Pacira BioSciences, Inc. (PCRX) Earnings Call Transcript & Summary

Good morning. I'm Chris Schott from JPMorgan. And I'm very pleased today to be introducing Pacira. From the company, we have Dave Stack, the company's Chairman and CEO. We're going to have Dave make some opening comments, and we're going to go to a fireside-chat format from there. So Dave, welcome back to the conference and look forward to the presentation.

Great. Thank you, Chris, and thanks to JPMorgan for the opportunity to spend a few minutes with you folks today. Standard disclosures for a public company. Just to confirm for folks that are not -- have not been close to Pacira, our mission and vision is to provide an opioid alternative to as many patients as possible. An interesting observation is that once our KOLs use our products that are available to eliminate osteoarthritic pain, we have a different conversation with the patients and they begin to request different approaches to enhance their lifestyle. So if a patient doesn't have chronic pain, then they come back and say, "I think I can play golf now. Can you do something about my ACL? Can you do something about my rotator cuff, et cetera?" So our mission statement and our vision statement have moved to the global leader in nonopioid pain alternatives and regenerative medicine. I'll start off with a slide on leverage and on cash. I think it is a significant differentiator for Pacira. Just to time-point a couple of numbers, EXPAREL grew by a little over 23% last year in the United States. We've disclosed in the public markets that we expect that, that type of performance is what we expect over the 5-year planning period. And we've added an asset that we also think is incredibly important to the same physician treatment population as well as their patients. So what's really happened here is with a nerve block indication, we've been able to expand our treatment group into the anesthesiology community through nerve blocks and field blocks. And that turns out to be an incredibly important leverage for the company and for the product. In addition -- and I'll talk more about that in a minute. In addition to that, we've done a number of studies where we believe there are underserved -- specifically underserved populations where opioids are the standard of care and where we can do much better. So the point of this slide is that we will be generating significant cash, and then we can invest that cash in other products that are of great interest to our anesthesia and orthopedic and sports medicine customers. So a couple of things about EXPAREL. This is the only product that has a broad label for infiltration for field blocks and for brachial plexus nerve blocks. I'll talk more about how we intend to extend that label. But what -- the importance here is that this allows us the opportunity to work with different customer groups to, in a very flexible and patient-oriented way, develop protocols called enhanced recovery after surgery protocols to address chronic pain and postsurgical pain but also to do that in a prescribed way through what's called enhanced recovery after surgery protocols that allow us to be able to train against those protocols to have a much higher quality associated with the outcomes from the appropriate treatment, especially with an anesthesiologist who is using our products under ultrasound guidance in a operating room setting. This is also the only product in the United States that has Level 1 evidence that's ever been done, peer-reviewed Level 1 evidence, that you can do a painful surgery such as a total knee arthroplasty, a C-section or a rotator cuff repair with no opioids. And with 20 million Americans in recovery today, we think that's an incredibly important differentiator that allows folks that are in recovery to still have a surgical procedure without the worry of having an opioid. And to date, we've treated about 6.4 million folks in the United States. So what's the sponsor? How are we growing by over 20%? And why do we expect that to continue? In April of 2018, we got a nerve block indication for brachial plexus nerve block. And this is a procedure where an anesthesiologist in what's called a block room can perform a procedure where under ultrasound guidance, the drug is put in close contact with the brachial plexus, with the sensory nerves and turn the pain signal off for several days. So the patient now has got several days of pain management on board and has not had any incision, has not even been in the operating room. And so the paradigm of how that patient responds to anesthesia, comes out of anesthesia, mobilizes after their surgery is quite different. And we've been able to show in this brachial plexus block study, for example, that there was a 78% reduction in opioids required to achieve pain control. 