Pacira BioSciences Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

Key Takeaways

  • Pacira adjusted its full-year EXPAREL sales guidance to $550 – 560 million and its consolidated gross margin guidance to 73 – 74%, citing softer elective surgery trends and Q2 performance.
  • Q2 revenues totaled $169 million, including $135.1 million from EXPAREL (4% volume growth), as Pacira added over 350 new EXPAREL accounts and 340B volumes accounted for roughly 20 – 25% of sales.
  • Consolidated non-GAAP gross margin improved to 73% (76% at the San Diego facility) and is expected to rise into the high-70% range by year-end following 200 L process improvements and facility capacity shifts.
  • ZILRETTA delivered $29.3 million in Q2 sales and ioverao reached $4.4 million, driven by a 200-person field team, new partnerships (e.g., Lexi Thompson), and planned label-expansion studies in shoulder osteoarthritis and spasticity.
  • Upcoming milestones include a supplemental NDA submission for the San Diego 200 L facility, an FDA PDUFA action date of November 13 for expanded lower-extremity nerve-block indications, and initiation of a Phase 1 trial for the gene therapy candidate PCRX201.
AI Generated. May Contain Errors.
Earnings Conference Call
Pacira BioSciences Q2 2023
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q2 2023 Pacera 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 Go ahead of Investor Relations. Please go ahead.

Speaker 1

Thank you, Gerald, and good morning, everyone. Welcome to today's conference call to and Charlie Reinhart, Chief Financial Officer. Ron Ellis, Chief Strategy Officer and Roy Winston, Chief Medical Officer are also here 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.

Speaker 1

For information concerning risk factors that could affect the company, please refer to the These 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 2

Thank you, Susan. Good morning, everyone, and thank you for joining us. We are entering the second half of the year with positive momentum after seeing a meaningful Uptick in year over year EXPAREL growth in June July. In addition, recent data indicate an improving elective surgery market that we believe will continue through the remainder of the year. As the economy moderates and soft tissue elective surgeries come back, We are well positioned to get back to more robust top line growth rates.

Speaker 2

While we are encouraged by improving trends, Today, we are adjusting the full year sales and gross margin guidance to reflect an updated view of market conditions and procedural cadence for the year. Charlie will discuss guidance in greater detail later in the call. In the second half of the year, we will continue to focus on 3 priorities: Growing revenue, improving gross margins and expanding market access. 2nd quarter revenues of $169,000,000 include EXPAREL sales $135,000,000 driven by solid volume growth in a slowly recovering market. In addition, we continue to build awareness around ZILRETTA And ioverao with our field based team now promoting all three of our products.

Speaker 2

2nd quarter XEREL sales exceeded $29,000,000 and ioverao sales grew to more than $4,000,000 Our significant top line combined with ongoing operating discipline It's driving strong and durable cash flows that allow us to further solidify our financial condition by recently prepaying $25,000,000 outstanding principle under our Term Loan A facility. The 2nd quarter also marks our 25th consecutive quarter of significantly positive adjusted EBITDA of $54,000,000 We continue to focus on improving gross margins and we are moving in the right direction with 2nd quarter margins improving to 73%. Our San Diego facility is now outperforming volume targets and achieved 2nd quarter margins of 76% for EXPAREL. We have also made significant improvements in the quality of the 200 liter process in Swinburne that we expect We'll begin to positively impact EXPAREL margins later this year. Bottom line, we believe that the foundation is set For gross margins to return to the high 70% range as we exit 2023.

Speaker 2

On the regulatory front, We remain on track to submit a supplemental new drug application for our 200 liter facility in San Diego later this year. This will be another critical milestone towards improving In addition, the FDA recently completed its review of our application for an improved product release assay for EXPAREL And as requested additional information to support an approval, we will submit a meeting request to define the most efficient path forward with the agency. Importantly, this shift in timing does not impact our ability to improve gross margins this year. Turning now to more specifics on the Commercial portfolio, starting with our EXPAREL franchise. We are pleased to report that we continue to outperform the broader elective surgery market with 2nd quarter EXPAREL sales of 100 $35,000,000 which was essentially flat versus the prior year as volume growth of 4% was offset by 340B pricing and other discounting.

Speaker 2

Our investment in these programs has continued to provide meaningful access to EXPAREL for a larger and growing procedure base, Setting the stage for a meaningful inflection in the implementation of the Neuro Pain Act in 2025. As a reminder, our performance last year was particularly strong with EXPAREL sales at near record levels with the Q2 of 2022 Being the 3rd highest quarter ever for EXPAREL. Importantly, year over year growth rate improved as the 2nd quarter progressed And into July, leaving us optimistic for a higher second half of the year as the market continues to normalize. We also expect that growth initiatives that we have put in place such as continued volume expansion from 340B and TRICARE reimbursement As well as initiatives in oral maxillofacial plastics and outpatient surgeries and sports medicine will contribute to revenue growth in the second half of this year. Turning to market access, we continue to expand our EXPAREL user base adding more than 350 first time purchasing accounts so far this year.

