Pacira BioSciences, Inc.

Good morning and welcome to the fourth quarter 2021 Becero Biosciences Inc. Earnings Conference call. My name is Brandon and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session during which you may dial star 1 if you have a question. I will now turn the call over to Susan Mesko, Head of Investor Relations. And Susan, you may begin.

Thank you, Brandon, and good morning, everyone. Welcome to today's conference call to discuss our fourth quarter and full year 2021 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer, and Charlie Reinhart, Chief Financial Officer. 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 the company's filings with the SEC, which are available from the SEC, or our website. One last piece of housekeeping. Local internet went down this morning, so the Pacira team is participating via cellular device. We ask for your patience if sound quality is limited at any point. With that, I will now turn the call over to Dave Stack.

Thank you, Susan. Good morning, everyone, and thank you for joining us. We'd like to devote most of the time today to your questions, so I'll begin today's discussion with a brief prepared remarks that cover recent business highlights. We remain proud of our team as they continue to perform and deliver both for our patients and our investors. The progress we made throughout 2021 positions us for even greater success in 2022. We have a series of value-driving milestones in the year ahead, and we couldn't be more excited for the future of Pacira. We ended the year in a strong position with a diversified portfolio of unique, safe, best-in-class products, that support healthcare providers' ability to provide low or no opioid therapies to improve patient experiences along the neural pain pathway. Our achievements in 2021 highlighted by growing XBRL sales, the acquisition of Flexion, and an exciting pipeline of innovation that have placed Pacira in the forefront of opioid sparing pain management. Zoretta provides us with a highly complementary commercial asset for the treatment of osteoarthritis knee pain while also increasing our presence in chronic pain. With more than $100 million in sales in 2021 and a significant potential for an even greater contribution moving forward, Zoretta gives us great confidence in its long-term prospects as a high-potential, durable product for Pacira. Importantly, this acquisition diversifies our revenue stream, enhances our top line, and we believe it will provide meaningful synergies as we expect to drive substantial near and long-term accretion to our cash flows and earnings. Turning now to progress we made with Expirel. I'll start with a recent achievement of a very exciting milestone. Over 10 million patients have been treated with Expirel since launch in the United States alone. Our team achieved record XPREL sales of $507 million with adjusted EBITDA margins of 37% in 2021, marking our eighth consecutive year of positive adjusted EBITDA. These are important accomplishments. As we have been reiterating, XPREL-based blocks are enabling the regional anesthesia revolution, which is our number one growth driver. Regional anesthesiologists are developing new blocks, perfecting old blocks, and using imaging to ensure successful patient outcomes. Our state-of-the-art PIT training and innovation facility is supporting this market transition with real-time best practice knowledge transfer and is helping accelerate the surgical migration to all patient sites of care. In addition, throughout 2021, we significantly fortified our XPRO IP estate with two new Orange Book composition patents that are now listed in the FDA Orange Book. Recently, we received four new notices of allowance from the US Patent Trademark Office. These are all composition patents that we will submit for Orange Book listing, after which there will be a total of six XBRL patents listed in the Orange Book with expiration dates of January 22, 2041. Last year, we were excited to launch XBRL in the pediatrics market, where we are making an even bigger impact than anticipated. We are seeing erector spinae, or ESP blocks, becoming the standard of care and displacing costly and cumbersome pumps and catheters. Interestingly, pediatric spine is triggering a halo effect in adult procedures. Spine surgeons are a tight-knit group of like-minded surgeons, and the technique for an erector spinae block is the same for children and adults. This provides us with an opportunity to establish expiral ESP regional blocks as the cornerstone of best practice enhanced recovery pathways for both adult and pediatric spine surgeries. Looking to our international expansion for Expirel, we are delighted to report that our targeted European launch is now underway. Importantly, as you may recall, Expirel enjoys a broad label in Europe, which includes both upper and lower extremity nerve blocks, as well as field blocks, such as transverse abdominus plane field blocks, or TAP. This is key and will factor into our ability to gain traction in this important market without having to expand our call points and should help simplify market access. Our women's health franchise has seen 30% improvement in Expirel procedures over the prior year. Expirel tap blocks for C-section are driving the success, which is not surprising given the incredible value proposition that faster recovery and opioid sparing pain control means to new mothers. With 1.3 million C-sections per year in the U.S. and rapidly expanding Expirel penetration, we see significant opportunity for continued growth. Further, positive experience and outcomes in C-section procedures are driving demand in gynecologic oncology and breast procedures. As we all know, mothers are the CEOs of the household, and a positive birth experience with Expirel will drive a lifetime of opioid sparing decision-making for other procedures. This past year, COVID has escalated the need for many breast, plastic, and oncology surgeons to expedite discharge for their patients. With Expirel, they are now able to meet the needs of women who demand an opioid-free experience and don't want to stay overnight in the hospital, while simultaneously optimizing their care experience through better pain management using Expirel-based multimodal ERAS protocols. In addition to the success of our growing Expirel and Zoretta franchises, we are also making great strides with our Ayurveda franchise. Iovera is the only cryotherapy option available in a handheld design, allowing it to be used in a variety of institutional settings and environments where you could not use the previously available console-based cryoanalgesia systems. In 2021, we launched Iovera with a partner in Canada and with Pacira Resources in the UK and EU. We also used last year as an opportunity to design a more user-friendly, next-generation device and develop additional smart tips new indications we now have a specific tip ready for human pilot studies for medial branch block as a treatment for chronic low back pain we are also preparing to evaluate iolvera as a treatment for spasticity which represents a very significant long-term opportunity looking ahead we expect to build on last year's success and believe 2022 will be a banner year for pasira as we expect to deliver another year of record sales significant ebitda growth and multiple clinical and regulatory updates. Enrollment is progressing in our two phase three lower extremity nerve block studies for Expirel or the STRIDE studies. COVID related delays in the fourth quarter of last year have shifted the expected timing of our SMDA submission to the fourth quarter of 2022. We believe the lower extremity nerve block label is at least as significant as the upper extremity market with around 3 million procedures a year and an addressable market of approximately $100 million. For Zorretta, the first and only FDA-approved treatment for osteoarthritis knee pain, we are focusing on three areas of development in 2022 and will be meeting with the FDA to obtain alignment. The first is to expand the current label to include a safety superiority claim in diabetes, which we expect will establish Zorretta as the first choice corticosteroid for osteoarthritis and pain of the knee. Second, we are preparing to launch a phase three shoulder study, which we plan to begin in year end. And lastly, we are working to expand the current knee indication to include repeat dosing. In short, we believe Zoretta is a perfect fit for the Pacira family of unique products, and we envision longer term our commercial and clinical capabilities will significantly expand its use. At the same time, we are addressing several issues with specialty distributors and pharmacies, as well as previously stocking of short-dated materials. We are moving these systems and processes to our PSEERA operations and expect to have many of these issues behind us by the end of the second quarter. For IOVERA, the launch of our next-generation handheld device is now underway, and we remain on track for an interim review of our PREPARE study, which is evaluating the combination of IOVERA and Expirel as a procedural solution in TKA procedures in the next few weeks. As I mentioned earlier, we are particularly excited for the opportunity in spasticity. You may recall that at our analyst event last year, Dr. Paul Winston shared some compelling proof of concept videos in his spasticity patients. Importantly, pain associated with spasticity is already unlabeled, and we are working to facilitate greater adoption given the efficacy, safety, and ease of use. We plan to work with the FDA to define a regulatory pathway for adding treatment of spasticity to our iogara label. Patients currently have limited and often costly therapeutic options. For example, patients are receiving Botox, which has dose limitations. Here, patients receive three to four treatments a year for $1,800 to $2,400 per treatment. Another example is the use of phenol, a chemical neurolytic, Phenol is painful, requires anesthesia, and has adjacent tissue scarring with outcomes that are highly variable. In contrast, Iovera has shown great promise in this indication. With tips costing $450 to $500, Iovera could represent a tremendous value proposition in spasticity. In addition to Expirel, Zaretta, and Iovera, our portfolio includes promising earlier stage opportunities. We expect to initiate a Phase II study of our multiviscerate vesicular liposome technology for subarachnoid analgesia in late 2022. We are planning pilot studies to evaluate Expirel and Iovera spasticity separately, I'm sorry, as stela ganglia blocks for use in cardiac dysrhythmia following heart surgery. In addition, we are defining next steps for clinical programs and our multi-vesicular liposomal formulations of dexamethasone for inflammation and low back pain and high-dose bupivacaine for longer-acting pain management of five days or more. Moving ahead with patients always at the forefront of our endeavors, Pacera will continue to innovate in all areas of our business, including new indications, line extensions, design improvements, and more. We will leverage our state-of-the-art PIT innovation and training center in Tampa, as well as a second facility that we are building out in Houston, to bring these innovations into the hands of our healthcare provider partners. I'm proud of all we accomplished last year and even more excited for what's to come. With that, I'll turn the call over to Charlie for some financial highlights. Charlie?

