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

Hi. Good morning, everyone, and thank you for joining us today. So my name is Balaji Prasad. And continuing on with the spec pharma track for the day today, we have the management team from Pacira with us today. So we have Dave Stack, Chairman and CEO; and Charlie Reinhart, CFO, with us on the call. Dave, Charlie. Good morning. Thank you for joining us. Would you like to start with a couple of opening comments [ and -- or go ] more into a fireside chat?

I think, Balaji, time is short. I think we usually do best here when we just jump right into Q&A, if that's okay with you.

Absolutely. So I just want to start off with the news that had come out, the Feb sales number that came out this morning. So we have 8% sales in January, 3% in Feb. You have indicated that Q1 is probably going to be weaker. But when you think about the longer-term growth potential you have articulated, cognizant that you're still outperforming the market, but how does this compare with the longer-term growth potential for EXPAREL?

Thanks for the opportunity, Balaji, as well as the question. First, I would point to our website in the Investors section, and we have put up the most recent IQVIA graph of elective surgeries versus EXPAREL, and that would be through February '19. So I think that will -- that says volumes about the month of February and where we are. But to answer your question specifically, Balaji, we're pretty much where we thought we were going to be. We thought the first quarter was going to look a lot like the third and fourth quarters of 2020. And ex the weather that particularly impacted Texas in the last couple of weeks, that's exactly what we've seen. So we think that the first quarter is going to end pretty much the way that January and February have rolled with Texas being largely back as of the last 10 days. So we're seeing some normalization back to the numbers that we would have thought without any weather implications. So as we go into the second quarter, we believe that we'll start to see some of these warehoused elective procedures and our TAM start to come back into the marketplace. Our numbers are something like 5%. And I mean, just for everybody's information, we believe there's roughly 4 million of these procedures that were not done in 2020 that will be done in 2021 and 2022. We think that those -- the early movers will be largely the orthopedic indications for a couple of reasons. One is they are painful and have a dramatic impact on the patient's life, not being able to ambulate. And it's not just work, but being able to go to church and the grocery store and all those kinds of things, we think, will move those people the quickest. We also know that the marketplace and the ASC marketplace in particular has been very aggressive in moving along the total joints and the spine markets, and that's largely driven by the insurance carriers as well as by the market preparation and the physicians being ready and willing to do that. So we think what's going to happen this year, especially as we get into Q3, is we'll start to see the orthopedic procedures move back into the marketplace and be taken care of by the ambulatory surgery center to the extent that the facilities are available. And then as we get into Q4, we think we'll start to see more participation from the soft tissue procedures. And the reason for that is when we canvassed primary care docs and asked the simple question about whether they would refer a patient for surgery on a telecall, the answer has largely been no. And so we're going to have to wait for or provide some time for these patients for hernias and hemorrhoidectomies and hysterectomies, et cetera, to have a live meeting with their primary care doc, who then will refer them to a general surgeon or a colorectal surgeon, et cetera. So there's a fairly significant difference between the orthopedic community that has a regular interaction with their patients that might last decades and general and admin -- and colorectal surgeons who are going to rely on a primary care consult. So that's the way we see it rolling out. We think roughly half of these 4 million patients will come back to the marketplace in 2021, and the rest will be accommodated in 2022.

That's very helpful color, Dave. Maybe I want to come to something which is a lot more topical in -- that we are to know in the next couple of weeks. So the pediatric label expansion, we're expecting on March 22. So we spoke to multiple KOLs over the past couple of months where we highlighted significant issues with current pain management and modalities for pediatrics. And the numbers that we got was nearly 5% to 10% of pediatric volumes could shift or switch over to EXPAREL immediately upon approval. And you also mentioned in the past taking a more careful approach on the rollout. So how do we titrate these 2? And how should we think about the market opportunity here and the way you will grow into realizing the full potential of the market?