Speaker 2

We are seeing a growing level of EXPAREL interest among oral and maxillofacial surgeons fueled by last year's rollout of the partnership with Suravodent. We expect to launch a similar partnership in the coming months with another large dental support organization with more than 1,000 offices across 46 states. Together, we will support training and education around best practice for optimizing patient recovery after oral surgery using an EXPAREL based opioid sparing approach. As expected, our 340B pricing program is continuing and is contributing to volume growth in both existing and new business as it Helps alleviate cost challenges by offering a reduced price to eligible entities where opioids are often most problematic. For the first half of the year, EXPAREL340B volumes were roughly 25% with recent weekly 340B volumes at roughly 20%.

Speaker 2

Gross to net remains a highly favorable level for our industry at roughly 86%. And we also expect the 340B Down to improve from roughly 28% to 25% in the second half of the year with the 2023 price increase taking effect for government orders, Which were pricing runs into with a 2 quarter lag. All in all, the 340B program is doing what it was designed to do, Expanding the EXPAREL user base and growing volumes within existing and naive businesses. This investment advances our mission to provide An opioid alternative to as many patients as possible regardless of income level or insurance status. Further, 340B is paving the way for us to leverage no pain since we are accessing a significantly larger pool of patients and their surgeon providers We want to perform more outpatient procedures.

Speaker 2

CMS recently issued their proposed outpatient prospective payment system rule for 2024 With EXPAREL continuing to qualify for separate reimbursement in the ambulatory surgery center under reimbursement code C9290. Their preliminary rule also notes that the agency will implement the No Pain Act, which mandates CMS to begin reimbursing separately for non opioid products for postsurgical pain in all outpatient settings on January 1, 2025. No pain will provide a reimbursement pathway for nearly 20,000,000 EXPAREL Revolent market procedures and we expect commercial and self insured payers to follow the lead of CMS. Reimbursement in the hospital outpatient setting as well as ambulatory surgery centers will cover more than 70% of the current total addressable market for EXPAREL. In parallel, we are seeing expanding access to non opioid pain management for government employees, our military and their families through efforts like no pain.

Speaker 2

In October of this year, TRICARE will adopt the CMS Medicare reimbursement methodology for ambulatory surgery centers And begin providing separate reimbursement for EXPAREL in this setting. We would expect TRICARE to also mirror CMS policy in the hospital outpatient setting with the implementation of No Pain. 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 the hospital outpatient settings, these programs will assist eligible healthcare systems in affording the opportunity to offer non opioid pain control for these populations. Our state of the art training and innovation centers continue to support the market's demand for best practice knowledge transfer to accelerate surgical migration to outpatient sites of care.

Speaker 2

In the first half of the year, our educational programs provided training in more than 140 on-site and in field events to more than 4,200 healthcare providers We want to be at the forefront of opioids bearing pain management. In pediatrics, interest continues to grow as new data are generated. Our commercial organization is focusing on top pediatric institutions and EXPAREL use continues to significantly expand at influential hospitals Such as the Shriner System and Wisconsin Children's. We also have secured several recent wins in spine programs at other centers Including Cincinnati Children's Hospital, CHOP in Philadelphia, Children's Hospital of Colorado, Mercy Children's in Kansas City and Seattle Children's. We will look forward to building on our success and to initiating our registration study later this year to support the expansion of EXPAREL label to include patients aged 0 to 6 years.

Speaker 2

On the regulatory front, we are advancing the FDA review process for our supplemental new drug application to expand the EXPAREL label with a PDUFA action date of November 13. To remind you, this application is seeking expansion of the to include 2 key lower extremity nerve block indications that we expect will significantly extend our reach into surgeries of the knee, Thecal administration continues and is on track for completion around the end of this year. Switching gears to ZILRETTA and ioverao, While our full 200 person field based team is broadening education and awareness around these complementary and standalone non opioid solutions For managing osteoarthritis pain. So far this year, the team added more than 270 new first time purchasing ZILRETTA customers and over 100 new ioverao customers. Several milestones are on track for the next year in current and new indications for both products.

Speaker 2

For ZILRETTA, we expect to initiate 2 new label expansion studies. These include a shoulder osteoarthritis study and a diabetes safety study in knee osteoarthritis. Importantly, if our shoulder study is successful, ZILRETTA should become the only the first and only approved corticosteroid specifically for shoulder OA. Both studies will evaluate ZILRETTA versus triamcinolone with a goal of adding a superiority claim to the ZILRETTA label. For ioverao, we recently announced our newest partnership with renowned professional golfer Lexi who will be advocating and educating athletes, their families and fans about non opioid solutions like ioverao.

Speaker 2

We also have a new broadcast TV commercial that started running last month on the Golf Channel and other select networks to drive viewers to learn more at ioverao.com. On the clinical front, we continue to be excited about the prospects for ioverao as a potential game changer in spasticity. Last month, Doctor. Gerald Francisco from the University of Texas Health Sciences Center highlighted ioverao and cryoneurolysis As Promising Technologies in his keynote address entitled, Looking Ahead: Exciting Prospects in Spasticity Management at the 2023 International Society of Physical and Rehabilitation Medicine Conference. Our registration study of ioverao for the treatment of spasticity remains on track to launch later this year.

