Pacira BioSciences Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 3, 2023

Key Takeaways

  • Strong Q1 results: Pacira reported $160 million in revenue (EXPAREL $130 million, ZILRETTA >$24 million), achieved $42 million of adjusted EBITDA, and cut 2023 interest expense by $15 million via debt refinancing.
  • EXPAREL outperformance: Volumes rose 6% year-over-year, outpacing the elective surgery market with 13% outpatient growth vs. 1.2% market and 1% inpatient growth vs. ‑6% overall.
  • Gross margin initiatives: The company has addressed supply chain challenges, appointed a new Chief Manufacturing Officer, and is advancing an enhanced release assay and a 200 L San Diego facility sNDA to push margins toward the mid-to-high 70% range.
  • Market access expansion: The 340B program added 180 new EXPAREL accounts in Q1 and sets the stage for No Pain Act and TRICARE outpatient reimbursement in 2024-2025, covering nearly 20 million procedures.
  • Pipeline and regulatory catalysts: Upcoming milestones include an EXPAREL lower extremity nerve block PDUFA on November 13, pediatric and intrathecal trials, ZILRETTA shoulder and diabetes safety studies, an ioverao spasticity registration trial, and a Phase 1 PCRX201 gene therapy study.
AI Generated. May Contain Errors.
Earnings Conference Call
Pacira BioSciences Q1 2023
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Q1 2023 Pacira Biosciences Inc. Earnings Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Susan Metzko, Head of Investor Relations. Susan, please go ahead. Thank you, Grace, and good morning, everyone. Welcome to today's conference call to discuss our Q1 2023 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer Ron Ellis, Chief Strategy Officer and Charlie Reinhart, Chief Financial Officer.

Operator

Roy Winston, Chief Medical Officer is also here and will be joining us for today's question and answer session. Before we begin, let me remind you that this call will include forward looking statements based on current expectations. Such statements represent our judgment as of today and may involve risks and uncertainties. For information concerning risk factors that could affect the company, please refer to the company's filings with the SEC, which are available from the SEC or our website. With that, I will now turn the call over to Dave Stack.

Speaker 1

Thank you, Susan. Good morning, everyone, and thank you for joining us. The year is off to a positive start as EXPAREL continues to outpace the elective surgery market recovery as we expand utilization across key target markets and sites of care. We are focusing on 3 major objectives for 2023 growing revenues in a slowly recovering surgical procedure market, Further advancing gross margins to the mid to high 70% range and improving reimbursement across our portfolio with a specific focus on the No Pain Act and TRICARE. 1st quarter revenues of $160,000,000 include EXPAREL sales of $130,000,000 ZILRETTA also was a key contributor for the quarter with sales exceeding $24,000,000 These results are highlighted by solid growth in EXPAREL volumes As the rollout of our 340B program continues to expand volumes within both existing and naive businesses.

Speaker 1

I'd also note that the Q1 of 2022 was unseasonably stronger than Q1 historical trends. Our significant top line is driving strong and durable cash flows that allow us to self fund growth opportunities and significantly improve our debt leverage ratio by recently retiring our term loan B using cash on hand and a new term loan A facility. This new highly flexible debt carries a significantly lower interest rate projected to reduce interest expense by at least $15,000,000 in 20 20 3. We are also pleased to report our 24th consecutive quarter of significantly positive adjusted EBITDA of $42,000,000 As we have said, improving gross margins is a top organizational priority. We have addressed different supply chain and manufacturing issues that negatively impacted margins for the last four quarters.

Speaker 1

As a testament to our commitment to excellence in manufacturing, We recently we are excited to welcome Chris Young as our new Chief Manufacturing Officer. Chris brings more than 25 years of experience to Pacira and is responsible for overseeing all manufacturing activities and locations across our product portfolio. Additional progress on the manufacturing front includes our enhanced product release assay for EXPAREL. The FDA is reviewing our application for this new test, which we expect to benefit gross margins and support additional intellectual property protection. In parallel, we remain on track to submit a supplemental new drug application for our 200 liter facility San Diego later this year.

Speaker 1

This will be another critical milestone towards improving EXPAREL gross margins. Turning now to more specifics on our EXPAREL franchise. We're pleased with our performance relative to the broader elective surgery market with EXPAREL volumes increasing by 6% year over year. To further illustrate this, let me highlight some key data points from our most recent site of care and procedural IQVIA data from October of 2022. These data show year over year growth for knee and hip procedures, while other orthopedic and soft tissue procedures decreased with inflationary pressures causing patients to delay healthcare due to costs.

Speaker 1

In outpatient settings, The procedure market was up 1.2% year over year, while EXPAREL showed 13% growth with EXPAREL joint procedures up 20%, Well, EXPAREL showed 13% I'm sorry, breast procedures and gynecologic procedures up 16%, General surgery up 11% and shoulder procedures up 9%. The hospital inpatient market was down 6% Versus EXPAREL, which was up 1%. With continued year over year growth in key markets such as spine with a 49% increase, Shoulder with a 20% increase and C section with a 16% increase. For your reference, these data points are summarized in our investor deck, which is available on our website. Turning to market access, we continue to expand our EXPAREL user base and added 180 first time purchasing accounts during the Q1.