13% of these patients were opioid-free, and we had a p-value for pain management with a 78% reduction in opioids. So you can see then that these patients can mobilize more quickly, and they -- in the trial setting, they actually left the hospital in a couple of hours, which started our anesthesia relationships moving in a very different direction, questioning why these patients, in many cases, were actually being treated in the hospital in the first place if they were only there for a couple of hours and they were being discharged on Tylenol. To make the point, in 2019, over 50% of the patients that were treated with EXPAREL were treated in an -- outside of the inpatient hospital environment. So you can see that rapidly, we're moving in that direction. That was of great interest to the anesthesia groups, the big anesthesia groups in the United States, who understood then that they could make a significant contribution to patient care by using this low-opioid treatment therapy, low- or no-opioid treatment therapy, and allowing the environment of care to change from an inpatient procedure to an outpatient procedure with significant cost savings, which, of course, was very important to the payers. So when we look forward, we believe that the anesthesiologist using a nerve block or a field block of EXPAREL and moving patients to the outpatient environment alone is worth something in the low teens in terms of compound annual growth over the 5-year planning period. In addition to that, we've identified a number of places where we think there are specific opportunities to enhance patient care with low or no opioids. The first is a study we call PLAY. It's a pediatric trial. The trial is completed. We're in the process of putting an sNDA together. This will be for package insert inclusion. It's for patients from 6 to 17. And it's hard to believe in some circumstances, but there is no postsurgical pain product available in the United States today other than opioids. And so there is great interest in the pediatric surgery community for a nonopioid alternative. We'll file the sNDA sometime early this year. If we get priority review, we would get approval in the third quarter. If not, we'd be approved the end of this year and would be the focus of a national meeting in 2021. The second trial is a STRIDE trial. As I mentioned, we have an indication for an upper extremity nerve block. This is for a lower extremity nerve block. This will be a 20 mL trial. The upper extremity is a 10 mL trial. What we're showing here is that the kind of efficacy and the kind of patient improvements that we saw with an upper extremity nerve block is absolutely reproducible in the lower extremity. The real target interest here is that in a total knee arthroplasty procedure, the orthopedic surgeons would love to have a package insert indication for an adductor canal block in addition to a periarticular injection with EXPAREL to improve really the ambulation and the mobilization of these patients in the immediate postsurgical environment. That trial is ongoing now. We expect to have a data set in the third quarter and a study report in the fourth quarter. We'll file an sNDA next year with an approval sometime late next year or early in 2022. And that will also be for package insert inclusion. The third trial I'd highlight here is the C-section trial. Using opioids for pain control and C-section has all kinds of obvious issues both to mom and to the baby. So this is a trial where we compared an epidural with morphine, a morphine derivative against a TAP block with EXPAREL. And the results were that we could have equal pain control with no opioids. So the first trial demonstrated that you could control pain with a modest amount of opioids used in the EXPAREL arm. The second trial showed that you can do opioid-free C-section surgery. Again, of great interest to the medical community, to the mothers and a number of the websites and the moms against opioids and all of those web-based organizations have great interest in this data becoming available. We expect the first study to be published in AANA here any day. And the second study, the opioid-free study, the society for OB anesthesia called SOAP has asked us to hold that data for their national meeting, which will be in May of this year. So we think that each one of those opportunities is $100 million on an annual basis over the planning period. So again, you can see that we have a base -- a very aggressive base business and then a number of important opportunities as we grow this product forward. We also have a couple of registry-type trials addressing medical needs in the marketplace, one for spine surgery and one for hip fracture surgery. We have a 3-year now relationship with Johnson & Johnson. It's been incredibly important to us. We wouldn't be where we are today if it wasn't for that relationship. As we move forward and Pacira is more involved in the anesthesia side of the business, Johnson & Johnson takes care of most of the orthopedic procedures. They also provide a wide base of educational opportunities. And then a couple of areas of specific interest are they are the only people right now that are using or selling EXPAREL into the spine marketplace. And you can imagine that, that will be important because in the pediatric study, one of the indications of interest is scoliosis. And they also cover the sports medicine interest. And so when we get the lower extremity nerve block, a lot of what's related there is ACL repair, meniscal repair, foot and ankle surgeries. And so the partnership has worked well. We expect that, that will run through the conclusion of the agreement at the end of 2021. We've added a second asset to the portfolio, a very interesting technology. We acquired this company in April of last year. It's a cryoanalgesic product. To our knowledge, this is the only totally mobile cryoanalgesic product, that's our asset, that's available in the market today. That picture on the right is an actual unit. And just above the base there, you can see it's what's called a Smart Tip. There are a couple of Smart Tips that are available for different applications of this product. But in short, you'll see the depiction here of Wallerian degeneration. So what happens here is this is 3 27-gauge needles on -- with 9 millimeters in length. You insert