Yes. Thank you, Balaji. So I don't think those 2 thought processes are mutually exclusive, by the way. So we've done a number of ad boards with pediatric surgeons and pediatric anesthesiologists, et cetera, and the standard of care is pumps and catheters. And so we need to be very thoughtful and careful about how we introduce this technology, making sure that the anesthesiologists and the surgeons are comfortable with a single administration of EXPAREL and replacing a pump or a catheter. There is a great need in the marketplace for a replacement for these catheters that are very difficult, say, in a 7-year old to keep in for several days, et cetera. And on one level, Balaji, we're -- we actually want to be careful that, that dramatic need doesn't foster a rapid conversion where patients might not be taken care of appropriately because of a lack of training. So we've hired a team of pediatric nurses, PACU nurses and OR nurses who will be totally dedicated and will handle the launch. We'll roll it out initially into 40 very high-profile hospitals, pediatric hospitals, and then we'll follow that up with roughly 25 more. And the strategy here will be to make sure that the chiefs of the departments, the high influencers, the key opinion leaders are very comfortable and have all the right answers -- or questions answered about EXPAREL, about how it works, why it works, how you replace a catheter and a pump, et cetera. And then at the end of, say, 60 days, we will ask those individuals to have webinar programs with all of their fellows and residents from the last several years so that they will hear from the boss, if you will, on how that person is adopting this new technology and this new opportunity in pediatric patients. And then as we get into the summer we will be training the larger sales force. But again, we want to make sure that the folks that are going to be the reference folks when people have questions, besides Pacira, are well versed and have all their questions answered. Now with that said, we do see this as a dramatic medical need. And we know that learnings and new opportunities travel quite quickly in the pediatric environment. So we do expect a material amount of sales in 2021 from the pediatric launch, but it will be staged in a way that we make sure we never put a child in harm's way.

That's great. And as you think about training and expanding the training to the later part of the year, could you speak about the role of your training facility or training center in kind of ensuring that you have uniform standards over here, especially when dealing with pediatric community you have -- with the pediatric population?

Yes, yes. And so we have to be a little bit careful, right, in terms of the final label to make sure that we're training inside the context of that label. So obviously, we have not been able to do that yet. But we will -- we studied cardiac surgery and scoliosis, spine surgery. And we will train against best practice for those procedures. The hope here is that we get a broad label for use by all infiltration procedures, similar to the adult label. And the strategy and actually what we worked with the FDA on is transfer of best practice against the adult data sets with the pharmacokinetics and the dose of 4 milligrams per kilogram in children. So we will talk with them about exactly what our experience is when an anesthesiologist does these procedures, the use of ultrasound, whether we're going to use anatomical markers or whether we're going to use visualization for most of the surgical procedures. You'll know exactly how the art is being performed on a procedure-specific basis. Just to remind everyone, we have roughly 50 nurses in the field. And those folks do this for both EXPAREL and iovera every day. We're using the PITT facility here in Tampa very effectively. In fact, we've got training programs every weekend between now and June. Actually, there's a cadaver lab scheduled for Friday, Saturday and Sunday this weekend. And so we can teach not only in the facility, Balaji, but it's fully IT capable so that folks can tune in on their laptops and watch the procedures. And we can have a KOL panel, if you will, on the wall watching what's going on in the lab, asking questions. And the folks on the laptop can actually call -- in the chat room can come in with their questions as well about anatomical markers, about how to use ultrasound, about the size of the gauge of the needle, the volume of product that's being delivered, whether you're going to use free bupivacaine or not. So all those things are in play and the dose here is 4 milligrams per kilogram for all procedures. And so we believe that we can train effectively. And as I said earlier, when we start -- it's funny. When we start these programs, the anesthesia community really hasn't thought about anything other than pumps and catheters. But as these several-hour meetings go on, you can see people really start to get interested and then excited about the fact that they won't have to send a 7-year old home with a catheter and hope that it stays in place for several days, et cetera. So we think we've got a really good opportunity, and we're really excited about the opportunity to provide an opioid alternative to these patients who are most vulnerable, actually.

Okay, maybe one last question on the pediatric side itself, and then I'll just move to lower extremity data that we're expecting at the end of the quarter. So you've spoken in the past about this $100 million market opportunity. Is that with the expectation for broad label? Or is there an incremental upside target there [ we're not seeing ]?

I think there's an incremental opportunity there. But the $100 million, we expect would be from the narrow label. And if -- and the thought process here, Balaji, is, again, we have to be very careful with how we train and how we use the PITT, very specifically. But most of the folks in the marketplace understand that we've taken 2 procedures where patients have multiple interactions with the medical system. Specifically, if you look at scoliosis, that child might have 5, 6, 7 interactions before they get to be into their middle teens. And you certainly don't want these patients on opioids repeatedly. So we think that what we'll train on here will be very appropriate for broader applications in the physician's office place. There's really 2 broad -- 2 longer-term opportunities: One is the broader label. And two is, as we get additional indications -- STRIDE, for example, as part of the STRIDE trial, there will be a pediatric application that will be done as soon as we have the STRIDE data in adults and the same in Europe. We will submit a separate package both in Brexit and in Europe for a pediatric label in those markets as well. So there's upside all around, but we think it would do $100 million in 2025 just as a stand-alone today.

