which often occurs in athletes, who opt to participate in sports such as soccer.

Football and basketball.

Active younger patients and high level athletes often opt for surgical reconstruction.

And severe postsurgical pain can persist from one to two weeks after the procedure.

This is where we see the unfair and EXPAREL as an ideal match for providing a powerful non opioid strategy for managing pain immediately after surgery, and we see potential for enhanced rehabilitation lost minimizing the need for opioids.

On the manufacturing front since completing the acquisition our team has done a tremendous job building out our near term capacity and we now anticipate being able to supply at least 100000 over smart steps by the end of 2020.

From a competitive standpoint, we believe the IUB era is very well positioned compared with other technologies.

Were healthcare professionals will schedule on Avaira treatment sessions with the physician assistant we'll see our ignite trained in its use two countries several patients per hour.

In summary, I have here is a safe and effective treatment that provides immediate pain relief that can last for several months as the nerve regeneration over time.

The treatment is repeatable.

Using a safe technology that does not risk damage to surrounding tissue.

Well I have ever uses a convenient handheld device with a single use procedure specific smart tip.

Therapy can be delivered precisely using ultrasound guidance on anatomical landmark, allowing medical practices to incorporate over as a new revenue generator.

We are actively executing our commercial plans.

Which include expanding manufacturing capacity, improving margins and developing additional clinical evidence.

As with EXPAREL, we will work with government and commercial payers to provide broad patient access to our Vera.

With that overview I'll now turn the call over to Charlie to discuss our financial results shortly.

Thank you Max and good morning, everyone before I walk through the second quarter financial results I'd like to remind you that we will be discussing non-GAAP financial measures. The press release. We issued this morning includes a description of these metrics and why we believe they provide additional insights into the financial aspects of our business. The press release also includes a reconciliation to GAAP for these measures.

We ended the first half of 2019, and a very strong financial position.

With approximately $318 million in cash and investments and significant and growing cash flow from operations, we are well positioned to advance our vision of becoming a leading provider of non opioid pain management and regenerative health solutions.

On the TNL side, we have significant operating leverage with rapid growing top line that we are supporting with only modest increases in expenses. This underscores the tremendous opportunity we have to capitalize across our business, while continuing to simultaneously ramp revenues and adjusted EBITDA.

I'll now turn to some specific financial highlights for the quarter.

Total revenues increased by 22% to $102.6 million in the second quarter of 2019 versus $84.1 million. In 2018. This growth was predominately driven by net product sales of EXPAREL, which increased by 23% to $98.9 million in the second quarter of 2019 as compared to $80.4 million in 2018.

In April after closing the Meyer Science deal, we began marketing Io Vera and reported net product sales of $2 million in the second quarter, which does not include any impact from our new value based pricing strategy that Max discussed.

Our non-GAAP gross margin for the second quarter of 2019 improved to 77% versus 76% in 2018.

non-GAAP research and development expenses were $16.6 million in the second quarter of 2019 versus $11.3 million in 2018.

The increase in R&D was primarily driven by the ongoing enrollment in our phase three pediatric study our phase for opioid free C. section study as well as startup expenses for the phase four spine study and the phase four hip fracture study.

We have also continued to invest in the scale up of our manufacturing capacity at our production facility in the UK.

non-GAAP SGN, a expenses were $43.8 million in the second quarter of 2019 versus $39.2 million in the second quarter of 2018.

This increase is attributable to increased sales and promotional activities for EXPAREL, including the establishment of a field based team of account managers, who are driving growth in access in the ambulatory setting as well as the dental and plastic mark.

Another key driver of this increase is our co promotion with JNJ, which as you know is directly linked to topline growth.

All of this resulted in non-GAAP net income in the second quarter of 2019 of $17.5 million or 41 cents per diluted share versus $9.9 million or 24 cents per diluted share in 2018.

Our cash position remains strong as we ended the quarter with approximately 318 million in cash and investments. This figure reflects our investment of approximately a $120 million of cash with the closing of the Meyer Science acquisition in April .

Looking ahead, given that EXPAREL is on a significant growth trajectory delivering substantial operating leverage and cash flow, we have tremendous financial flexibility to capitalize on internal and external growth opportunities that align with our commitment to evolving pacira into a global leader in non opioid pain management and regenerative health.

The last item to cover is our financial guidance as Dave discussed we are very pleased with our financial outlook and feel very comfortable reiterating our 2019 sales guidance as follows.

