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spk01: Good day and thank you for standing by. Welcome to the Q3 2021 PACEBRA Bioscience Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star and the number 1 on your telephone. Please be advised that today's conference call is being recorded. If you require assistance during the conference, please press star and then the number 0. I would now like to hand the comments over to Susan Mesko, Head of Investor Relations. Please go ahead.
spk00: Thank you, Amanda, and good morning, everyone. Welcome to today's conference call to discuss our third quarter progress. 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 here for our question and answer session. Before we begin, let me remind you that today's call will include forward-looking statements based on current expectations, including those related to the potential transaction between PACIRA and Flexion Therapeutics. 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 for free on the SEC website or our website. In addition, we'd like to remind you that the required tender offer documentation for both the CIRA inflection has been filed with the SEC. Please also refer to the information in such documents which are available for free on the SEC website. With that, I will now turn the call over to Dave Beck.
spk14: Thank you, Susan. Good morning, everyone, and thank you for joining us. We'll begin today's discussion with a few prepared remarks to cover recent business highlights before turning to your questions where we'd like to devote most of our time today. Last month, we were thrilled to deliver a major milestone in our growth strategy with our proposed acquisition of Flexion Therapeutics. This transaction directly aligns with our goal of building out a robust offering of novel non-opioid treatments that will allow us to broaden our differentiated portfolio of end-to-end solutions across the neuropain pathway. With Zoretta, we have a highly complementary commercial asset for the treatment of osteoarthritis knee pain, which will diversify our revenue stream, grow our top line, and provide meaningful synergies that we expect to drive substantial near- and long-term benefits accretion to our cash flow and earnings. We are developing an integrated Zaretta operating plan for 2022. We expect significant operational synergies, accretion, and growth potential for Zaretta, which will be fueled by our complementary call points and commercial activities. To put some quantitative context around this, the three complementary commercial assets are each on a strong growth trajectory with year-over-year to date net product sales growth of 27% for XPRO, 76% for Iovera, and an estimated 25% for Xelretta as reported by Flexion Therapeutics last month. And based on our estimates, Pacira only needs to capture 30% of the operational synergies to make this deal accretive in 2022. Future growth opportunities for Expirel and Iovera were highlighted at our Investor Day last month, which we hosted from the Pacira Innovation and Training Center in Tampa. We were joined by eight key opinion leaders who shared their experiences across multiple procedures. Dr. Jeff Gadsden, head of regional anesthesia at Duke University, provided an excellent summary of the revolution taking place in the field of regional anesthesia, where ex-pro-based blocks are transforming the standard of care by institutionalizing enhanced recovery after surgery, or ERAS, protocols that are yielding improved outcomes, faster recovery, better pain control, and enabling the shifting of complex procedures to outpatient settings. Regional techniques are redefining the standard of care for post-surgical pain management with field and nerve blocks expected to grow from 20% of anesthesia procedures in 2019 to 75% by 2025. Expirel is the only FDA-approved product that allows field and nerve blocks for single-dose long-acting pain control. Dr. Sonny Toomber, a pediatric anesthesiologist from Shriners Children's Hospital, discussed how Expirel is changing the standard of care for his institution where they are using Expirel-based regional techniques such as erector spinae or ESP blocks to achieve excellent pain control using low or no opioid regimens in highly painful procedures such as scoliosis, noose bar placement, and colorectal surgeries. XPREL is redefining pediatric post-surgical pain management by displacing opioids and cumbersome catheter systems, which can have a 50% value rate, especially important for this vulnerable patient population. With approximately 1 million pediatric procedures per year, we envision pediatrics to be at least a $100 million market opportunity by 2026. Dr. Maggie Holtz, a regional anesthesiologist and medical director at WellStar Health Systems, performed live demonstrations of ultrasound-guided Exprel-based ESP and tap blocks, showcasing the ease of administration and superiority to general anesthesia in terms of earlier recovery and fewer side effects. For example, as discussed by Dr. Tumbler, Expro-based ESP blocks are becoming the marquee procedure for pediatric spine surgeries at influential children's hospitals across the country. Dr. Michael Wang, Chief of Neurosurgery at the University of Miami Hospital, highlighted how Expirel-based ERAS protocols have paved the way for him to perform awake spinal fusion surgery and cited cost savings of more than $5,000 per case, as well as a reduction in procedure time of more than two hours per case. Enabling the transition of spine procedures to outpatient settings is a game changer and represents at least a $100 million growth opportunity for Expirel. Dr. Paul Sethi, a leading research physician in sports medicine from Greenwich, Connecticut, has established new Expirel-based clinical guidelines for shoulder surgery, where he is seeing 30% of patients go opioid-free after surgery in the ambulatory surgery setting. Shoulder surgery is the fastest-growing orthopedic procedure for Expirel in the ambulatory surgery centers. Dr. Steve Garber, obstetric anesthesiologist at Saddleback Medical Center in California, highlighted his success using Expirel tap blocks to help new moms have opioid-free, pain-free experience after C-section surgery. C-section is the cornerstone of the women's health market with Expirel, with sales also expected to exceed $100 million by 2026. Dr. Josh Urban of Ortho Nebraska, who has used Iovera in more than 1,000 patients for treating pain associated with osteoarthritis or total knee arthroplasty, summarize the advantages of Iovera cold therapy as a long-acting, non-pharmacologic nerve block versus the safety risks associated with heat-based approaches. We are successfully positioning Iovera as a total procedural solution for total knee arthroplasty and expanding to peripheral osteoarthritis as well. As we reported previously, orthopedic procedures make up slightly more than 50% of our Expirel procedures. All of these above are on-label applications and are driving real-time demand in the market. The event also highlighted several exciting future development opportunities, such as the treatment of pain from spasticity, presented by Dr. Paul Winston, who is the medical director of rehabilitation and transitions at the University of British Columbia, Victoria, and also the current president of the Canadian Association of Physical Medicine and Rehabilitation. Dr. Winston presented compelling data outcomes data using ivera cold therapy as a novel approach for treating not only the pain of