these into these -- through the skin to get to close contact with the peripheral nerves. When you push the button, you get 10 seconds of normalization of the environment, 40 seconds where the temperature is lower to minus 80 degrees centigrade and then 10 seconds of normalization. So the probe can be taken out and reinserted into the skin. The effect of that and the interest in the Wallerian effect is because we don't kill the nerve. We have an immediate effect where once frozen, the nerve cannot transmit the pain signal. And so it regenerates slowly over time. The effect is immediate, as I said, and it can be used for chronic use, and we have patients that have had these now up to 10 times. So they have gone 5 years to extend their ability to not have a total knee arthroplasty. We've got 2 strategies as we take this to launch. We'll actually launch this coming out of our national meeting next month. The first is in association with a surgical procedure where you would use it in advance of a TKA, for example. We're calling it pre-habilitation where you could use it up to 90 days before the surgery is planned. If you want to take a patient off of opioids, if you want them to lose some weight, if you want them to just get back in the gym, we can take the pain signal away so that there will be no excuse from a pain perspective as to why that patient wouldn't be a better prepared patient for the surgical theater, use EXPAREL to control the pain storm during the surgical procedure. And then of great interest to me, having been a patient and will be a patient again a month from now, is that we expect that you'll be able to have a much different physical therapy experience because you will still not have anterior pain. Hopefully, these patients will sleep better and then be better prepared for physical therapy. In fact, at AAHKS, we had doctors telling us that we should have a PT app because they were moving patients through physical recovery so quickly that they didn't feel there was a need for many of them to go to a rehab center at all. The second is of great interest, I think, to most of us in the room, for chronic OA pain. This is not associated with the surgery, but a patient who wants to get through the summer, wants to play golf, wants to play tennis, wants to hike with the grandkids, wants to go on a family vacation, all the different things we've heard in the marketplace, you can turn off the chronic pain signal for up to 6 months. And as I said, it can be repeated. And so we've given patients and their health care providers the opportunity to be in control of when they have this TKA surgery, which is quite a traumatic surgery, as I'm sure you all know, with an extensive recovery period. The tagline is, "Stop pain cold." No drugs, no opioids, no surgery, up to 6 months of pain management. So I mentioned that we're generating cash. We expect to be quite prolific in that effect. And so our intention and our aspiration is to use that cash to work with our key opinion leader folks in anesthesia, specifically in sports medicine and spine, to acquire assets that are of great interest to them, same patients on their journey through osteoarthritis, same patient -- or same physician populations largely in 2 distinct strategies. One is for pharma where we extend the pain platform into the future, looking at things like recalcitrant pain, neuropathic pain. Any place that you have peripheral nerve pain, we can address with a pharma product. And we've got several of those on the short-term horizon. The other is in devices. I mentioned earlier that when patients don't have pain, they have a different question of their health care provider regarding how they can improve their lifestyle. Here, we're looking at things like ACL repair, meniscal repair. There are technologies now where we can grow bone and grow cartilage. And on the pathway that's up on the slide, you can get the idea that we can turn the -- we can have an anti-inflammatory, turn the signal off, keep the white cells from coming into the injured space. We can replace -- or I'm sorry, we can repair ACLs rather than replace them. And these are all of intense interest not only to the customers, to the physician customers that we have, but our discussions with the payers around the opportunity of EXPAREL to develop a suite of products that can then be worked with and trained on is of significant incidence to the payers. We also have a DepoFoam-based pipeline. The interesting thing about DepoFoam as a delivery technology is we believe it is the only delivery technology available in the United States today that is safe enough that it can be used in the intrathecal space or the subarachnoid space. So we're using a isomer bupivacaine attached to DepoFoam in low doses as a spinal analgesic. And we believe that we can provide several days of pain control with 3 or 4 mLs of a DepoLevobupivacaine product in a spinal, a very simple procedure for a anesthesiologist to do. So in closing, and Chris, I think I'll leave this slide up as we go through the Q&A discussion. We've got a busy year. We intend to grow rapidly over the planning period of the next 5 years. And we're really in a very good spot given our opportunity to not only address the national health emergency and the opioid crisis but to do it in a way that greatly enhances the lives of our patients and is of great assistance to the clinicians who we become very close to as we work in the OR with these patients and get to know them and their patients on a day-to-day basis. So I thank you for your time and attention.