EXPAREL net product sales guidance of $400 million to $410 million, which we expect to follow a similar cyclical pattern to last year with the fourth quarter, historically being the largest quarter of the year.

As for Io Vera we remain optimistic about its long term prospects and continue to expect 8% in dollars of net product sales in 2019.

Given the strong commercial synergies, we believe higher variable will become a significant contributor to our business over time, we remain confident that myocytes acquisition will become accretive beginning in the second half of 2020 and accelerating thereafter.

On the expense side. The PNM, we continue to be on track to achieve non-GAAP gross margins of 75% to 76% to remind you. We expect margins to eventually improve to roughly 85% once our second dedicated suite in Swindon comes online and dislocation becomes primarily responsible for supplying EXPAREL.

Our non-GAAP R&D is expected to come in at the high end of our previously guided range of $60 million to $70 million as we begin to invest in I O Vera.

We now expect non-GAAP SGN eight to be between 180 and $190 million versus our previously guided range of $165 million to $175 million. This increase is primarily driven by the inclusion of KMR commercial infrastructure cost for Iowa very.

Lastly, our guidance for stock based compensation expense remains unchanged from our previous guidance of $30 million to $35 million with that I will now turn the call back over to the operator to begin our Q and a session operator.

Thank you ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your touched on telephone. If your question has been answered your question on yourself from the queue. Please press the pound key to prevent any background noise. We ask that you. Please place your line on mute. Once your question has been stated.

Our first question comes from the line of Randall Stanicky with RBC capital markets. Your line is open. Please go ahead.

Great. Thanks, guys, Dave we've seen pretty robust EXPAREL growth from the first half and I know you've said that can continue to accelerate.

Going forward in the back half is that still the case and.

Maybe can you just comment on how sustainable this level of growth is yes.

If we see a competitor.

Able to get to market answer and then one for Charlie just on the DNA increase can you just.

Is that a new step up so that we should think about an annualized spend next year and the $20 million range and is that all that so I think you said, that's all associated with I O. Veera can you just confirm that thanks.

Sure. Thanks, Randall Yeah, we don't we don't see any anything in the marketplace that can that convinces us that we should continue to see.

Growth that is.

Well as we've seen so far this year I mean, it's it's driven by anesthesia and by nerve blocks.

And we are doing and additional now lower level nerve block trial now that will add additional impetus and next year. When it's when it's available. We are just beginning to see the roll out of.

Of the ambulatory care coverage and reimbursement from all payers, except for Aetna, So cigna and United in the Blues at a number are just beginning to have active scenarios, where they are paying for EXPAREL.

We continue to see the ambulatory care space grow rapidly.

So you know as you look out over time, and you see section and peeves data coming.

There is no reason to believe that we are anywhere as near.

At the end of a of a growth cycle and it looks pretty similar to us to what we've seen over the last several months.

Come back to me if you have anything more specific than that I'll ask Charlie to answer the second part of your question Randall ran off from the SGN eight perspective.

The increase in guidance was primarily related to.

I owe Vera and we would expect the same thing that to look.

To happen next year as well.

And remember that's only nine months, so it actually could be a little higher if it's 12 months, but wait and see how this plan shakeout.

Dave Thanks, Charlie Dave just how are you thinking about the entry or potential I should say potential entry of a competitor you've obviously had more time to put some of your house programs and and I assume you're thinking about these relationships is sticky so for investors thinking about potential 2020 entry of a competitor how are you thinking about that.

So we have treated over five and a half million patients now Randall.

We've had 750.

Peer reviewed articles that have been published I think really increasingly important as we crs protocols growth, where the use of EXPAREL as a platform for non opioid treatment Postsurgical pain management is institutional lines as part of the Mars and so you know when you look at all of that you say that we have had several years now to become embedded with our customers and in the institutional practices.

On top of that you know with the good deal of the growth is coming from these new market segments around the use of the anesthesiologist triggered by the break you'll plexus block, but then pretty quickly moving into tap blocks, which we highlighted several times in the script.

And how much of the ACA blocks and Peck blocks and all the different ways that an anesthesiologist can provide a regional approach.

So you know there is no reason to think that a competitor is going to be able to challenge EXPAREL in on any of those fronts.

And you know with the addition of peed data and very specific C. section data.

We see a F.C. and the movement of our product to the outpatient Center said it is a growth driver we cps as a growth driver, we see the lower extremity nerve block as a growth driver I don't see any of those being really challenged by any of the competitors that we see on the short term horizon. So we're very comfortable with our position and.

