Pacira BioSciences, Inc. ($PCRX)

Good afternoon, everyone, and thank you for joining us. My name is Matt Dellatorre. I'm a biopharma analyst here at Goldman Sachs. And we're very pleased to continue the next session this afternoon with Pacira BioSciences, where I'm joined by the company's CEO, Frank Lee. Frank, thank you for being here.

Thanks for the kind invitation.

Frank, maybe to start, just to get everyone up to speed before we dive into some of the specific programs, maybe for those less familiar with Pacira give us a brief overview of the company? And then maybe frame for us where you all stand today, what your key priorities are? And then how you're thinking about the outlook and strategy for the company as we head into second half and beyond.

Sure. Well, Pacira, as many of you know, is a leader in non-opioid pain management therapies. And what does that mean? That means that we have 3 products in our portfolio plus a pipeline that's growing that we should talk about. And as we think about sort of the company's history then and now, I mean, we had a pretty substantial reset of the organization with the organization just over 2 years. Joined in 2024, there was a restructuring reset. And in '25, we rolled out the 5/30 strategy for value creation. So what are the 5 things that we want to accomplish by year 2030. Those are quite simply into 2 different buckets. First is what are we doing about the here and now. And the last 2 are really more about building for the future. And so it speaks to 3 million patients in 2030, double-digit compound annual growth rate. 5-point expansion in margin for the first 3. And for the second 2, we talk about 5 new programs in development and 5 partnerships. And in that regard, we can go through some of the details where we made a lot of great progress. And so what to look forward to, we had very strong results in quarter 1 of this year with EXPAREL growing at 5% on sales. and volume was up 7%. And as the year goes on, we expect volume and sales growth to converge because we lap our last GPO. And we're quite pleased with the growth that now we've seen with our 2 other products that is ZILRETTA 15% year-on-year growth, iovera, 21% year-on-year growth. And so that's the Care Now business. The other part of it is, from a pipeline perspective, we have now 3 really exciting data events coming up this year. So by the end of the year, we'll report on the registrational study for ZILRETTA in shoulder OA and if positive, that could be the first drug approved for shoulder away. Second is spasticity for iovera. And again, if approved, that's a registrational study, that could be the first medical device approved for spasticity. And I have to say the most exciting thing that I look forward to is our readout on PCRX-201, our local gene therapy for osteoarthritis. And this is the Phase II Part A of that study. And as you know, that's an active control plus 2 different doses of PCRX-201, and that will be an exciting readout an important catalyst for us. In the meantime, we're readying the commercially viable manufacturing process. And as you know, in cell and gene therapy, and that's very, very important. And the good news is we've stood it up, and we expect to start enrolling Part B of the ASCEND Phase II study with commercially viable product here very, very soon. So that's a little bit of a backdrop. You can see we're making very good progress on our plan, the existing business, strong first quarter, pipeline events coming up really for the first time in the company's history and a few other things on the horizon.

Great. So you touched on one of those goals of inflecting towards double-digit CAGR by -- I think, by 2030. Maybe help us understand what gives you all the confidence to kind of bridge that gap where you are now. I think 2026 guidance mid-single-digit growth. So how do you expect double digit?

Yes. First of all, we set guidance to really make sure that we can deliver on that and all the different macro environment events that could potentially happen, right? So we set that accordingly. Now that said, when you go back in time a little bit with no pain legislation being enacted in January of 2025 is what we said is that, hey, that's an important catalyst because that involves the 40 million Medicare patients in the outpatient setting. Now we say a catalyst because we need to get commercial payers to follow suit to make sure that we have the majority of patients covered under outside the bundle policies, right? And so based on that, we said, look, the second half of last year would be a time when we really see volume growth, and we did. So we went from about 3% volume growth in the first half of last year to about 8% in the second half of the year. And that volume growth continued in the first quarter because with EXPAREL, we saw a 7% volume growth. And so 5% sales growth, 7% volume growth. And the reason we believe those 2 growth rates will catch up to each other is because in the second half, we lap the last group purchasing organization. And then going forward, then any price increases we might take would more readily flow into that math as well. So that's one way of seeing line of sight to double digits. In addition to that, there are 2 other important growth drivers come end of next year for EXPAREL and Zilretta will start to kick in. That is with LG Chem. So they're starting in Korea and Thailand, but they have rights to sell EXPAREL and ZILRETTA in the Asia Pacific region. So that's another growth driver and we'll continue to sign ex U.S. agreements. And finally and very importantly, we've got a very strong focus on expanding access to the tune of covered lives outside of the bundle. So right now, one could argue that, "Hey, Frank, don't you have coverage 100%? That's yes, but that's included in the bundle. If you talk about outside the bundle reimbursement that is being reimbursed separately for a product like EXPAREL. We have that for 110 million covered lives out of what, $300-plus million in the U.S. So we've got some work to do there. And so we're really pushing on that. So what to look forward to in the second half of the year. I would say that look forward to expansion in covered lives in a significant way. And when we do that and we get to a tipping point, that is the majority of lives are covered under outside the bundle of reimbursement that is for Medicare ASP plus 6% or for commercial, what we're seeing now is ASP plus 29%, then you'll start to see even more of an acceleration. So those are some of the key growth drivers. One is GPO agreement, lapping it any potential future price increases ex U.S. revenue, right? And this idea that we're going to continue to push on covered lives.