Speaker 1

In addition, the rollout of our 340B pricing program for outpatient procedures increased both 340B and non-340B volumes in these accounts. We believe this program will drive significant volume expansion with its existing and naive 340B accounts representing nearly 10,000,000 EXPAREL relevant market procedures. As expected, we are seeing growth in existing 340B accounts take place at a greater pace than new 340B business. This is resulting in a slightly lower gross to net, which remains at a highly favorable level for our industry at more than 86%. Importantly, 340B will pave the way for us to leverage the No Pain Act.

Speaker 1

This legislation currently mandates CMS reimbursement for non opioid postsurgical pain treatments And outpatient settings beginning in 2025. We are actively monitoring efforts to accelerate implementation to 2024 and should know more about This when the preliminary CMS rules issue this summer. We believe policymakers in Washington appreciate the urgency for improving access to non opioid options. No pain will provide a reimbursement pathway for nearly 20,000,000 EXPAREL relevant market procedures with commercial and self funded payers expected to follow the lead of CMS. Reimbursement in the hospital outpatient as well as the ambulatory surgery centers We'll cover more than 70% of the current total addressable market for EXPAREL.

Speaker 1

In parallel, we are seeing expanding access to non opioids for government employees for ambulatory surgery and begin providing separate reimbursement for EXPAREL in this setting. We would expect TRICARE to also mirror CMS In the hospital outpatient setting with the implementation of the No Pain Act. There are roughly 10,000,000 members enrolled in TRICARE for primary or secondary coverage. Importantly, No Pain, TRICARE and 340B are especially meaningful to the migration of lower margin soft tissue procedures to hospital outpatient Settings. These programs will assist in eligible healthcare systems affording the opportunity to offer non opioid pain control for these procedures and advance our mission to provide a non opioid pain management solution to as many patients as possible.

Speaker 1

Earlier this year, we opened our 2nd innovation and training center in Houston, which more than doubles our previous capacity Meaningful Educational Programming. Our training centers are core to developing both physician champions and community based clinicians We want to stay at the forefront of opioid sparing pain management, especially for nerve blocks and field block procedures. In the Q1 alone, our educational programs provided training to more than 1700 healthcare providers at 63 on-site and in field events. We believe this immense need for training around opioid sparing pain management bodes well for our future growth and more as more physicians become familiar with best practice and how to incorporate our portfolio of safe and unique commercial products into their practice. Outside the United States, we continue to make steady progress.

Speaker 1

Our team has secured approval for EXPAREL access in key centers across the European Union and the United Kingdom. We are focusing our attention on regional Analgesia for EXPAREL and we form partnerships with thought leaders who are now advocating for EXPAREL and ioverao. We will also have a presence at several key Scientific meetings and society meetings. In Latin and South America, our partner Europharma is advancing the regulatory approval process for EXPAREL in Brazil And we are on track for submissions in other South American countries in the coming months. On the regulatory front, we're making important progress.

Speaker 1

FDA review of our supplemental new drug application for EXPAREL is now underway with a PDUFA action date of November 13, 2023. To remind you, this application is seeking expansion of the EXPAREL label to include 2 key lower extremity nerve block indications that we expect will significantly extend our reach into surgeries of the knee, medial lower leg, foot and ankle representing more than $3,000,000 annual procedures. And pediatrics interest continues to grow as new genera data are generated. We look forward to building on this and initiating our regulatory study later this year to support the expansion of the EXPAREL label to include patients from birth to 6 years. Finally, our Phase 1 study of EXPAREL for intrathecal administration And is on track for completion later this year.

Speaker 1

Switching gears to ZILRETTA and ioverao where our full 240 person field based team is Broadening education and awareness around these complementary and standalone non opioid solutions for monitoring And managing osteoarthritis pain. In the Q1, the team added 122 new ZILRETTA first time purchasing customers and 55 new ioverao customers. Several value creating milestones are on track for the next year and current and new indications for both products. For ZILRETTA, we expect to initiate 2 new label expansion studies. This includes a Phase 4 diabetes safety study in knee osteoarthritis And a Phase 3 shoulder osteoarthritis study.

Speaker 1

Importantly, if our shoulder study is successful, ZILRETTA could become the 1st and only approved corticosteroid specifically for shoulder osteoarthritis. Both studies will evaluate ZILRETTA versus triamcinolone with the goal of adding a superiority claim to the ZILRETTA label. For ioverao, we recently launched a cash pay program and are seeing expanded utilization in knee applications. Clinicians are using ioverao as an additional offering to patients for pain management. In addition to the orthopedic practices, We are seeing success in regenerative medicine specialists historically early adopters of new technology.

Speaker 1

Our clinical education team is working closely with KOLs on ioverao treatment for the pain of spasticity to provide a new treatment option for pain control in this patient population. We recently announced a year long partnership with the PGA Tour Champions, naming ioverao as the Official non opioid pain management option of multiple 2023 tournaments. And this partnership will raise awareness around drug free pain control With ioverao and as the product that will have a presence at several PGA Tour Champion tournaments with the first appearance recently taking place at the invited celebrity classic. We also recently hosted various educational awareness initiatives and the LPGA's fitness trailer during the Chevron Championship, which is the tourist's first major of the season. On the clinical front, we are preparing to launch a registration study for the treatment of spasticity later this year.