Great. Thank you.

So thanks for that, Dave. And so I think what we'll do with the last 5 minutes or so of this presentation is start some Q&A, and then we'll continue it across the hall in the Georgian Room. I guess maybe first starting with EXPAREL, where are we right now in terms of drivers of growth as we think about the nerve block opportunity versus the traditional infiltration business?

We have moved on from infiltration largely. But there's a couple of key aspects to that. Infiltration is by definition done at the end of the procedure as you're closing the wound. It is done by a surgeon who does not get paid generally. And the opportunity to move to a nerve block that is routinely done at the beginning of the procedure by an anesthesiologist under ultrasound guidance and they do get paid for the procedure has made the move relatively easy. The bigger aspect of that, Chris, as you move to an outpatient environment, a couple of 3 minutes at the end of a procedure, if you're doing several in a day, is meaningful. And so the ability to be able to have greater control through these ERAS protocols of how long this is going to take and what the patient throughput looks like is an important aspect not only to the sites but to the payers.

Yes. And on that nerve block opportunity, that seems like a nice -- clearly a positive trend for you. You got the label in 2018. What inning of the launch would you say we are at this point in terms of as you think about the direction and the various settings that this can go over time?

Yes. One of the aspects of what we do is these products are technical in nature and the surgical technique or the administrative technique that's associated with the use of these products is very high. So there's a -- by definition, there's a lag in most of the efforts that we have. To answer your question directly, we're in the early innings. Regional anesthesia is very much desired by the anesthesia groups. But there is an issue where we train against these protocols that have to be developed by them, and then they work their way into the hospital systems as a new way to do business to improve patient care and patient satisfaction. So 1.5 years, coming up on 2 years, we're really still in the very early innings for both regional anesthesia and nerve blocks with EXPAREL as well as the ability to move patients from inside the hospital institution to out.

Okay. Great. And as a next question there, just thinking about growth drivers for EXPAREL, what are we seeing in the ACS setting? And how much of the growth is coming from ACS at this point? ASC, sorry.

Non-hospital growth is very quick. So what happens in the marketplace is it's largely driven by the payers. And so you would move CMS, for example, who controls really the broad strategy of reimbursement, would move a product from an inpatient-only procedure to a hospital outpatient procedure to an ambulatory care procedure. One of the reasons that we're so bullish on 2020 is 2 years ago, they moved the total knee arthroplasty to the hospital outpatient. As of 2 weeks ago on January 1, TKAs are now paid for in an ambulatory care environment with a significant opportunity for both commercial payers and government payers to have a better -- a lower cost structure in this reduced cost environment. Seven spine surgeries have now been approved for ambulatory setting. You can see these programs are moving quickly largely because you can treat large, painful, profitable procedures now with an opioid with an EXPAREL nerve block. And 4, 5 years ago, there was a stagnation in the ambulatory care world because the profit margins on most of the procedures that were being done in that environment were quite modest. Now when you can move procedures where the physician can actually generate several thousand dollars and the insurance company can save several thousand dollars, you have a very different environment, which is what's fueling the rapid growth. So again, pretty new, a lot of these procedures just coming to the marketplace for ambulatory care, but importantly, being driven by the payers.

Yes, that makes a lot of sense. As we look out to 2020, we're going to see a competitor enter the market. How are you viewing that landscape? And talk about your differentiation versus the new entrant that is coming.

Yes. So I mentioned in the presentation that EXPAREL is a very patient-friendly, customer-friendly technology. We will be the only product that will have a indication for a nerve block and a field block. That is where the vast majority of our growth comes from. That is the environment of the anesthesiologist who we -- is a very thoughtful customer and provides high-quality pain control for these protocols that we're developing. We also believe that we have a very safe technology against other technologies that themselves have some neurotoxicity and some toxicity issues. But then this is a cholesterol in triglyceride and water component. We can put it almost anywhere, and it just falls apart. So we don't have any safety issues at all. We don't have to use an NSAID in order to have our product work. We've had 1,000 peer-reviewed journals around EXPAREL. And as I stated earlier, we've got a little over 6.4 million patients in the safety database now. So we're in very good shape. It's a very big market. I think there are room for some competitors in some of the more nichey kind, the small incision marketplaces, but I think I like where we are.

Yes, great. Maybe last question here for the last 10 minute or so. Bigger picture, you've talked about top line growth in the high teens over the next 5 years. What does the expense side of the P&L look like as we think about that growth?

Yes, thank you. I should have been more explicit about that. So when you look at high-teen growth, what we're -- what our 5-year plan says is that our OpEx would grow by 5% or less. That is part and parcel to the other discussion that we had is as we move away from a rep having to stand with a surgeon and get -- and have that surgeon use our product 4 or 5 times a day, when you move into a block room environment with an anesthesiologist that can do a brachial plexus block in 3 or 4 minutes, that anesthesiologist would have the capacity to use 40 or 50 vials of EXPAREL. So our needs in terms of the field force are more built around education than they are around what you would think of as a traditional rep. And so we will grow modestly and still have the revenue generation that is forecast here, which is added that to the fact that we'll have roughly 10 points in gain from gross to net margin over the planning period from bigger facilities that are coming online, both in the U.K. and in our facility out here in California. And you have a very interesting opportunity to grow rapidly at the EBITDA line. We will not be a taxpayer probably until 2022. So this is an unusual story from at least from my experience.

Yes, great. Well, let's keep the dialogue going across the hall. But thank you very much.

Great. Thanks, Chris.