Thank you, Dave, and good morning, everyone. I'll start with a quick update on sales and margin trends. As previously reported, in the last week of December, we began to see a slowdown in elective procedures as regional surges in Omicron cases prompted governmental restrictions and escalated staffing challenges. These trends continued in the beginning of January until around the middle of the month when we began to see a notable improvement in XBRL sales with continued strong trends in February. On the competitive front, we have not seen any impact from new market entrants on our XBRL-based business or our ability to generate new business. More than 10 years of physician experience, well-established efficacy, and a pristine safety profile continue to be key differentiators between Expirel and other extended release bupivacaine formulations. For Iovera, the significant growth in 2021 was driven by a 72% increase in new customers with a growing representation from the physician office site of care. We believe the addition of Xilretta will accelerate this as it gives us another entree into the physician office and allows us to extend our reach of physician office interactions. For Zulretta, as previously reported, sales were negatively impacted by rebate program modifications and several unanticipated manufacturing batch failures that led to short-dated Zulretta inventory, resulting in smaller order sizes and higher product returns. As Dave mentioned, we are currently addressing these issues and expect to have them resolved by the end of the second quarter, with 2022 sales trends improving throughout the year as we extend inventory dating simplify the rebate program, and complete our transition of the product to the PACERA operating environment. Turning to gross margins, on a consolidated basis, our full year total non-GAAP gross margin was 75% for 2021. This is comprised of full year non-GAAP margins of 77% for XBRL, 33% for IOVERA. as well as post-acquisition non-GAAP margins of 82% for Xilretta. In 2021, Iovera margins were negatively impacted by overlapping expenses as we transitioned production to our San Diego facility and a new contract manufacturer, along with our investments in our next generation Iovera handheld device. Looking ahead, we continue to expect to see improvements of roughly 3% per year for XBRL gross margins in each of the next three years until we reach gross margins in the mid 80% range. This improvement will be driven by a combination of steadily improving volumes and lower unit costs as our 200 liter suites can contribute a greater percentage of XBRL units sold. For Iovera and Zoretta, as volumes continue to expand, we expect margins to increase and reach levels in the mid 80% range in approximately the same timeframe as XBRL. For Iovera, margins will also benefit as the cost to transition our manufacturing locations to a contract manufacturer at a reduced unit cost, as well as the rollout of our Generation 2 device with a reduced COGS by the end of the second quarter. For Xilretta, we are making investments in manufacturing facilities to improve quality metrics and efficiency as volumes grow. While we are currently not providing 2022 revenue or gross margin guidance, given the continued uncertainty around COVID-19 and the pace of the recovery for the elective surgery market, we will continue our practice of transparency of reporting preliminary monthly product sales for Expirel and Iovera to share intra quarter trends with you. For Zolretta, we are currently not recording preliminary monthly Zolretta net product sales as the required adjustments for certain product rebate programs are calculated after the end of the quarter. However, we will include a range for Zolretta sales in our quarterly pre-announcements. We will consider adjusting this practice for all three products as the year and visibility progresses. Turning to our expense guidance for 2022, I'll start with our expectations for non-GAAP R&D of $75 to $85 million. Key drivers over 2021 spend include approximately $14 million in incremental clinical and pharmaceutical product development costs associated with Zolretta and an early stage program acquired from Flexion, which is now known as PCRx201. Approximately $6 million in XBRL manufacturing capacity expansion costs for our 200-liter batch unit located in our San Diego facility, and the advancement of clinical development activities related to our STRIDE and PREPARE studies. For non-GAAP SG&A expense, today we are guiding to a range of $220 to $230 million. Key drivers over 2021 spend include approximately $37 million of incremental SG&A spend for Zulretta. This includes doubling the size of our Iovera and Zulretta field-based team, a Zulretta marketing campaign, an expanded market access function to include Zulretta, and G&A costs, which includes some transitional activities for certain shared support functions such as finance, legal, HR, and IT. approximately $7 million in EU business costs, which includes our commercial footprint as well as legal and regulatory support. Our forecast also includes expanded activities to accelerate growth within our spine, sports medicine, plastics, and OMFS businesses, as well as increased medical innovation and education programs at the PIT. Finally, our 2022 stock-based compensation is expected to be in the range of $40 to $45 million. So in summary, XBRL continues to be on a significant growth trajectory that is driving substantial operating leverage and cash flow. With Zolretta, we have added a significant and highly complementary revenue stream that makes our earnings outlook even more compelling. For Iovera, we remain very excited about the near and long-term outlook for growth. Continued growth in our Iovera customer base and the addition of Xylretta to our commercial offering leave us well-positioned to help physicians individualize osteoarthritis care with our unique pipeline of non-opioid options. On the longer-term horizon, we are investing in exciting new Iovera opportunities that have the potential to be game changers like spasticity and stellate ganglion blocks. The bottom line is that Pacira is financially stronger than we have ever been. And despite turbulent macro environment, we continue to deliver impressive financial results and remain bullish in our long-term expectations for robust growth. We are confident that we are on track for year-over-year top-line growth in at least the high teams, gross margin improvement to the mid-80% range, modest year-over-year growth in operating expenses, and adjusted EBITDA margins that exceed 50% by the end of 2024. That concludes our prepared remarks. I'd like to turn the call over to the operator to begin our Q&A session. Operator?

