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

Good morning, everyone. Thank you for dialing in. My name is Balaji Prasad. I cover specialty pharma for Barclays. Continuing our health care conference virtually for day 3, we have with us today, Pacira Pharmaceuticals to -- for the 9 a.m. session. And from the management team side, we have with us Dave Stack, Chairman and CEO of Pacira; Ron Ellis, Senior Vice President, Corporate Strategy and Business Development; and Susan Mesco, Head of Investor Relations. Dave, Ron and Susan, good morning, and thank you for joining us.

Good morning, Balaji. And Charlie Reinhart, our CFO, is also with us here.

Good morning.

So maybe a good point to start, Dave and Charlie, is the resounding guidance you gave recently of high-teens growth for the next 5 years. There are not too many companies where you can come out currently and confidently speak of high-teens growth to over the next 3 to 5 years, especially when you have a major competitor launching -- potentially launching in the near future. So I wanted to understand what has the reaction been to this guidance? What parts of it resonated well? And were there any pushbacks on this?

There's been no pushback. There have been questions, which is fine. And there have been some areas where folks ask for some clarity about how you got there, what were the pieces of the business that led us to be confident in that conclusion. And I'm happy to go through those again Balaji, if that helps for the purposes of this call. But essentially, just to be -- give you the executive summary, we are -- we believe that we will be the only company that will have a nerve block claim and a field block claim, which is really critically important to the anesthesia audience as the primary driver of not only the use of EXPAREL and growth of EXPAREL but also the ability to move patients from the inpatient environment to the outpatient environment. We do expect that the vast majority of these procedures in the ambulatory environment will be nerve blocks and will be done by anesthesiologists and we will be the only product that has an indication there. So you get something that is -- that drives growth. And right now, we have a very low market share. And so we see that as being something in the low teens as an agent by itself. And then add on to that the C-section data, which we're just rolling out now, the peds indication that we think will be approved at the end of this year, the lower extremity nerve block indication that we think will be launched at the end of next year and then launches in Canada and in the European Union at the end of next year and early into '21 or end of this year into early '21 and China sometime later inside this planning cycle, though. And we believe each of those is valued at $100 million over the planning period. And so when you add all these together, you can be pretty comfortable that we're going to continue to grow in a way that's similar to the way we've grown for the last 7 quarters.

That's a good summary. We'll probably pick each of these in the sections as we discuss going ahead. So just on the guidance, coming to the guidance itself, I think something -- coming -- questions that I've been getting from investors have been are more focused on what are the downside scenarios to this, kind of tells me that probably there is a fair degree of acceptance of the guidance. But when you look at the growth drivers or the competitive landscape or even the payer landscape, do you see any downside scenarios to the guidance that could play out and that we should be mindful of and keep looking at?

Only that -- I mean if we were completely surprised, and it would be a real surprise because they haven't even done any clinical studies in nerve blocks or field blocks. So it would -- I would be really surprised, capital [ R ] surprised if any of the competitors got anything in nerve block that would be -- that we interrupt the outline that I just gave. I guess the only other issue there is, it does suggest that we will have a peds approval. And remember, we've got all that data. We're filing the sNDA probably next month. And so there is no -- there are no data card flips there. And we've got a lot of data in lower extremity nerve block with EXPAREL. And so it's always possible that you wouldn't get an FDA approval. But even with those caveats, everything else that we outlined still takes you to where we guided. So I don't think there is anything there. I would say to you that the payer environment actually is a positive for us. The payers understand that moving a patient from an inpatient environment to an ambulatory environment provides the opportunity for them to save something on the order of 35% on the cost of a surgical intervention. And so you've seen not only the commercial payers but you see CMS approving needs for the first time to be done in the ASC for -- to approving hips and a series of spine surgeries to move from inpatient only to the hospital outpatient environment. So you see a normal progression, Balaji, of inpatient, most expensive HOPD you save. You don't want to say you practice, but you actually improve the practicality of doing it on an outpatient basis. And then you move to an ambulatory environment. And when you do that, you're saving between 35% and 40% of the cost of care. So the payer environment, at least as we sit here today, is actually a positive for us, not a negative.

Understood. So it looks pretty solid on the revenue side, what -- how should we interpret the expense side of the P&L as you deliver high-teens growth? And how should we factor profitability ramping over the next few years? Could you grow earnings faster than your revenues? And at what pace? Any pushes that takes place?