Okay. Great. I think we're ready to kick off the Pacira breakout session. I'm going to start with just a few questions, and we'll open it to the audience from there. So I know in the main session, for those who caught it, we did -- Dave did a presentation. We did some quick Q&A at the end. I will just continue along with some of the -- some questions on EXPAREL then move over to ioveraº and kind of go from there. So I guess another one. The final CMS rule, I think, didn't unbundle EXPAREL in the outpatient setting for 2020. How should we think about that dynamic as we think about the business?

So it didn't unbundle EXPAREL in the hospital outpatient, right? So we have -- we are paid for, under C9290, get $1.25 a milligram by CMS in the ambulatory environment. Ask me the same question when we get to ioveraº because I have better news there.

Okay. Sounds good.

And the absurdity of their position to me is just almost beyond belief. They said that they didn't give us reimbursement for EXPAREL in the hospital outpatient department because there was no evidence that if they did, it would improve access to the product. It is absolutely true that we grew quickly last year. It is also absolutely true that we have a very modest market share there. And so to make the attestation that reimbursement wouldn't improve access is just bizarre, but it is what it is. And so we -- the way we're working through the paradigm, Chris, is use ioveraº in this pre-habilitation weeks to months before your surgery. It is reimbursed at roughly $1,900 for that procedure in the hospital outpatient setting where you wouldn't want to do boot camp in these serious surgeries anyway in most cases. And then at the end of the pre-habilitation, do your surgery in the ambulatory care environment, which is where most of the payers are going to force you to do it anyway, where you would get reimbursed for EXPAREL and have the best of both worlds.

Okay. That makes sense. Is there a chance to go back and have that decision reversed just so...

Oh, we're going back for sure. But if we didn't get it last year, the way we're growing in the hospital outpatient department, I don't want to deep-six myself here, but it's hard to imagine, unless there's a change of personnel, I don't like our chances that it should be completed...

Okay. Victim of your own success there. So talk about the J&J relationship moving forward. It seems like there's some opportunities with the new indications that would be helpful. But at some point, does the company outgrow that relationship as more of your growth comes from nerve block and things like dental and...

There's really -- people just -- people gravitate right to the sales force, right, as the primary driver of the relationship. In fact, it's important, and I'll get to your -- the specifics of your question in a second. But where J&J actually helped us more than that in the early days was their training center in Raynham where they train 10,000 surgeons a year, it's like a small college campus. It's is not anything that a company of this size, of this era could ever even aspire to, right? So they've helped us a lot there. They've helped us in our Washington, D.C. initiatives. They've helped us with big academic centers where they own meetings and have provided us access to things that we never could have done any other way. In addition to that, there are -- there is a critical mass effect of them working with the orthopedic community, especially with the number of -- it's over 3,000 folks that are involved in the relationship. And they have intense relationships with spine surgeons, sports medicine surgeons. So at the end of the day, the way we view this is they kept us the -- continuing through the relationship meant that we didn't have to disrupt our relationships with the anesthesia community and having, from the last presentation, talked about the importance of nerve blocks and plane blocks to the future. So we really have another 2 years to watch the marketplace mature and watch these procedures move from inpatient surgery-driven to outpatient anesthesia-driven. And we'll be in a much different position to step into their shoes 2 years from now than we are today.

Okay. And kind of how do I think about the P&L impact as we -- to the extent that you were more on your own, I'm assuming there's some additional SG&A that would come on the back of that, but then the royalty changes. So how do -- just help me think about that.

So we're -- well, we're -- so we're hiring a dedicated -- small dedicated sales force for ioveraº now. And so we are not sharing the orthopedic use of ioveraº with any partner. So we are starting to reestablish that. From a strategic perspective, we're starting to reestablish that relationship with the orthopedic community and with the sports medicine community through a second product, right? And we are also adding 15 people to the organization just to support all of the growing uses of the product in different environments. So for example, an OB anesthesiologist generally in a major center is a distinct section of the hospital and a distinct customer base. So we have -- we are creating more customers in verticals that are going to require some level of expertise. So we'll grow this year. Next year, the effort will be around putting folks that are specifically in sports medicine and spine and places that we depend on Johnson & Johnson for totally today. We're building out a training center in Tampa. It'll be modest relative to the Johnson & Johnson training center, but it'll be appropriate for what we need to do to train folks on our devices and on our products. And so again, if you look at the ROI per a unit of sales force activity against an anesthesiologist versus a surgeon, you could see why we would be benefiting greatly in terms of the leverage that's being created by moving into that more advanced environment.

Yes, that makes sense. Just pivoting a little bit, as I -- actually one -- maybe one more on EXPAREL. Potential for generic competition here, just what would the pathway look like for the product?