Would that come on kind of with each of the big 3 PVMs like those will kind of be in blocks as you expand to the commercial.

We're looking primarily at directly to payers and so we already have some of the big ones already. But what we're looking to do is really get some of the remaining big ones on board. And again, this is outside of the bundle reimbursement. So just to really double-click on that, if one gets a knee replacement surgery, the facility will get on total fee regardless of what you use. Now what pain and outside the reimbursement bundle does is provide that incremental reimbursement for the product that you use. So historically, that's been the primary barrier. Clinically, EXPAREL does a fine job of preventing pain after surgery. But clinically, 1 of the barriers has been, well, gosh, if I get 1 payment inside the bundle, then many folks are incented to use the least expensive as opposed to the most effective. And what we see based on if you follow our press releases, we've had a few recently, we've invested in collecting these data, health economics and outcomes research data that definitively shows that EXPAREL is saving the system cost, patient outcomes are improved. So as you see more and more access and those announcements come through, there's good reason why.

Great. Great. So you kind of walked us through some of these maybe commercial levers and how we'll see the volume and sales growth kind of converge. Maybe shifting over to market I think you guys have highlighted 21 Orange Book listed patents for EXPAREL, and then you have kind of a favorable volume limited settlement with a single approved generic starting in 2030. So you clearly have some runway set out.

I guess, how should we think about other avenues you all are taking to address potentially other generic entrants and just kind of how we should think about that aspect of the drug. So broadly speaking, as we all know, in biopharma, this is inherent in the industry, right? So you innovate, you put IP around it. And over time, you diversify your portfolio and you bolster your IP. That's how we go about our business. And let me talk to you a little bit about then and now when it comes to the IP. Then this is before my time a bit, we had on Orange Book-listed patent. That was a $4.95 patent. And that patent, we got a ruling against it in 2024. And so what do we do? Well, what we did was we further bolstered the strength of that patent for specifically the volume limitation that the judge called out. So now it was reexamined by the patent office, reissued after the USPTO looked at all the different court filings. And so that patent is 1 of our stronger patents now. In addition to that, we put another 20 patents in the Orange book. And as you know, manufacturing patents by statute can't be listed in the Orange book. These are composition of matter and product by process patents, which are stronger. So they cut across 2 different families. And now we believe we've got a very, very strong patent portfolio based on the investments that we made. And what is that exactly? Well, we found another way to really construct this molecule using a larger scale process, which develops a better molecule on a number of different fronts. So that's really the thesis behind it, and we continue to innovate meaning like what to expect is more patents forthcoming during the course of this year and next year. And so from a court proceeding standpoint, we think that the whole process will last through 2030 with really the Markman hearing hasn't even started yet. So to really determine if there are any merits to the different ANDA applications and that will be determined by the FDA in due course, but to the particular patent filings as well. So we have a long journey ahead of us. Again, what can we do as an organization? First is strengthen our patent estate, which we have. And the other piece of it is broadly diversifying our portfolio, which, as you can see from the pipeline we're doing. And finally, what I'd say is that from a legal proceeding standpoint, as I mentioned, this will take some time to resolve. And a lot of things can happen before that.

Yes. So we should assume any additional entrants would be kind of post 2030. And perhaps be...

