Pacira BioSciences, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2021 PICERA Biosciences Earnings Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Susan Mesko, Head of Investor Relations. Please go ahead.

Thank you, Tina, and good morning, everyone. Welcome to today's conference call to discuss our first quarter 2021 financial results. Joining me as speakers on today's call are Dave Stack, Chairman and Chief Executive Officer, and Charlie Reinhart, Chief Financial Officer. Additional members of the PACIRA Executive Leadership Team are also here for our question and answer sessions. Before we begin, let me remind you that today's call will include forward-looking statements based on current expectations. Such statements represent our judgment as of today and may involve risks and uncertainties. For information concerning risk factors that could affect the company, please refer to our filings with the SEC, which are available from the SEC or our website. With that, I will now turn the call over to Dave Stack.

Thank you, Susan. Good morning, everyone, and thank you for joining us. One year ago, when we reported our first quarter results, we were facing significant challenges in the face of an expanding pandemic. In the blink of an eye, a moratorium was placed on hospitals performing elective procedures, and the notion of COVID-19 treatments and vaccines seemed a long way off. I cannot tell you how proud I am of our entire Pacira team, as they have truly risen to the occasion over the past year to ensure that we continued our important work to provide non-opioid pain management to patients in need in a difficult and dynamic environment. Consequently, I am delighted to report the significant progress we have made thus far in 2021, highlighted by the U.S. approval and launch of Expirel in the pediatric setting and its growing utilization across a wide range of long-acting regional blocks for low or no opioid pain control. Our first quarter financial performance was strong with a total sales of $119 million and Expirel averaged daily sales coming in at 115% of prior year levels despite ongoing COVID-related challenges. with the elective surgery market. Today, we also reported adjusted EBITDA of $36.2 million and remain well positioned to deliver sustained and accelerating profitability. Before turning now to a more detailed strategic review of our business, I would like to quickly cover the recently filed lawsuit against the American Society of Anesthesiology, seeking damages and the retraction of three articles published in the February issue of their journal, Anesthesiology. These articles create a false and misleading impression that XBRL is not an effective analgesic. Not only were these articles scientifically and statistically unsound, but also failed to disclose that certain authors were accepting payments from competing pharmaceutical or drug device manufacturers, which is not only an ethical violation, but very likely instilled an apparent bias into this body of work. The decision was not one taken lightly. We reached out to the society and the editor multiple times to discuss the shortcomings of the articles and our concerns around lack of proper author disclosure. These requests were repeatedly dismissed. As you know, Expirel is a critical piece of our business and we initiated this legal action to protect the clinical integrity of Expirel and ensure that false and misleading information is not inappropriately cited as an accurate reference in other scientific manuscripts and is not used to limit access to patients and providers who need a safe, effective opioid alternative like Expirel. We would encourage you to review the declarations related to these studies, including Brown University's professor and meta-analysis expert, Dr. Thomas Tricolinos, whose statement discussed the serious methodological and statistical failings of the meta-analysis. These documents are all available on the PCERA website. Now on to our first quarter business update. We continue to execute across our stated global growth strategies. First, expanding the use of Expirel and Iovera for opioid sparing pain management while enabling the migration of large, painful, and profitable procedures to the ASC. And second, pursuing innovation by investing in our internally and externally sourced portfolio of non-opioid pain management and regenerative health solutions, while simultaneously investing in educational programs to revolutionize medical practice through opioid sparing ERAS protocols. I'll start with Expirel. With more than 8.3 million patients treated since launch, an excellent safety profile, a growing body of satisfied customers achieving favorable outcomes, and a long exclusivity runway, XFRL is well-positioned to remain the market leader as the only long-acting local analgesic approved for infiltration, field block, and brachial plexus nerve block. In March, FDA approved the expansion of XFRL label to include use in patients six years of age and older for single-dose infiltration to produce post-surgical local analgesia. With this approval, Expirel is now the first and only FDA-approved long-acting local analgesic for patients as young as age six. Importantly, our label is not limited to cardiovascular and spinal surgeries, but rather a broad label that encompasses all surgical procedures for pediatric patients ages six and older. The broad label is really a testament to Expirel's established safety and excellence. efficacy, and excellent safety profile. With approximately 1 million pediatric procedures per year, we envision this to be at least a $100 million market opportunity. Our initial launch in pediatrics is underway, and we are very encouraged by the high level of receptivity and enthusiasm for replacing current standards of care. Opioids, epidurals, and IV PCA pumps, elastomeric pumps, and off-label use with local analgesics with Expirel. We also see a halo effect in adult procedures. For instance, spine is a tight-knit group of like-minded surgeons. Many have practices that include adults and the technique for spine infiltration or an erector spinae block is the same for children and adults. This opportunity provides a rapid transfer of best practice for erector spinae regional blocks as part of enhanced recovery pathways for both adults and children. The unmet need in this population is clear as physicians understand the difficulties of placing indwelling catheters in pediatric patients. Just imagine trying to keep a catheter in a seven-year-old on top of the well-known catheter and pump issues such as dislodgement, leaking, wound healing, and dose dumping. A recent article in the Journal of Health Economics and Outcomes Research highlighted clinical and economic outcomes associated with the use of Expirel versus the standard of care for the management of post-surgical pain in pediatric patients undergoing spine surgery. Dr. Robert Ballack and his colleagues at Cleveland Clinic concluded pediatric patients undergoing spine surgery who received Expirel had significantly reduced inpatient post-surgical opioid consumption, length of stay, and hospital costs compared with those who did not. The study was a retrospective cohort analysis of 10,189 pediatric patients undergoing inpatient spine surgery. We will also be highlighting Expirel in the pediatric setting at IMASC, the annual meeting of the Scoliosis Research Society, where we will be discussing new and advanced techniques for the treatment of spine conditions with leading surgeons. Additional near-term commercial initiatives include POSNA, the annual meeting of the Pediatric Orthopedic Society of North America, new key opinion leader and fellows training programs, and ask the expert panels, all of which we are launching this quarter. As I've said before, we are deploying a thoughtful, gated approach to ensure providers understand the nuances of Expirel versus short-acting generic bupivacaine and are well prepared to achieve the best outcomes for their pediatric patients age six and up. Our goal is to quickly onboard key opinion leaders at the most sophisticated children's hospitals to ensure that they are well equipped to deploy education across their networks and spheres of influence. Next, I'll turn to an update of the role that XBRL is playing in regional anesthesia and the market shift to outpatient settings. The regional anesthesia field is poised for rapid expansion, given the advances in ultrasound guidance, newer techniques, and improved outcomes. In 2020, only 20% of procedures requiring anesthesia used a regional approach. Given the tremendous upside potential to broaden the use of regional approaches, we have invested significantly in education and training to further expand clinician adoption of regional blocks as they represent the most important growth driver for our business in 2021 and beyond. XPREL-based enhanced recovery after surgery or ERAS protocols continue to revolutionize regional anesthesia by enabling earlier discharge and accelerating the migration of elective procedures to all patient sites of care. Long-acting Expirel-based blots have reliably and reproducibly extended the duration of pain control from hours to several days, establishing institutional protocols that directly enable the migration of procedures such as total joint arthroplasty, spine, and rotator cuff repair to outpatient markets. The COVID-19 pandemic has further shifted the mindset of patients, physicians, and institutions to establish safe outpatient environments providing a reliable continuity of care. By doing so, patients will be able to obtain the care they need. Importantly, we expect this transition to become permanently embedded in the healthcare systems, given the improved patient outcomes, satisfaction rates, and economic advantages, and being driven by payers determining the site of care. These market dynamics, along