Almost impossible. I mean a rational person would probably not even try, and I'll step through it. So first, this is sterile cold chain manufacturing. We can't use heat, and we can't use filters. And so we have to make it sterilely, and we have to vial it sterilely. It doesn't sound like much of a chore, but actually, it's harder to vial it than it is to make it. And so there is a hurdle there. We don't know of anybody else that has commercial scale, make -- capabilities to make multivesicular liposomes, which is what the basis of DepoFoam and therefore EXPAREL and all of our products is. And about 2 years ago now, the generic division of the FDA came out with guidance on a generic multivesicular liposome. We were surprised by it. So I can't tell you what the nidus of that activity was, but the only multivesicular market or the only multivesicular liposomes in the world are all made by us. And so clearly, somebody was trying to accomplish something. What they, in fact, did is made it very difficult, if not impossible, for a generic to come along. In the generic guidance, you have to have a exact replica of EXPAREL. Particle charges, the way the APIs move back and forth between the lipid layers, the constitution of the lipid versus the triglyceride components, how the product is released, and you have to provide that data to them at commercial scale. So somebody is going to have to spend hundreds of millions of dollars on the bet that they can do that. The reason that I'd say I wouldn't even start if you were doing a thoughtful evaluation is, at the end of that guidance, it says that you have to match -- except for excipients, you have to match the EXPAREL exactly. We released against batch specifications, as you would expect, and we validate those specifications with an assay. We've never told anybody what those specifications are, and the assay is proprietary. So it's going to be the ultimate card game. If anybody tries to go there, I just can't see how it would even be positive.

Yes. Challenging that.

So I'm not saying there wouldn't be another multivesicular liposome that somebody could develop over 7 to 10 years, but I don't think you'll ever see a generic EXPAREL.

Okay. Helpful. Pivoting to ioveraº, reimbursement has been one of the hurdles for the product. Maybe first talking about the CMS side of things, can I talk a little bit about how we think about the impact of the 2020 physician fee there and what that means for the product?

Yes. So just so everybody knows how the game is played here, we acquired this in April. By April, you've already had all of your documents, and everything is already in the hopper, so to speak, for the CMS approval for the next year. So we had no opportunity to impact on 2020 at all. And so our reimbursement efforts are nascent, starting, we have all the people in place, and we're doing it with all the legal firms, et cetera, but we had no impact on this at all. So this was largely done by folks who use heat to ablate nerves, which is why you have a very good reimbursement for hospital outpatient because those are all fixed capital equipment. So you have to bring the patient to the unit, right? The reimbursement in the ambulatory care center and in the physician's office is not yet appropriate to cover the cost of the tips. So our endeavors this year will be to change that. But it has given us the opportunity, just if -- add a little bit more color to your question. So the company we bought was selling tips at a loss. Hard to imagine how long that could take, but that was what they were doing. So we've had to normalize the pricing structure and have a robust strategy against which we can actually sell the product in a way that's appropriate for a public company business, right? So we've gone from less than $300 for a tip to a WAC price, a wholesale acquisition cost price of $600. And our best customers on volume purchase agreements can buy a tip for $450, and the tip is a single-use one-patient tip, all right. So if you have that on the table, then I mean you could understand that the reimbursement in a hospital outpatient environment is $1,900, just a hair under $1,900. The physician fee for that is $254. So the facility does quite well if they perform either the chronic pain, genicular nerve cryoablation or cryoanalgesia or if they use it as a pre-habilitation mechanism before a total knee surgery. I should add, I'm going to have ioveraº for the third time next Tuesday, and I'm having my right knee replaced on the 21st of February. So I'll be able to give you a full report the next time I see you guys.

As you think about the ramp of this product, these 2 different markets, how do you see the difference in terms of how those indications are, the presurgery versus the kind of deferring surgery kind of approach?