spasticity, but the spasticity itself. The unmet medical need is significant, and the social impact and costs are extremely high. With an estimated 5 million patients, we believe Iovera could make a meaningful impact for stroke, cerebral palsy, multiple sclerosis, or spinal cord injury patients suffering from spasticity. Pilot studies are almost completed. Treating the pain of spasticity is currently on label, and we are defining the regulatory strategy to add spasticity itself to the indication. Spasticity has the potential to be a blockbuster market for Iovera. From the beginning to the end, the event underscored the vast untapped market opportunity that lies ahead. With a total addressable market of 32 million procedures for Expirel and 31 million procedures for Iovera, and current single digit penetration, we feel great about the outlook for growth, with each 1% incremental market share adding another $100 million to the top line. A replay of our investor day can be found on the investor section of the Pesera website. Turning to Europe, the launch of Expirel and Iovera are now underway in this important market. We are generating interest, taking orders, and expect to be shipping product by mid-November. We are seeing a high level of interest as COVID has caused a tremendous backlog for orthopedic procedures in Europe, with waiting lists as high as two years. Importantly, the average length of stay in Europe is several days, which provides an optimal opportunity for both Expirel and Iovera to improve pain management for patients waiting for surgery, as well as recovery time, surgical efficiency, and throughput for total hip and total knee procedures. On a clinical front, our team continues to make strong progress. For Expirel, two phase three registration studies for Expirel and lower extremity nerve block are now underway. This timeline places us on track for regulatory submission in the third quarter of 2022. Activities to support label expansion to include a pediatric nerve block program and an indication for patients under six years of age continue to progress as expected. A number of academic collaborations are also starting. These include an opioid-free C-section study at Henry Ford Hospital in Detroit and ESP blocks in pediatric spine surgeries at Shriners Hospitals and the Cleveland Clinic. Finally, we're defining regulatory strategies in new areas of interest, such as stelae ganglion block for treatment of post-operative dysrhythmia from open-heart surgery procedures. With Iovera, we remain on track to report interim results from our PREPARE study, which is evaluating Expirel and Iovera in total knee arthroplasty procedures. In addition, we are supporting a wide range of pilot initiatives in exciting markets, such as restless leg syndrome, spasticity, and rib fracture. As for the DepoFoam pipeline, we're moving to the next cohort in our subarachnoid program for spinal administration, a Depo-dexamethasone asset for particulate-free inflammation therapy, and a high-potency Expirel with an extended duration of action. In closing, we feel great about where we stand today and the market dynamics we are seeing for both products. We will continue to build on our momentum to remain highly confident, and we remain highly confident in our growth outlook. Looking ahead, we intend to cement our leadership position by expanding the use of XPREL and Iovera, and look forward to adding Zoretta to our commercial offering to deliver patients end-to-end non-opioid solutions along the pain pathway. And with that, I'll now turn the call over to Charlie for a review of the financial outlook. Charlie?
spk13: Thank you, Dave, and good morning, everyone. Turning to our financial outlook, we feel very confident in the financial strength of Desira. We continue to see potential for significant revenues and cash flows to support debt reduction and continued investment in innovative non-opioid additions to our pipeline. I'll start with a quick update on recent expiralt trends. As previously reported, the elective surgery market faced additional pandemic-related challenges in August and September due to regional surges in COVID-19 Delta variant cases, staffing shortages, and surgical fatigue from care teams addressing significant procedural backlogs. October XBRL revenues already indicate that these challenges are beginning to moderate, supporting our optimistic outlook for a strong fourth quarter. On the competitive front, we have not seen any impact from the new market entrance on our base business or our ability to generate new business. A pristine safety profile continues to be a key differentiator between XBRL and other extended release bupivacaine formulations. Regarding any potential generic XBRL, I'll quickly reiterate our confidence in our proprietary position and ability to protect a thriving XBRL franchise. To get to the finish line, a potential generic would have to successfully overcome every one of the rigorous hurdles that have been established for XBRL, including, first, our strong and growing XBRL patent estate. We currently have two Orange Book listed patents, and we recently received notices of allowance from the U.S. Patent and Trademark Office for two additional patents, including a product composition patent that is eligible for Orange Book listing. Several additional Orange Book listable patents are forthcoming to further secure our exclusivity runway. Second, the high specific and rigorous regulatory criteria for approving bioequivalence established by the FDA. And third, the practical manufacturing challenges of the complexities of making a multi-vesicular liposome product using a validated commercial scale cold chain sterile manufacturing process without any insight into the product composition specifications or batch release records that are proprietary to Pacira and have never been disclosed. In short, we have great confidence that there will never be a generic XBRL, and given the package inserts and safety profiles of potential competitors, we believe XBRL will remain the branded market leader for many years to come across a broad range of infiltration, field block, and nerve block procedures for adults and pediatrics. Now let me turn to gross margins. We continue to project gross margin improvement of 1,000 basis points over the next few years, with XBRL gross margins reaching at least 85% by 2024, through lower cost manufacturing capacity and steadily improving volumes. During the third quarter, we began producing commercial product using our enhanced manufacturing process at our custom 200 liter suite in Swindon. We expect this facility to start benefiting gross margins in 2022 as we ramp up 200 liter manufacturing volumes and units sold. While we are currently not providing 2021 guidance, given the continued uncertainty around COVID-19 and the pace of recovery for elective surgery market, we will continue to report preliminary monthly product sales to share intra quarter trends with you. We will consider changing this practice as we have more visibility around pandemic related disruptions. What I can tell you today is that we remain bullish in our long-term expectations for robust top and bottom line growth, and we are confident in our five-year plan, which is on track to deliver year-over-year revenue growth in at least the high teens, gross margin improvement of 1,000 basis points, and operating margins that exceed 50% by the end of our planning period. With that, I'll ask the operator to begin our Q&A session. Operator?