Thank you, sir. We'll now begin the question and answer session. If you have a question, please dial star 1 on your phone keypad. If you'd like to be removed from the queue, please dial the pound sign or the hash key. If you're on a speakerphone, please pick up your handset first before dialing. Once again, if you have a question, please dial star 1 on your phone keypad. And from Piper Sandler, we have David Amsalem. Please go ahead.

Hey, thanks. So just a few. So on Expirel and the elective surgical environment, I may have missed this, so if you could clarify, in terms of the pace of volumes, where is it relative to pre-pandemic levels, or to maybe put it differently, you know, with the Omicron wave receding, are you getting back to pre-pandemic levels, when do you think you might be there, and just talk about in any way that's quantifiable the surgical backlog and how XPREL stands to benefit as that backlog is cleared. So that's the first set of questions. And then secondly on Zolretta, it sounds like there's, you know, I guess some speed bumps here, but I wanted to ask you about your commercial efforts, sales and marketing, and Talk about what you're doing differently in terms of getting in front of physicians in terms of head count, your physician targeting. I know you've alluded to this in the past, Dave, but maybe just provide some detail in terms of, you know, how you're approaching detailing differently than the predecessor company.

Thanks. Thanks, David. First, the pace of volumes. I mean, you know, we get the Acuvia report every Friday. And it is up on our website. And what you would see is that we've come up onto the pre-COVID elective surgery line several times, only to retreat in several weeks afterwards. And then the week after Christmas was really bad, almost as bad as COVID inputs. We're, I think, well, we haven't seen this week yet, of course. It lags by two weeks. I should have said that, David. And so, you know, we bounce back and forth off of the pre-COVID elective surgery line in that report. I think the interesting thing is that Expirel is routinely between 20 and 40 percent higher than the line, than the return. So, we expect that when we do return, we're going to enjoy all of the share that we've taken, you know, with all of the programs that we've talked about. So, you know, I would say based on the performance in February, David, that we're probably very near the elective pre-COVID line again. But again, we're two weeks in arrears. So, I mean, just to give you some context, the last week of the year was horrible, almost unbelievably so. The first two weeks in January were a little better but not great. I'm sorry, the first two weeks in January were a little better but not great. The second half of January got us to plus four in January, and we continue to see that kind of momentum into February. So, you know, think teens again. Not 100% back, but we're getting there. On the Zolretta, so we've got a team that's been out there with Iovera And we were fortunate enough to have a number of people come over to Pacira from the Zoretta Salesforce. So we've been able to supplement them with some new hires. Again, people that are willing, you know, looking to come here based on all the success and some of the things that are exciting around our program. Actually, interestingly, David, many of them have been referenced by their physicians to come and work for Pacira, which we think is a very, very positive sign. And so, you know, without being trite, I would tell you the first difference in terms of Zaretta customers is that we're actually calling on them. And we hear that often, you know, that our folks are working with, you know, I don't even know how to make that any more clear. And, you know, we're working our way through you know, Zoretta being useful in the, or I'm sorry, Zoretta being useful in the office primarily. As Charlie said in his script, we see a lot of chronic pain medicine docs adopting Iovera in their offices. So we see the benefit of having two products when we go talk to the chronic pain docs and to the orthopedic surgeons and the spine folks. It is clearly driven by You know, the patient status, the duration of pain control that they're looking for, major driving by reimbursement. So that does, you know, subset select patients that you're going to want to treat in a hospital outpatient department where the reimbursement is very good for Iovera versus the office where the reimbursement is quite good for Zoretta. So we can talk about these folks in different sites of care, different reimbursement options they have based on the patient needs. And you know, we're working again on, we've found a number of physicians in the marketplace have come to us with data sets on the use of Zoretta in type two diabetic patients. And so we've got a number of these folks writing those data sets up for us with the intention of bringing them to the FDA to show them how the product is actually being used in the marketplace in this patient category that obviously has some specific needs that are all their own. All in all, I think, you know, it's very early days. Remember, we only had our national meeting, what, three weeks ago. So what I'm telling you is a couple of weeks' worth of largely anecdotal data, David. But, you know, so far, everything is going the way we expected it to, more or less.