with XBRL utilization, significantly and consistently outpacing the recovery of elective surgery markets leave us well-positioned for long-term growth as the COVID crisis resolves and elective surgery demand normalizes with the continued rollout of vaccines. Now turning to our Pacira Innovation and Training Center in Tampa, or the PIT, which is delivering best practice knowledge transfer in near real-time for our key expo markets. Momentum and uptake of newer regional blocks continues to drive significant demand from both new and existing customers for education and training through live and virtual programs at the PIT. We recently hosted two regional anesthesia workshops designed for healthcare professionals who are seeking to advance a platform that enhances patients' post-surgical experience. Techniques are taught by expert instructors using didactic presentations, phantom model screening, state-of-the-art 3D virtual cadaver imaging, and ultrasound-guided hands-on live model scanning. In February, we featured a webinar and multi-specialty panel discussing the migration of breast surgery to the ambulatory surgery center. This was also featured recently at the annual meeting of the American Society of Breast Surgeons with over 150 healthcare providers in attendance. In March, we hosted two cardio programs, a cardiothoracic bio-skills lab where key thought leaders from leading cardiac programs around the country collaborated to determine the optimal Expirel technique and volume to adequately treat pain following cardiothoracic surgery. The lab involved ultrasound-guided parasternal blocks, such as the pecto-intercostal and transverse thoracic plane blocks, while capturing the spread and distribution of Expirel via live fluoroscopy and dissection of cadaver models. These findings will help enhance the educational offerings to both cardiac surgeons and anesthesiologists when implementing enhanced recovery pathways using these newer regional blocks for cardiac procedures. The second cardio event featured a panel on the emerging role of regional anesthesia cardiac ERAS protocols and included both discussion and live demonstration. This program was highlighted at the Society of Cardiovascular Anesthesiology annual meeting last month. In March, we hosted an interactive workshop entitled Hot Blocks You Need to Know in 2021. This workshop was broadcast live from the PIT and focused on pericapsular nerve group, or PEN blocks, and erector spinae, or ESP blocks, and was featured during the American Osteopathic College of Anesthesia annual meeting with over 100 healthcare providers. It is important to note that each of these events focused on significant on-label opportunities, so they are driving real-time demand. Approximately three-quarters of the attendees at the PIT event already have experience with Expirel. Clinicians are eager to expand the use and generate data and new procedures after seeing the positive outcomes and consistent results of regional blocks such as erector spinae for scoliosis and cardiac surgeries. Beyond these on-label educational programs, we have a key label expansion milestone on the near-term horizon with our STRIVE lower extremity nerve block study that is evaluating Expirel as a regional block for knee as well as foot and ankle surgeries. Enrollment in stride is now complete and database block is underway with top line results on track for this month. If positive, we will move forward with an SNDA submission seeking expansion of the XPREL label to include lower extremity nerve block, which we believe to be as significant as an upper extremity market. Next, let's turn to our continued progress in the markets outside of the United States. We remain on track to launch XPREL along with Iovera in Europe in the third quarter of this year. a slight delay based on continued COVID-19 issues in key EU markets. The EU launch will focus on only those markets where we can secure pricing that closely aligns with the U.S. price. COVID has caused a tremendous backlog of orthopedic procedures in Europe, with waiting lists as long as two years. In addition, the typical length of stay in Europe is several days. These circumstances provide an important opportunity for both Expro and Ayurveda. There's great interest in using Expirel to improve throughput by accelerating recovery times and discharge, while Iovera can play a key role in long-term pain management, especially as doctors work through the significant waiting list. We would expect the United Kingdom to be our largest contributor in Europe, driving more than 50% of the total business in that market. Importantly, our broad efficacy label, which covers Expirel administration via infiltration field blocks and, importantly, both upper and lower extremity nerve blocks, along with a superior safety profile, give us a clear competitive advantage in Europe, where Ayurveda is already approved. For Canada, we remain in labeling discussions with health care authorities. Given the current status, it is not likely that we will launch Xprel in Canada, as we will not jeopardize the brand with labeling that is not in harmony with major country regulators' authorities. As for the China market, we recently terminated our agreement with our partner Nuance due to the lack of regulatory pathway that makes strategic sense and protects our intellectual property without presenting the risk that our proprietary data would be used to develop a generic competitor. We made a payment of $2.8 million to Nuance in connection with this termination. Switching gears now to Iovera, we remain highly competent in the innovative Iovera system. Since our acquisition in 2019, we have significantly improved the reliability of the device and launched new clinical initiatives to demonstrate its potential to improve patient care using novel cold technology to administer a non-pharmacologic nerve block to safely and immediately deliver months of non-opioid pain control. We have great confidence in a long-term opportunity for this important addition to our commercial portfolio. With our dedicated Iovera sales team, along with recently implemented commercial enhancements now driving new customers and expanded use, Iovera sales increased by 44% in the first quarter, and an average number of ordinary accounts is up 48% year-over-year. As with XPIREL, the PIT is providing a valuable training and educational tool for Ayurveda. So far in 2021, we have hosted four Ayurveda simulation labs that all focused on introducing the product to new customers. Participants at these programs learn how to target superficial genicular nerves using the Ayurveda Smart Tip with ultrasound guidance. Led by healthcare professionals, the lab includes didactic lectures and hands-on training, including live model scanning with nerve identification using ultrasound and peripheral nerve stimulation, virtual 3D cadavers, smart tip treatment steps, and reviews of the Iovera system setup and handpiece operation. We recently hosted an Iovera Bioskills cadaver lab that investigated the utilization of Iovera as a medial branch block for back pain. During this session, a multidisciplinary team comprised of an interventional pain management physician, neurosurgeon, and research engineer evaluated the current modalities of medial branch blocks and the potential for Iovera blocks as an opioid-free option for the 14 million Americans suffering from low back pain. These educational and commercial efforts are driving significant increase in our Iovera customer base, approximately 90% in the first quarter of 2021, with a growing presence in the ASC setting. In fact, ASCs represented roughly 60% of our new Iovera customers in the first quarter. On a clinical front, PREPARE is enrolling patients to evaluate Iovera and Expirel for opioid-sparing pain management for patients undergoing total knee arthroplasty. We continue to expect enrollment to conclude before the end of this year. In parallel, we are launching an Iovera registry to capture real-world evidence for use in TKA procedures with leading academic and orthopedic centers of excellence. We are also encouraged by the excitement around using Iovera in other areas. Key opinion leaders in orthopedics, spine, and anesthesia are interested in replacing heat-based radiofrequency ablation with Iovera cold therapy with interest across a wide range of treatment opportunities such as low back pain, spine spasticity, and rib fracture. We will use investigator-initiated studies and grants to develop data across these areas. Turning now to business development, our team is leading a robust effort to thoughtfully pursue opportunities of interest to our surgical and anesthesiologists we serve today. We believe our growing leadership position in opioid-sparing pain control provides us with a significant opportunity to build a differentiated portfolio to improve the patient journey along the neural pain pathway. Earlier this year, we announced a strategic investment in GeneQuine, a gene therapy for osteoarthritis of the knee, and recently invested $3 million in Spine Biopharma to support their advancement of a regenerative approach to treating low back pain caused by degenerative disc disease. Spine Biopharma's lead product candidate is Remedisc, a seven amino acid chain peptide that binds to and induces downregulation of transforming growth factor beta-1, or TGF beta-1, which is often highly expressed in the degenerative discs of patients with low back pain. We also recently made a $10 million equity investment in a privately held company with an exciting gene therapy platform. We will share more details in the coming weeks. Finally, to augment our business development efforts, our in-house team is focused on leveraging the proven safety, efficacy, and customizability of our DepoFone platform. With that, I'll turn the call over to Charlie to review the financials.