spk01: Thank you. As a reminder, to ask a question, you will need to press the star and the number one on your telephone. To withdraw your question, press the pound key. Our first question comes from the line of David Anselm from Piper Sandler. Your line is open. Please go ahead.
spk11: Hey, thanks. So just a couple on Flexion and Zolretta to the extent that you can answer them. First, just broadly, Dave, can you talk to – what you think you could do differently regarding the commercial support of that product relative to flexion. And just maybe talk about the extent to which you might have more reach into a wider audience of physicians with the transaction. So that's number one. And then number two, now that you're sort of pivoting into orthos more deeply and more deeply into chronic pain, How do you think about the extent to which you'd like to do additional acquisitions leaning more into chronic pain? And what is your appetite for something significant in the near term to intermediate term? Thanks.
spk14: Thanks, David. I'll grab the first piece and I'll ask Ron to comment on where we're going with our additional BD activities. I think, David, really what we're talking about here is our deep relationships with the orthopedic community. We've had a number of discussions with folks who use Zoretta, and they've given us some feedback about things that they'd like to see to make it a little bit easier for them to be able to use the product and understand the reimbursement and some of the rebate programs, et cetera. So, you know, that'll be task one. We also know that there's a number of people that are very close to Pacira that have not used Zoretta at all. And so we have an opportunity to use our network to go to a new group of folks that we think will benefit from not only the corporate relationship, but it's pretty interesting. Actually, when they were all here last week or two weeks ago for the Analyst Day, The folks who were using Zoretta started selling it to the folks who weren't using it at the dinners that night. And so I think just the scale of what we do here and the fact that we have multiple products going to these same customer audiences, including Alvera, by the way, is going to help us a lot. And that's basically a partial answer to the same question, is that our reps now will be dedicated to this chronic pain marketplace, and we'll have Iovera as well as Xilretta. So we'll have a couple of different ways that we can treat these patients, and we believe that it'll be based on the physician's training, the reimbursement profile, where the site of care is, very different aspects of this, whether you're doing it in a hospital outpatient department or in the physician's office. If the patient is a type two diabetic, we'll offer different solutions to those patient populations, et cetera. So we think there's a few considerations here that allow us to basically cast a wider net. And also from the perspective of the synergies that this allows, we can do what we think very cost effectively and generate a lot of interest in Zoretta. So for the second part of the question, David, I think you'll hear from Ron that chronic pain is really important, but also reimbursement, and I'll just make the point here that All the things that we're looking at are going to the same target audiences, which is really important when it gets back to the same answer to the same question. I mean, by dealing with these same physicians for all of these assets, we're able to get their ideas not only on the individual products but on the pipeline as all this lays out in terms of how we develop these products one against the other as well as the total pipeline. So, Ron, give David a few ideas on what we're thinking about here.
spk12: Sure, and David, thank you. So in terms of ortho and chronic pain, Iovera and Zaretta are both at the crossroads between chronic pain and muscular skeletal. We've made investments in gene quine, which we would say is in a similar vein. as well as spine biopharma in that area as well. When we focus on chronic pain specifically, we get into neuropathic pain, and we made an investment there in Coda Bio as well. In terms of anything more significant, I think we'll look towards the integration of Flexion and Zaretta before doing something more significant at a commercial scale, but that's That will primarily take place in the first half of next year and in the second half that may open up for other availability or opportunities.
spk14: And David, just to reiterate, I mean, what our folks are telling us is, you know, they would like to have, they have a long-term relationship with these patients, especially the ortho folks and the sports medicine folks and the spine folks. So, you know, don't lose sight of, you know, a Depo-Decimethasone would be a particulate free product. So think about being able to turn off the inflammation of a traumatic sports injury in a teenager and then following those patients with the same customers. through the advancement of these osteoarthritic situator scenarios until you end up with a total joint arthroplasty or a spine procedure or something like that. I mean, that's really the focus is where are the holes in their ability to treat all of the different aspects of these patients who might start out in their 20s and still be a patient when they get into their 60s.
spk11: Okay, thanks. Thanks, David.
spk01: Our next question comes to the line of Gregory Renza with RBC Capital Markets. Your line is open. Please go ahead.
spk07: Thank you for taking my questions. Just two for me, Dave. The first one is just around the commentary on certainly the elective procedure pressures and the surgical fatigue that you've commented on, but also the positive shift that you're seeing in October and exiting that month. I'm just curious if you could put a finer point on on some of those potential drivers, whether there are regional considerations or other factors that we can look for for leading indicators. And then secondly, just on the longer term, to build on the previous question, certainly as you focus on your multi-year growth and revenue potential, just in addition to what Silvretta can offer, I'm curious if you can comment on Flexion's earlier pipeline with 201 and 301, but maybe just a word on how you're thinking about the chronic pain and even the rheumatologic relief landscape across the variety of novel targets that do exist in the early stage space today. Thank you very much.