Okay, that's helpful. And if I just may go back to the question, the XBRL questions. Just on the surgical backlog, can you just quantify that? And anyway, I think you've done in the past, but if you could provide a little color there, that would be helpful.

Yeah, you know, the surgical backlog in orthopedics is, it has been actively worked upon largely in the ambulatory surgery marketplace. And so, you know, we know that the docs are out, you know, two, three months. But I think most of these very painful procedures are being driven to the ASC by CMS and by commercial payers. And given the long-term relationship of orthopedic patients with their physicians, you see a system that's actually working. They go see the doc and they go to an ASC that the doc might or might not have interest in. The soft tissue is much more difficult to predict. And, you know, if you look at ASCs now, David, and you look at Expirel, over 75% of our business, as reported by Acuvia, is ortho. And so the other side of that, of course, is there isn't a lot of ASC capacity for soft tissue. We see some of that being taken up in HOPD, and the HOPD actually has, in hospital outpatient, there's a slight bias, like 55%. to soft tissue, so you can see that many of these patients are finding their way there. The issue that we see in the marketplace today is that the insurance companies are trying to save cost by moving these patients to these outside environments, and largely what's happening is the hospitals really struggle to be able to do a soft tissue procedure like a hernia or a hemorrhoidectomy for what the insurance companies want to pay for a soft tissue procedure because they're basing that off of what they can get it done in the outpatient treatment. So the backlog in soft tissue is suffering from two things. One is these continued intrusions by COVID. The fact that the primary care guys want to meet with the patient even if it's telemedicine and they need to have lab work done and EKGs done and stuff before they go for these soft tissue procedures. that marketplace is not as structured as the orthopedic marketplace, so it's lagging. And when you put on top of that the fact that there isn't a lot of capacity in the outpatient departments for these patients to go get their procedures, it's hard to predict that this soft tissue marketplace is going to be satisfied in the next year or so. I think it's going to take longer than that. And then you get into the issue of You know, some of these patients have been waiting a year and a half or two years, and they're ASA2 patients that become ASA3 patients, and then do you operate on them at all? So soft tissue is a lot more complicated, David, than ortho. Long answer to a simple question, sorry.

No, no, that's helpful. Thanks.

From RBC Capital Markets, we have Gregory Renza. Please go ahead.

Good morning. This is Nina Long for Gregg. Thank you for taking our questions. Maybe first one, just follow up on, you know, what you're seeing around recovery on procedures. I was wondering, could you provide more color around what you're seeing in terms of, you know, nursing staffing shortage now and when do you think we'll see the labor force return to pre-pandemic levels and how that will impact, you know, the recovery on procedures in the clinical environment and expert level? Thank you.

Yeah, thank you for the question. It clearly is the issue. And frankly, in December, it was the issue as well, and in August, it was the issue as well, right? So, I mean, you think Omicron was easy to identify, but I think underlying that, the real issue, frankly, was labor shortages. It's better. I can tell you that the ambulatory surgery centers, in particular, are not all the way back, right? You know, it still is difficult to get a nursing team together to work a 12 or a 14-hour shift on a Saturday. And, you know, the docs struggle when you get a number of PRNs and you bring them in and you have five people in the OR on a Saturday morning, but, you know, they've never worked together before and they don't know each other and the anesthesiologist is introducing himself to the nursing team, et cetera. It just slows everything down. And so... I wouldn't say that we're back to where we have to be in order to take care of this backlog that David was just referring to, but I think right now we're at a place where folks are working, the centers are open, and our numbers would suggest that February is gonna be a very good month, looks a lot like October did, and November did, actually. And we'll see. But, you know, when you run into trouble, it's when you start talking about, you know, a 12- or a 14-hour shift on Saturday. And, you know, nurses, especially nurses that have got young families, really struggle with how they do that when the kids are out of school. And, you know, this week, for example, is a little bit tough, right? Up in the Northeast, all the kids are off for the whole week. So you can see right away that the ASCs are slowed down.

Great. Thank you. And then just a second question, if I may, on the RETA. Maybe could you talk a little bit more about, you know, your plans to address some of the other headwinds the RETA face on manufacturing, rebating, and maybe just pandemic vulnerabilities? And when should we expect to see, you know, meaningful growth in revenue in the near term? Thank you.

I'm not sure I caught the first question. Is it around manufacturing of Zoretta?