Yes. We haven't given any formal guidance on that topic, other than the fact that we're very bullish. The answer to your specific question, will revenues grow faster than -- I'm sorry, will net income grow faster than revenues? The answer is absolutely yes. We've got some very specific formulas that are also part of the plan around how OpEx will grow and as a fraction of revenue growth. And then on the gross margin line, as we open the 200-liter facilities, both in Swindon and in San Diego over the next 5 years, you -- we expect to see material improvements in gross margins as well. So you have an improved gross margin. You have a revenue stream that's growing as we guided and an OpEx line that's growing at a fraction of that. And so yes, it's a very positive story.

Great. Maybe just one last question on the overall business side before we get into some of the specific products. Topic du jour, COVID-19, something that we are checking with all the managements we are speaking to. Can you take us through the impact that you see or could anticipate, both from a demand perspective and a supply chain perspective, be it on EXPAREL or iovera?

Sure. On the supply chain, we have no exposure to China. And through our supply chain, we don't see any interruptions or any potential interruptions. And the delivery of all of our suppliers and all of our discussions with our suppliers around their ability to provide the materials that are required are all intact. So on the supply side, we don't have any interruptions. Our factories are all running today as they would have if there was no coronavirus issues. On the demand side, we don't see any, at least today, and this is through this morning. We get yesterday's sales this morning, Balaji. So I can tell you that as of an hour ago, this is a true statement, we don't see any difference in the surgical volume at all. In fact, on the last call, Charlie said, we were very happy with the start to 2020, and we can make the same statement today that things are unrolling slightly ahead of plan, actually, as we sit here today.

Great. Hopefully, it stays that way. And let us probably shift gears and discuss EXPAREL. When -- in your opening comments, you spoke about some of the growth drivers being the nerve block and field block opportunities. So looking at your current trials, you currently have ongoing trials for lower extremity surgeries, lumbar surgeries, trochanteric block and you also said that each of this could be a $100 million opportunity or at least some of these. So can you maybe take us through this a bit more in detail about time line or ramp that we can think of on the revenue impact?

Okay. Sure. So I'll go back to April of 2018 when we got the nerve block indication and allowed us to really sort of change the paradigm of how EXPAREL was going to be used to improve patient care and reduce opioids. So -- and I'll take 2 seconds, Balaji, and just provide a little bit of context here to make sure that the story is understandable, right? So if you go back to 2015, '16, when we had -- the last time we had a really good ICD-9 data by procedure, EXPAREL was used in over 1,500 procedures. And so the surgeons then would like a protocol that was a best practice example of how EXPAREL would be utilized in 1,500 different procedures. And you can imagine that, that just was not possible. And in many ways, some of the data that was put into the marketplace that EXPAREL didn't work was really an example that if the drug isn't used appropriately and isn't put in close contact with the sensory nerves, then the statement would be correct. This is not bupivacaine. Bupivacaine spreads, EXPAREL does not. You have to have a very good understanding of the neuroanatomy. And when you put this product in close contact with the sensory nerves, it is profoundly effective. And so what nerve block did in April of 2018 was to give us the opportunity to work with anesthesiologists who would perform under ultrasound guidance. And so we were looking at the brachial plexus. And you would inject the drug directly in contact with the brachial plexus. So the quality assurance aspect of the use of the product went way up with the use of ultrasound. The anesthesiologist, of course, is expert in neuroanatomy. And so that was what really started the acceleration that we saw after the resolution of the warning letter and all of the stuff we went through in the '14-'15 cycle. And so what happened as a result of that is you would have a customer and an anesthesiologist, and I'll just use a real example here. If you were going in for a rotator cuff and you were in a hospital that had a regional program, and that's not everywhere yet, to be completely candid, right? It's growing as ultrasound grows and as the regional anesthesiologists are trained. You would go into a black room before you had the procedure and in a matter of a couple of minutes, they would do a brachial plexus block and now you would have several days of pain control onboard, and you would not been in the OR yet. You had no incision, you had nothing. It took out all of the issues associated with the surgeon providing the pain control after the surgical procedure was done. And the anesthesiologist in many cases is actually paid for that transaction where the surgeon was in an environment where it was bundled into the DRG. So we went for -- from a modest extension to the time in the OR to actually a scenario where the surgeon didn't have to worry about providing postsurgical pain control at all. And as a result of that, a very high-end surgeon might have the opportunity to use EXPAREL 5, 6, 7 times a day. A very high-end anesthesiologist and a regional practice would use EXPAREL 10 times that much literally. And so you saw the product then start to grow. I think in the first half year, we grew by 17%, and we've been growing by 20% plus every year since then. That realization then that you could provide several days of pain control, and they saw that these patients who were brachial plexus block patients were leaving the hospital 2 hours after surgery with half a dozen oxycodone tablets and Tylenol. And so the insurers pretty quickly picked up on the fact. Well, if that's the case, why are they in the hospital. If they're not staying overnight, why are they in the hospital at all? Let's move into the ambulatory environment. And so very quickly, you saw the anesthesiologist sort of marrying the opportunity to provide several days of opioid-free or very low-opioid pain control to move that patient to an ambulatory environment. And that's why you've seen the ambulatory world take off the way it has. We see EXPAREL as the enabler of that activity. And so we reported last year, we were up, well, just on EXPAREL, over 23%. Overall, we were up 25%. And the -- that move is nascent. And so you see that basically is underpinning all of the growth going forward. And in fact, we're building out a training and education center in Tampa right now, which is where we're having this call from. And we will -- and as we sign the Envision agreement and the MEDNAX agreement and several others to follow, we are becoming the training center for regional anesthesia for the big anesthesia groups in the United States. And so it's pretty easy to convince yourself if you were sitting here with us that regional anesthesia is the path forward, and it saves the payers money. I would just make one other point. Before we had a nerve block indication, you would have to have a protocol for a carpal tunnel syndrome and for risk surgery and for elbow surgery and for shoulder surgery. A brachial plexus block does all of those things. And so with a very simple, few minute transaction with an anesthesiologist, a surgeon can do all of those things. And so the need for the company to provide best practice protocols across the whole range of everything that would happen in the upper quadrant are gone with a single indication from the FDA. I hope that's clear because it's a lot.