Speaker 2

As you know, this is a highly dissatisfied market with inadequate treatment options currently limited to phenol and toxins. Our ioverao expansion activities also include a new ioverao smart tip for medial branch blocks for low back pain, which we expect to have on the market in 2024. 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-one RA for osteoarthritis. As you may recall, data from our 1st Phase 1 study were very encouraging with the greatest level of efficacy observed at the lowest dose studied. Based on this positive data, we are planning to launch a second Phase 1 study for PCRX201 in osteoarthritis of the knee.

Speaker 2

We are currently finalizing our protocol after receiving input from the FDA. We also continue to advance Phase 1 readiness activities for our internal multivesicular liposome pipeline, which includes vesicular 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 for becoming addicted to their pain medications. And with that, I'd like to turn the call over to Charlie for his Financial review. Charlie?

Speaker 3

Thank you, Dave, and good morning, everyone. To remind you, I will be discussing non GAAP financial measures 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, we had a solid second quarter with net EXPAREL sales coming in at $135,100,000 2nd quarter average daily volume growth of 4% was offset by the impacts of our investment in the 340B program and other contracting activities.

Speaker 3

As Dave mentioned, we were encouraged to see improved year over year growth in June July. These data leave us optimistic The second half of the year will be stronger than the first half of the year. For ZILRETTA, 2nd quarter sales were $29,300,000 With our 200 person field force now promoting education and awareness, we continue to see encouraging uptick in the first time customers And expect ZILRETTA growth will accelerate over time as the team continues to grow our user base. For ioverao, 2nd quarter sales came in at $4,400,000 Here too, we are seeing strong growth in our customer base and expect demand and sales to gain momentum With the full field based team generating awareness around the advantages of a drug free nerve block with ioverao. We also expect our sports initiatives with NFL alumni, the PGA and the LPGA to drive awareness around ioverao as an innovative opioid free option for managing pain.

Speaker 3

Turning to gross margins. On a consolidated basis, our 2nd quarter non GAAP gross margin percent was 73%. This is comprised of non GAAP gross margins of 72% for EXPAREL, 82% for ZILRETTA and 78% for ioverao. As Dave mentioned, our San Diego facility is performing in line with expectations and achieved EXPAREL margins of 76% for the Q2. For Swindon, while we've made significant improvements in the 200 liter process at this facility, These changes did not take hold quickly enough to drive a more favorable impact to the overall mix of EXPAREL units sold in the 2nd quarter, With units produced at the higher cost San Diego 45 liter facility, representing a significantly greater proportion Of total units sold versus units from the lower cost Swindon facility.

Speaker 3

The good news is that the Swindon production is now on track We expect to exit the year with margins in the high 70% range as we shift to a more favorable mix of commercial products sold. Turning to expenses. Non GAAP R and D expense for the Q2 was $17,100,000 down from $24,800,000 last year. The year over year decline primarily relates to the completion of our 2 lower extremity nerve block studies, which was partially offset by production development and capacity expansion costs for the 200 liter facility in San Diego. We expect to see an increase in R and D expense in the back half of the year with the launch of new clinical programs.

Speaker 3

Non GAAP SG and A expense came in at $57,100,000 which is in line with the $56,500,000 reported last year. We expect to see a decline in SG and A expense in the back half of the year. 2nd quarter interest expense improved significantly to $3,900,000 versus the $8,800,000 reported last year. This was driven by the interest expense savings As you know, the Pacira leadership team is constantly assessing the best use of capital and ways to optimize our balance sheet. To that end, last week we made a $25,000,000 principal prepayment on the term Loan A and we continue to fully expect our significant Cash flow outlook will enable early retirement of the remaining Term Loan A balance of approximately $122,000,000 For modeling purposes, the $25,000,000 prepayment will result in interest expense savings of roughly $1,000,000 in the second half of the year.

Speaker 3

And lastly, despite some challenges, we delivered another quarter of significantly positive adjusted EBITDA of $54,300,000 As for guidance, as noted in today's release, we are updating our full year guidance EXPAREL net sales of $550,000,000 to $560,000,000 versus previous guidance of 570 to $580,000,000 With respect to cadence, the Q1 of 2023 appears to have shifted away from typical seasonal trends And will represent a slightly higher percentage of the full year than it has historically, similar to 2022 When we had 1 quarter outlier with the 2nd quarter at near record levels. We now believe the 1st 3 quarters of the year will be more evenly balanced in terms of Percentage contribution to full year EXPAREL sales. With the market showing signs of normalization and 340B hitting its 1 year anniversary in We continue to believe that the 4th quarter will be the strongest performer and the largest contributor to full year EXPAREL sales. ZILRETTA net sales of $110,000,000 to $115,000,000 versus previous guidance of to $225,000,000 Non GAAP gross margins of 73% to 74% versus previous guidance of 76 to 78% and stock based compensation of $46,000,000 to $49,000,000 versus previous guidance of $51,000,000 to 54,000,000 Today, we are also reiterating our full year 2023 guidance for the following.