spk14: Yeah, thanks, Greg. That's a mouthful. So the first one is pretty easy from what we've seen. And I think Charlie talked about this a little bit. I mean, we're not where we need to be and where we want to be yet, but you can see that week by week, the market is getting stronger. It's It's stronger both in new customers, total number of customers ordering, the size of the orders. I mean, we're not back to June yet, but we're moving in that direction, and you see improvement every week, including this week so far, by the way. Remember, we get data every morning at 7 o'clock. So we've seen yesterday. So, you know, I think COVID is largely behind us, and we don't really see much of people that tell us that COVID is having a big impact today. I think we're seeing the front end of that for the really painful procedures, but what you've seen from some of the device manufacturers this week is they've started to report on these lower pain acuity procedures starting to come back to the marketplace yet. I can't tell you that we've actually got visibility on that, Greg, but I'll tell you I'm happy to hear that they think that that's happening because so far everything that's come back, well 74% of the ambulatory surgery procedures as we went through the summer were actually ortho and so this was very largely an ortho recovery and if the soft tissues are coming back now that's good. We still do see some shortcomings in the labor market as it relates specifically to being able to get nursing teams to work on weekends. you know there's a whole bunch of things going on there of course you know they have to be able to do a certain number of procedures so they have to work 12 and 14 hour days to make it worthwhile to open the place and still is some rest reticence and the mandates and all the rest of the things are are still confusing in the marketplace so I can't tell you that's cleared up but I think that's what we're seeing modest progress in on a week-on-week basis and why we see these elective surgeries coming back As we go forward, there is a whole lot of things out there that are addressing what we see as a fairly dramatic need in the chronic pain area. Ron outlined a number of the things that we're looking at specifically. I think we have to be careful in how we address our participation in the clinical development of these products, but things like gene therapy and some of the IL-1 RAs and the NAV-17s, especially different preparations of those products that give you the idea that we might be able to sidestep some of the adverse events that have been problematic in the past, I think are of real value to us. And Ron's sitting right across the table from me, so it's silly for me to keep talking when he's sitting right here, so I'll ask him to comment.
spk12: And Greg, thank you. In terms of the the patient journey, per se. We shared a couple slides during the analyst meeting of how we think about the knee osteoarthritis, or joint OA space, as well as the chronic vertebrogenic back pain. And we are looking to add assets in that middle category. As Dave mentioned, Depo-dexamethasone may be available for spines, Eretta for knee is starting patients off, and then Expro at the end of that journey. In terms of the exact flexion pipeline, we're looking forward to getting the data on both assets, both the phase one data for 201 and 301 later this year, the beginning of next, and have some decisions on that. If you may recall, the 201 product was licensed from a company that we've invested in, GeneQuine. So they share the same platform as well, the HDAT platform. So a lot of similarity there and overlapping interest. And 301, as Dave mentioned, the sodium channel modulator may be interesting in terms of a reduction in motor weakness. But we're looking forward to seeing the data on both assets soon. Yep.
spk07: Yeah, so I think that pretty much sums up where we are, Greg. You okay? Thank you very much, guys. Appreciate the call. Thank you.
spk01: Our next question comes from the line of David Steinberg with Jefferies. Your line is now open.
spk03: The competitor to XBRL has been out in the market now for a little over a quarter. I know at your R&D meeting a couple weeks ago, we heard from a bunch of the clinicians and their view, but just more broadly, What are your salespeople hearing and seeing from the field now that it's been out for a quarter? And have you lost out in any hospital formulary P&T discussions to them? And then secondly, I know you've been talking about gross margin improvement. Charlie just mentioned it over the next couple years. Just in your most recent quarter, it looked like it was the lowest gross margin over the last year and 100 basis points lower from last quarter. I know these things move around a lot, but just curious why the somewhat softer gross margins this quarter. Thanks.
spk14: Thanks, David. We haven't lost a single formulary to Heron that we know of, not only from the reps, but from the physicians themselves. The cruelest feedback comes from people who have actually tried to use it. and it's not usable from all the feedback that we've gotten. I'll accept that that's probably a little bit one-eyed, you know, given who we are and who they are, but we haven't seen anything that concerns us on any level. So I think we're in very good shape, and we view that as in the rearview mirror. Charlie, you want to talk about gross margin improvement?
spk13: Sure, sure. So, David, I think the question is, you know we're investing in a 200-liter unit in the UK, and that is transitioning up to speed. You also, I think you probably know that we've expanded the manufacturing capacity for Iovera tips as well, so there's an awful lot of manufacturing transition going on at this point. In addition, quite frankly, the third quarter was lighter from a volume perspective than we had anticipated due to the reasons that I mentioned in the script. So, you know, it's a transitory issue, and we're going to be back at it and fully expect to get to the mid-80s.
spk14: Yeah, I think ex-parole was where we thought it was going to be, David. Iovera, in building out some additional capacity for Iovera, had a greater impact based on lower revenues, as Charlie said. So the impact was really on both sides.
spk03: Okay, that makes sense. Just one quick follow-up. Just to clarify the backlog situation, I think most recently you had indicated that the backlog was about 3 million procedures and that you thought about a million would be next year, but there's this ongoing and more recent development of fatigue in ASCs and hospitals. Is that still the cadence? You think 3 million backlog patients and a million next year with 2 million to be done this year, or has that changed a bit? Thanks.