Speaker 1

In spasticity, ioverao has the potential to be a game changer. There are approximately 10,200,000 patients in the United States currently diagnosed with spasticity. 2,600,000 of those patients have moderate to severe spasticity And 42% of them have received at least one treatment modality, but only 150,000 are currently receiving a treatment with a toxin. This underscores a highly dissatisfied market with inadequate treatment options like toxins and phenol. We have an ioverter smart tip for a medial branch block for low back pain, which we also expect to have on the market in 2024.

Speaker 1

Beyond our commercial portfolio, we have an exciting earlier stage portfolio of new product development opportunities that include PCRX201, a novel intra articular gene therapy product candidate that produces IL-1Ra for osteoarthritis. Our preliminary Phase 1 safety and efficacy findings were recently presented at the Osteoarthritis Research Society International World Congress in Denver. PCRX201 was well tolerated with improvements in knee pain observed across all dose groups. Importantly, the greatest level of efficacy was observed at the lowest dose. Based on these encouraging data, we are planning to launch a second Phase 1 study of PCRX201 in osteoarthritis of the knee.

Speaker 1

Ron Ellis will share some more details around the PCRX201 development program shortly. We also took advance of Phase 1 readiness activities around our internal multivesicular liposome pipeline, which include a multivesicular liposome dexamethasone formulation for low back pain and a multivesicular liposome bupivacaine formulation as a nerve block or field block for longer lasting chronic pain where patients are most at risk of becoming addicted to their pain medications. With that, I'd like to turn the call over to Ron to provide some more details on our investment in Gq Bio and PCRX201. Ron? Thanks, Dave, and good morning to all joining us today.

Speaker 1

I'm excited to share some highlights on the progress we have made for PCRX201, which we believe has the potential to be an important disease modifying Gene therapy for osteoarthritis. The product candidate was discovered by GQ Bio, a privately held biopharmaceutical company headquartered in Hamburg, Germany. GQ Bio's product candidates are next generation gene transfer vehicles. These gene therapy vectors are highly efficient in entering Joint sales to confer multi year clinical benefit. In PCRX-two zero one, these high capacities Adenoviral gene therapy vectors express IL-1Ra when in the presence of inflammation.

Speaker 1

IL-one is a cytokine inhibitor that plays a central role in inflammation in catabolic processes, many of which are associated with disease progression in osteoarthritis. Interrupting this cycle is likely essential to slowing disease progression. After intra articular injection, The vector enters joint cells and turns them into factories to produce sustained therapeutic levels of IL-1Ra to manage pain and mitigate OA related joint damage while remaining localized to the joint space. Our Phase 1 single ascending dose trial enrolled 72 patients in 2 cohorts, a co administered steroid cohort in a cohort that did not receive a steroid. As Dave mentioned, 201 was well tolerated with efficacy observed at all doses.

Speaker 1

But what was particularly compelling was the level of efficacy achieved by the co administered steroid group, which showed a significantly greater percentage of patients With the decline of WOMAC pain stores that exceeded 50%, the level of efficacy and duration of response would be an unexpected finding from steroids alone. The outcomes were so unique, we have filed for patent protection around it and currently have a patent pending. Based on these data, we are initiating a second Phase 1 study that will help us to find the best administration regimen to take into the next stage of development. We expect to launch the study later this year. In parallel to the Phase 1 study, we will begin advancing our process development activity.

Speaker 1

To that end, we are expanding our relationship with GQ Bio to include process optimization and forming a new collaboration with Exothera, a Belgium based clinical development manufacturing organization with a proven track record in customized process development and GMP Manufacturing Services for viral vector technology. These activities will ensure that we move forward with a commercially amenable process with a competitive cost of goods. Lastly, in April, we made an additional investment of €2,500,000 In GQ Bio in the form of a convertible note, we will make an additional investment of up to €2,500,000 upon the achievement of certain pre specified Development and scale based milestones. We look forward to providing you with additional updates on PCRX-two zero one on future calls. With that, I will turn the call to Charlie for his financial review.

Speaker 1

Charlie?

Speaker 2

Thank you, Ron, and good

Speaker 3

morning, everyone. To remind you, I will be discussing non GAAP financial metrics this morning. A description of these metrics along with our reconciliation to GAAP can be found in the news release we issued this morning. I'll start with an update on sales and margin trends. Starting with EXPAREL.

Speaker 3

We had a solid quarter with net EXPAREL sales coming in at $130,400,000

Speaker 1

for the Q1.

Speaker 3

1st quarter average daily volume growth of 6% yielded average daily revenue growth of 1%, primarily due to the combined impacts of our January price increase and the impacts of the 340B discount program and other contracting activities. With the Q1 historically representing 22% to 23% of full year sales, we believe we're off to a positive start to 2023, especially given several growth initiatives that we expect to kick in as the year progresses. These include ongoing growth in volume from both existing and new 340B customers, new initiatives with OMFS, plastics, outpatient, sports management and pain management and rehabilitation healthcare providers and our ongoing expansion in European markets. For ZILRETTA, 1st quarter sales were $24,300,000 With our 240 person field force now promoting education and awareness, We expect ZILRETTA growth will accelerate as the year progresses and the team gains traction. As Dave mentioned, we are already seeing an encouraging uptick New first time ZILRETTA customers.