Speaker 3

Ioverao net sales of 17 $20,000,000 non GAAP R and D expense of $70,000,000 to $80,000,000 non GAAP SG G and A expense of $220,000,000 to $230,000,000 In summary, we remain bullish in our 5 year plan with year over year top line growth Returning to more robust rates as economic conditions improve and the elective surgery market normalizes. Gross margin 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 turn the call over to the operator to begin our Q and A session. Operator?

Operator

Thank you. We will now conduct a question and answer session. Our first question comes from the line of David Amsellem from Piper Sandler. The line is now yours.

Speaker 4

Hey, thanks. So just had a few questions. I know you talked about underlying Electosurgical Dynamics, but with improvement, I guess I would have thought we would see more Robust volume growth for EXPAREL and it doesn't seem to be there. So I'm just wondering out loud, Is there something else that we're missing on the volume side? Is there something regarding underlying commercial execution that we're missing.

Speaker 4

And just help enlighten us as to what is happening here and why EXPAREL seems to be lagging in the overall recovery of the elective surgical space. So that's number 1. Number 2, You talked about margin expansion and operating leverage for a number of years. Here you are guiding down for gross margins. I get your remarks on Swindon, but at what point can you take more aggressive measures To deliver on the operating leverage that you've talked about again for a number of years and Is there a sense of accountability that the margin expansion and operating leverage that you've cited in the past just hasn't come to pass yet.

Speaker 4

So I'm wondering if you can give us some thoughts on that. Thank you.

Speaker 2

Good morning, David, and thanks. First on the first question, as we come out of if we came into and out of Q2 of this year, April was very soft, David, and actually one of the worst months that we've seen Since the pandemic. And so we saw that that increased as or the market conditions improved at least Related to EXPAREL as we got into June July. So as we look at commercial execution, I don't believe that there's any issues in the marketplace Related to how we're being viewed, I think the marketplace continues to be financially strained, Especially in the hospital marketplace and we do talk to folks regularly about the HOPD marketplace and These low margin soft tissue procedures that are difficult for the providers to do because of the low margin aspects of what they're doing And the trying to move these procedures from the hospital inpatient to the hospital outpatient environment, Which is helpful, but still doesn't provide the kind of return that would provide comfort to people who are using 30 minutes of their OR time for a very low So what we're what I'm trying to point out here is that, the issue here really is That people are struggling to be able to provide their patients with a low opioid alternative and we cure that With the institution of the No Pain Act.

Speaker 2

Now, so I don't believe that this is a commercial execution story As much as it is a macro story with customers and patients who are being squeezed and the cost of a non opioid treatment Therapy is quite a bit different than the ability to use EXPAREL in opioids and many of our patients are being treated with bupivacaine in opioids Purely because either the system or the patient can't afford the more costly non opioid therapies. So Hopefully that provides some color to Q1. On Q2, all fair comments on your part David. And We've struggled and if you go back to the Q1 of 2022, Our gross margin was in the 79% range. And then we ran into a series of issues that have been well described.

Speaker 2

We thought we were coming out of those issues and that we were going to have some more significant recovery in 2022. And then we had yet another acute issue In Swinon, it caused us to improve, but not at the level that we were expecting with the guidance that Charlie just gave. The lowered guidance is really a conservative measure to make sure that we meet these new milestones. What will happen here over the next several quarters is the cadence is we have to fix Wynnett. I mean that's number 1.

Speaker 2

As we sit here today, Science Center is the most reliable material that we produce, but it's also the most expensive. So we need to fix Swinin because it's the least costly material that we can make. And so that is High on the list and we think that we've achieved that for the most part. We're still it's not perfect yet, but we've made great progress over the last 2 months. We will also open a 200 liter facility in San Diego and that will provide us the opportunity to have significant capacity and again lower the cost.

Speaker 2

And then I think slightly underappreciated is the fact that when those two facilities are running efficiently and we can depend on them, We will close at least 1 of the 25 or the 45 liter facilities in San Diego and the cost associated with that The savings associated with that is material. And so that's the plan and that should all happen here. As we get into the 1st part of 2022 Or 24, we should start to see material that's been produced in these lower cost facilities and that will enable us to get into this 80 ish percent range that we've been talking about for quite a while. And it is also David a revenue story, right? I mean, obviously, We need more revenue in order to be able to make more material to have a lower gross margin, but that I think is obvious to everybody.

Speaker 2

But that's the cadence of what we're doing here.

Speaker 4

Okay, thanks. If I might just sneak in a follow-up, why are you continuing to invest significantly in ioverao?

Speaker 2

That's an easy one for me, David. Ioverao, it to me remains a Opportunity to change patients' lives. When we see what we're doing on the market and we see the response to How the product is being used in the marketplace, it truly is a game changer. And again, we've got to Be able to do the studies and provide the data that allows us to have a label that can turn the sales force on to these things. But we are seeing real growth In cash market opportunities, we're seeing physicians who are opening ioverao only cash pay Facilities on the outside of the organization, both in the U.