Great. I think [ that's obviously ] a good segue into the STRIDE data and the lower extremity opportunity. So are you still on target to report top line data by the end of month? And as we evolve our discussions, what we are seeing from various experts that we have spoken to is a prolonged duration that they anticipate with the lower extremity procedures just because the region is less vascular and so the drug gets cleared up slower. Is that in line with your thoughts? And how does that impact your market opportunity around lower extremity indications?

Yes. Two great questions, Balaji. Thanks. There's a couple of dynamics here, actually. One is it's certainly true that the further from the heart you get in the lower extremity, the PK of local anesthetics, in general, the Tmax is longer or -- yes, longer or protracted. And so we do expect that the duration of action will be extended in the lower extremity. And in fact, the STRIDE trial goes out to 96 hours in anticipation of exactly that. It also is -- a learning from all of the experience we've had is that when you inject into an avascular environment, like a brachial plexus nerve block or a lower extremity nerve block, in an avascular environment, these lipid particles dissolute at a slower rate. So you've really got 2 dynamics here that are extending the duration of action. And in fact, in the package insert, the shortest duration that we see, the 72 hours, is actually a hemorrhoid procedure, which is an extremely bloody field. And so both of those things are at play here. So the applications of the STRIDE study are twofold. One is as an adductor canal block and a total knee arthroplasty. And that is both a defensive and an offensive strategy. Our best information is that roughly 30% of the knees in America are currently receiving an adductor canal block for a total knee arthroplasty off-label. And so we want to protect the folks that are doing that on a regular basis now and then address the other 70% that we think are still available to an adductor canal block as part of a TKA. And then the lower extremity nerve block, foot and ankle is a relatively nascent marketplace for us. And it is interesting that those are the surgeons and anesthesiologists that have been most interested in an extended duration of action. Unlike a knee surgeon that wants a patient to ambulate in a very short time following their surgery, most ankle surgeries are -- those patients are not immediately ambulatory. So providing a longer duration of pain control in that marketplace makes a lot of sense. All in, there are roughly 3 million lower extremity procedures done in the United States on an annual basis. As I mentioned, roughly 30% of the 1 million knees already receive EXPAREL. So it's not purely a growth strategy, but it still leaves 2.7 million procedures that will be relatively new for EXPAREL on a go-forward basis. And the vast majority of these procedures are done in an ambulatory environment.

Understood. That's helpful. As you look at these procedures, would you have any incremental data on how many of these procedures can be using EXPAREL today on an off-label basis? And I'm trying to titrate the [ area under the curve ] that could play here. And I'm also cognizant that it's [ mostly ] the pediatric indication, especially, and also maybe cognizant that there is also the few pediatric conditions with lower extremity indications, too. So any data there that you can share [ if you want to share those data ]?

Nothing that is that I'm -- that I've got in my hand that I could share you -- share with you with any greater certainty, Balaji, although we certainly can work on that, and I'd be happy to share with you what we have. Let me tell you. What we do know, right, is that, as I said earlier, the EXPAREL is routinely being used in knees. It is -- there's really 2 ways that it's being used. It is a periarticular infiltration, which is an infiltration, of course, where the product is injected into the posterior capsule and the periosteum as part of a total knee procedure. Almost all of those patients will also receive an adductor canal block, and roughly 30% of those are off-label today in the U.S. That's our best available information anyway. So when you go outside of that, you're talking about all of the other knee applications and all of the things that are done on the foot and ankle. And it is a rapidly growing field for regional field blocks. But I can't tell you that I could break out bunions versus other opportunities to provide pain control in the lower limb. I just don't know what that data is, Balaji, but we'll get back to you.

Okay. Great. Maybe one last question on EXPAREL, and then I will more focus on iovera and a few other recent news last year. As we think about you launching EXPAREL into the EU and as you target individual markets and expand these markets, what should we be thinking about the numbers and the cadence, assuming a normalizing environment, a post-COVID environment and factor growth into the numbers?