Speaker 3

For ioverao, 1st quarter sales came in at $4,000,000 Here too, we are seeing strong growth in our customer base and expect demand and sales will gain momentum with the full field based team generating awareness around the advantages of a drug free nerve block with ioverao. We also expect to benefit from new commercial initiatives. Our sports initiatives with NFL Alumni, the PGA and the LPGA are off to a strong start The cash pay market is gaining real traction with orthopedic healthcare providers. Turning to gross margins. On a consolidated basis, Our Q1 total non GAAP gross margin percentage was 72%.

Speaker 3

This is comprised of non GAAP gross margins 71% for EXPAREL, 83% for ZILRETTA and 58% for ioverao. As discussed on our Q4 call in February, The tail end of the manufacturing challenges experienced in late 2022 were seen in our Q1 of 2023 operations. Based upon action that Chris and the team are taking, we expect to report sequential improvements in quarterly margins for the remainder of the year And that we are on the path to reaching our goal of achieving sustained margins in the mid-eighty percent range over time. Turning to expenses, non GAAP R and D expense was $15,300,000 reflecting ongoing investments in our clinical programs. We expect R and D expenditures to be more heavily weighted to the second half of the year as several new clinical studies get underway.

Speaker 3

Non GAAP SG and A expense came in at $62,500,000 We expect that SG and A expenses will be more heavily weighted to the first half of With the launch of new commercial initiatives. 1st quarter interest expense was $9,600,000 Importantly, the remainder of the year will benefit from $15,000,000 or more of interest expense savings With the retirement of our Term Loan B on March 31, 2023 using a new Term Loan A and cash on hand. The new term loan A carries an interest rate that is 400 basis points lower than the previous term loan B debt And has enhanced flexibility that meets our operational needs. And lastly, despite several challenges, we delivered another quarter of significantly positive adjusted of $41,900,000 As for guidance, today we are reiterating our 2023 full year guidance as follows: EXPAREL net sales of $570,000,000 to $580,000,000 ZILRETTA net sales of 115 Ioverao net sales of $17,000,000 to $20,000,000 non GAAP gross margins of 76% to 78%, Non GAAP R and D expenses of $70,000,000 to $80,000,000 non GAAP SG and A expense of $220,000,000 to $230,000,000 and stock based compensation of $51,000,000 to $54,000,000 In summary, we remain bullish on our 5 year plan year over year top line growth returning to the teens once inflation eases and the elective surgery market normalizes.

Speaker 3

Gross margins improving modest year over year increases in operating expenses and adjusted EBITDA margins that exceed 50%. That concludes our prepared remarks. I'd like to now turn the call over to the operator to begin our Q and A session. Operator?

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from the line of David Amsellem of Piper Sandler, David, you are live.

Speaker 4

Hey, thanks. So just had some questions on margins and spend. Can you provide more color on the gross margin headwinds? I think you talked about pricing, but Just wanted to drill down on the extent to which just manufacturing has been problematic in terms of getting Margins up, I know you had some issues periodically last year. So can you talk about that and how to think about cadence of gross margins as the year progresses?

Speaker 4

And then secondly, when do you think you'll get to the 80s? You said over time, but what's your thinking on timing there Longer term. And then lastly on R and D spend, how should we think about that generally? I mean, I know there's a number of things you listed in the slides. Should we think about that as kind of growing over time, flat, getting some leverage in the model?

Speaker 4

Just help us understand that. Thank you.

Speaker 1

Good. Thank you, David. Thanks for the questions. On margins, gross margin for manufacturing, and we've talked about this, I mean, over the last four quarters, We've had quality issues with some of our APIs and we believe that that's now behind us. And we've had some issues with some sterile filters That we think we've got our hands around, David, but it's not totally behind us.

Speaker 1

And so we think that we've got the folks in place They can handle these things and we're working in a very aggressive manner with our suppliers to make sure that we can solve those problems. I'll remind everybody that we've been we've had a gross margin of 79% before. So We're not trying to break into new territory here. We're just trying to fix some of these issues that appear mostly to be COVID related in one way or another, So that we can get back to those kinds of numbers. And you just heard Charlie reaffirm 76% to 78% for this year.

Speaker 1

So I think we're well on our way to get there. I mean there are a couple of inflection points right in front of us here. We will submit the sNDA for the 200 liter facility in San Diego as we get into the Q3. We expect that that facility will be making commercial material in the beginning of 2024. So on the relative short term, We're building out another fill line for ZILRETTA at our contract manufacturer.

Speaker 1

And that's important because the yield needs to be improved from the yield of the fill line and the product that we bought From Flexion last year. So and we've moved the production of the smart tips for ioverao To a contract manufacturer with a much better margin profile as we go forward. So really we need to get back to that 79%, 80% plus we think we'll do that with a 200 liter facility. Just as important David is that that will allow us the opportunity to decommission At least one of the 45 liter skids save the other for Europe and for some of the smaller countries in Latin and South America. And we should get back into the 80s here over the next 2 or 3 years.

Speaker 1

That's the plan. On the R and D spend, We're nearly done with EXPAREL. I mean, there really isn't much more to do. We've got infiltration for all uses and all indications in adults. We've got peds 6 to 17 now for infiltration again.

Speaker 1

We have agreement with the FDA on what the clinical Looks like to go from neonates to 6. So with the approval of the lower extremity nerve block, there's really nothing else The study for EXPAREL unless there's some specific indication that comes to light that we haven't really anticipated yet. You'll see the move Go over to the pipeline products. There's a lot to be done with ZILRETTA as it relates to Safety and use in the diabetic population, which we've highlighted a couple of times and that trial will start this year. We have a protocol for a shoulder study and we have our eye on a superiority claim versus Triamcinolone acetonide, which I think will be a real marketing advantage.