Yeah, just manufacturing, rebating, and then something else.

Okay, thanks. Yeah, that's pretty much over, frankly. The issue of making manufacturing with appropriate dating is behind us. The issue in the marketplace is short-dated material that was shipped in beyond the capacity of a physician to use it in the time that the label enabled. especially in some places where inventory was placed with a specialty distributor or in a scenario where a doc bought a lot to maximize rebates, et cetera, you know, cleaning some of that up is what's happening. And so, you know, there's some, you know, this is always going to happen in an acquisition, so there's nothing here that's alarming or troublesome. It's just running a business. You know, it's just stuff. And I think that, you know, you're going to see Zoretta do better largely just because of the exposure that we're giving it, right? I mean, the docs that come to the pit to learn about Iovera and to learn about Expirel, it's a little bit surprising to us that I would say just a general number, at least half, maybe more than half of these guys don't even know what Zaretta is. So, you know, I think given it more exposure, we will come back with a It won't be a rebate program. It will be a discount program, which is much easier for the docs to understand and won't incent them to bring in large quantities. We want them to order it when they need it and not order a bunch of it in some type of a rebate program. I think we're doing fine right now. February looks okay. And as we clean the rest of these things up and we give these guys more exposure, then, you know, we'll clear any of these hurdles that are in the way. And we think that this will be a good growth opportunity this year. You know, and we're looking at all of these products to grow substantially in this year. And then, you know, as we talk to the FDA about improving the label and we start to shoulder study and, you know, there's a number of things that we think we can do to improve this. And, you know, remember where XPREL is already used extensively in the shoulder. We're also looking at Iovera in the shoulder, so we've got a lot of contacts doing clinical research in this part of the body. So we think we're equipped pretty well to handle doing an Iovera or a Zoretto shoulder study.

Great. Thank you very much.

Thank you. From Jeffries, we have David Steinberg. Please go ahead.

Thanks. Good morning. I have a question for Charlie. You gave us a pretty clear pathway, both, you know, sequencing and sort of peak margins for Expirel. But with regard to Zolretta and Iovera, I think you mentioned about three years to expect mid-80s gross margin. It was a little unclear in the sequencing and phasing and how you get there. Could you give us a sense of sort of annual increments in improvement in gross margin for those two products to get to that peak number?

Well, David, you're on the top of your game because that's exactly right. I was a little less specific, and there's a reason for that. And that is, you know, it's a little more volume dependent. And for Iovera and for Zoretta, we literally just got the product. So you notice that in Q4, we had 82% margins in Zoretta, which was actually better than I had anticipated. I think that was a little higher than normal because late Q4 manufacturing was humming along to make up for the normal shutdown at the end of the year. So I think Zulretta should have been closer to 80 for the full year, and it'll get to 85. I don't know that there's any prescribed notion other than in the next three years we'll pick up five points. I don't think that's anything more specific. Iovera will change drastically. This year, 21 was an outlier because we doubled up. As we basically were running the relay race, we had an overlapping section of operations in Northern California, operations in Southern California, operations in Mexico, more QA activity at all three locations. There was just some additional expenses in addition to investing in the Gen 2 device. And, you know, when you're talking about a $16 million revenue base, it doesn't take much of additional expense to change that margin. That margin will go up very noticeably in 22, and we'll be, you know, at that point we'll be on track, I think, over the next three years for Iovera to make it to. So I think, you know, this is the first time we've given detail other than total gross margin, and so I suspect you were interested to see what some of the other margins were. I think maybe the more important lesson is that Expirel is already in the high 70s and is on a nice path to get to the mid 80s as we were trying to communicate.

Okay, thanks Charlie. And then Dave, a couple questions for you. First, you mentioned in your prepared remarks that pediatrics were doing well and actually better than you expected. I guess on that point, could you give us a little color around that, and then sort of some quantification. I think you'd said that pediatric peak sales for Exprel could be a range of $100 million, and has your thinking changed based on that comment? And then finally, you know, Zenerlef's been on the market for a couple quarters. Have you seen any losses at P&T committees, and just any color, what you're seeing in the field from that product? Thanks.

Yeah, no, thanks, David. You know, for pediatrics, what we forecasted was largely off of the adult population, and so there's a number of places in pediatric medicine where physicians are using Expirel almost exclusively, clubfoot, scoliosis, and things like that. So immediately, It was obvious that our forecast was conservative because there were a number of procedures that weren't included in it at all, to be honest with you. The big enhancement, though, is we projected that we would have a percentage of the replacement of pumps and catheters. And in fact, what we're seeing is that based on the desire of many of these surgeons to have these patients go home on the same day, they're replacing pumps and catheters totally. And so, you know, I don't think anybody would have believed us if we told us that we were going to replace pumps and catheters totally at a number of big major centers. But in fact, that's what's happening. And we hear docs tell us all the time, I hope I never put another one of those things in in my life. So, you know, it's going to be more than 100 million, David, I think, over time. frankly, we haven't changed the long-term forecast to make it, you know, to improve that in terms of, you know, how it gets there and when it gets there, but it's 100 million given the pace of what we see is clearly on the low side. We were all at Rady's Children's Hospital again last week and, you know, the drug is, they're finding all kinds of different ways to use Expirel. Again, maybe a a bit of a conservative judgment on our part, but the ability to have a patient have a surgery, a pediatric patient to have a surgery and to go home from the hospital with mom and dad can't be overestimated in terms of what we're seeing in the marketplace. And so, you know, the pace of what's going on in pediatrics is extraordinary. And, I mean, even this morning there were several 10-box and 12-box orders from pediatric hospitals, where a year ago we would have had maybe a box, but likely none. And so it's doing really well. Oh, so, oh, ZENRELF, yeah. Oh, that's a short one. I haven't, I've talked to a couple people that were, for one reason or another, tried it. Nobody has decided that they're going to use it. all the issues that we've raised before. It smells, it's sticky, it forms a shell over the sutures, you gotta use a different suture technique. There have been a couple of issues with infections, especially in the lower extremities. Honestly, David, we've been out in the community a lot in the last couple of weeks. Not one single customer has brought it up to us.