Yes. So a couple of things from a broad strategy perspective. We've had boots on the ground there, our own employees, for roughly 1.5 years now. We had a strategy not to dig a big hole from a financial perspective. We have good relationships with a number of the high-profile KOLs in Europe through our relationships with the ERAS Society and especially the International ERAS Society. So we have good contacts, and we're building out training programs with folks that we've known for a very long time in the European community. With that said, we'll launch with -- we'll launch into roughly 8 countries with EXPAREL and 9 countries with iovera. And it will be slow. It will not be a material contributor or contribution to revenue in 2021. The way the folks work in Europe is it's very much driven by the professors. And then generally, they would take a new technology down into their fellows and their residents. And so that takes some time. We do believe that we've got a very good price so far in Europe for EXPAREL. And so that's a great thing. And we think that we will have a breakeven calculation in roughly 3 years, maybe a little bit longer than 3 years. So from a business perspective, it makes great sense for us to go to Europe and be true to our mission to provide an opioid alternative to as many patients as possible, but it will not be a huge contributor to the top or bottom line in 2021. And we think over the next 5 years, it gets into the neighborhood of $100 million, roughly 60% EXPAREL, 40% iovera, just to give you some round numbers, Balaji, but it's well worth doing but not anything that you're going to say holy cow in 2021.

Okay. Great. And so I think, again, you've provided us a good segue into iovera. And if I kind of extrapolate 40 cent -- 40% of $100 million, so in 5 years' time, we are looking at around approximately $160 million, $150 million from the U.S. and $40 million from Europe for iovera. That's your $200 million game plan. When I look at the current run rate, it's significantly below where you probably want to be. And I guess, it's been impacted by COVID and some of your strategic rethinking about the product. So how should we think about the run rate and how -- the certainty around this run rate that you're -- well, you're targeting?

Yes. And so a couple of things. First is the current. And so we now have a dedicated sales team that is selling just iovera, roughly 30 folks, and we've moved our most experienced sales manager over to head that group. And so new management, many new folks, recent training at the PITT with some of the world's leading experts in iovera. So those folks are ready to go. And in fact, we've had a couple of systems wins in the last month. So things are looking up. That team is selling EXPAREL and iovera together as a procedural solution, so -- and this is the basis of the PREPARE trial. So if you think about your boot camp and when patients are going to be instructed on how to be prepared for this surgery and then what's going to happen after surgery -- as you know, Balaji, I've had both my knees done in the last 2 years, and it's a fairly difficult procedure. So the way we're instructing the marketplace is have your boot camp in close proximity to an HOPD, do iovera 2 to 4 weeks before the surgery, and that would allow you to have reimbursement for that procedure. And it's a very good reimbursement, just as an aside. That would allow the patient to get out of the wheelchair, start going up and down stairs, start having some modest activities that will make them a better patient for the surgical suite. And then use EXPAREL for the pain storm of the surgery itself. And largely, that's being done in the ASC. So again, the position is reimbursed for that activity. And then we measure the functional return-to-work, return-to-life activities, et cetera. Increasingly, the self-insured payers in the United States are looking for information about not only the cost of that procedure but what was the status of that patient when they came back to work. Are they indeed "back to normal?" Or do they still have a significant deficit, et cetera? So the PREPARE trial measures these functional outcomes in a way that will allow us to talk to the self-insured employers and to the folks who are reimbursing in a quite different way. The other opportunity that they are currently working with is osteoarthritis. So the product is approved for peripheral OA. And the place where we're starting is with the knee. And this is largely a cash market. It's a procedure that is done in the physician's office by either a PA or an OR nurse that's not in the OR that day, et cetera. And the docs are batching the patients very similar to the way they would with PRP. Say Tuesday morning is iovera day, one person can right now -- once they get their -- once they get some experience, can do 3 of these procedures an hour. Generally, if a tip costs the physician, say, something in the neighborhood of $400, they will charge the patient $1,000. As I said, it's largely a cash market. It's a pretty significant interest given the cash situation of many of the orthopedic practices as a result of COVID, very different than the 120-day DSO that they have for their insurance payments -- or from their insurance patients. So we think that patients who have -- who belong to a country club but can't play golf because of knee pain, grandparents that just want to go on vacation -- we hear all kinds of stories, weddings, Italian vacations, just want to walk down the beach with my grandkids, all of those reasons. We think that this market actually has the potential to be larger than the procedural solution OA TKA market. And then it gets really exciting, and then the numbers will be vastly different. During COVID, we had a number of surgeons who sent in very specific protocols where they were currently using ablation, and they had a significant interest in turning those procedures into cold-based therapies. These are largely spine procedures and low back pain procedures. 14 million Americans suffer from low back pain. And we've been working with these folks and are making very specific procedure-specific Smart Tips for different applications in the spine and then the lower back. In addition to that, think about rib fracture, foot and ankle again, shoulder, all of the different places where cold might have an application. I'd just give you a couple of examples. If you want -- if you're going to go after the intercostal nerve and you want short-term pain control for a thoracotomy or some type of a sternal issue, et cetera, or chest tube, you can use EXPAREL and get 3 or 4 days. If, on the other hand, you're working with fractured ribs, you could go after that same application of an intercostal nerve block with iovera and achieve several months of pain control. At the same time, we have very active discussions with different pediatric surgical groups and anesthesia groups. And for things like cerebral palsy, they're using Botox for the spasticity associated with cerebral palsy. And we're talking to those folks about a protocol for replacing Botox with several months of a nerve block with cold and not having it include any pharmacotherapy at all, and there's great interest in those applications. So when you look at where we are, you're absolutely correct. 2020 was not a great year for iovera at Pacira. But things are moving. And as COVID resolves itself, we think that we're in a very interesting position. We will launch a generation 2 handheld and tip that is much more robust than what we bought as part of the acquisition. That will happen this summer. And we think that we can roll out a number of these new applications over the next couple of years that will make iovera a very important asset in the Pacira portfolio.