Speaker 1

And there's some discussion, especially in the PM and R doctor world That we should develop ZILRETTA for hips, not much so revenue for revenue, but more for proof of principle and showing that we can actually have a long term impact on this Procedure Group. So there's a lot of things we can do with ZILRETTA as we go forward from here. And then ioverao, we're Currently working on the pain of spasticity as well as the broad label that we have for peripheral pain. I would say David that this is not a direct answer to your R and Deep question. But we now have folks in the marketplace asking us if they can use the ioverao trade name for cash pay clinics in local markets, several of them around the country, Especially for sports, and so you see a lot of traction there.

Speaker 1

And ioverao for spasticity Is probably as big an opportunity from a patient care perspective as well as from a revenue perspective as I've had in my career. And the results are dramatic. We've met with the FDA. We think we have a line of sight on a clinical trial that we'll do later that we expect to start later this year. And so we're training up many of the KOLs in spasticity by using the pain of spasticity where those are Both apparent in certain patient populations.

Speaker 1

And then spasticity really has the potential to be a game changer for the spasticity population as well as for Pacira. You just heard Ron talk about 201. I think we need to get another look at not only the Phase 1 study, but what the protocols look like from our discussions with the FDA

Speaker 5

Going

Speaker 1

forward, these trials have in the past had a propensity to be pretty expensive. So we have to decide whether we want to do this Ourselves or whether we want to take on a partner. And then we've got the portfolio of dexamethasone and a higher potency Bupivacaine product that will mimic EXPAREL, but will last for a longer period of time. So when you look at all of those things together, I mean our plan is that R and D expense should be relatively consistent over time with EXPAREL moderating backwards And the other 2 commercial products being front and center for the next couple of years while we work through the Phase 1 studies With the intrathecal EXPAREL with 201 with dexamethasone and bupivacaine. So there's a lot to be done here, David.

Speaker 1

I don't think you're going to see any spikes. I think we're in a position where we can Take the most important things from a revenue and patient care perspective and move them forward, and then QS that with some of the other things that we've got in the multivesicular So that's the plan. Okay. Thank you.

Speaker 3

Thanks, David.

Operator

One moment for our next question. Our next question comes from Glenn Santangelo of Jefferies. Glenn, you are live.

Speaker 6

Yes. Thanks for taking my question. Hey, Dave, I wanted to talk to you about the revenues a little bit because I think last quarter you said you expected EXPAREL sales in 1Q to be roughly 20% of the full year and you clearly did better than expected there. But conversely, if you look at ZILRETTA, it seems like you're happy with the new accounts that you signed up, but revenues sort of declined Almost mid teens on a sequential quarter basis. So what's interesting is you did better in EXPAREL, maybe a little bit worse What we were thinking in ZILRETTA, but yet you maintained the guidance for both of them and intuitively you would think You might have raised 1 and lowered the other.

Speaker 6

And so I'm wondering if you could just sort of reconcile what happened in 1Q relative to your expectations?

Speaker 1

Yes. Thanks, Glenn. A couple of things. I'll start with EXPAREL. I mean, we did slightly better than the historical trends would suggest.

Speaker 1

We also have the outlier of 2022 and the Q1 was one of the strongest quarters. And so I think it's entirely prudent for us to wait for another quarters of data before we start increasing off of what would have been the smallest number in the quarterly progression of the year. So we're happy to have a little bit of cushion there. I don't think it's time yet to raise the revenue until we start to see the procedures Start to come back into fold and we think that that's going to happen over the next couple of quarters and couple of years, but let's let that happen before we raise guidance from where we are. On the ZILRETTA front, there's a couple of things.

Speaker 1

First, the field force only started promoting ZILRETTA to the wider base On the reach and frequency strategy in the back half of January. So you're talking about a very small sampling here in terms of letting that opportunity Mature. There's also the issue, Glenn, that we had a couple of significant users Of ZILRETTA that were that came over from Flexion, the issue that we were facing was that they were giving What we thought were inappropriately high discounts and it took a while to straighten all that out until In the middle of February, we were able to come to agreement with those large purchasers and they are now buying ZILRETTA. When you add that to the safety story that we've got in the marketplace, again, didn't start until the back half of January relative to Keeping the patients in range and eliminating these glycemic spikes, I think that ZILRETTA is a little light On an annual basis, but with a number of levers that we think will get us back to the number that Charlie just reiterated. So I don't think we're uncomfortable with either one.

Speaker 1

I think it would be a little early to raise or lower or raise either one of them.

Speaker 2

Maybe if

Speaker 6

I could just ask one quick follow-up on the margin With respect to gross margin, I heard your comments that you hope to get to the 80s over the next kind of couple of years. But If you look at the result in 1Q with the 71.8 percent gross margin sort of almost matched your low watermark last year. And in order to get to the midpoint of the Guidance, it almost needs it seems like you need 78% to 80% for the next three quarters and it seems like a pretty sizable ramp. I was wondering if you could comment on that. And then lastly, with respect to SG and A, it certainly seems like you're running hot relative to your full year guidance in 1Q.