Speaker 2

S. And in Europe, we now have spasticity Hospitals who are using ioverao, many of these programs are quite nascent, but real. And as we do the spasticity trials and we think that that trial can be done reasonably quickly And because it's a device, it can be approved reasonably quickly as a 510 that this product in spasticity Will be a very important asset for EXPAREL and our share for ioverao for the company and for our shareholders and that is A 25 event. So that's it's not something that we have to wait a long period of time for, but we're seeing Significant interest in the marketplace, not only from physicians, but from societies and people are starting to really understand the value of cryoneurolysis. And so I think it's a fair question clearly on the amount that how long it's taken us to get going here.

Speaker 2

But I think that we're in a tipping point with where Ioverao will start to really change lives and add significantly to the value of Pacira as a company.

Speaker 4

Thank you.

Speaker 2

Thanks, David.

Operator

Thank you. One moment please. Our next question comes from the line of Gregory Renza of RBC Capital Markets. Please proceed.

Speaker 5

Great. Good morning, Dave and team. I appreciate all the color and thanks for taking my questions. Dave, just maybe for you and for Charlie, just on the revised guidance. I'm just curious as you set the full year earlier In the year and leading to where we are.

Speaker 5

Now I know you've acknowledged potentially this tale of 2 halves for the year. But are you and Charlie applying a more cautious methodology? Are there newer inputs that I think are informing the potential predictability? Just walk us through just that process and how you've really incorporated some of the new data points and how it sort of changed maybe your degree of confidence? And then just Dave, maybe broadly for you as you're commenting on that degree of optimism for the second half of the year.

Speaker 5

Just curious, if you could just build on that a little bit, maybe just put the other way, what is your level of concern that the disconnect That was that you've covered earlier between EXPAREL and the broader market can persist or maybe more relevantly that the gap can close and EXPAREL can sort of Certainly outsizing in growth here. Thanks so much for the questions.

Speaker 2

Yes. No, thank you, Greg. So when we set out the annual goal, we were looking At the expectation that procedures would be a 6% to 8% growth Analysis for the period of the year. What we saw Greg was 6% in the first quarter, 4% in the Q2. And so the Q2 is where we start to take a look again.

Speaker 2

And it's largely an analysis around soft tissue procedures. We've got a lot of data now, Greg, On what the issues are related to patients getting these elective surgeries, especially soft tissue elective surgeries And the impact of inflation is real, labor is real, mortality as it relates Looking backwards at the patients who expired as a result of the COVID pandemic. So as we're looking forward here, We've taken that 6% to 8% number down to 4% for the Q3. And then we make it up in the Q4 with something that approaches The high end of what we originally thought at 8% or in the range of 8% plus. So as we move And to the back half of the year, we do have a number of things that we think will help us close this gap.

Speaker 2

First is TRICARE. We've got a 1,000,000 patients. We are increasingly strong at the military installations themselves. And so we do see VA business picking up and the military year closes at the end of September. So for SSS and DoD, we should have a strong influence in the Q3 from the military accounts.

Speaker 2

We also have TRICARE kicking in On December 1, in the East that will largely be for EXPAREL. In the West, we expect to have a positive impact Across the entire portfolio, so that is a relatively strong opportunity for us Located in several states where we are the strongest. So there is a allocation of new business coming from those places. The new OMFS site that we or partnership that we cited in the script Is a major player and when we mirror that against the ceravodent experience, we saw that those organizations, those Dental service organizations have the opportunity to move very quickly to have their members adopt this new strategy and be educated on this New non opioid strategy. And then a modest benefit, but a benefit nonetheless from the 340B pricing, Which provides a 1% tailwind for the year and a roughly 3% tailwind as we go into the second half of the year.

Speaker 2

When we roll those things together, Greg, we are comfortable that we can meet the opportunity that we have to get into the $550,000,000 range Charlie talked about in between $550,000,000 $560,000,000 So I hope that answers your question, but please come right back if it doesn't.

Speaker 5

No, that's very helpful and Dave, I appreciate the additional color.

Operator

Thank you. One moment please. Our next question comes from the line of Glenn Santangelo from Jefferies. Please proceed.

Speaker 6

Yes. Good morning and thanks for taking my question. Hey, Dave, Not to beat this EXPAREL horse to death here, but when I look at the full 6 months sort of coming into this year, we thought we entered the year with you seemingly giving Somewhat conservative guidance and now you're taking the guidance down mid year and I appreciate the last couple of months seemingly looks better. But When you look at the first half of the year, I mean, what played out differently relative to what Would have thought, is it just that the pricing dynamic of EXPAREL versus bupivacaine and the opioids is just creating a much larger headwind Then you thought is that the primary issue here? Because it sounds like 340B, the volumes there are playing out as expected and the pricing related to that It's kind of as expected.

Speaker 6

So I'm just trying to really figure out what's gone different relative to what you thought at the beginning of the year?

