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spk02: Ladies and gentlemen, thank you for standing by. Your conference call should begin momentarily. Again, thank you for standing by. Your conference call should begin momentarily. Thank you. Thank you for standing by, and welcome to the Q1 2022 Pacera Biosciences Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentations, there will be a question-and-answer session. To ask a question at that time, please press star then 1 on your touch-tone telephone. As a reminder, this call is being recorded. I would like to turn the conference over to your host, Ms. Susan Mesko. Head of Investor Relations, please go ahead.
spk00: Thank you, Valerie, and good morning, everyone. Welcome to today's conference call to discuss our first quarter 2022 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer, and Charlie Reinhart, Chief Financial Officer. Additional members of our executive team are joining for today's question and answer session. Before we begin, let me remind you that this call will include forward-looking statements on current expectations. Such statements represent our judgment as of today and may involve risks and uncertainties. For information concerning risk factors that could affect the company, please refer to our filings with the SEC, which are available from the SEC or our website. With that, I will now turn the call over to Dave Stack.
spk05: 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. Pacira continues to drive innovation in non-opioid pain management with notable progress taking place across our entire portfolio in the first quarter of 2022. We are pleased to cap off the first quarter with record high expo sales that exceeded $51M for the month of March. This is particularly impressive given the recent and ongoing pockets of persisting COVID related operational disruptions in the elective surgery market, along with labor shortages, which continue across all surgical settings in the first quarter and especially around the Easter and Passover holidays in April. Strong top-line sales, coupled with our operational efficiency objectives, continue to drive attractive adjusted EBITDA margins of over 34% for the first quarter, marking our 20th consecutive quarter of positive adjusted EBITDA. XPREL utilization continues to expand and support the market transition to outpatient sites of care. This is demonstrated within our latest available weekly data, which shows XBRL significantly and consistently outperforming the elective surgery market by a very healthy margin, period over period, as well as sequentially when compared to pre-COVID baseline levels. Our most recent IQVIA data are available in the investor relations section of our website. Expro-based nerve blocks and field blocks are fueling a revolution in regional anesthesia, so it is not surprising that this segment is our number one growth driver. Anesthesiologists are developing new blocks while perfecting existing block techniques. In addition, anesthesiologists utilize imaging to ensure successful blocks and pain control to expedite recovery times and ensure best practice patient outcomes, a critically important element in ambulatory surgery cases as the aim is to discharge patients shortly after surgery. In-person society meetings are back and enabling us to engage directly with clinicians who remain eager for education and training around regional approaches for Expirel, as well as drug-free nerve blocks with Iovera and intraarticular injections with Zoretta for osteoarthritic knee pain. We are leveraging our state-of-the-art PIT training and innovation center in Tampa to facilitate real-time best practice knowledge transfer and accelerate surgical migration to outpatient sites of care. In the first quarter alone, we had 84 inbound requests for institutions requesting training for their anesthesia teams on select blocks, with erector spinae block, or ESP, being the most requested, underscoring its growing popularity given its simplicity, safety, and broad coverage. Our medical and innovation team also continues to host monthly workshops where interest and attendance remain high. We have launched development plans for our second innovation and training facility in Houston, which we will look forward to opening later this year. We expect Houston will have an equally positive impact on expanding ExPRO and IOVERA expertise among clinicians, especially for field and nerve block procedures, which are driving the majority of our growth. This cutting-edge facility will feature an adaptive lecture hall, broadcast studio, state-of-the-art advanced imaging, and dedicated space for cadaver labs and other interactive workshops. These training centers are core to developing both our physician champions and community-based clinicians who want to stay on the forefront of opioid sparing pain management. Importantly, we continue to advance our robust patent strategy around expirale and have fortified our intellectual property with new patents which extend protection to January 22, 2041. We now have five patents listed in the FDA's Orange Book and expect a sixth patent to issue in the coming weeks. Drilling down into a few key expirale markets, Orthopedic procedures are growing significantly with our most recent IQVIA data from October 2021 showing year-over-year XPREL utilization of 26% for this orthopedic market segment. XPREL-based regional protocols are safely and reliably enabling a shift of orthopedic procedures with XPREL utilization of 34% over the same period in the 23-hour sites of care. In pediatrics, XPREL is performing very well and quickly replacing pumps and catheters as a standard of care. We are continuing to drive medical education around the latest techniques. In addition to spine and cardiovascular surgeries, we are seeing emerging regional blocks in pediatric deformity, trauma, and injury-related procedures. Later this month, we are launching a new monthly production from our Tampa Innovation and Training Center, the Pediatric Exchange, which will feature pediatric surgeons, anesthesiologists, and nurses from nationally recognized institutions who will share their clinical experience and outcomes with Expirel. These remain early days in the pediatric market, where opioid-sparing pain management in these vulnerable pediatric