Well, we feel reasonably certain that the court case won't be done until 2030, right? For the 2 other ANDA filings. And as you know, for the first one, it was a very favorable volume-limited settlement. So no entry until 2030, and then from then on a gradual entry to the high 30 percentages than flat and unlimited entry starting in 2039. So that's a very favorable settlement. And you might ask, well, gosh, I mean, that seems like favorable if you lost the first court case. Well, if you think about the other patents that we have, it makes a lot more sense.

Interesting. Maybe moving over to your knee pain products. Both Zilretta and iovera had double-digit growth in 1Q. And that -- but kind of in contrast to that, your guidance assumes relatively flat year-over-year revenue growth. I guess, what do you want to see to kind of give you confidence in revising that guide higher?

So as a part of rolling out our 530, we said, look, these are very different products being sold to very different audiences. And we had to focus and make sure the EXPAREL team have the capacity to really pull through no pain and expand commercial payer access, as we talked about. So what do we do in 2025? We went from 1 sales force selling all 3 products. to 3 separate sales forces. And we also signed a co-promote agreement with Johnson & Johnson Medtech now called DePuy for ZILRETTA. And so that agreement took a little bit of time to get on its feet. And now based on first quarter results, you can see that it's driving 15% year-over-year growth. And for iovera, what we did there is instead of having pharmaceutical representatives, sell a medical device. We've got medical device representative selling a medical device, which is very different. If you know med tech, that's regulatory compliance, just the way you interact with your customer is very, very different than the expectations. And so now that's starting to show good momentum with 21% sales. So that was the idea. And now 1 data point doesn't make a trend. And so we've been very careful about Sean has as well and Susan about how we set guidance, and we want to see a little bit more before we adjust it either way.

Interesting. Okay. But the potential for that to kind of be sustainable if things go well. Okay. How about maybe switching to margins. Maybe give us a little color on what's driving the 2026 gross margins. I think they're a little bit below 25% and then how we should think kind of maybe the cadence for the year and going into '27.

Yes. Well, first off, from a margin perspective, let me take a step back, there's a big difference than a now consistent with our transformation story. There was a time when we're literally living hand to mouth on our products. and that gross margin was around 76% very consistently. In the course of just about a year now, we've taken it to 81%. So you could argue, well, gosh, Frank, I mean, it seems like you've already a major goal of 5/30, 5-point expansion and rightly so. I mean, because we deliver based on the team's efforts that kind of margin expansion just over a year. That said now, we're selling through some of that inventory that we manufactured last year and because we didn't throw away as much because we got better at making the stuff. And this year, as you know, by accounting standards, these lots are bigger now. So if we have a miss lot, then it really hits this year or this quarter in that quarter. So we just want to be mindful of that in terms of -- before we adjust a lot of things. And so we'll see that in the first few quarters, as we talked about, and Sean's provided good guidance around this, fairly stable to what we saw before and then a little bit of a dip in quarter 4 before we start to catch back up again.

Okay. Great. Maybe now coming to the pipeline. You touched on this a bit in your intro segment when you gave an overview. You have a number of catalyst coming up, you highlighted Part A or 201. Maybe kind of just walk us through more broadly what we'll see later this year and then what we might be able to expect over the next 18 months.

Sure. I'm really excited about PCRX-201. I've been in this industry, what 35 years. I think about this as local gene therapy for the masses right, as opposed to systemic gene therapy for the few rare orphan very different approach. So what we're talking about is gene therapy that you locally inject at least as a start in the knee for osteoarthritis knee. And all we're doing, it's a derisked mechanism of action. We know that blocking IL-1 is important. There are 2 drugs already approved on a small molecule, want a monoclonal antibody to block IL-1. So all we're doing -- and by the way, they have a very short half life. All we're doing here is delivering instructions to the body cells to produce more IL-1 RA receptor antagonist when there's inflammation as an inducible promoter. And so by the Phase I results, which is 72 patients, quite durable responses relative to baseline. So at 1 year, over 70% of the patients had a 50% or greater response which is quite substantial. So the relevance or the importance of Part A is now we have a control, an active control. So we have an active control and a short-acting steroid 2 different doses of PCRX-201 with the steroid. So -- and that's at 52 weeks. This isn't a short-term study. So it's not statistically powered to look at efficacy. But we'll be looking at different trends. So as you might imagine, a short-acting steroid will have an effect, and that effect will whereas what we expect for PCRX-201 is that, again, we'd have an effect. Over time relative to baseline. And we saw that in Phase I and 72 patients, and we look forward to seeing the results in our Part A. In addition to any safety, although in Phase I, we really didn't see much in terms of a safety signal because it's local and it stays there. We know through biodistribution studies. And that's, I think, a very important contributor to safety, which has been really the downfall of many gene and cell therapy. And in addition to that, because we're locally administered in very small amounts, the cost of goods is very attractive. So we will be able to price it in such a way where we can be market competitive to other innovative therapies because, as you know, most gene therapies for rare orphan disease these days are close to $1 million or more. So this one won't be that way because right now, there are 15 million patients in the U.S. alone that have osteoarthritis in a fascinating.