Speaker 2

It's really it's 2 things, Glenn, and you're accurate in your assessment. I mean, 340B has been slightly heavier for the 1st 6 months of the year than we anticipated as we came into the year. Although net impact on the bottom line is modest, it really is the discussions we have with customers and a lot of these Based on our discussions relative to TRICARE and no pain, Where the pharmacy is being squeezed is not the right word, but it's the word that comes to mind. I mean, there's demands being made in And many of the treatment centers on cost savings and where can they save money relative Their budgets and what we hear from these folks is that the CFO and the CEO are less aware of The issues of opioids and consider opioids to be free actually because the prescriptions that they write are Filled outside the hospital under Part D, so there is really no cost to the use of opioids. And so our clinicians Don't like the way that this is being done, but really have no choice but to use the lowest cost alternative.

Speaker 2

And so they're using bupivacaine and they're Using and they're supplementing that with opioids as the only treatment option that's available in many treatment centers. And so We've seen that in the past of course, but I think the pressure on pharmacy and on hospital systems from a cost perspective has It's been intensified and so again another reason why we are So, hopefully, when we get no pain approved and as we roll TRICARE out there and as we put 340B in front of folks That we've got solutions to this cost issue that will allow us to improve patient care and opioid and offer non opioid alternatives. But We're not massively behind where we thought we were going to be. We're behind and we're restating for sure to be conservative, but we think we're in a good spot and Relative to everything that's right in front of us with TRICARE, low extremity nerve block and no pain as we get into 2025.

Speaker 6

I appreciate those comments. And so now sort of looking forward, it's I guess hard to think that anything changes in the next 18 months. So isn't this all Window dressing ahead of no pain coming in 2025 and have you started to think about how much of an impact no pain In have in 2025 and my follow-up and then I'll hop off is with no pain less than 18 months away, Does that change depending upon your view of the opportunity, does that change how you think about capital allocation priorities maybe shifting away from business development and maybe focus on focusing on repurchasing some of your own stock here in the low to mid-30s just given This seemingly large opportunity just 17 months away now and I'll stop there.

Speaker 2

Sure. No, fair enough, Glenn, so we do we have a very significant product launch around a PDUFA date of lower extremity nerve block on November 13. That brings another 3,000,000 patients to be under the protection, I guess, of a package insert. It is surprising to us that many of these situations that I just described to your first question Our result of not having a direct package insert that allows our customers, our physician customers To show to a pharmacist or to a CFO that we have a direct label for a lower extremity nerve block and that's The guys under which many of these access denial programs are built. So we cure that with a lower extremity nerve block We have some confidence that that will happen in November.

Speaker 2

So that'll be a very important launch later this year and into next year. We also do see that there are some early signs that there is recovery in some of the areas that have cost us some issue, Inflation modestly, labor modestly. The restocking, If that's not an inappropriate word for the number of patients who are now acute or chronically ill And having acute soft tissue surgeries is a result of their chronic illness. And I raised that point because One of the issues that has caused the soft tissue market to be soft is that the patients Who would have done and would have had many of these soft tissue procedures that we're not seeing expired during the pandemic. And so We do believe that the market is slowly seeing the recovery of those things coming on those patients coming back and we'll be getting more of these Soft tissue procedures as we go forward through this year and next year.

Speaker 2

So we don't believe that 2024 Is anything but a year to focus on all of the good things that are going on with lower extremity nerve block and TRICARE. It is also a year to get ready for no pain. I mean, we are talking to many of our customers about the impact of no pain And showing them the blended rate of what how important no pain will be to them. So I'll give you a specific example. We will show a hospital that 60% of their 70% of their business is outside the hospital and will be totally reimbursed.

Speaker 2

And when we do that, that the average cost of EXPAREL for these accounts it's going to be in the $70 range, which surely that's blended of course across all of their sites of care. And that makes it comparative To almost anything that is out there. The other piece of that is when we have no pain, EXPAREL or EXPAREL will be the only The 0 cost opportunity to treat pain, even bupivacaine will have a cost that will be not appropriate With EXPAREL. So that's the first part. The second part is we have a tight we have a we still have a term loan A And we want to retire that using cash.

Speaker 2

And we have a convert that comes due in August of 2025. We have the option of using cash Or stock and depending on the share price, you rightly point out that the share price is in our view inappropriately low today. We will pay that off as cash to the extent that that's possible. And we continue to believe that that's the best use of cash as we go forward. So those are our 2 priority focuses.

Speaker 2

We really have put back burner It's a slow burner for the BD opportunity so that we can address those two opportunities to delever as we go forward.

Operator

Our next call comes from Lesk Silevskiy from Truist Securities. Please proceed.

Speaker 7

Good morning. Thank you for taking my questions. Just to go back to EXPAREL, on the 4% volume growth, Can you just give us a little bit of a dynamics of what portion of that was on 340B and then the existing channels, how they perform? And then also on trends from 20 ml to the 10 lower dosage, any impact on the margin side there? And then perhaps us the latest on the Paragraph IV filer.