Charlie? Thank you, Dave, and good morning, everyone. Before discussing our first quarter financial results, I'd like to remind you that I will be discussing non-GAAP financial measures this morning, which we believe more accurately reflect our business results. A description of these metrics, along with our reconciliation at GAAP, can be found in the press release we issued this morning. Let me begin by reiterating our confidence in what the future holds for our business. Market indicators remain strong, with XBRL consistently outperforming the elective surgery market. This leaves us on track for accelerating top and bottom line growth as the COVID pandemic continues to subside and the elective surgery volumes begin to recover and normalize. We also continue to see XBRL enabling the shift of many procedures to outpatient settings. The COVID pandemic has only accelerated this shift, and we are confident that this surgical migration will remain embedded in healthcare practice going forward. We ended the first quarter with more than $625 million of cash and investments. This strong financial foundation and the cash-generating nature of our business leave us well-equipped to continue to invest in internal and external growth opportunities that align with our vision to become the global leader in innovative non-opioid pain management and regenerative health solutions. First quarter total revenues of $119 million were driven by $114.7 million in expo sales. On an average daily basis, this was 115% of the first quarter of 2020 due to the expanding utilization of long-acting XBRL-based regional approaches. For Iovera, we reported net product sales of $3.3 million for the first quarter of 2021, an increase of 44% from the $2.3 million for the first quarter of 2020, primarily due to significant COVID-related shutdowns last year. Importantly, we're also starting to see many of our new commercial initiatives start to kick in with the greatest demand for Iovera coming from pain relief for patients in advance of a TKA procedure, as well as chronic pain management for those with mild to severe osteoarthritis of the knee. Our non-GAAP gross margin for the first quarter of 2021 improved to 75% versus 73% for the first quarter of 2020. This was due to sales of lower cost product manufactured at our custom suite in Swindon, UK, as well as the impacts of pricing and vial mix. We continue to expect adjusted gross margins to progress towards 85% as the 200 liter batch facility comes online and our investment in the second generation Iovera products is complete. Non-GAAP research and development expenses were $14.8 million in the first quarter of 2021, versus $14.6 million in 2020. Increases in clinical and regulatory costs were offset by reductions in manufacturing capacity expansion costs, with our Swindon-based 200-liter manufacturing suite advancing from the development phase to the registration phase. Non-GAAP SG&A expenses were $41 million in the first quarter of 2021 versus $38.3 million in 2020. While sales and marketing expenses declined due to the decreased sales commissions to Depew Synthes with the conclusion of the agreement in January 2021, our G&A expenses increased on a year-over-year basis due to an insurance recovery of $2.1 million received in early 2020 related to legal expenses for the DOJ claims, all of which were fully resolved in 2020. With respect to taxes, on a non-GAAP basis, the first quarter tax rate came in at approximately 25%, which is where we expect to land for the full year. To remind you, we expect to become a cash taxpayer during the second half of 2022. All of this resulted in non-GAAP adjusted EBITDA of $36.2 million in the first quarter of 2021 versus $26.9 million in the first quarter of 2020. While we are not currently providing 2021 guidance, given the continued uncertainty around COVID-19 and the pace of recovery for the elective surgery market, we will continue to report preliminary monthly product sales to share inter-quarter trends with you. We will consider changing this practice as we have more visibility post-COVID. For April 2021, we continue to see strong sales as we saw in March, and expect to report a significant year-over-year increase when we report monthly sales next week. To remind you, in 2020, we saw a precipitous drop in sales beginning in the second half of March and continued through the end of April, with a decline in year-over-year X4L sales of approximately 70% during this period. Lastly, we remain very bullish on our long-term expectations for robust top and bottom line growth. We believe that by the end of our five-year planning period, revenues will be approaching $1 billion for XBRL and $200 million for Iovera. Gross margins will have improved 1,000 basis points, and operating margins will exceed 50% for our current base business. With that financial overview, let me turn the call back to Dave for his closing remarks.