So you really have no -- there's no concern from a safety perspective. You've seen like no safety signals.

We haven't seen anything untoward of concern in our Phase I. And we follow these patients now in Phase I. So I think we're up to 5 years, we're going to publish here in the not-too-distant future. So we're excited about this because you might think about the possibility here. So this is a high-capacity atnovirus platform. whereas most gene therapies are AAV, smaller capacity. So this is sort of the Mac truck, so to speak, in terms of how many genes it can hold. And so 30,000 base payers. So theoretically, you could hold not one, but many genes. And so we're thinking through already what are the other places in the body where it's local gene therapy could be useful. For example, the eye, the year the back. There are closed spaces where local gene therapy could be super useful. And also, where are the known mechanisms of action where we could put 1 or 2 or 3 genes into the construct. One of the very first places we're testing that is with our canine OA program. So as for those of you that own dogs have -- dog owners, you know that as they get older, they get a way of the knee and joints. There's a product approved already for that. It's doing about $0.5 billion in sales. So we're about to start the clinical part of our canine OA program. And as you know, those development programs are much shorter than humans. And so we look forward to reporting those results. And in due course, we'll have to figure out are we the best ones to develop something like that? Or should we get a partner?

Interesting. And then maybe -- I think you talked about Part A later this year. What should we expect for Part B.

Yes. Good question. So Part B, as I mentioned, the tricky part of cell and gene therapy is a stand up a commercially viable manufacturing process. And through team's efforts. I mean, they've been working very hard on this. We're ready. So we're going to dose Part B with commercially viable product. Part B will be exactly the same in terms of design to Part A it will just have 90 patients as opposed to the 49. And then as we move forward, what will happen is we have RMAT designation with the FDA, the equivalent in Europe as well. So what that allows for, it's basically breakthrough designation for cell and gene therapy. So what that allows for is regular dialogue with the FDA and other regulatory bodies. And so as we see and really critically look at the Part A results, then we can make a better determination with the FDA? And what should Phase III start to look like and get ready for that.

Great. Great. Maybe hitting to 2002. You acquired 2002, I think late last year. Maybe just kind of walk us through that asset, how you're thinking about the opportunity?

Sure. So first of all, for 201, we also acquired GQ Bio, the owner of the platform. So we have access not only to 201, but the entire platform and that expertise, which is really important in cell and gene therapy. So 2002, this is an interesting one. It's another good example of how we're thinking about building the pipeline. The mechanism is derisked. We're just adding some additional value on top. So what is it? Well, it's ropivacaine instead of bupivacaine. So we know ropivacaine works. Now what we've put on top of that are 2 interesting polymers that when you actually put that into a surgical site instill it, so you square it in there, close up the site. It could provide postoperative pain relief for up to 14 days. So we've seen this in healthy volunteers. And so by contrast, EXPAREL. Now you're either going to infiltrate that is a different pattern you injected into the surgical area or what you do is you put it as a nerve block, which is put it right by the various nerves that are in play. So this one has an ease-of-use benefit that, as you squirt in, close up the site and a potential duration benefit that is instead of 3 or 4 days like EXPAREL, it could be many more days longer than that. So we're excited about this one. Like I say, it could be a nice complement to EXPAREL, and we think the timing of this one could come right around that 2030 time frame, which is important. So yes, that's another good example of -- it's a derisked sort of known pathway and molecule, but we've kind of put it a different sort of innovation around it.