You know I may not have competitor that comes in and.

No talks a lot about opioid sparing approaches could actually be helpful to us. It's a very large market. We still have a relatively modest market share. So you know you not Randall ive known you for a long time to bring it up let's let's see what you got.

That's great. Thanks, guys.

Thanks.

Thank you and our next question comes from the line of David Amsellem with Piper Jaffray. Your line is open. Please go ahead.

Thanks So.

Total occurred.

Questions. So can you talk maybe qualitatively or even quantitatively about.

How the unique.

Separate coding.

Is.

Driving or part of driving the growth.

Oh Thats grow this year.

No you talked about ambulatory I know you talked to that nerve block and those are the ones are obvious and then drivers but in terms of the.

Evolving reimbursement landscape, how much of a tailwind has it been to date and is it going to be a bigger tailwind going forward as you have more and more.

Payors.

Follow suit. So that's number one and then number two on the island there are supply.

Can you just talk about.

You know your longer term plans are regarding manufacturing in and ultimately.

Where do you need to be.

Where are you looking to be regarding your your longer term.

Supply also the product and the extent to which thats a gating item to more aggressive promotion. Thanks.

Thanks, David.

On the first one David we started the Aetna pilot in December .

And so that really is our our beta study on what can happen as this rolls out across a broader a broader platform, which I think is the nature of your question.

Our same store sales if you will of the.

Aetna ambulatory surgery centers in New Jersey in Florida is is exceeded expectations I mean, it's done extraordinarily well and so we see that as a very significant driver I think there is theres significant insight in your question because what's happened to date is when it's only now that is paying.

Most of the centers have to have an opioid sparing approach that aetna will pay for and then a more normalized approach with the use of opioids, where other insurers have not yet caught up with the C code 90 to 90 and are paying for EXPAREL as we get more payers.

Paying you see that you reached a tipping point and in some cases, we are seeing the tipping point, where our blue as Cigna and an aetna are all paying and then these then the the ambulatory care centers says we are only going to have the opioid free system. We are not going to we're no longer going to support an opioid platform in a non opioid platform. So you're either going to pay for EXPAREL or we're going to stop taking your patients and I think you're going to continue to see that movement over the rest of this year at least as as additional payers come on and it's all geographic specific.

There are places where the bigger blues are covering EXPAREL and then there's places in some of the smaller markets, where we have some work to do.

But achieving that tipping point.

Given the nature of your question is a really big deal for us and will further accelerate the kind of things that we've seen from the Aetna pilot so far.

On the manufacturing side, David we've put a second manufacturing line in the current facility, which is why Max was able to say in his part of the script that we're comfortable being able to provide a 100000 of the smart tips to the marketplace in the next year.

The five year plan Thats in development will provide the opportunity to have many times that number.

And you know, we just we have outpatient or we have I'm, sorry, outsourced opportunities to increase that demand.

You know those levers will be pulled as we see how this rolls out over the next several quarters I can't tell you that I know exactly what the capacity is going to be after owning this asset for a few months.

But we can get into we can get many times to 100000 units. We deem next year inside the current five year plan if required.

Okay and Simon sneak in one additional question, so I think theres been.

A lot of questions about the nature of the JNJ relationship and how that's evolving so I guess the question here, yes going forward is.

Are you.

Where do you want to go with with.

Your relationship with J. and J.

Particularly given that.

The piece in peace thoughts are mainly hospital focused and your growth is coming from.

Outpatient ambulatory, particularly so so.

Help us understand your thought process going forward regarding that relationship.

So I'll ask Max to comment in a second is uniquely qualified to comment on this topic. I think there is there are that the marketplace is changing there is no doubt David as you point out and but there are huge opportunities that our verticals inside this.

You know their professional education programs that the JNJ provides we can't match I mean, that's just not possible. They have sports medicine sales forces. They have spine sales forces I mean, there is a number of things that that even though the bulk of our growth is coming from anesthesia and ambulatory. There are places, where Johnson and Johnson provides us an opportunity for.

For leadership around new data development.

That would take us all will develop so.

I'll ask inside the context of that Alex Max to comment. He is now in charge of the JNJ relationship here for obvious reasons, yes, what I would say is the partnership has contributed to our growth and improving growth trajectory over the last two years and we work very closely with Johnson and Johnson, who are responding to the changes in the marketplace, including the movement of total meal philosophy to outpatient.

And.

Meeting unmet clinical needs in spine, where they have a number two market share position as well as leveraging the professional education infrastructure and channels into sports Medicine, which also.