spk14: I think we've, well, as you, I think your question leads me right to the answer, David, right, is that we do see it extended out, and it becomes more of a 22 event than we ever thought it was going to be, and I think, you know, all of the companies that work in this space are reporting similar kinds of activities. I think where the 3 million number that you referenced starts to fall apart is, you know, ASA, these patients... Some of them have been a year and a half without surgery now, and there is every reason to expect that some ASA3 patients would be now ASA4 patients and no longer appropriate for surgery. I think these procedures that have gone on for this extended period of time become much more difficult to do. and much less likely to be done in the ASC, which is where the insurance companies are trying to send all these patients. And so you do see a pool of patients out there that are gonna be directed by their insurance carrier to go get these procedures in an outpatient elective surgery center, but more of them are on opioids. Would have been the case if we would have done them in the timeline that would have been appropriate for the patient. And as the disease progresses, these folks are less and less likely to be appropriate for the ASC. And so we do see more patients than we ever did before struggling with their insurance company to find, to be able to marry where the insurance company wants to pay for the procedure with somebody who's willing to do it, not only at a certain environment, but at a certain price. If you've become a very complex chronic patient on opioids and United wants to have you done in an ASC at a 40% discount to an inpatient, that creates some tension in the marketplace that's going to take some time to work our way through.
spk03: Got it. Thank you, Dave. Thanks, David.
spk01: Our next question comes from Balahi Prasad from Barclays. Your line is now open.
spk08: Good morning, and thanks for the question. And just two from me. Firstly, with the recent notices of allowance that you received, can you describe the IP for strengthening and the impact that it's going to have on FAFSA challenges? And also, when do you expect to see the OB listing? Secondly, in the longer-term dynamics that you highlighted, Using a mid-teens CAGR, we look at a $900 million potential export revenue by 2025. What part of this would be from the international market? And maybe can you provide some context around the relative sizes of these markets? Thank you.
spk14: I'm sorry, Benj. Our connection isn't very good, Balaji. I may have to ask you for some clarity on exactly what your question was. I think the first one was IP exclusivity.
spk08: That is right, David. When do you expect to see the Orange Book listing and a bit more details about the patent claims or which strengthens your IP?
spk14: Yeah, thank you. So, you know, we expect that they will be listed by the end of this year, at least the ones that have currently been prosecuted. We expect to have more that will also be coming along. So what you're seeing now is just the tip of what we expect to have happen. So we think there'll be a regular cadence here for another half dozen patents coming Not all will be orange book listed, Balanchi, but certainly some will. So we would expect that we would have four to six orange book listed patents that would have to be navigated. I should also tell you that Charlie referenced the press release of yesterday. We actually asked the PTO to look at the paragraph four filing before they sent us the acceptance of those patents. And they did. And so the patent office has already looked at the P4 filing and still issued those patents to us since the P4 was filed. So our belief and our position here is growing. And so we feel pretty, well, we feel increasingly positive about where we are in this whole thing. So, come again now with the second part of the question. It was much clearer the last time, so.
spk08: The second question was on the long-term dynamics. As you pointed out, at least the mid-teens CAGR, which places ex-parallel around $880 to $900 million by 2025, what part of this would be from the international markets as you start to expand internationally? And also, can you provide some context around the relative sizes of some of these markets? Thank you.
spk14: Yeah, so it's important, Malachi, especially given our mission to provide an opioid alternative to as many patients as possible, we expect to be profitable in the middle of 23, or 24, I'm sorry. So there is a reason to operate here, but as you would see in our five-year plan, it does call out for our board that 95% of our revenues are still going to be in the United States. So, you know, important, good business, profitable business, but it's not, you know, not material to the long-term viability and the EBITDA numbers that we expect to attain as we go forward. In Europe, the biggest customer, or at least as we see this, is going to be the UK. They're way behind in terms of total joint arthroplasties, and their length of stay is nearly four days. The time lag is over two years. And so the NHS has actually worked with a number of orthopedic groups on transitioning through ERAS protocols into something that looks like the U.S. marketplace without the ambulatory facilities where a patient can go. So what we're working on with them is how do we use their current hospital facilities where we perform something that looks very much like a same day surgery without having a same day surgery center to do it in, right? And so that's the kind of thing that they fully understand that they need to catch up and they can't catch up with a four day length of stay, right? And so... That's on Expirel. On Alvera, great interest on using a non-opioid to be able to control pain, especially in the more serious patients while they're waiting this extended period of time in order to get their surgical procedures. So we have big hopes for both of them. It will be led by the UK. We'll focus on knees and shoulders out of the blocks. but we're already getting a lot of interest in spine and some of the other procedures because they're hearing about all these things at the conferences, right? And so, you know, almost immediately there's requests for, well, what are the URAS protocols that these individuals are using, et cetera. In Latin America, we have a partner, and in Latin America, it's Brazil. basically, and then it's Brazil, and then it's Brazil, and then behind Brazil is a whole bunch of smaller countries, but there's over 20 countries, or close to 19 countries involved in the deal, but Brazil calls the shots on pricing and on the regulatory approval pathway and the indications and everything else, and so you really don't do much until you know exactly what your status is in Brazil. In Canada, we have a partner for Iovera, and it just so happens that the premier spasticity guy in the world is in Canada, and so Paul Winston has the opportunity then basically to lead the way with our Canadian partner in the use of Iovera for spasticity, for spasticity pain, and then hopefully we'll be able to figure out a pathway that will get us an indication for spasticity itself. But those are the big markets. There'll be some other opportunities here over the next couple of quarters, but it really is, a lot of this is driven by our capacity to have close to $2 billion of product at this improving margin that Charlie pointed out by 2024. So if you could make a couple billion dollars worth of this stuff at 85%, then we should be finding ways to sell $2 billion worth of it at 85%. Now, we're not there yet, but for the first time, we have the capacity to make more than we can sell. And so that puts us in a very different category when it comes to looking at the different world marketplaces.
spk08: Thank you, Dave. Very helpful.