Great. I think that's a very detailed and very clear answer, Dave. Appreciate that. I think one of the things which I get the most is the story is getting understood better, EXPAREL and its positioning in the space and the opportunity is probably getting clearer. What many still do wonder is the competitive landscape about and we addressed those initially. So it is -- is HTX-011, assuming if it does get approved, what is EXPAREL's competitive strength? Is it as binary as many assume? And also, how should investors think about potential generic competition, the mode that you're establishing with your outreach programs with establishing EXPAREL as the standard of choice here?

So 2 very different questions. We think that the Heron product will be approved. And we think it might have some application in small room, in small wounds by infiltration, right, something like a bunion or something like that. We also think it has some very significant deficits that don't exist with EXPAREL. And so it doesn't -- I mean I frankly wish they would come and we would demonstrate in the marketplace, the limited utility of the product and then we could get on with it. I mean the overhang associated with that is just completely out of line from my perspective on what the real commercial opportunity is for these 2 assets laid against each other. On the generic front, it's a very interesting situation. So about a year ago now, the FDA put out a guidance, the generic division of the FDA, and that's an important distinction because they are actually much harder on generics than the normal regulatory pathways. They put out a guidance document on generic multivesicular liposomes. From us, it's a very interesting analysis because we're the only one. So it had to be written, either for us or against us. Actually, we're not entirely sure, frankly. And -- but what it says is it goes in great detail about the very specific nature of how a generic would have to be developed relative to how the APIs move around inside the lipid particles, the diffusion characteristics, the size of the particles, all of the different aspects of multivesicular manufacturing. And keep in mind, this is sterile cold chain. And in order to file an ANDA, you would have to be working with product that was made at the commercial scale. And I'll just remind everybody who's on the call that when a company who was asking us if we could use DepoFoam for one of their assets, they had a group come in from University of California, San Diego, and their analysis was, it would cost more than $150 million and take 7 to 10 years to be able to make a generic multivesicular liposome. But to finish the story around the FDA and why we think that, that is the best thing that they possibly could have done for us to protect the EXPAREL franchise is, in the document, it says basically that you would have to be able to prove that you were releasing a product that had the same specifications as EXPAREL. And there's 2 things about that. We've never told anybody what they are. And we measure those with an assay that is proprietary to Pacira. So -- and it's a whole series of different specifications. So how anybody could guess at what all those specifications are. And then develop an assay that would allow them to release those batches as a generic EXPAREL. I just don't see that there is any way that that's possible.

Great. That's helpful. We have around 7 or 8 minutes left. So I just want to ensure that we cover some of the parts of the business too. On -- shifting gear to iovera. So you did give out your -- again, as your 2025 guidance and goal, so how should we think about the component of price increases within this? Would it be in line with EXPAREL? And maybe just apart from price, just what are the top indications that you're most excited about? And anything else that you'd be seeing that you will be -- how will you be getting this involved with physicians working it into their practice, that would be great.