Fair enough. Thank you. Thanks, man. From Barclays, we have Balashi Prasad. Please go ahead.

Hi, good morning, and thanks for the questions. A couple of questions from me, Dave and Charlie. Firstly, as I understand that you're still not providing revenue guidance, but I appreciate the color on some of the other metrics. But if I look at where consensus is right now, approximately $750 million with XPREL at 575 and Zilrata at around $140 million, would you be able to provide some color around these or throw some ranges around what would move both on the upside and downside? And how do you think 2022 will be with regard to your longer-term goal? That is one. Secondly, Dave, we discussed the distributor issues around Zillrata last month. Could you just drill down on that a bit more, especially around the rebate inventory and manufacturing issues, and what you're doing currently, and what would that mean for the cadence of Zillrata revenues for the year? Thanks.

Sure. On the first part, on the revenue guidance, You know, I think if we look at history, you know, you see you have a pretty good idea, and we've been quite honest about, you know, candid, I guess is probably a better word, about how much we expect the product to grow every year, and that is where we are. You know, I think we have to keep in mind the fact that, you know, we do have lower extremity nerve block, and we expect that to be a very big product going forward. But as we said in our prepared remarks, Balaji, that, you know, C-section is growing, ortho is growing, pede is growing. We're launching in Europe, you know, so I don't, I think that you can expect, you know, the same kind of performance on a percentage basis. And then you have to think about adding for stride in 2023 and then stellate ganglia blocks probably in that same kind of timeframe, 2023. So from our perspective, our longer term guidance is intact. I mean, I don't see changing any. There's some puts and takes. ASCs are growing very rapidly. Hospitals are not growing at all, low single digits. So as the world goes to HOPD and ASC, I think basically what we built the forecast off of is happening. It's slightly accelerated because of COVID, but then, you know, COVID gives us a little bit by moving to the ASC, and then it takes it back, too, you know, by not having staff and not being able to do all the procedures that a facility might be able to handle. So I think long-term is intact. For Zilretta, I think 140 is too high. you know, just to put it out there, right? I mean, they did 102, 103 million last year with 12 to 13 of that in the fourth quarter. So those two numbers, nothing about those two numbers would suggest that you're going to grow by 40% or 50% this year. And so as I've tried to say already, you know, the manufacturing issues in terms of manufacturing product with two years of dating is behind us. We have that. What we have to clean up and why it'll be hard to give monthly numbers, well, first of all, the way the current rebate program that we're honoring, by the way, while we replace it with our own program, that program doesn't allow you to actually have a final accounting of the numbers until the month is over. So, yeah, and the quarter's over. So there would be no way for us to give you a monthly accounting there. We will hopefully be able to provide some ranges as Charlie said in the context, but there's no way for us to have a firm handle on exactly that. So in the very short term, there's some things in the marketplace that we just are cleaning up relative to dating and some of the way the product was being handled in the marketplace. But that'll all be behind us shortly. So if you were just thinking general terms, and you were thinking about our products growing by 20-plus percent on an annual basis, I think thinking about Zaretta that same way would put you into the right place.

Got it. And the second part of the question, Dave?

Yeah, the second part around, well, it sort of answered part of that as well, right? So what was being done was a pure rebate, right? You ordered so many boxes, and... and the rebate grew as the number of units grew. There's a bunch of problems with that from an operating system perspective. You let inventory run out to zero until you can get the big discount or the big rebate at the end of a quarter. This is a fairly expensive drug at 500 plus dollars a unit, so expecting that our customers, especially in our office-based practices, are gonna order you know, anything close to 100 boxes all in one order is just not practical, right? We would rather put you in a system where you get a discount based on volume and you know what that discount is because it's going to be for at least a year. And so, you know, the hope is then, Elijah, that you would order it when you need it. And as we've said before, you know, we have people who order XFL three times a week. You would want your customer to order enough inventory so that they're going to get through the next 10 days or so and know that they can order it any time they need it at the same price rather than running the risk of running out and then having a ton of product and then running the risk you're going to run out again. And that's what leads to the center ordering inventory that they're borderline whether they're going to use or not. and that's where the dating comes in. You order a lot of it to get the total rebate, the biggest rebate you can, but then you don't use it all because of COVID and the fact that patients didn't come into your office, and you end up having inventory that's short-dated, that's out of date, and obviously we have an obligation then to work with our customers to take that back, even if we're not the ones that sold it to them, and that's where we are, if that helps you.

Yes, that was very helpful. If we could just have one final follow-up on Expirel, could you discuss the opportunity around high-dose bupivacaine and where all do you see applications for this?

Yeah, I'll give you a little bit more than that, right? So the low dose is really for basically what it is, is a spinal, right? And so it'll be for a very simple way that we can produce pain control in patients where spinal analgesia is currently being used. So then the corollary to that then is can we produce a lipid particle that can take more bupivacaine than the current 13.3 milligrams in Expirel? And the answer to that is yes. And so we've got a particle that has roughly 40% more bupivacaine on it And then the way these things are manufactured, we can change the triglyceride component of the product so that these lipid particles that are more potent become available to the sensory nerves on a longer-term basis. And so we think, based on the early data, that we're going to have at least five days, and it looks like it's going to be longer than that. And so what we'd be addressing then is We hear from ankle surgeons and foot and ankle surgeons that three days just isn't enough when you operate on somebody's ankle. There's a number of facial indications and oncology indications where it's an open procedure. Say you're doing a debridement and the doc would just like to be able to provide a longer term of non-opioid pain control, if there was some way for them to do that. So if you thought about doing a lung resection, for example, you're in there, is there someplace I can put this stuff so that the patient would get a week instead of three days? That's the question we're trying to answer. We have the product. Now we've got to go on and do all the rest of this stuff.