So the presurgery is what we bought basically. That's -- when you talk to the folks in the sports medicine and in the orthopedic community, that's what they relate to because that's what they were -- that's how they were taught to use the product, right? So that's the obvious place for us to start. And we've signed a half a dozen system agreements with big centers. And frankly, over the last several months, we've been monitoring exactly how are they executing on this procedural solution, when are they using the ioveraº relation -- in relationship to the surgical procedure. I'm sure you guys know there's windows of opportunity for the payers. Procedural solutions have to be used in so many days, plus or minus, or you pay the penalty. If you use ioveraº too close to EXPAREL, you can't get paid for both, then we got to figure all that stuff out with these centers. And so I would say for '20, the majority of the revenue will come from the surgical protocols around the use of these 2 products together to enhance patient care in ACL repair and in total knee arthroplasty. And we're doing clinical trials in both of those indications, both of those surgical procedures. The other is newer. It's -- the customer response is so strong, frankly, that we're afraid to turn the whole sales force onto it. The physicians are the -- well, I can tell you quite frankly, the last 2 times that I've gone out and talked to docs about -- and that -- this is what I do, right? I go sit in the office and talk to the patients and talk to the doctor, and some people think it's weird, but it's worked for us -- is they -- both of the guys said to me, "If you had a dozen of those in the trunk, I could use them all this afternoon." And so the first gal I saw wanted to dance at her mother's -- or their daughter's wedding. It was actually fairly comical. She said, "How much does it cost?" They said, "$1,000." She thought for a couple of seconds. She said, "Well, I already paid $42,000 for the wedding. I might just well go for another $1,000 so that I can actually enjoy it." Then about 30 seconds later, she asked me if she could drink. I said, "Yes, you can do whatever you want." But those are the kinds of ways that -- those are the ways that patients are interacting with the docs. A gentleman was -- his family had ordered a wheelchair. He was embarrassed by the fact that he was going to have a wheelchair on a family vacation in Italy, had ioveraº, barely could come into the office, walked out of the office 20 minutes later and went to Italy, no wheelchair, no nothing. I mean it's quite astonishing. Having been the patient twice, it works immediately. As you -- as soon as you freeze that nerve, you can go play and never guessed, and you couldn't get in the car a half an hour later. So we're very glad we have it. We've actually said to the sales force that if you don't meet your EXPAREL number, there will be no compensation for ioveraº. That's the only way we can control the excitement in a rational way so they don't just go chasing the new pony all over town. So those of you that have run sales forces, I'm sure you know what I mean.

I'll turn to the audience for any questions that might be out there.

In the presentation, you said we've moved down from an infiltration network kind of market. Did you mean your sales force is not -- you and like J&J kind of network and...

No. So when we launched, it was in infiltration, right, and it's a complex story. So I apologize for giving you a shorthand. I wasn't intending to misinform anybody. When you do an infiltration, the proxy here would be bupivacaine. And bupivacaine migrates from the site of injection fairly rapidly. And so it decreases the effectiveness, but it also is the great arbiter of bad practice because you can put it in a few places, and it migrates, and you get a little bit of something is going happen no matter how bad your technique is. EXPAREL works quite differently. When you put bupivacaine on a multivesicular liposome, very small quantities of drug are provided to the sensory nerve over the next 3 or 4 days, but you have to get the product in close proximity to the sensory nerve for that to happen. So in 2018, which is the last year we have good IDC-9 (sic) [ ICD-9 ] data, EXPAREL was used in 1,600 different procedures. And every one of those surgical groups wanted Level 1 evidence and a protocol for best practice administration for an infiltration into each of those. Very difficult to do. And you would then get reports that the product doesn't work as advertised because either the person hadn't been trained appropriately or just refused to take the time to do it appropriately. Juxtapose that against a brachial plexus nerve block because it's the easiest example for people to understand. You would come into an ambulatory center now. You would go in, and the anesthesiologist would talk to you for a couple of minutes. You'd have the PICC line in. Instead of going into the OR, you would go to a block room. You'd walk in. There'd be a fellow or a resident. You'd have ultrasound on your brachial plexus block. We confirm your name, the surgery that's being done, the dose that's being given. The anesthesiologist would perform the brachial plexus nerve block. You've got 4.5 days of pain control. You have an end incision, you're ready to go. Under ultrasound guidance, the quotient of quality goes way up, which is critically important in an environment where we're only going to see that patient for a few hours. And that customer now, once trained, can do dozens and dozens, tens of dozens of patients in a week. And so there are still some surgeries where we do infiltrations just because you don't have access to the peripheral nerves: posterior capsule of the knee, periosteum of the knee, some spine surgeries, et cetera. But other than that, the quality of the postsurgical pain with a nerve block far -- is far superior to infiltration. And so the nerve block indication not only gave us the opportunity to provide better care but gave us the opportunity to work through an anesthesiologist. So I'll give you the -- here's the case study example. If you do a brachial plexus block, you can do a digit amputation, and you could do a carpal tunnel syndrome. You could do a hand or wrist surgery. You could do an elbow surgery. You could do a shoulder arthroplasty. You can do a rotator cuff repair. That's all the same 3- or 4-minute procedure versus teaching a surgeon how to do every one of those.

What's your estimate right now in terms of what percent is nerve block versus I think -- it makes a lot of sense what you're saying, but what percent of the business is?