spk14: Thanks, Blake.
spk01: Our next question comes from Greg Frazier from Truist Securities. Your line is now open.
spk10: Can you speak to the Gen C Yovera platform and the advantages that that version will bring over the current system? And then a quick one on XPREL. I know you're not providing specific guidance for sales, but you mentioned expecting robust growth in the fourth quarter. I was wondering if you could expand on what you think of as robust growth. you know, double-digit teams, just any additional color on that would be helpful. Thank you.
spk14: Yeah, sure. The first one is a lot easier than the second one. So Gen 2, so there's some ergonomic improvements. Some are modest. Greg, in terms of visually, if you looked at it, it wouldn't mean that much to you. But for example, as we get into different marketplaces where the clinician wants to be holding an ultrasound probe with one hand, with Gen 1, you couldn't hold an ultrasound probe and you couldn't reach all the buttons on the handheld to actually be able to trigger a treatment. And so we've moved things around to accept the fact that somebody's going to want to hold this handheld with one hand. There's a number of other modest things, but we will go from a tip that screws on to a tip that clips on. There's some significant changes in the actual design of the handheld and the tip that will allow us to get a lot more... The cartridges, the NO2 cartridges will not only be more robust, but we'll be able to do more treatments per cartridge, and that continues to go on downstream. We continue to refine this and look at ways that we can shorten the cycle time for different procedures. Right now, it's sort of one size fits all. You push that button, you get a minute of a treatment. That might not necessarily be true as we get into some of these other facilities where the docs are trying to use Iovera. So it's a bunch of things, and then we get all the way, and again, Gen 2 is going to be a work in progress over time as well. But just to give you a real-life example here, as the chronic pain guys start to use Iovera, they use fluoroscopy. And the way the current system is set up, you have to be at a 90 degree angle in order for that NO2 cartridge to fire. Well, that would put the hands of the operator in the field of the radiation, and obviously that's not a good idea. So, you know, there's designs that are ongoing where we'll be able to make different kinds of ice balls using different configurations. It might not even be an ice ball at all. It might be an ice... line, if you will, that lays across the top of a nerve because it's coming in longitudinally rather than laterally. So just to give you a sense that there's a lot of things going on around eye of error and these tips that will be specific for specific procedures. Your second question, yeah, as we get back to normal, we would expect that we would be into the teens. We were in the teens, and obviously we're over 25% through the third quarter, so the teens are not an unreasonable expectation. We're not there yet. In Q4, October was, like I said, a lot better from flat, but we're not there yet, just to be candid. This week might be that week, actually. We're pretty strong so far, Monday, Tuesday, Wednesday. So I don't think that's an unreasonable expectation, Greg, but remember we're coming off of a not-so-great spot.
spk10: Great. Thank you.
spk14: Thanks.
spk01: Our next question comes from Anita from Argenberg. Please go ahead. Your line is open.
spk09: Hi, Dave. Good morning. I have a few questions here. I just wanted to touch upon the resumption of elective procedures. I know you talked about it earlier, but I'm just trying to think about considering the amount of backlog still building up and getting pushed out. Are you likely to see the similar dynamics that you had seen pre-pandemic where Q4 was one of the stronger quarters, is it likely to be the procedures being more spread out throughout the year?
spk14: No, well I hope not, Anita. Thank you for the question. The dynamics of Q4 really, there's two things that we see here that are very strong every year. One is the whole dynamic of insurance, And patients who have satisfied their deductible and their co-pays, etc., especially if they're in a place in their life where their employment situation is unsettled and they might not have insurance next year, we see a lot of elective procedures come in, especially for orthopedic procedures in the Q4 driven by that dynamic. There's not as many people employed with insurance, and so that's a bit of a... We can't count on that like we would have in earlier years. It still will be there for sure. We just don't know whether it's going to be as strong as it was in other years. The other dynamic that you might smile at, but it's true, is that... folks get cosmetic plastic surgery procedures as holiday gifts and they must know it's coming because they appear to go to the physician the next day after they get them and It sounds crazy, but it's very strong in that week between Christmas and New Year's every year You know we think that that actually will be stronger as people start to come out and do more and get back into an active lifestyle. Just to give you some context here, the Q4 would be roughly 30% of our business on a normal year. You know, I think this year, given the fact that the numbers are lighter than we would have expected, given the COVID dynamic, that is not an unreasonable expectation again, but it's 30% of a smaller number. So it's a little bit of game playing, but you see where I'm going.
spk09: Yes, that was helpful. Thank you. And then with regards to the launch in the pediatric market, I just wanted to know if you're sort of going to increase your presence there, or are you continuing to adopt a slow approach?
spk14: No, we did. So in September, we trained the entire field organization on pediatrics. And, you know, we continued to get approvals in the major centers, which is exactly what we were hoping was going to happen, Anita. You know, our team is dedicated to peds. has been very successful at major academic centers, and that's really what we needed to accomplish. We need the folks that look to those places for guidance to understand how they're using it, what their protocols are, and then get those protocols and send them out into the community. The wholesale force is trained. The folks that ran the PEDE launch are still running the PEDE launch, and so they're actively involved in making sure that the fuel force doesn't just go to a bunch of hospitals, introduce the idea that you can replace pumps and catheters, but then not follow up appropriately. So we're being manic about the fact that this is one hospital at a time. When you go into a hospital and you start to sell, you have to train all the folks. You have to train the nurses. You have to make sure pharmacy's on board. You have to make sure the C-suite's on board. And until that's done and we're satisfied that a patient is going to get appropriate care, you know, soup to nuts, you don't go to the next hospital. And that's not an easy thing for a field force to understand, as you can imagine. So we are still... stringent in the way we're providing access, but everybody's trained now, so we have a large opportunity to train.