Thank you for that review, Charlie. Looking back over the past year, we emerged from this unprecedented global pandemic and lockdown as a stronger company. We have become more resilient as a team and united around the shared sense of purpose for the important work that we are doing. At Passura, the pandemic accelerated the transition to the ASC setting and has opened the door for a variety of digital interfaces, from our meetings with some of you to medical meetings to training physicians and more. These changes are likely here to stay, and we have embraced them. One thing that has not changed with the pandemic is the need for improved non-opioid pain management. The pandemic has had a devastating impact on our society with increased opioid adverse events. Here, Pacira continues to lead the way by expanding the use of Expirel and Iovera, and by investing in novel, innovative technologies that are synergistic with our goal of bringing non-opioid pain management and regenerative health solutions to patients in need. With that, I'll turn the call over to Tina to begin our Q&A session. Tina?

As a reminder, to ask a question, press star 1 on your telephone keypad. And our first question is from David M. Seller with Piper Sandler.

Hey, thanks. So just a couple. So first, you know, regarding the matter with the American Society of Anesthesiologists, I mean, just looking ahead, and obviously this is a core audience for you, Sue, Should we be at all worried that this is something that could in any way have an unintended consequence of alienating a core constituency, particularly in the context of a competitor that could be coming to market? I realize that that product cannot be used as a nerve block, but just in terms of creating noise, how should we think about that and what's your thought processes? So that's number one. And then I joined late, so I apologize if I missed this, but can you just talk about cadence of recovery in elective procedure volumes as the year progresses? And I guess what I'm asking here is in the second half, are you expecting sort of fully normal pace of elective procedure volumes, particularly as we get into the back half of the year? Thanks.