That's fascinating. Maybe before we shift to capital allocation, what would be kind of an ideal label for 201 or 2002? I mean could you get -- would 1-year dosing, would that be something that's what you would target in terms of duration? And then how are you thinking about the potential for redosing?

Sure. That's a good question. So I just want to really emphasize this point. for 201, the way we're sitting in now is 1 injection. That's it. One injection for this study. One injection, and we're following the durability of that over 52 weeks, and that will be Part A. Doesn't mean it doesn't work longer. It's just saying we're reporting out in that time frame, okay? And so as I mentioned earlier, in our Phase I studies, we saw the durability go much further out than that, right? But it was uncontrolled, right? So that being said, based on our market research, what we know from physicians, from payers is that the current standard of care provides durability of 3 to 6 months max. What we heard loud and clear is if you can get patients out to a year, that's considered transformational. More than that is I don't know what beyond transformation is, even more transformational. I don't know what the term is, right? So anyway, that's how the market is viewing it, right? And so for us, as we think about that, we say, gosh, I mean, at a minimum, if we could think about getting patients out to a year with durable response, that would be important. And then certainly, now we have plans to think about redosing at the right time. So most people, if they have one knee with osteoarthritis, they have another knee with osteoarthritis and they have other joints with osteoarthritis. And what's interesting is we look at neutralizing antibodies, baseline and after. And what we see is that we don't see a big spike in neutralizing antibodies because we're putting such a small amount into the joint. So it's an early indicator that perhaps redosing not only in the index knee but the contralateral knee is a possibility.

Interesting. Maybe shifting gears to capital allocation. I think you guys a share buyback program in place. Maybe just speak to that, how does that fit in with your kind of broader capital allocation strategy? And how does it relate to your maybe 530 aspirations?

Yes. Before we rolled out 530, we took a lot of time with the Board and external advisers about capital allocation. And so broadly, as we think about it is how much do we invest in the current business and 1 sort of proxy for that is SG&A. And for our [indiscernible]

[indiscernible] is that 17%? We're at 14%. So as our studies that will come to conclusion at the end of this year roll off, we'll start to add some additional studies and likely we'll be around that 17%. Okay. Separately, we look at, gosh, how do we think about our value relative to how the market is thinking about it. And so there came a time and we thought, gosh, the value of our company as we see it, is higher than what the market is seeing it. So we rolled out this $300 million buyback program. And so we've completed $200 million of it, took out 9 million shares.

We're down to 39 million shares now, which is a fairly small base. And so we've got $100 million left to go. And so we'll constantly look at, is this the right time to go ahead and do the balance of that? Or should we put our dollars into something else, right? And so -- and we can talk about what that something else might look like, but certainly, since we have the infrastructure in place now adding an accretive asset to the bag, selling back would be important. So if something fit nicely into the Exparel bag or silretibag or average we could bring a lot of synergy to the table, and it will be accretive out of the gate. So that's 1 way to think about it. The other way is, yes, continue on the buybacks. And another 1 is just like we've done for PCRX-201 and 202, be very careful about derisked mechanisms of action and sort of innovative ways to develop it. And so it could be likely a combination of those things, but I just want to give you a sense of how carefully, we thought about these things and benchmark ourselves.

Okay. So I think kind of for BD more late stage or in market within your current commercial footprint -- and then in terms of maybe size or capacity? What do you think is kind of...

I don't think you're going to see us do these kinds of bet-the-farm kind of things. I think these will be careful assessments and careful, I would say, investments. And -- take a look at what we do with GQ Bio. We bought that company. It was a very efficient use of our more of the milestones that are to come. not only the expertise but also the preclinical programs and the platform. So we've got a pretty good deal on that. And the same thing with the Amicaera asset. We didn't pay a whole lot upfront. And so we're going to be very careful about this.

Great. Well, with that, Frank, thank you for joining us, and we'll be excited to watch the updates over the coming months.

Yes. So thanks for having me here, Matt. And look, I think this is a really great story of then and now. The company has come a long way with the new Board, new CEO, 530, and we're now starting to see really the benefits of this new strategy. And hopefully, you see it when you take a look at the first quarter results that we've delivered and also some of the data catalysts to come. And so I'm excited about the balance of the year and what will hold for us as well.

Thank you.

Okay. Thank you.