Great. Thank you, Dave. I know that you have a meeting at 11:30 a.m., so I'll probably just ask one last question, a pretty important one on operational leverage. You've spoken about 1,000 basis points of gross margin expansion and operating margin of 50% odd. I just want to understand -- and you've factored in competitors launching this period. So if there is any delay to this and you grow faster than your mid-teens growth rate that you have articulated, what is the sensitivity to your operating margin target if you grow faster than you expect?

Well, the operating margin...

Dave, do you want me to jump in here?

Yes. Well, at least start with gross margin, Charlie, and then I'll pick up the sales organizations, et cetera.

Okay. So Balaji, of course, if our projections of revenue growth are conservative, then, yes, the leverage in the operating margin would come more quickly, I think -- because we think that volume will also help us drive gross margin. So gross margin expansion is predicated on, a, how we make it. So do we make it in a 200-liter batch process or a 45-liter batch process? And do we make it in the U.K. versus San Diego? That's part of it. But it's also strongly contributed by volume. So the quicker volume shows up, the quicker the -- we'll reach margins in the mid-80% range, 85%-plus range. I don't expect that if revenues grow significantly more quickly that the OpEx will change that much, and so that would imply that the leverage would be even stronger on the bottom line.

Dave?

Yes. So the competitive environment doesn't change that much, Balaji, in our mind. As we've discussed many times, we don't see a great commercial application for anything that's currently in development. And currently, we see -- we certainly see that with the direct approval of Posimir. And so what Charlie was referring to is remembering that we've terminated the Johnson & Johnson agreement. Probably, the simplest way for me to explain that is we've put out a team of nurses that are for a pediatric launch that I described earlier. We've added people to the national sales force of roughly 130 now. We've dedicated a team of 30 to iovera. We've built a small internal team that's focused only on spine surgery, and we've prepared for the European launch. And with all of that activity, our 2021 budget is less than our 2019 budget for sales and marketing. And so I think you can see the application that -- as Charlie said, gross margin is a huge contributor as we go forward but also our ability to have a modest increase in OpEx on an annual basis. And we believe that we're pretty much done with EXPAREL in terms of the big-ticket items, STRIDE, et cetera. The iovera studies are not as expensive as the EXPAREL studies, the device world just doesn't have the ends that we're used to with pharma. And so think about '22, '23. We're largely focused on iovera, finishing the registry, finishing PREPARE. We're just about to complete a protocol for osteoarthritis of the peripheral nerves without a total knee arthroplasty, so just a plain OA arthritis study. And then the $60 million to $70 million that we've guided to for R&D will largely be allocated against assets that are currently not in our portfolio, so GeneQuine and other things that Ron Ellis and his team are working on. So I think if you roll that out a few years and you look at a number of $100 million-dollar opportunities and the biggest opportunity being a 15% annual growth rate in regional anesthesia approaches over the next 4 years, you get to some pretty significant numbers in terms of EBITDA, and that's where we think we are.

Great. Fantastic. So I think we'll probably stop at this point and let you get on to your next meeting, too. Dave, Charlie, thank you very much for your views and for joining us today. I wish you a great day and a productive conference.

Thanks for the opportunity, and we appreciate the questions very much, Balaji. Thanks a lot.

Thanks, Balaji. Bye-bye.

Bye-bye.