Thanks, David. First, I don't see, if anything, actually, we think that the legal action against the society is having a positive benefit. The society has done what it has done, and we believe that we didn't have any option, frankly, but to defend ourselves against what was clearly a well-thought-out attempt to defame Ex Perell. What we've gotten from the medical community is great support for, you know, there's some questions before people read the Tricolinos declaration and before they read the declaration on CME and on conflict of interest, et cetera. But as soon as folks understand what the legal issues are here, we've had great support from the anesthesia community, up to and including, you know, several people wrote rebuttals to those articles and asked for them to be published in the same journal. and they were told by the editor that he would not publish any of those because they didn't follow the scientific process. So, given some of the ways that this has been positioned, I think, you know, the folks who are members of the society who are using ex-pareil not only to enhance their practice by increasing the reliability and the viability of regional blocks, but also XPREL is making this migration to ambulatory surgery center possible, which is really of high value to the anesthesiology community. I think we see a clear separation between the journal and the society and the folks who are actually practicing regional blocks in the marketplace. So if you judge by April and the first few days in May, we don't have anything to worry about in terms of any kind of a retributive action. Actually, things are going very, very well in addition to what we talked about this morning. On the second point, and I'll be consistent here, David, with what we've said in the past, and God knows if we're right, but we are starting to see some of this start to rectify itself. So what we said is Q1 will be pretty much a continuation of Q4, and I think that's pretty much what happened. We think in Q2 we're going to start to see these things start to modify, and at least in our models, we've got 5% of the 4 million procedures in our TAM that were not done in 2020 coming back to the marketplace. And those are almost entirely orthopedic procedures. And then as we go to the back half of the year, we think that something like half of those 4 million procedures will come back. Now this is just in our TAM, by the way. But we think half of those procedures will come back to the marketplace. And so in our manufacturing forecasts, we have included the opportunity that we will treat the percentage of those patients in addition to what's going on now. It's not quite as clear as a normalized market where people that have pain go and get their surgery. You've got these patients coming back to the marketplace and being prioritized in many cases, so there still is an expanded time lag even for new patients today. But I think that that will resolve itself over the next year or so. Just one extra piece of insight, because I think it is really valuable, is we will benefit greatly from our strength in orthopedics. And the reason I say that is that the orthopedic community has an extended relationship with their customers or their patients. In many cases, it's decades long. And so those patients remain in contact with those surgeons, and the waiting list for how you move those patients into a an opportunity to do elective procedure is vibrant. Very different than the soft tissue, you know, we're talking about colorectal belly, where we've had a number of calls with primary care docs and asked them the simple question, would you refer a patient for surgery from a telehealth call? And there are some exceptions, but generally speaking, the answer is no. And so that pathway has to rebuild itself, right, where the patients live go to see the physician, the physician wants to look at the blood work and see the patient and all of those things, and then you will see the primary care belly surgery start to come back online. We think that will be more of a fourth quarter event. So that's a long answer to a fairly simple question, David, but we think, yes, not all of these patients will be able to come back because we just don't have the capacity But we think the ambulatory surgery centers will prioritize the high profit total joints, spine, rotator cuff, et cetera.

Okay. No, that's helpful. Thanks.

Thanks, David.

Okay. Your next question is from Daniel Busby with RBC Capital Markets.

Hey, good morning. Thank you. Two questions. First, we've started to see more companies reintroduce full-year financial guidance. Clearly, you've held off for now. Can you talk a little bit more about what you're waiting to see in the market before doing so, and does uncertainty around a potential competitor approval later this month factor into that decision at all? Second, if we look at the weekly elective surgery data you provided in your slide deck, there's been a fairly tight correlation between weekly elective surgeries and expert usage over the last year or so. but that's actually diverged a bit in the last few weeks. Elective surgeries have declined while Expirel has held reasonably steady. Can you discuss what's driving those trends? Thank you.

Sure. The first one is easy. A potential competitor has had no impact on anything that we're doing here, specifically with guidance. I mean, I think more of what we were seeing as we went through the first quarter, Daniel, was these spikes in COVID-related closures and the marketplace moving around, you know, we had some weeks where some of our bigger states were not performing at the same level. You know, there was no consistency in the marketplace, I guess, especially in the states that provide the majority of our business. And so, you know, that and really more waiting to see how the pediatric launch was going to go you know, what kind of reception we were going to get in the marketplace when we were talking to, you know, the general pediatric population, et cetera. You know, I think with what we're seeing now, I think we will be in a much better position for the next call. But I think coming into this call, there were just too many unknowns for us to make a statement. And if we did, it would have been so modified with risk adjustment that nobody would have been happy with us. So it just made sense to keep presenting data on a monthly basis, which has had a really interesting impact because it gives us a lot more opportunity to interact with the marketplace than only waiting for the queue call on a regular basis. So I wouldn't be surprised if we continue to do both. But right now, you have to be determined. But as I said to David's question, we've had a strong few weeks here, and so I think we're in a much different position when it comes to determining how we provide planets going forward. On the IQVIA chart, we just have to be really careful with that data, Daniel, because that's claims-based data. And so you will see that that modifies over weeks, right? And as more claims for that week that's reported come online, you'll see that the gap narrows between XPREL and the elective procedures. What we pay more attention to is how XPREL is always on the top of the line and the elective procedures still remain generally modestly on the bottom of the line, which tells us that we are not only growing market share, but as the elective procedures come back, reference the answer I just gave to David, that we will have a share of the market in these elective ASC procedures that is higher than what it is in the hospital marketplace and what it is in the hospital outpatient environment, which again goes back to providing guidance with some certainty that we're going to be in the right band.

Got it. Thank you.

Thanks, Daniel.

Your next question is from Greg Frazier with Truist Securities.

Morning, folks. Thanks for taking the questions. I just want to follow up on the anesthesiology matter. Are you aware of any proposed changes to protocols or reimbursement stemming from those articles? And can you also comment on whether there's been any discussions between the company and the ASA since you filed a complaint?