spk09: Okay, great. Thank you. And then just one more related to the studies in the lower extremity nerve blocks. When are we likely to expect results from these?
spk14: So they've started. We think that we can complete these trials. You know, we're using many of the same sites and we're using most of the same surgeons. And so, you know, we think that we'll have data sometime by the mid of Q2. That's the current plan anyway. Now there's two separate studies. One is an adductor canal block and the other is a bunion study, but it's really a sciatic block. So, you know, we're hopeful that we can get both of those studies done. in the first half of next year so that we would submit an MDA early in the third quarter on a 10-month approval that would give us a launch opportunity in the second quarter of next year. That's the plan.
spk09: Great. Okay. Okay, that's helpful. Thank you.
spk14: Thanks.
spk01: Our next question comes from Chris Neor from J.P. Morgan. Your line is now open.
spk05: Good questions. So the first one's on 2022 expense progression and gross margin improvement. As we're looking into next year, I was wondering if you could provide a bit more color on expectations for gross margin and expense progression through the year. You've outlined very helpful operating margin targets for both COGS improvement and also expense leveraging, but I'm just thinking about the pace at which some of these opportunities can be realized in the near term. And then the second one's just a follow-up on business development. So post-flexion. How are you thinking about capital allocation priorities shifting? And are there any significant capacity constraints for pursuing additional deals, whether that be financial or operational integration? Thanks so much.
spk14: Thanks, Chris. You know, on the first one, there's, well, it's a dynamic situation given flexion and Zoretta, right? And so, you know, we, on the Iovera-Expirel plan, you would expect that you would have OPEX increasing in, you know, mid single digits. You know, we expect to get something like this, you know, if you think that there's a thousand basis points, we would get 300 of them and as 22 rolls along and we use more material that's actually produced in the Swindon facility. and revenues are expected to be several times that right so if if revenues are growing at something in the 20s and expenses are growing in single digits and we're getting a gross margin improvement at the same time it will improve as revenue improves of course but often but without the addition of a flexion expense line, then that still is not as clear as you might like it to be, and frankly as I would like it to be, but we don't have all of the information yet from Flexion. So my working assumption, Chris, is that the synergies will be significant. And the margins will be better than, significantly better than they would have been without the Zillretta addition to the portfolio next year, meaning that the synergies will be really important if we reach our revenue projections. I'm not giving you a perfect number-based example, but it would have been good with Iovera and Expirel. Actually, it would have been very good with Iovera and Expirel. It would be very, very good with Xilretta. And so everything is leading towards these margins improving dramatically as we go through the next couple of years specifically. I'm looking around to see if anybody's got a better idea than I just gave you, Chris. So far, nothing. So good. Okay.
spk12: And then Chris, it's Ron. On the BD question, don't see any significant shifts in strategy. We'll continue to focus on three core franchises of, well, two franchises, musculoskeletal and pain, broken up across the osteoarthritis or tuberogenic back pain, and specialty therapeutics within the specialty therapeutics You have the acute pain and the chronic pain, as we talked about earlier. And then in regards to capital allocation, we'll continue to look for more promising external innovation opportunities and on a larger side beyond the integration period, which we discussed will primarily be in the first half of the year of 22.
spk14: And I think it's fair, Chris, to say, you know, ask Rhonda to comment if I'm incorrect here, but, you know, I don't think you're going to see us do another $600 million deal in the near term. You know, but there's a lot of things where our ability to do clinical trials and our commercial understanding of the marketplace leads folks with earlier assets here. You know, I think spine bioscience is a great example of that. a seven amino acid peptide that they believe actually turns off the progression of this disease. That's an investment that was made against a target profile. If that target profile is met, then we would take the asset on I think that style of investing over the short term while we digest the flexion deal makes a lot more sense than looking at something else that's a significant opportunity.
spk05: That's helpful context.
spk14: Thanks, Chris.
spk01: Our next question comes from the line of Serge Bellinger from Needham & Company. Your line is now open.
spk02: Hey, good morning. Just a couple questions for me. First, wanted to revisit one of the 2025 target, more specifically related to Iovera reaching 200 million in sales. And I think that's only in TKA and OA methane. Just curious, do we get there with just more clinical data and those specific indications and building more awareness and Maybe what needs to be done on the payer reimbursement front in order to get there?
spk14: First, it's Gen 2 and having a more reliable system that the docs can count on. There have been some issues with the Gen 1 system that we bought. So that will help a lot in terms of stabilizing the market. What we need, frankly, is access to the customers. I mean, when people use Iovera, if you use it once, you'll use it a bunch of times. I mean, the opportunity for patient care improvement is dramatic. So what we need, frankly, is... You know, we're increasing the size of this sales force to take Zillretta on as well. We need COVID to be behind us, frankly, so that the reps have access to the docs. That's the single biggest thing. And then a system that we rely on. And then I would say the third biggest thing, Serge, and this is in some instances is a data opportunity as well, is reimbursement. You know, the reimbursement in the HOPD is very good. We've got docs who are using the drug very successfully in workman's comp, for example, from a reimbursement perspective. And we're finding an increased acceptance of self-pay insurers and commercial insurers to pay for a non-drug therapy to provide pain control, especially for pre-surgical patients. So I think what's been hampering us the most since we've had some of these data sets and some of these KOLs that are using the product is just frankly a new device with a rep that is not known to that office. And, you know, you go in and they're used to seeing drug guys, and you go into an orthopedics office and you've got this thing that looks like a space-age cell phone, and you say, you're not going to use drugs anymore, you're going to use cold, and you're going to freeze the nerve, and the nurse looks at you like you just fell out of a spaceship. Right? We need to have an organized marketplace that these guys can sell into that I think is probably as big as anything. then this is a little bit diversion from your question because it does go to spasticity but the interest in spasticity has been overwhelming and we have a series of ad boards with the world KOLs in spasticity over the next several months and I think you're going to see some real interest in spasticity The average cell price for this unit is, with a tip, is something in the neighborhood of $450. When you look at the use of Botox, it's between $6,000 and $12,000, depending on the dose. When you look at phenol or when you look at the baclofen and the pumps they have, I mean, the marketplace is just littered with failed opportunities to treat spasticity pain. It may be cheating a little bit against the way you asked the question, but I think $200 billion is not an issue anymore if it works in spasticity, and it is spasticity pain. So, you know, just to be completely candid. Sure.