Is conducted in the assay environment. So we're very happy with how this partnership is performed and we continue to work closely to focus on our major opportunities for growth.

Okay. All right. Thanks, guys and David just just to be clear what Max reference that the CMS has.

Mandate.

Thank you and our next question comes from the line of David Steinberg with Jefferies. Your line is open. Please go ahead.

Thanks, a couple of questions first on gross margin I know that the first quarter is usually.

The press, we had a very significant uptick in the second quarter, perhaps a little better than expected. So I was wondering.

How the sequencing and gross margin will look like for the rest of the year will Q3, better than Q2, and Q4 will be better in Q3 and then.

In terms of.

Any objective with your new facility in the UK is to get the gross margins.

Well above 80% and so would that be a 2020 event or more more like 2021 and then.

Second question is on new sources of growth for EXPAREL and I know that.

You indicated you have are or will be soon.

Filing your packaging that you and so just curious you know just in general.

Since you May get your first revenues next year, how would you quantify.

There are lots of different territories, but just in general.

How would you quantify the revenue opportunity ex us and and pricing as well.

Thank you.

I'm going to turn it over to Charlie to answer your specific questions in a second David Let me go backwards here.

The there are.

We will be selective in the geographies, where we launch, especially in the EU. There are countries, where we see great benefit to this opioid platform and where eras protocols are the standard of care across the majority of the hospital systems and we think we can have great effect there.

There are several territories, where you just is very difficult from a cost perspective, and so we're not going to bring our head against the wall. We're going to go where there is something that can be done and.

And address the opportunity, Canada is an opportunity generally 8% to 10%.

What is the U.S. opportunity is available in Canada, and just generally speaking Europe is four to five times that just to give you a sizing it will take us a while to get there. So if you look at these launches that will be 2021 timeframe over the five year plan, but the vast majority of the revenue that will be generated around EXPAREL and I'll Vera is in the U.S.

I'll turn it over to Charlie but just to remind you that the the delta of difference from Q1 to Q2 is largely driven by the fact that we have a several week shutdown in Q1 and the fixed cost facility. So you know we're paying those folks whether we're making it or not and so that's why you'll always see that that shutdown driven.

Difference between Q1, and Q2 and then Charlie give you color on the rest of your questions relative to cost.

Hey, David.

Q1 common is absolutely right on I mean, if it's historically consistent look go back and look at last year, it's pretty much. The same thing just this first quarter. We also had peighty on coming online. So so they were just starting and getting their feet wet as well so that impacted Q1.

Q2 was not really a surprise frankly, it's pretty much on plan I mean, we said 75 to 76 for the for the year and we start out with 71. So you have to be above 75 for there the rest of the quarters in order to take to get back on track and we just confirmed.

From reaffirm that guidance. So the second half of the year volumes will be stronger than they are in the first quarter just like they always are and margins will be better than the first quarter just like they always are and.

So we don't see anything unusual relief in that.

As far as the longer term margins.

What we really need to do is to continue to transfer volume as total volume grows and transfer that volume into the 80 on space in the UK, we set a number of times that the the per total per unit cost there are lower.

There is a.

There's also a little bit of a seesaw effect, because if you take too much volume out of.

San Diego when you put it into to the UK than the fixed cost of San Diego start to make those units go up so it's not a night and day or or switch you can turn on and off.

The next big jump in.

Improvement in the gross margin comes with our 200 leader unit coming online Thats.

As you May recall, we currently use 45 liter batch process into 200 liter batch process brings with it some of some significant additional efficiencies as well.

We're hoping that that is commercially available what kind of the end of 2021. So if we're making product at the end of 2021, we probably won't sell until 2022, so you'll start to see to a change in that kind of a timeframe.

Thank you.

And our next question comes from the line of Liana Moussatos with Wedbush Securities. Your line is open. Please go ahead.

Thank you for taking my questions and congratulations on the strong quarter.

The 2 million in sales for Io beer was where would that only for osteoarthritis teekay, what indications, where the sales floor and a little clarity on the $450 per smart tip. There are different types of smart tips and some are more complicated is that just an average or are you planning to have different pricing for the different types of tips.

Yeah. Thanks Liana.

The the $2 million was.

What bio science could achieve you know before the acquisition and it was.

Almost entirely hospital driven associated with Teekay Ace ER. So you know it was where they they have strong they had strong reimbursement in the H.O.P.D. section session.

And that's really where the focus of their activity was more the vast majority of their.