You know, we have some examples, Greg, where, you know, and especially remember we're launching PEDS. And so, you know, folks are looking for formulary approvals and things. There are some, a modest number, not material to our total business, but you could see that there were some folks who were asking questions about, you know, why would you want access to a drug that is not superior to plain bupivacaine, et cetera. A number of things and reasons that you would want to do that. So we did have a couple of surgeons who stopped using it. They have now returned to using it, given the tricolinos. declaration and the appearance that there's more to that story than was published in the anesthesia journal. More to the point is our field force was being asked a lot of questions about that and obviously didn't have a lot of things that they could say about it given the stature of the anesthesia journal. So having the Tricolinos declaration that they can provide to their patients and having all of this stuff on our website where folks who want to know what's going on can find out, you know, the other side of the story, if you will. I think most pertinent to us is that we couldn't have other articles referencing this as truth when, you know, immediately after these articles came out, we had folks do their own meta-analysis on the same data sets and come to a very different conclusion. So, you know, you can't, if you're PSIRA, you can't let this be referenced as fact when we know that it's deeply flawed and came to a negative conclusion, well, there's a whole raft of reasons why that might have happened not to be gotten into here. Part of your second question, Greg, and I know this will be no surprise to you, I mean, we're not in any position where we're going to negotiate this in the public domain. So, you know, there's going to be notifications that come out between the law firms that are in the public domain. I think that'll be the the breadth of what we want to share with anybody. Other than that, the discussions that we're having have to be held private.

Got it. Totally understand. And then on Europe, I was just wondering if you could put some numbers around the XPREL opportunity and how you see the launch evolving over the next few years. Thank you.

Yeah, you know, so it's very much a specific launch. We're going to launch XPREL in, you know, something on the order of eight countries and Iovera on eight or nine countries. As stated in the script, we really are only going to launch in places where the value that's being created by XPREL is recognized in the price that we're able to get. And so, you know, we have, well, I guess in a word, I would say that the opportunity appears to be at least as big as we thought it was a couple of months ago. And I say that because You know, we talked to a surgeon in the UK two weeks ago, Friday, that actually said he had 5,000 patients on his waiting list. And so there is a, it'll take us several years to work through that opportunity. And so iOVERA, while patients are waiting for years in order to get their surgery, and then Expirel, and we're working with a number of different hospitals now and a number of different anesthesia and surgery groups who are interested in the model that's been established here in the United States and driven by ERAS protocols where we can move these patients to a shorter timeframe and the idea of addressing this backlog by being way more aggressive with something that approaches an ambulatory surgery center. You know, these groups with the NHS, the National Health System, are forming their own ways and their own throughput programs and their own opportunities to address this backlog. I think where we go, we will be very successful. What the model says, what our model says, is that we get into 2025, that between the two products, we're pushing the $100 million around in Europe. And on the current model, at least, Greg, somewhere in the back half of year three, we become profitable in Europe. You know, it's not massive in terms of what our expectations are for in the United States, but it's profitable and it supports our mission of providing an opiate alternative to as many patients as possible. So, you know, we're happy to be going there.

And your next question is from David Steinberg with Jefferies.

Oh, great, thanks. And sorry if this question has been asked. I just had another call. But I have two questions. First is I know that you indicated at the beginning of the year, Dave, that you're looking to be active in business development and M&A, and you've done a few smaller type in licensings or acquisitions. And I'm just curious what your appetite might be for something larger. I know last year around this time, The company, you know, with the pandemic just hitting, indicated that they were going to husband their cash and not really do much in business development for obvious reasons. But that's obviously changed. Are you looking, you know, I guess how active are you currently, and would you be disappointed if you didn't do a few transactions this year? And I guess, you know, how big a transaction could you do given your, you know, cash and debt capacity? That's the first question. And then secondly, you know, this is round three, waiting for, you know, Heron's PDUCA date. You know, it's hard to find a lot of doctors who can talk about 011. We recently held a doctor panel, and they were somewhat knowledgeable and viewed the products more as complementary versus competitive, you know, small surface areas versus large surface areas, and the fact that they can't do nerve blocks and things like that. Would you agree with that? And then the related question is, there's some discussion that if they get approved, they're going to come in at a much lower price point than yours. And I was wondering if you could comment on what your competitive response might be if that's the case. Thanks.

Thanks, David. First, on the M&A question, I mean, if you include the gene therapy company that we've most recently made an investment in, we've now made three investments in the last couple of months. I think given the opportunities that we have, and Ron and his team are exhaustively looking at opportunities in the marketplace, we don't have any emotional or financial reason we wouldn't do a transformative larger deal. We just don't have one. that we have confidence in, David, that would meet the objectives of the organization in terms of finances and all the rest of that stuff. So there's no reason why we wouldn't do it. There's no stated strategy that we won't do it. It's that most of the things that are coming to us are relatively early, gene therapy and cell therapy and things like that. And the best way for us to have a number of shots on goal is to make these financial investments, take an observer role, or in some cases taking a board seat with the prescribed opportunity to invest or acquire in a future date based on clinical milestones being met during the development process. I think that that model makes a lot of sense to us. We expect that we will announce several more of these over the next couple of quarters. We're in a good spot. If you or anybody else has a transformative transaction that they think makes sense for us, please don't keep it a secret. We've got a lot of cash. This would be our slowest quarter for EBITDA, and we still had $36 million, and so we think we're going to accelerate significantly as we go through the next three quarters. I think we're in a very strong position. It's just that we don't have anything that makes strategic sense that we're aware of today. So I think if that doesn't cover the first point, come back to me. On the second point, as usual, David, a number of mirages created here, right? If we follow the EU label, and for everything that I've ever done in my career, the EU label is strongly suggestive of what you're going to get in the United States. there really is no market for this product. It's the first time in my career that I've ever seen a package insert that says this medicine should not be used for serious surgeries. They don't define serious surgeries, of course, but if you ask the patient, I think you're going to find that all surgeries are serious. And so on your specific topic or question around price, the European label is very clear that this drug is to be used on small wounds. If you use a small wound, then you would use the 10 ml dose of Expirel, and the WAC cost for that is around $180. The 011 company has actually said that they're going to come in the low $200. So if you compare our small vial to their price that they've talked about in the marketplace, we're still cheaper. So the only way their argument makes any sense is if you use a 20 ml vial for Expirel to do a small wound. And nobody would do that in the marketplace. In fact, I think you've seen the steady growth of our 10 ml as we continue to expand, and you'll see a fair amount of 10 ml as we get into the PEDS market, especially in the younger children as well. So the argument, as with everything, doesn't make any sense. So I hope that they get approved. I mean, we can't lose. If they get a CR, hopefully they're finally dead. If they get approval and it's a bad label, and it for sure will be, then they can't sell it to anybody, and that would be our preferred option, frankly, as we sit here today.