Speaker 6

And you seem to suggest it was more heavily weighted in the first half. I just wasn't clear why. And I'll stop there. Thanks.

Speaker 1

Sure. So as it relates to the gross margin, we noted on the Q4 call That there was some overlap from Q4 into Q1 that was going to depress the Q1 margins. Some of that was related to EXPAREL and some of that was related to ZILRETTA. We believe that we've cured both of those and I'll remind you again, We were running at 79% in the Q1 of last year. So we've made some structural changes from a personnel perspective.

Speaker 1

And right now Science Center is running as planned. So we're not uncomfortable With reassuring the guidance of 76% to 78%, noting that what we've got is $130,000,000 of the $570,000,000 to 5.80 So the majority of the business for the year is in front of us at the higher margin. So the math doesn't exactly work It's a quarter of the year that's gone. As a matter of fact, it doesn't work at all. So we're not uncomfortable with where we are with the manufacturing goal, Especially with some of the personnel changes that have been made in some of the ways that we're now working with the 200 liter in both places.

Speaker 1

On the SG and A, we reconfigured the sales force as at the national meeting this year. And we put folks out there with the idea that we were going to have 3x the frequency and the reach for both ioverao and ZILRETTA. We think that that's working in terms of new users and it's not a direct comparison From Q1 when somebody has is getting started using these compounds to the way their product will grow as they get used to using the product and they expand their utilization. So SG and A is according to plan, but is a little higher In previous years for the same quarter because we've added some folks and we've got a 3 product portfolio now that these folks are Working in the marketplace with, we've also added PMNR guys to the call pattern and we've got a separate sales force out there that is small, But still an added expense, it's focused just on OMFS and peds. So there's some structural changes that we made that support the SG and A.

Speaker 1

We watch that carefully of course and every quarter we look at all of those territories to determine where the growth is and where the growth isn't. But right now, same comment. For the year, I think we got the right folks in the right place.

Speaker 6

Thank you.

Speaker 1

Thank you.

Operator

One moment for our next question. Our next question comes from Gregory Renza of RBC Capital Markets. Gregory, you are live.

Speaker 5

Great. Thanks. Good morning, Dave and team. Congrats on all the progress and thanks for taking my question. Dave, maybe just on 340B pricing program, just wanted to ask you to perhaps expand a little bit on your commentary.

Speaker 5

Maybe just give us Maybe a state of where you are now, certainly with respect to the mix of the existing and NIAID businesses that That you've represented or that you've discussed and how that has fared with your expectations thus far and really where you see that going? Thanks so much.

Speaker 1

Yes. Thanks, Greg. It's doing what it was supposed to do. Just to reiterate, we wanted to open up those Additional procedures where EXPAREL wasn't being used, understanding that there was going to be some purchases from current users That was going to modify the benefit of that. I think generally, Greg, we're exactly where we thought we were going to be.

Speaker 1

The numbers that we see are basically flat week to week, a little bit higher than what we projected when we talked about this in Q4 call, but understand that the price increase of 2023, this year's price increase, We've not seen any of that yet in for the 340B customers and that will take effect In July. So there's a 6 month lag in any pricing action that will fall over to the 340B customers. So we expect that the majority of that 3.5% will come and have an impact on 340B It'll take it right back to where we thought we were going to be and what we guided to as we came out of the year. So, I mean, we're not disappointed. It's running I would say, Greg, we're probably a point higher than we thought we were going to be.

Speaker 1

So it's slightly higher than we thought that it might be. But we also see that the new users Are increasing their use and we continue to have 7 to 10, 12 new users every week, Which are all positives. And so if you look at this in the short term and you want to train the healthcare providers and you want to offer the Tunity for non opioid pain control for the patients, I think we're doing exactly the right thing while we work on TRICARE and no pain, Which will give us yet another alternative way to provide these patients and maybe not have to discount the product according to the 340B calculations that we were just talking about. That makes

Speaker 5

sense. That's great. Thank you. And maybe just a question on the pipeline perhaps more broadly. It's nice to see you talk about 201 and others in the hopper.

Speaker 5

I think you alluded to just certainly the investment and maybe the differentiation of capabilities when it comes to taking a gene therapy or some of the novel approaches forward. Could you just touch a little bit upon And where you see those decisions coming to bear at what stage of development certainly as you're proceeding in early stage and But with the Phase 1, I'm just curious how you're thinking about really changing the complexion of your capabilities and R and D approach should you I want to move forward with this approach. Thanks so much.

Speaker 1

Thanks, Greg. The approach It's different for sure. I mean, I think the first thing that Ron just talked about right is the process. And as you guys know well the product is the product or the process is the product as we go forward here. So right now, Greg, where we are is, we're going to look at some additional Phase 1 work.

Speaker 1

It's really around the timing and what Type of steroid, whether it's oral or injectable, the timing of that steroid and how to best prepare ourselves for a protocol. We will have a as we get closer to when we have the process determined for doing The actual pivotal trials, we've had some interest. We've had some inbound interest in 201 already from potential partners. And I don't think you'll see us make any radical changes to our R and D organization. We've been fortunate enough to bring the people that we're working on 201 at Flexion have joined Pacira.