spk02: All right. And let me squeeze in one more. Taking your prepared comments, you talked about regional anesthesia approaches growing from 20% to 75% in 2025. Just curious what that means for the installation market. Will there be one in 2025 and going forward?
spk14: Yeah, yeah, there will be. There's some places where you just can't do a nerve block, right? And so there's, well, first of all, in P's right now the indication we have is for infiltration. It is not for a nerve block. So we're training and we're talking to guys about infiltration. I'll give you an example. When you do a knee, for example, we're doing an adductor canal block, but at the same time, most of the docs would address the pain in the anterior, either by doing a periarticular infiltration, where they actually inject the periosteum and might also put some drug in the posterior capsule, but they would do a direct injection into the periosteum, or we have guys and gals for ACL repair, for example, doing different kinds of infiltrations. And so I think you're going to see a combination. It's interesting in the marketplace because we define this this way for the FDA and for you guys. In the marketplace, the docs think that these discussions are nonsense, that they're all nerve block. In one case, you're blocking little nerves with an infiltration because you can't see them one at a time, and the nerve block or the field block indication, you can see them so you have a greater opportunity to define them on ultrasound, but I'm lectured all the time that my positioning is stupid on these calls. because a nerve is a nerve and a nerve block is a nerve block, and the way you define it because the FDA forces you to doesn't make any sense to the anesthesia community. Okay.
spk02: Great. Thank you.
spk14: Thanks, Serge.
spk01: Our next question comes from Andreas Aguirre from Wedbush. Your line is now open.
spk04: Just so sticking on the topic of Biovera, you know, PREPARE, the TKA PREPARE study, results are expected, I guess, late this year, early next year. You know, how are those results, I mean, what can we expect from those results, and how are they going to, in essence, you know, kind of add to that? profile for Ilovera. And then secondly, and I don't know if this was asked earlier, pardon if it was, just on the other partnerships that you have with the SpineBio, et cetera, Remedisc data we have kind of sometime in 2022. Is that still a timeline or when can we expect data from that study?
spk14: I'm going to take number one round of comment on number two, Andreas. Thanks for the questions. So really, the PREPARE study is done mostly for reimbursement and mostly to provide data for self-insured employers. So what the self-insured, and by the way, I don't think that the market in general, the financial community in general, understands how much weight the self-insured employers now carry in the marketplace and how they're defining what they want to use and how important opioid sparing is. And so this is done looking at functional endpoints. When does the patient ambulate? When do they get into PT? How long does it take before they can drive? And the big question is, I'm gonna pay X amount of money to have this procedure. Do I get a patient back that's actually in better shape than they were before I sent them to the physician? And so those are the big questions that PREPARE will answer. And it will also be useful for us in addressing the CMS and the commercial payers with a reimbursement outside of the HOPD into the ASC, and then looking in the other direction, working with those same groups of people, and now this is not prepared, but we'll do a separate OA study, to look at things like workman's comp and if you can handle those really painful patients who have very significant joint issues, if you can turn the pain signal off in those patients, what does that look like relative to the current cost of care and what it costs you to treat these chronic patients? Those are really the two angles that we're taking with Iovera. So it's as much a reimbursement story as it is a clinical efficacy story. And what we're trying to show, and I think we are showing, frankly, because, you know, we talk to the guys who are doing the trials, is that the idea here is to get patients off opioids. to have them stop smoking. If they're abusing alcohol, to get them to stop abusing alcohol. If they need to get into a BMI range that supports a total knee arthroplasty procedure, how do we allow them to do that? One of the big thoughts is, if we could turn off their pain, We could let them start going down the stairs. We could get them out of the wheelchair. Even simple things like when we're with docs, can you walk to the mailbox? Every day I want you to walk to the mailbox and get your mail. I mean, that doesn't sound like anything to you and me, but if you've been in a wheelchair for 18 months, that's a big deal. And so we're trying to turn the pain signal off, get the patient to be a better patient for the surgery itself. And then almost by definition, they become a better patient in the post-surgical environment, which is why we're focused on functional outcomes. Does that make sense?
spk04: Yeah, very helpful color. Just a quick question on the progress of Remedisc program. Yeah.
spk12: Andreas, it's Ron, just on Remedies. We expect the phase three program to open in the early 2002 timeline and then... 22. 22, yes. And then for results in the first half of 2023.
spk04: Fantastic. Thanks, guys. Very helpful call and congrats on all the progress.
spk14: Great. Thank you. Thanks, Andreas.
spk01: This concludes our Q&A session. At this time, I'd like to turn the call back over to Dave Stacks for closing remarks.
spk14: Thanks, Amanda. 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 Berenberg and the Jeffries conferences later this month. Thank you all, and stay well.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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