Okay, thank you.

Thanks, Ed.

Our next question is from Serge Bellinger with Needham & Company.

Hey, good morning. Thanks for taking my question. First one is on the pediatric label expansion. Dave, you consistently talked about the pediatric opportunity consisting of about a million procedures. Does your pediatric label allow you to capture or target that whole one-way procedure or just segments of it? And then on the European opportunity, maybe just talk about the dynamics of the opportunity. Is there a similar movement to the ASC setting and how familiar are the Europeans with the cryo analgesia?

Yeah, thanks, Serge. First on PEDS, so this label is for infiltration, which via the Janet Woodcock letter from the legal settlement with the FDA is the same as a field block. So the million surgeries that we reference are what's available to us as a result of that label. We also are in discussions with the FDA on patients zero to six. It'll probably be done in two tranches, two to six and then zero to two, neonates to two. And we're also in discussions with the FDA on a nerve block indication. And interestingly, since we've had the launch, We've talked to a number of major hospitals who do, well, we've got one hospital in particular that does 2,000 peripheral nerve blocks in children itself. So we think that we now have a lot more understanding of the market and opportunity to go back to the FDA with these folks who are doing these nerve blocks every day who are using Expirel now in order to achieve those. And so the million, the direct answer to your question is the million is the current opportunity with the current label. and would be expanded if we get a nerve block label or as we go below six. In Europe, yes, they are understanding of cryoanalgesia. In many markets, especially the Nordic markets, for example, they actually have more exposure to cryoanalgesia than we do here in the United States. So this is not a zero-based launch. There are folks there who have been asking for Iovera now for several months. we will address those same markets with many of the materials we have here in the United States. It's interesting. Every country is different. There are some countries where ASCs and outpatient is favored. It is more the norm to have patients stay in the hospital for an extraordinarily long length of time. five days plus for a total knee arthroplasty, which of course is a major problem if you've been locked down for two years. And so what's happened specifically in the UK is you have folks who are getting together and approaching the National Health Service with their own models for how they can address this backlog. So we're working with groups of surgeons and anesthesiologists who have said to the NHS, we're going to go with these ERAS protocols. They might still be done in the hospital because they don't have the ASC facilities that we have, right, the freestanding facilities, but you would still set up a model where you could do knees and hips on a same-day basis. And so think about it not quite as COVID resilient because it's actually a separate building, but using the same approaches Similar to what we're seeing, frankly, in some cases in spine in the United States. When we talk about same-day spine, in a number of cases, those are actually being done in the hospital, but the patients are still being discharged without an overnight stay. Think about that same kind of a model with an ERAS protocol. And we've got a lot of friends in Europe. There's a lot of folks that have been trained in the United States. We're very strong in the International ERAS Society. And a lot of our educational programs benefit greatly from some of the folks that are now active in Europe. So I think we're, you know, it's going to be slow. Europe is slower to adopt than the U.S. is. So this year we'll be modest at the revenue line. But as we said to the earlier question, I think over the next three years it will become profitable. And over the next five years, you know, if this turns out to be a $90 million to $100 million market, it's well worth doing.

And your next question is from Anita Deschamps with Berenberg Capital.

Hi, good morning. Thanks for taking my questions. Just a couple here. Just in terms of the IAVERA sales guidance that you have been mentioning in the past of about $200 million, can you sort of talk about what drives your confidence of achieving these numbers despite the reimbursement being better in the HOPDs? versus the ASC. And the next question is just regarding the patent that you have filed for the new manufacturing process related to Expro. Are we likely to see anything related to that in 2021? Or is it, you know, USPTO works a little bit slower and we're likely to see it maybe next year? Thank you.