Speaker 1

So we have a cadre of gene therapy experts in our organization now, and that have helped us a lot with the discussions with the FDA on that topic. It will really be driven by the protocol that's agreed to and I think we're there and we'll see how this Eventuates with trials over the next year and a half. And then the cost that's projected versus The commercial costs in addition to the clinical costs. So I think we'll our desire would be to Keep as much of this asset as we can at least early on as we create value. And then if it turns out that there is a partner that can add more value and can share the expense with us, We've got a lot of interest in being able to do that and that would be an approach we would probably take.

Speaker 1

We're not looking To double the size of our R and D organization to be a gene therapy company for sure if that's the nature of your question. Ron, I don't know Ron's here with us, Greg, it would be we should ask him. He works on this every day.

Speaker 5

Greg,

Speaker 1

thank you for the question. Just to add what Dave said, we're a couple of years away from having a defined Dose and process and that really opens up the next milestone where we can take a look at opportunities to partnership. Thanks guys. Thanks Greg.

Operator

One moment for our next question. Our next question comes from Greg Fraser of Truist Securities. Greg, you are live.

Speaker 7

Thanks. Good morning, folks. Can you comment on the export net in the quarter? Is gross net stable now or would you anticipate Some additional pressure in the coming quarters as volume to the 340B hospitals grows. It sounds like you lost some offset from the price increase in the second half.

Speaker 7

And then I had a question on pediatrics. How much demand do you think is being driven by pediatric use? And what inning do you think you're in with respect to the pediatric opportunity? Thanks.

Speaker 1

Sure. Thanks, Greg. It is stable at the current percentage use. And as you said, we do expect to benefit by several points as we enjoy the price action of the beginning of the year against the 340B account. So, I think our thought process is that we are probably at or very near the low point and without Any price increase and we will get back to where we thought we were going to be initially with the price increase.

Speaker 1

And so I think it is stable And it doesn't move much at all from week to week now. And so I think we're in a stable position and can improve from here with more Purchasing from the non TOR340B accounts outside of 340B. I think also Greg, there's also a bit of a shadow here as more there's activity significant activity In the whole 340B arena. And I think folks are taking the idea that they have to use 340B purchases for 340B customers very seriously. So I don't think that there's any risk of any additional use out in a 340B in an inappropriate 340B program going forward.

Speaker 1

So we feel pretty good about that. Peds is still in the early innings. I mean, if I said it was The lady hasn't sung yet for sure. It's probably the 3rd. It is a slower group to adopt In terms of just making a significant move in a short period of time, I would tell you it's good to see though that when the people have adopted EXPAREL impedes that their growth is quite explosive and they get to be significant purchasers of the drug in a very short period of time.

Speaker 1

I mean Roy is with us and this is Roy's baby. So I'll ask Roy to see if there's anything additional you would say to that for pediatrics?

Speaker 2

Yes. And I think it's a very good question. The thing about pediatrics, it always lags behind what you see in the adult. So it's probably 5 years on the curve Still to go with Peds to get it to get to where EXPAREL is today. And with that, we have a lot of data that's about to come out pretty much From collaboratives and from some investigator initiated.

Speaker 2

So for instance,

Speaker 7

as an

Speaker 2

example, scoliosis, which is one of the Really big painful procedures you see in pediatrics. We now have 2 large centers. 1 is the Shriner system and 1 is Cleveland Clinic doing studies in scoliosis with EXPAREL and we should have that data I would hope within the next 6 months. And once that's out there and really objective from 2 big places like that, I think it'll be something that people can latch on to. We have calls every day Dealing with pediatric centers looking to get started.

Speaker 2

But again, the process is longer because they want very strict Protocols, they want all the details. And just like you do anytime with kids, the threshold is always higher to adoption. So I don't hopefully that helps.

Speaker 7

Very helpful. Thank you very much.

Speaker 1

Thanks, Greg.

Operator

One moment for our next question. Our next question comes from Mikaela Franceschini of Barclays, Mikaela, you are live. Hi.

Speaker 8

This is Mikaela on for Balaji Prasad. Thanks for taking our question. Just following up on the 340B, could you just provide a bit more detail on its impact on gross margins and operating margins this quarter? Or really just any further color you can provide on volumes index? Thank you.

Speaker 1

Yes. Thanks, Mikhail. When we Started down the road of 340B. It was really mediated by the fact that we had to Either get in or get out because we purchased ZILRETTA which that was a 340B participant and so our hand was forced To some level. But at the same time, we saw 340B and the expected decrease in the gross to net As a way to get additional clinicians using the product outside the hospital, especially, as we anticipated the No Pain Act coming.

Speaker 1

So That was a clear understanding that roughly 20% of the business that we currently enjoy, this is October of 2022 now, Kelly, That 20% of that business would likely move to 340B and that that would cause roughly a 5%, 5.5 That reduction in the gross to net. Now that was without the benefit of the price increase, right? And so we are just very modestly ahead of that. Ahead of that, interestingly, it's because we the greatest benefit So far has actually been more purchases of 340B active accounts. And so the Fastest growing section of our business actually is the 340B participating accounts both non and 340B.

Speaker 1

So it has worked to some level. Our anticipated growth into non-340B accounts Who would not who would order both 340B and non-340B has been slightly slower than we thought. And so that's what brings us back to this 25.5%, 26%. And then the focus then is on the 6 month delay in the 340B Pricing reflecting the price increase of January 1. So when you lay that on top for the rest of our business the net net of that was about 3.5%.