Thank you.

Thanks, Ledge.

From JP Morgan, we have Christopher Nayor. Please go ahead.

Great. Thanks for the questions. So the first one's on the elective procedure shift from HOPD, or to HOPD in the ASC setting. So what key trends is Kaseera seeing in this channel, and any Omicron-specific impact that you would note? Also just going to try to get a better picture around experiment procedure volumes across each of those channels, and what their growth rates are in those respective markets. And then maybe for the second question, Could you maybe give a bit more color on the 2022 OpEx guidance and the flexion deal synergies? You've talked about the 30% target for deal synergies and achieving that in 2022. Where do you stand versus those initial expectations with the 2022 guidance? Just trying to get a sense of what's baked in there and To what extent could there be further upside? And then on the OpEx guidance, maybe just any more color you can provide on the cadence of OpEx through the year.

Thanks, Christopher. I'll take a shot at the first one and hand the cell phone to Charlie here with this very sophisticated system we've got. So real specific data, and I'll remind everybody that the IQVIA data by site of care and by procedure is six months delayed. So what I'm sharing with you now is August of 2021 data. But if we remember August was a horrible month, I still think it's all directionally correct and clearly allows me to answer your question with a lot more color, which I think is helpful for everybody. So if we look at, let me see, I'm just gonna get myself a second piece of data here so I don't confuse the heck out of everybody here. So let me tell you overall, If you look at all procedures, hospitals are about 50-50, both orthopedic, what we call hard, you know, bony surgeries, and soft tissue surgeries, and they're growing at a mid-single digit. If you look at HOPDs, they are a slight bias towards soft tissue, which is what we would expect given the answer, you know, what we tried to talk about on the call. It's about 55-45, and it's growing by 13%. And in the ambulatory surgery center, it's 75 ortho, 25 soft tissue, and it's grown by 18%. So you can see a clear bias, and what you see inside those numbers, Christopher, is that the insurance companies are effectively moving their large, painful, profitable procedures. So if you can save 35% on the cost of care, there's a huge difference between doing a $1,500 hernia and doing a $15,000 knee. And if you can do a $40,000 spine, now you're really talking. And so that's what's going on in the marketplace, and that's why you see these soft tissues gravitating more towards HOPD and into the hospital. So if you have any follow-up questions, please come back. I'm going to hand the phone to Charlie to answer your question on OPEX.

Great, thanks. That's super helpful.

So I think that one of the questions you had on OPEX was overall timing. Is that what you were looking for? Oh, and synergy. Yeah, timing through the year. So from a timing perspective, I don't have my quarterly progression in front of me with this phone hiccup this morning. We're all rushing to one little conference room. I can get back to you. I don't think there's anything unusual. I would just look at past trends and expect them to follow probably a similar path. And if that's not right, I can get back to you.

Just one piece, Christopher. Go ahead. I'm sorry.

I was just going to say... Oh, go ahead.

I was just going to add, you know, I mean, you said 3%. 3% was really what we were talking about in terms of gross margin enhancement on an annual basis. The way we think about OPEX is that, you know, net-net, we think in something in the mid-single-digit range. So, you know, the whole idea of the story here is gross margins heading towards 85, revenue, you know, high teens, OPEX, a third of that, if you're thinking about it in the broadest terms, right? So I don't want you to think that that 3% was not related to OPEX overall. It was related just to gross margin improvements.

Okay. Great. And then on the OPEX front, how much of those deal synergies are really captured up front? Is there any additional synergies you should be expecting further or later dated in 2022?

So I have to tell you, I'm really pleased with the, with our organization and our quickness with which we've implemented changes and started to bring things in. So the 2022 guidance includes significant synergies. There might be, you know, two, three, $4 million better that we do next year. There are, as I mentioned in my script, there are some transitional activities on the GNA side, mostly that, you know, we have overlapping things for the next six months or so. as we fully transition. But after that, I have to tell you, I think we've done a great job with Synergies. If you go back and, you know, I tried to lay out in my script a path for you guys to follow from a top line, a margin, and Synergies perspective. And, you know, what we said when we acquired the company was that we expected it to be highly accretive and that we only needed to capture 30% of our target to break even on this, and we've well exceeded that at this point. So I don't think it's going to be significantly different going forward, and I'm pleased with where we are.

That's great context. Maybe one last one for me, maybe more on the M&A and the business development side. So I realize that you guys have just completed the function deal, but I think you guys talked about staying active, and we've seen a pretty meaningful pullback in valuations for both early-stage and commercial-stage companies. Maybe any opportunities we're seeing for acquisitions either on chronic or acute pain space? And maybe what's the profile of the asset, the type of asset you guys would be looking to acquire?