The revenue was on the $450 ASP, what Max said in his prepared remarks, we're.

No. The ASP is lower than that today and it will it will ramp up as contracts come due and as we generate new customers over the next 12 months.

And so you know that will be that will be a climb to that point over the over the next 12 months or so you're right. There are several tips.

We will limit manufacturing to two of the tips or a smart chip with the call Triton with the Threed needle sites. That's generally used when the physician is going by anatomical markers and.

What do you think that the broader.

Application of the of the Cryoanalgesia technology, and then a 190 tip that looks almost like a spinal needle it's like a three and a half inch spinal needle that is use generally when the physician is using ultrasound guidance and identifies the nerve and then.

They go in and apply the application specifically to the nerve while we're looking at it on ultrasound.

We will limit manufacturing to those two tips, which is what allows us frankly to be able to make more tips by making fewer different kinds of tips.

And the 450 is really a blend of those two.

But we don't have any intentions of having dramatic differences and the ASP of the different tips. We want the man we want the the reimbursement work that we do and the value based pricing that we do to be easy for the customer to understand and so the 450 represents a blend of the two but will be actually what the customer sees.

Okay, and when do you expect that your marketing efforts will start.

Affecting their sales.

So we brought over a group of people from miles science, Liana and they are working with customers and.

Working with some of the new strategies that will be employed.

We will turn on a greater function of.

The use of our resources and then the additional resources that are required and I should mention that every year. At this time, we go through a review of what resources are required for next year. We are doing now for 2020 right now.

And so Charlie mentioned that.

The guidance for SGN, a is going up I mean.

To answer your question very specifically one onetwenty is when we will have a formal soft launch if you will relaunch if you will.

With additional resources right now the I O Vera folks that came over with the product are working with some of the physicians on our alliance team.

To main chip to make sure the customers are having a positive experience et cetera, and then we'll add to the Pacira resources. Once we're sure that we're going to hit the 400 to 410 that has been promised for this year.

Thank you very much thanks.

Thank you and our next question comes from the line of.

All right Ms net with H.C. Wainwright. Your line is open. Please go ahead.

Hey, Thanks for taking the question I hope help us growing false better understand this device side of Vera.

Right now, there's existing CPT codes, right, which I understand very across different settings, and we are probably for significantly lower amount than the numbers you're talking about for the device hit sales themselves. So how do dr. purchase and get reimbursed.

And cover their costs and make margin on these.

Perfect have disposable and is there a big upfront cost for the device itself and just help us understand the economics for Frac friend Dr. any of this stuff.

I'll ask Max to comment again here are and I'll just get US started so you can purchase the handheld if you'd like.

Or it can be included in the price of the tips. That's what we met really by value based pricing and the team is still working on different approaches for how different customer groups will want to actually acquire the handheld device and the tips.

And not to be too mysterious there, but there are some market segments, where they cannot lease or have an embedded cost associated with the variable piece of the equipment right. So you've got a handheld it is fixed equipment that plugs in and as used over and over again and then you got the tip that used once and so the fourfifty that Max was talking about really is the price that that a physician would use to establish a.

Whether they were making money in a reimbursed environment or or what their charge was going to be in a cash environment.

The.

The payment in the H.O. PD environment. The hospital outpatient environment is actually between 950, and a $1000 and so the physicians at the ASP price. The Max mentioned actually can do very well.

The opportunity in the physician office, and where you are using it for all way in the 14 million patients that Mac mentioned.

That we see largely as a commercial market or a cash pay market and the than the work that's been done so far we see a mix of the two.

And so the reason that physicians have been offered or have been interested is largely around the ability to have a cash pay market for these 14 million.

Okay patients the Vacs mentioned and I should mention also 40 or $2 million of those patients are under 45, and so there is a real need in this marketplace to provide some for pain control in a patient thats just too young.

To get a knee replacement given the actuarial tables that suggest that the live to be 83, and you can only have this done twice. So there's a bunch of different reasons why physicians are thinking about how they want to use this cryo technology.

And I don't know if acts as anything additional AD, but I'll just turn it over if he does.

Thank you, Dave I think a few points to make is that we as described earlier today in the cooler targeting.

The T.K. candidate most patients are in the latter stages of federal steel prices journey.

I mean that in doing so we need the orthopedic surgeon to sponsor the use of our era.

At the most advantageous so into cash for our customers is the hospital outpatient department based on the reimbursement.

And we have what we're observing is that we will compete axogens alstom.