Speaker 7

And then I have a follow-up on ZILRETTA. Thank you.

Speaker 2

Good. Thanks, Les, so for 340B, we were running at Something that was approaching 25%. And then over the last, I guess, probably month and a half now, We've seen that come back to something that's closer to 20%. So we think some of the activities that are going on externally outside the company And some of our own internal activities on appropriateness of 340B pricing are having some impact in the marketplace. And so, I think we're on top of And so, I think we're on top of that less.

Speaker 2

I don't think that it's going to get higher than what we've In the past and I think we have some reason to believe based on our specific discussions with many of the people in the marketplace about 340B pricing And some of the activities that are going on in Washington that 20% our initial belief of conversion was appropriate. We also it's been slower than we thought, but we are seeing new Customers, meaning 340B Hospitals, who never purchased EXPAREL before, buying EXPAREL or purchasing EXPAREL now. And when you look at those accounts, there is a material portion of those purchases that are not being purchased under 340B. So there is some benefit to the overall franchise of selling the drug at a discount for a portion of those patients and also having the benefit of those sales outside of 340B pricing. So that would be number 1.

Speaker 2

Margins on 10 ml versus 20 ml less, they're about the same. We've taken a couple of price increases on the 10 To try to normalize the procedure value of 4 days of pain control, so that the 10 ml obviously the revenue It's lower for a 10 ml versus a 20 ml, but the margin associated with the 10 ml actually works out to be slightly higher than the 20 ml. So it's not half. It's better than the 20 ml on the same procedure, But the total revenue is materially less, if that's an answer to your question. I think that's what you're asking.

Speaker 2

And then last, A paragraph 4 update is pretty easy. There really is not much. I mean, since we had the Laxman hearings, we really don't have Anything new to report to the marketplace on any activities here It's just slow going in terms of what's required in order to meet the demands of a 340B filer are Slow to progress. And so things are sliding backwards as timelines are not met. Not by us.

Speaker 2

Very helpful.

Speaker 7

Got it. Very helpful. Thank you. On the ZILRETTA front, what is the latest progress on moving into specialty pharmacies? And what have been some of the adoption trends from naive patients versus those on repeat dosing?

Speaker 7

And I'll stop there. Thank you.

Speaker 2

Yes. Thanks again Les. So we are moving towards specialty pharmacy. There's a number of reasons to adopt this. The market continues to be unsettled and especially what we saw in June, where one of the more popular HAs From an ability to generate profit perspective took a pretty good hit on pricing.

Speaker 2

So the market is really cautious, I guess is the best way to put it about buying a lot of stock Because the price changes every quarter and if they've got a lot of inventory they have to try to use it up while they still have The old price and they don't have a lot of time associated with that. So there's some drivers in the marketplace that frankly didn't exist Before these issues have taken hold. And so what we see is Physicians would tell us that they have a lot of resource tied up in prior authorizations and cash Tied up in inventory and moving to the specialty pharmacy leads both of those issues and we can work with them then in some things around Customers who would like to be buy and build, but when you have a product acquisition cost over $500 that's a difficult task For these especially these small orthopedic procedures, so we can operate in a different way With the specialty pharmacies than we can with the physician accounts themselves on being able to address the customer needs in this marketplace. So That's this is in progress, Les. I don't think we haven't fully optimized where we're going with Zalready yet, but we expect to achieve that as we get into the later parts of this quarter.

Operator

Our next question comes from the line of Balaji Prasad from Barclays. Please proceed.

Speaker 8

Hi, good morning. This is Shao on for Balaji. Thanks for taking our questions. In our recent conversation with you back in June, You mentioned that there was a positive structure change in the demand for volumes. And how do we reconcile that with the low volume for I'll now explore with those comments.

Speaker 8

Thank you.

Speaker 2

Yes. What we saw is, I think what we were talking about was that we were seeing strength in the back half of June and that's accurate. We were. Unfortunately, we were coming off a well, not unfortunately. I mean, the fact is that April was very soft.

Speaker 2

And as we got into May, we saw some normalization back to what we thought was going to be the case for them every month in the quarter. And then we saw strengthening in the back half of June. And I think that was the reference. And so when you blend those things together, You get to what we reported as a 4% procedure increase and that's the cadence. And so both things are true.

Speaker 2

We did see strengthening in the back half of June and we had 4% volume growth, but it was a recovery from what was really a very Soft April and then recovery in May and then increasing strength as we went into the back half of June.

Speaker 8

Got it. Very helpful. Thank you.

Speaker 2

Thanks,

Operator

Our next question comes from the line of Rohit Bahashan from Needham and Co. Please proceed.

Speaker 2

Hi, this is Rovid on for Serge. Thanks for taking our questions. Why do you think we haven't seen EXPAREL benefit from the Proved procedure volumes that we've seen with medtech companies and hospital companies report in the first half of twenty twenty three? And then also can you provide an update on the European launch of EXPAREL and how that's going? Thanks.