Yeah, thanks, Christopher. So, you know, they really fall into two buckets. You know, there's things like spine biopharma, you know, where they're looking into degenerative disc disease with a 7-amino acid peptide that, you know, we think can turn off the degenerative process. you know, those kinds of assets are meaningful. You know, we've made an investment in that company and, you know, there's a target profile and, you know, hopefully on attainment of that target profile, there would be further activity, you know, of the nature of which you're talking about, right? There's a number of places where we're working with folks on different products for neuropathic pain, for, you know, for recalcitrant pain, We have a whole bunch of different pain opportunities. Some are very broad, like diabetic neuropathy or peripheral neuropathy, and some of them are highly specific, like specific spine types of pain. So Rod and his team are active across a broad spectrum of opportunities. I would agree with your comment on pricing as it relates to commercial resources or commercial assets. I haven't seen anybody in the private side say that their asset isn't gonna change the way we practice medicine in the world and they're worth a lot more than anybody that's been around the block for 10 minutes thinks they're worth. So the private market in my view needs a lot of thoughtful reflection on what their assets are actually worth in this economy. Most of the stuff that we're working at is in that environment and folks are still very proud of their assets And so, you know, we'll have to see where that goes. But the majority of deals that we don't do are because of just a crazy valuation and, you know, people that are pre-manned comparing themselves to a product that's on the market in terms of the market cap of the company. I mean, it's just crazy stuff, Christopher. It's unworldly in some cases.

Great. That's super helpful context. I appreciate you guys taking the questions.

Good, good. No, thank you for the question.

And from Tourist Securities, we have Greg Frazier. Please go ahead.

Good morning, folks, and thanks for taking the questions. On the pediatric market, could we be doing more in terms of sales calls or marketing spend to drive use, or would you say the pediatric effort is pretty well resourced for now? And then on iOVERA, when do you expect to have visibility on the regulatory pathway for asbestos indication? Thanks.

Yeah, thanks, Greg. So, you know, in PEDS, you know, I mean, if you put additional resource out there, you're always going to get some additional revenue. The question is whether it's, you know, whether it's profitable revenue or whether you're just turning revenue. I mean, I think we have to be careful here. And so we launched with a team of nurses, all, you know, hospital critical care nurses, ICU, pediatric ICU nurses, etc., and we were very careful to let the leaders in pediatric pain control talk to their constituents, their fellows and their residents and stuff about how they're gonna use this and how they're gonna replace pumps and catheters and things like that. So the sales force has been turned on and I guess since August now or early September maybe, the bigger sales force has been working with the community hospitals and the smaller centers But I think the number of educators that we've got and the number of KOL's key opinion leaders that we've got in each of the specific disease categories suggest that the right way to do this is to take our time and to do it very well so that we don't put any little guys in harm's way. So I think we're happy with the pace. I think, you know, as docs continue to use Expirel in different ways for different procedures and invent new blocks for how we can do things in kids that might be a little bit different than adults. I think if we went any faster, Greg, we would run the risk of cutting our legs off long-term. I think the best thing for us to do is keep doing what we're doing and training people and making sure that a hospital is fully prepared to use Expirel and Iovara, all our products basically, but the question here is largely around PEDS. And so, you know, I don't know, Roy, if you've got anything to add to that. Let me come back, let me answer the second part of the question here, which I can't remember. What was the second? Oh, yeah, asbestos in the regulatory. Well, you know what? I'm going to give the phone to Roy Winston, who is our chief medical officer who is here with us, and he can answer both those questions.

All right, good, and thanks for the questions. So I think starting with the regulatory pathway for spasticity, we are in the middle of discussions with the FDA right now on exactly what that is. Just keep in mind, Ayurveda has a very, very broad label at this point. And it's really only a small addition because it's the same process. It's treating, could be treating the same nerves even just for a different purpose. So we feel that the 510 pathway is fairly well defined for this. We feel it'll take one relatively small study, and we're in the planning stages of that now. We have a lot of engaged KOLs who are guiding us on what that really looks like for us. I always hate to throw out a timeline, but I do think you're going to see a lot of very fast progress in spasticity, and we have a lot of interest already in the community since the investor day of several months ago. we find it to be one of the most frequently asked questions we have. And it's surprising, too, to see how many people, whether it's elderly friends and relatives with strokes that have spasticity as a byproduct of that or families with kids with cerebral palsy who now are going to have a treatment modality that is really groundbreaking. So we're on it and we're engaged and I would expect by this, by the next earnings call to have a lot of very specific granularity on that.

Yeah.

So Pete's continues to, to grow at a, at a rapid rate. We have a, uh, several collaborative studies now starting one with the Cleveland clinic looking at a major spine surgeries and for kids with scoliosis, uh, as you know, they're one of the leaders in doing that. And another one, with Shriners Children's Hospital, which could go throughout all their campuses. And then we have a meeting, which was postponed by the FDA because I guess they're overwhelmed with everything going on, but we have a meeting towards the end of March to define the regulatory pathway for the expansion of the pediatric label down to, we hope, somewhere around six months old, and to include nerve block in all those kids. I think in pediatrics, the combination of lower extremity nerve blocks and the rest of these tissue plane blocks like TAP and particularly erector spinae really are the pathways that people are using now. And if you look at the literature, almost a week doesn't go by where someone doesn't publish a case report about using Expro for some new indication in pediatrics, which is very exciting to us. And the major pediatric centers, Texas Children's, the largest children's hospital in the world, has now come online as a user in multiple treatment modalities and I think we're going to see it because where the leaders in the community go, everybody follows.

Greg, I would just close that Roy raised an important topic for I think everybody on the call to at least have a frame of reference on. We've had several of our FDA meetings delayed for all the different things that they're going through and the same kind of staff shortages that we've referenced in other places. it's very difficult to figure out what a timeline is when it's very difficult to know exactly when you're going to be able to meet with the FDA. So, you know, just something else to keep in the back of your mind as we go forward.

Got it. Thank you. Thanks, Mike.

Thank you. And we'll now turn it back to Dave Steck, Chairman and CEO, for closing comments.

Thank you, Brandon. I'd like to thank all of you 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 Barclays Conference next month. Thank you all, and stay well. Goodbye.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.