Speaker 1

The government has all of these CPI calculations and we go through all of that with this 2%. So we're not calculating that we would enjoy the full 3.5%, but that there will be a 2%, 2.5% improvement in the gross to net On July 1 as we start to enjoy the benefit of the price increase. So that brings us right back to the 24% That 23%, 24% that we thought we were going to get in the 1st place. So it's pretty much where we thought it was going to be. And I think we did the right thing, especially given the progress on no pain and some

Operator

All right. One moment for our next question. Our next question comes from Rohit Fosin from Needham and Co. Rohit, you are live.

Speaker 1

Hi, this is Rolod on for Serge. Thanks for taking our questions. Can you talk about your expectations for the remainder of 2023 for surgery trends? And then secondly, how do you think having the lower extremity nerve block indication label for EXPAREL changes its market opportunity? Thanks.

Speaker 1

Good. Yes. Thank you, Ryan. Let me start in reverse. So when we look at lower extremity nerve block and just to remind everybody this data will be Specifically for knee and foot and ankle, that those two procedures encompass about 3,000,000 additional procedures.

Speaker 1

I always caution everyone that we are already being used in about 300 of 1000 of the knee procedures. It's not necessarily for an adductor canal block, but in the same procedure. So the delta is about 2,700,000 procedures, clearly meaningful. We think that we'll get some of those knees relatively Quickly because it is just a matter of not being in the package insert, especially with a number of the younger anesthesiologists. Foot and ankle will be a more linear approach.

Speaker 1

I think there's interest in many of the foot and ankle surgeons, but they don't have a lot of experience with EXPAREL yet. And so that'll be a bit of a longer term opportunity. But clearly one that should take we should take advantage of pretty quickly. Just to be clear, Roy, we will More than likely unless there's some type of an early approval, which we do not expect, we will start doing some immediate targeting on Approval, but the big launch for this would be at a national meeting in January of 2024. For the rest of this year, There's a whole bunch of stuff going on.

Speaker 1

And so that's a very complex question. But I'll give you what we think. So first, Well, we thought that the big issue in 2022 was labor Until we saw that the peak of the 2022 procedure volume was in the 2nd week in April. So if that was true, then it couldn't have been labor because we had enough labor to meet those peaks Early, very early in Q2. So and all the procedures by the way except knee and hip Went down at the same time.

Speaker 1

Knee and hip normalized as we got into the 2nd month of Q4. But just so you know, knee and hip were the only two procedures that grew in 2020 2 over 2021, knee by 5% and hip by 3%. The other orthopedic procedures We're down just like the soft tissue procedures and actually orthopedics overall was actually down Through 'twenty two over 'twenty one. So that's how we got into this year. And so as we go through the rest of this year, What we think is going to happen is that there's a number of impacts here.

Speaker 1

Inflation clearly is the major driver. As we look at food prices, you see that food was 7% of budget last year, it's over 9% now as we get into this year. So as inflation moderates, we expect That elective surgeries will also moderate. There's something new that we've been investigating that it's not something that we really Thought about a lot before, but it appears that especially in the socioeconomic strata that depends Heavily on income tax returns that there is a correlation between the Patients getting their refund and having the free cash to be able to get to be able to pay the co pays and Some of the coinsurances associated with procedures. I'm not sure we ever really understood that before, but the refunds are late and smaller this year.

Speaker 1

And when we talk to folks in the marketplace, we hear that they are delaying until they get their refund. And in many cases, they're Surprised that the refund isn't as much as they thought it was going to be. Neither of those are helping us. On the other side of the coin, We know that the mortality associated with the pandemic Has really taken the bottom of the procedure market out, especially for things like debridements And those kinds of procedures. And there is some evidence that those procedures are starting to come back to the marketplace and replace the folks who would have been here That they didn't pass away as a result of the pandemic.

Speaker 1

So we do think that no matter what the scenario is with inflation and The possibility of a recession that elective procedures will continue to Move modestly as we go through the 3rd Q4 of this year. We do expect to think we'll continue to favor the outpatient procedure And we expect that by the end of the year, the outpatient, this is HOPD and amyloid arthritis surgery will be in the mid-70s, in the 73%, seventy 4% range overall, which again shines light on TRICARE and no pain and our ability to get reimbursements In the reimbursement for these patients who are moving to where the procedures are moving to the outpatient environment, If we can achieve reimbursement in that marketplace, we would have reimbursement for nearly 50% of our covered procedures in our TAM And then with CMS or with commercial payers generally following CMS in terms of the roadways, The paradigm for how you get reimbursement. So we're working hard on 2024. We'll know that Sometime probably in July when the new rule comes out and we'll see where we get. But the possibility everything is Trending very modestly in the right direction.

Speaker 1

I don't think you're going to see any hockey sticks over the next couple of quarters, but I think we've survived the worst of it. Great. Thanks for the color. Thank you.

Operator

I would now like To turn it back to Dave Stack, Chairman and CEO for closing remarks.

Speaker 1

Thank you. And thanks to all on the call for questions and time today. 2023 is off to a positive start and we're energized about the opportunities that lie ahead of us. Throughout the balance of the year, we continue to work to transform the lives of patients in need of non opioid pain management, which is an ongoing play throughout the country and around the world. Next up for us is the RBC and Jefferies conferences in New York.

Speaker 1

Thanks. Stay well. We'll see you all soon. Bye bye.

Operator

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

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