Speaker 2

Sure, sure. Thank you. I'm sorry, I didn't catch your first name. Sorry about that. So I mean the answer is, I'm glad you asked actually.

Speaker 2

So the only two procedures That are growing and this is true of 2022 and it's also true of the 1st 6 months of 2023 our foot and ankle. I'm sorry, Jesus, knees and hips. And we have participated in that. And our knees and hips as a growth driver are in line with what you would have heard from the med tech companies. The Issue for us and relative to other ortho procedures like rotator cuff and Foot and ankle and hand and wrist and things like that, those procedures are also soft enough that actually ortho overall is down.

Speaker 2

The marketplace for 2022 and the 1st 6 months of 2023 is actually down year on year using IQVIA data. And that is especially true of soft tissue. So the answer to your question, the specific answer to your question is we are participating In hips and knees, mostly knees by the way. Knees are the primary driver. Hips are growing and those are the only 2 as I said earlier.

Speaker 2

And we have a presence in all of the rest of ortho, which is not growing in line with hips and knees. And 45 plus percent of our business is actually in soft tissue, which is not growing at all. In fact, is Has brackets around it for all of 2022. And again, we only have data by our data for IQVIA is on a 6 month lag. We only have January as it comes to this full report of site of care and procedures by site of care.

Speaker 2

But in that report, you can see very clearly that hospital procedures are down And soft tissue is down in that environment. Everything is down in that environment. And that soft tissue is down in outpatient And so it's because our procedure base is much broader than the Med tech companies that we have a slightly different profile as we look at how these procedures are done and how the cadence of procedures are done. So that's the first part. The second part is Europe.

Speaker 2

Europe has been slower than we thought. They've had a lot of Issues around the war and some of the negative implications in Europe of how the importance of getting new things approved on hospital formularies and Things like that. I would tell you that recently we've had significant progress. We've had several major Medical institutions approve EXPAREL and ioverao for use In the last 6 weeks, several spasticity centers of excellence Have approved ioverao for use in Europe. And we've just in the last 14 days Have won a 52 hospital chain and a number of major orthopedic hospitals In Europe, especially in the particularly in the UK, but in many other European countries.

Speaker 2

And I would say, we have ioverao actually questions coming to us from a number of places in Europe that we have not Staffed with individuals, but when folks are going to their national meetings, we're getting the calls wondering Where they can train, where they can travel to be trained across Europe on ioverao and of course that gives us an opportunity to talk to those same folks about EXPAREL. So Europe was slow, but I think now we are catching up. And actually, we expected we're okay in Europe For the next 6 months and for the into 2024. So I appreciate the question. Thank you.

Speaker 2

Thank you. Thank

Operator

you. One moment please. Our last question comes from the line of Boris Peaker from T. D. Cowen.

Operator

Please proceed.

Speaker 2

Great. Thanks for taking my question. First, I just want to know, So bupivacaine has been on the FDA drug shortage list, I think for a while now. I'm curious what you're seeing in terms of bupivacaine availability And how that may be impacting EXPAREL? And my second question in terms of the lower extremity nerve block, have you discussed with the FDA if you should be expecting an Advisory panel on this or not?

Speaker 2

Thank you. Yes. Thank you, Boris. Our experience with bupivacaine is that it had a much greater impact on The pumps that it had on EXPAREL and the issue as we see it in our major EXPAREL institutions is not a Tution's is not a bupivacaine shortage. It's a bupivacaine shortage of certain package sizes and certain dosage and certain strengths.

Speaker 2

And what I mean by that is, if they have a protocol for example that Says that they use 10 cc's of 0.25%, but they don't have 0.25%. Then what they're concerned about is that there's going to be inappropriate administration when somebody just grabs bupivacaine and doesn't when somebody just grabs bupivacaine and doesn't really take the time to understand that all of the dosage strengths that Were previously available, are now available. So the net net of that is that I can't tell you that I think there's any material benefit to EXPAREL Because of the cocaine shortage, because the in the pharmacy, obviously, they would just grab a different dosage strengths. And frankly, If there is anything they're making under 797 in a sterile environment, they would use the cheapest available form in any case, right? It's more the floor stock and when people are Stuff out of the on-site machines that they're worried about whether the nursing staff and the physicians are going to be able to follow the protocols that are written Because all of the dosage strengths aren't available.

Speaker 2

On the second piece, we've had some extensive discussions with the FDA and we do not expect There was going to be an ad count. Great. Thanks for taking my questions. Thanks, Boris.

Operator

Thank you. At this time, I'm showing no further questions. And I would like to turn the conference back to Dave Stack, Chairman and CEO, for closing remarks.

Speaker 2

Thank you, Gerald, and thanks to all on the call today for your questions and time. We are starting the second half of the year in a positive momentum and we are excited about the opportunities that are ahead of us. Throughout the balance of the year, we will continue to work to transform the lives of patients who need non opioid pain management, which is an ongoing play throughout this country and around the world. Next up for us is the Wedbush Conference in New York. Thank you all and stay well.

Speaker 2

Goodbye.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Powered by Quartr