No, thank you. So, you know, in terms of Iovera, the guidance, the $200 million really comes largely from what we bought, thinking about total knees and the ability to freeze the patient in a cash marketplace for osteoarthritis, more of a lifestyle kind of a sale in an orthopedic surgeon's office for somebody that wants to play golf or walk on the beach with their grandkids, or we hear a lot about, I want to go on vacation, my daughter's getting married, all of those kinds of things. So that's primarily where the $200 billion comes from. As we get into the marketplace and we start to talk to people about rib fracture and spasticity and spine and shoulder and all the other things, I think our expectations as this product matures and as we develop smart tips specifically for opportunities for low back pain and spine procedures and things like that I think you're going to see that number grow so I would say today 200 million over the over a five-year plan actually has turned out to be a minimum expectation and as we get into these different marketplaces I think you'll see that grow on the IP issue we filed over a dozen additional patents and there is some reason to believe that a couple of those will be prosecuted this year or early next year. As you say, it's impossible to say there is no PDUFA date on IP, right? So we don't have a date, but there's enough interest in this market, and some of these things have been structured in such a way that we do expect to have some activity in the back half of this year. Actually, it's not the back half. It's actually in the fourth quarter of this year.

Great, thank you. And just one more question. Have you considered using the Depoform technology for other drugs besides X-ray?

Oh, sure. Yeah, I mean, we're looking at another local anesthetic, actually. Levopivacaine is an epidural opportunity now, you know, especially after having discussions with the pediatric burn folks. They would like to see a... a procedure where you're not identifying a specific nerve and it's not actually a field block in the classic definition of the term. It would be more an opportunity to address a more broad span, broad and extended need for pain control, right, when you're taking the skin off of a patient's scalp and transferring it to the patient's face, for example. How do you address that marketplace, you know? If we could do that in a more broad spectrum way with something like a DepoDural application, that would be the way to go. Yeah, we've continued to look at a number of things. You know, we're looking at anti-inflammatories. In DepoFoam now, we've got a number of things against the strategy of any place that you use a catheter for a subarachnoid use, you know, can we replace that catheter with Expirel? And any place that you use an opioid as a standard of care, can you replace those with Expirel? So our group continues, you know, we have an R&D group out in San Diego. They continue to investigate these things. And the hope is that we're going to be able to supplement the products that are coming in from outside with products that are going to be developed with our own DepoFoam technology here. But so far, it's, you know, we've looked at antibiotics, very difficult. You know, you've got an infection rate of 0.025%. And if you've got a 30% delta benefit is you're, As your threshold for an efficacy trial, you're talking about 30,000 patients. Those kinds of hurdles make it very difficult to develop in some of the markets that we're currently in.

Thank you.

Thanks.

And we have time for one last question from Christopher Nayor with J.P. Morgan.

Great. Thanks for the questions. First ones for the regional anesthesia market, you've talked about fairly low penetration rates for overall surgeries at 20%. When we think about the tailwinds for your business, including the shifts to the ASC setting, how should we think about where that number is going to go over time and the pace of that change? And then second one, as we think about the recovery of the elective procedure market through 2021, What does that mean for your margins near term? And should we think about certain expenses coming back into the P&L with the recovery?

Yeah, thanks, Chris. So, you know, we've said a couple of times that if you look at all of the procedures that are being done by anesthesiologists, only about 20% of them are regional. Remember that, you know, before Expirel had the claims, the docs had an intense interest in how they make these procedures last longer. They had an intense interest in all of these different blocks that we're investigating now, but because they only worked for a few hours, there was no way to have a justification for the time and resources invested in those blocks. I mean, I'll just give you a quick example. Four or five years ago, the anesthesiologist would have done what they called a rescue tap, where they waited for the patient to wake up in pain, and then they gave them a tap block, hoping that they were gonna extend the duration of pain controls control through the first post-surgical night. Now when we're doing these blocks into these avascular environments, these blocks are lasting for several days. And so our own internal thinking is that with the PIT and with our strategic relationships with a number of the big anesthesia groups, that over the next 12 to 15 months, we can double that to 40%. And the reimbursement for these regional blocks because they allow patients to be moved to the outpatient environment, et cetera, are significantly higher, they are, than when an anesthesiologist performs a traditional procedure. So the regional anesthesia groups themselves are interested in moving this along. And so to the point where probably the most dramatic example I can give you is the anesthesia groups have tied a significant part of the physician's bonuses to their understanding and moving towards regional blocks and one of the main places that they're learning how to do that is in our facility the pit and from our manuscripts that are coming out of the pit on you know what's the volume how many dermatomes do you hit with different volumes you know ultrasound nerve stimulation all of those things that are required so i you know it'll never get to 100 but i think the guys that are coming in the gales that are coming out of out of their residency and fellowships are all ultrasound savvy And so they very much migrate towards regional programs. And so you're gonna see it increase into something that's over 70% for sure over the next four or five years. And then I think it's gonna be a generational thing where the older guys just sort of stop practicing and it grows from there. Elective procedures in the back half of the year. It doesn't mean, I mean, so, The budget is the budget pretty much. We don't anticipate having any additional expenses to what's currently budgeted for 2021. One of the beauties of regional programs and our move away from a surgical audience where there were 1500 different procedures that they were doing to a regional approach where a single block can cover a whole bunch of different procedures, is that the ROI per rep day work from our field force goes up dramatically. And so we don't see any additional expenses coming back to the market to our P&L in 2021. And so, you know, beyond the budgeted expenses and just the COGS and the cost associated with producing additional medicines, everything will fall to the bottom line for both products.

Perfect. That's super helpful.

Good.

And I will now hand the call back over to Dave Stack, Chairman and CEO, for closing remarks.

Thanks, Tina. I'd like to thank you all for participating and listening to today's conference call. We look forward to keeping you updated on our progress. Next up for us is the RBC conference later this month. Thanks to you all. Stay well. Bye-bye.

Thank you again for joining us today. This does conclude today's presentation. You may now disconnect.