There's really no way to tell you that for a bunch of reasons. First of all, the data is not generally available. You have to piece different things together. The best practice use may very well be both, to be honest with you. So if we went to Walter Reed today and somebody said, "Well, what are they doing with our military folks when they come back from Afghanistan and they have knee surgery?" They would take 7 ccs of EXPAREL and use it in adductor canal block as a straight, just right-out-of-the-vial EXPAREL. They would take the other 13 ccs. They'd dilute it up to 80 ccs with some free bupivacaine, and they would do a periarticular injection with that 80. That's a long way of saying, we think it's -- well, it's clearly nerve block in -- anesthesiology procedures are growing much more quickly than infiltration. I would say, today, it's probably about 50-50, but that's leaning towards anesthesia in a real-time way.

Okay. Great. Other questions? I guess just the gross margin expansion. Can you talk about the gating factors and how we think about that step-up over the next few years?

Sure. I'd be happy to, Chris. So the focus of gross margin expansion really links back very closely to the manufacturing capacity. So the manufacturing started in San Diego, and we have 2 45-liter batch units there. We have now replicated those 2 45s in the U.K. So we now have 4 in 2 different locations. And we're working very diligently to bring online a 200-liter batch process in the U.K. as well. So the U.K. facility is slightly lower cost, and the 200-liter is better cost. So we've been saying for a while that we expect to get gross margins into the mid-80s, the 85% range. And we expect to be able to do that when a majority of the EXPAREL is being supplied out of the U.K. And the focus really is to get -- to free up the 45s in San Diego to use on pipeline so that we can have the best of both worlds. Dave also has mentioned that we're in the process of planning to create a 200-liter in San Diego as well. And so that would really help us with the gross margins.

Is there a revenue level of EXPAREL we should be thinking about that would get you to that 85% level? Or is this more a timing issue? Timing, okay.

Yes, timing.

I mean the more we sell, the better the gross margin, of course. That's great, and today, it's largely driven by timing. 2 years from now, it'll be driven by volume.

Okay. Great.

I should also say, by the way, if you allow me, Chris, I left this out of the presentation not by intention. We're under review in Europe. We'll launch in 5 or 6 countries in Europe by ourselves. We're also under review in Canada. And we have a very close working relationship with Nuance as our partner in China, and the CEO of Nuance is here. So I can't forget to tell him that we're happy getting -- very experienced in working in China and working with the CFDA. So we're -- we've got a very good relationship there. And it's relevant to what Charlie just talked about because if China gets turned on in any kind of a reasonable way against a reasonable label, the facility in London will be dedicated largely to Europe and China. And the facility in California will be largely dedicated to the Americas.

Okay. How -- so you mentioned priorities of future biz dev of kind of building on what you've got here. I just want to think about conceptually what your cash flow could start to look like as sales ramp. You've mentioned OpEx that's not growing that quickly. It does seem like it puts you in a position to have a lot of capital to work with. How do you think about the opportunities that you could consider with that?

So there's -- we have aspirations, as you would expect, right? And we have the luxury of having an immediate past President of the American Society of Hip and Knee Surgery on our Board, a Chairman of anesthesia, one of the New York hospitals on our Board. So we have a very intense interaction with the marketplace. We are looking for very specific things that our KOLS, surgeons and anesthesiologists are telling us they think would add great value to our relationship with them. What's happening on the other side of the aisle is many of these meniscal repair companies, ACL repair companies, you can expect that peak revenues are going to be in the $150 million to $200 million range. Just to give you guys a sense, I mean our OpEx this year is approaching $300 million. So there's no way any of those companies can launch by themselves. And so you marry together the fact that we haven't had a failed pain trial, and I hate saying this because I feel like that guy that says this guy never misses a fall shot, and sure enough, but we haven't had a failed pain trial in several years now. To give you why that's important in the community, for the folks who are developing pain assets is 50% of all pain trials fail. So you can get into these very expensive clinical trial programs, and it's pretty easy to get to the stage where you need to do Phase II, Phase III trials. But then these smaller companies really don't really have the wherewithal to do those either from an expertise perspective or from a firepower perspective. So we've got a lot of those companies coming in. We've got a number of device companies that -- we've got 50 people in the marketplace that don't do anything but educate and train. They're not sales reps at all. They're geographically dispersed around the country. We're building out these innovation labs and these cadaver labs, et cetera. So you can get the idea that if you've got a -- if you're going to replace somebody's meniscus with something that's brand-new that the docs have never seen before, the training aspect of that is way more important than the sales force expert of that. And we're the only ones that are doing this.

Great. We're about out of time. I really appreciate the conversation here.

Yes. Thanks.

Thanks so much. Good to see you.

Same here.

Charlie, great seeing you.

Good to see you.