Yes, good questions. So to start, it's not really price increases. It's actually getting our price. So the asset that we acquired was all over the place in terms of price. And in fact, the sales force was allowed to determine what the price should be for the customer, right? So that's a new one for me. And so we've had to stabilize the price. And -- not stabilize. We had to bring the price to a number that was recognizing the value that iovera was providing to the health care system. And we've done that. And so the price now -- that the base price for our very best customers is $450 for a Smart Tip and the list price is $600 for a Smart Tip. And so you can see there is a fairly high variance there for big systems and things like that, that come on to purchase iovera. So the launch, the actual launch that's underway right now is iovera plus EXPAREL in a total knee arthroplasty. And just you mentioned workflow, I'll just give you a very, very quick summary in the interest of time. But think about a boot camp for a total knee and then in coincidence with that boot camp, the patient would get iovera and that would typically happen 2 to 4 weeks before the surgical procedure. And if they did that in the hospital outpatient department, it would be reimbursed. If -- then you would have your surgery, if you had it in an ambulatory care center, which is where I had mine 3 weeks ago tomorrow actually. EXPAREL would also be reimbursed. And the insurance companies would be very happy because they would save a bunch of money by having you go to the ambulatory care center. And so then the thought process is by removing the anterior knee pain with iovera, you would actually be a better patient coming to the OR because you would have had 2 to 4 weeks to exercise and all the other things that might make you the best possible surgical patient. And then you won't have the anterior knee pain that is highly intrusive around the initiation of physical therapy. And my own particular case, the last knee I did last year, I couldn't sleep. And I had iovera this time, and I would tell you until a coronavirus, I was sleeping very well. And so it makes a huge difference in how you can accept physical therapy and we start physical therapy 3 days after surgery and not having that interior pain is just a blessing. I can tell you from a customers' perspective, from a patients' perspective. Coincident with that, we're rolling out EXPAREL -- I'm sorry, iovera not associated with a TKA. So going to surgical practices, sports medicines practices, in some cases, some spine and CRNA practices, talking about patients and physicians who, for a whole range of reasons, don't want to send the patient to TKA right now. It might be a temporary situation. It might be pain post the previous TKA. In the simplest form, it's somebody who belongs to a golf club has significant knee pain, they're not playing. We use iovera. They get rid of the anterior pain and they can play golf and delay their surgery until maybe October when they wouldn't be playing anyway if they lived up north. So that is more nascent than the TKA. We have several of the big health systems in the United States that have signed up for the procedural solution of EXPAREL plus iovera for TKA. We are just rolling out the OA pain. Just to put a bow on this, the product is approved for OA and TKA and for all peripheral nerves. And so we're studying it for spasticity, for occipital nerves, for foot and ankle, for spine, for low back pain, for any place -- your shoulder, any place that you can get to a peripheral nerve with a 9-millimeter needle. And there is a program that is in place, where we will start to assemble data across the whole range of treatments and then determine which ones would require further study.

Great. So we have just 1 minute left. What I'd like to do is focus on J&J. I mean you've been asked this question multiple times. But what I really want to know is, if the agreement concludes in 2021, what impact does it have on your P&L, your guidance that you had given? What kind of range it may lead to the guidance, too?

Thank you. I can't answer that answer with great specificity because it's still almost 2 years away, right? But what I can tell you is that we added 30 people to the sales organization this year. We also have a team that is specific and dedicated to iovera. As we see iovera grow, we see us taking us back into pain, in spine and sports medicine and orthopedics which are all the areas that Johnson & Johnson covers for us today. So over the next 1.5 years, we will gain more clarity on that. We will do an analysis as we put the 5-year plan together, the next iteration of the 5-year plan together. And really what J&J is owning right now is that spine, sports medicine and recon business, and we'll determine where we are with J&J and what resources we need to bring onboard in order to be able to handle that business ourselves. At the same time, as we move to nerve blocks and anesthesia, the -- it's more and more obvious that Pacira has gone from a surgeon-based hospital company to an anesthesia-based ambulatory company and so you can see the business shifting towards what we do very well anyway. Now that doesn't mean that we're not going to resign the J&J deal in some reason. Never say never, right? But we will be prepared to do it ourselves if that's the best example for our shareholders.

Okay. Thank you, Charlie. With that, we're out of time. So I wish you a great day, and I hope you have some great conversations with investors during your virtual calls today. Thank you, again, Dave, Charlie, Ron and Susan. have A good day.

Bye-bye.

Bye-bye.