Delegates through treatment to physician system.

Or Nova healthcare provider in that practice and they can organize very efficient.

On a beer section.

Were they apply these treatments.

Trying to tee carrier in the latter stages of osteoarthritis.

Using a member of the team a PPA or ceiling.

They really love the technology, because it's safe, it's easy to use and it provides immediate pain relief.

And.

What we're finding costs physicians, who.

Using the technology is that the advocacy patients provide pool that physician service is very strong in the community.

Because they are really very few solutions.

Yeah, PRP arent as the one that we've used if if if if if an orthopedic group is doing PRP. They generally have a PRP day and they batch patients and they have a physician extender as Max outlined actually doing the procedures, we expect to see very much the same kind of approach with EXPAREL.

I'm sorry without over.

All right. Thanks, Hey, thanks.

Thank you and our next question comes from the line of allows you to start with.

Barclays. Your line is open. Please go ahead.

Hi, good morning, and thanks for squeezing me in.

Just a couple of questions on the manufacturing capacities with both EXPAREL and Uh Huh.

I will first do an EXPAREL have you given an update on the capacity at both your current and upcoming Swindon facilities.

And how can I pay that off with the gross margin improvement that you're speaking to.

Secondly on I know you spoke about a 100000 smart temps till 2020.

Can you also please help me understand what's the limiting factor or how should we think about the.

Supply year and going by the guidance on the SP that you provided.

Right in understanding that the supply is pretty adequate for the next two to three years.

So I'll go to <unk> I want to go quickly.

So EXPAREL today, we can make between 9800 $900 million worth at the current price.

I would hope that that would be wonderful if that was an issue in 2020 it won't be.

We expect as Charlie outlined the 200 liter to come on.

That gives us fourx, what we can currently make so that will make about another $900 million worth go between now and year to 2021, if we left all of the 45 liter facilities in place, which we probably won't we could make a billion of between a 1 billion a $2 billion worth of EXPAREL. So were in very good shape.

With I O Vera the demand the issue with the rate limiting issue is that these are put together by hand, so component of Cogs is actually people based and so you know, it's just hard to keep hiring more and more people. So we are looking at automating part of the process and we are looking at the opportunity to move the process to some less expensive environment.

And both of those things are in process. None of that is done yet so I can't tell you that we know exactly what we're going to do we've really we're focusing on 2020. So that we can get everything going in the marketplace and then we'll have to give you updates on where we're going to go from there and in future calls.

That's helpful. Thank you.

Thank you.

Thank you and our last question comes from the line of Serge lender with Needham. Your line is open. Please go ahead.

Hi, Good morning, I'm wanted to talk a little bit about some of the label expansion activities specifically the pediatric study in the <unk> and if you announced a new lower extremity trial can you just discuss the timelines for these trials and when do you expect to be part of the label and then maybe the market opportunity for each one.

How much off label usage are you currently seeing and is indications.

Well, let me let me let me go backwards surge so.

I want to be very clear that we only promote and nerve block for upper extremity.

With that said you know there are places where the physicians are 100% dedicated to what's in the package insert and there are places, where and anesthesiologists will say to us a nerve as a nerve and I'm going to use that where I think it's the best in the best interest of patient care. So we had a little bit of both.

Clearly, having a lower extremity nerve block will work to our advantage.

That trial is just kicking off.

We've we've met with the FDA I mean, we're clear on exactly what we're going to do I think that the best estimate and I'm looking at rich Scranton here to give you. Some help if I get off base is that we would expect to have data sometime mid next year.

And then it will be a formal at San Diego. So it will have to go to the FDA for review. So you wouldn't think it a normal course of events that we would have a lower extremity nerve block and the first quarter of 2021.

For Peeves, it's a little clear that trial is enrolling very well, we expect to have data by the end of the year.

If we had submitted Sn da under accelerated approval, which we would have to ask for of course, we would have a approval early in the summer of 2020, if we do if we did not get accelerated approval. It would add 60 days and it would be in mid summer of 2020. So in either case, it would be something where we would be.

Hopefully in the market promoting pediatric use in the fourth quarter of 2020, and then the the first the lower extremity nerve block would follow approximately by year.

Great.

Thank you.

Thanks.

Thank you and this does conclude today's kuni portion and I would like to turn the conference back over to chairman and CEO Mr. Dave.

Yeah. Thanks, Michelle Thank you for your time and attention. This morning, we'll be presenting at the Wedbush Conference next week and he just hope to see some of you there have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.