patients is tantamount. In women's health, we continue to see significant growth and are experiencing a powerful halo effect, with success in C-section driving expanded utilization in breast augmentation and gynecologic oncology procedures, where we are also seeing a lift to the 23-hour setting. The growing level of interest around XPREL regional blocks and women's health was recently evidenced by a high level of engagement at our educational events focused on neuroanatomy, regional techniques, and same-day surgeries at recent congresses, including the Society of Gynecologic Surgeons, the Society of Gynecologic Oncology, and the American Society of Breast Surgeons. Regarding our European launch, we continue to make slow but steady progress and now have a full team in place. We've been encouraged by the strong interest in XPREL as physicians in Europe work through a surgical backlog with wait lists of one to two years. We are effectively using our virtual capabilities from our Tampa Innovation Center to train European anesthesiologists and surgeons in best practice pain management techniques, utilizing XPREL and iAlvera multimodal therapy and enhanced recovery after surgery protocols. Looking at the XBRL pipeline, our two Phase III studies evaluating lower extremity nerve blocks are advancing with data expected in the third quarter. If successful, these studies will support a supplemental NDA filing by the end of this year. Planning is also underway for a multi-center registration study of Expirel as a stellate ganglion block for treating refractory cardiac dysrhythmia. Dr. Shiv Kumar, director of UCLA Cardiac Arrhythmia Center and world-renowned expert in the mechanisms of cardiac dysrhythmias, is collaborating with the team on study design and will be the principal investigator. Once finalized, we intend to meet with the FDA to align on study design and regulatory strategy for expanding the Expirel label to include stellate ganglion block. A stellate block, which lasts for several days with Expirel, will be a significant improvement in patient care, and Dr. Shubhkumar is leading the way forward. Beyond our success with Expirel, our acquisition of Flexion continues to perform and support the strong rationale for this combination. Out of the gate, our Zoretta franchise has performed well. While still in the early stage of its growth trajectory, we are confident this product will be an important revenue and earnings contributor. To better align Zoretta acquisition and distribution with the needs of our customers, we recently introduced a simplified volume-based tiered discounting program. We expect this will normalize ordering patterns and cash outlays for our customers while embedding Zoretta earlier in the treatment paradigm. Beyond the currently marketed indication for Zilretta, we continue to advance a pipeline of opportunities to drive product growth and new indications in the coming years, including a phase three label expansion study and shoulder that we intend to discuss with the FDA in the third quarter. We are also defining a regulatory pathway to add repeat dosing and safety data in type two diabetic patients to the Zilretta label. Moving to Iovera, our novel handheld cryotherapy device, we are working toward transitioning the market to a new Generation 2 device. The rollout of Generation 2 to our broad customer base has been slower than anticipated as we are implementing a software update to further optimize the user experience based on feedback received during the initial phase of the launch to our top Iovera users. Turning to the PREPARE study of Iovera and TKA, following an interim review, we decided to close the study early, as it was unlikely to support our commercial goals around reimbursement since the design no longer reflects the market's current practice patterns. The market is moving rapidly towards ultrasound-guided Iovera blocks delivered by anesthesiologists, pain management specialists, and nonoperative sports medicine clinicians. These providers use a longer 190 tip with ultrasound visualization to precisely target deeper nerves associated with osteoarthritis of the knee. This newer approach confirms nerve location and ensures accuracy of treatment. The IGAR registry study is now positioned to provide real-world evidence with IOVERA, which will better support our commercial initiatives by reflecting these evolving standards of care in real time. IGOR is capturing both Iovera and Zoretta data in the osteoarthritic knee treatment paradigm with leading centers of excellence. In addition to use in total knee arthroplasty and peripheral nerve block, we remain particularly excited for the opportunity for Iovera cold therapy as a novel approach to treating spasticity. As you may recall, we have been working with Dr. Paul Winston, President of the Canadian Association of Physical Medicine and Rehabilitation, who has been conducting IOVERA observational studies in spasticity. The preliminary findings of Dr. Winston's research continue to be highly encouraging, and he is now collaborating with our clinical and medical teams on a publication strategy for these data. In parallel, we are designing a registration study to evaluate IOVERA and the treatment of spasticity. We expect to meet with the FDA later this year to secure alignment on study design. Patients currently have limited and often costly therapeutic options. For example, patients are receiving three to four Botox treatments a year at $1,800 to $2,400 per treatment. Another example is the off-label 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. And with Iovera Smart Tips costing $450 to $500, Iovera could represent a tremendous value proposition in spasticity. An effective and safe treatment for post-stroke patients and pediatric cerebral palsy patients would be a significant advance in the treatment of spasticity. In parallel to our XPREL stellate ganglia block study, Dr. Shiv Kumar is also initiating a study utilizing Iovera's cryo technology to treat the stellate ganglia as a long-term approach to efficacy effectively, I'm sorry, to effectively address various cardiac dysrhythmias such as those that occur post myocardial infarction. Expirel and Iovera have the potential to address both acute and persistent cardiac disease in a wide range of patients. Moving now to our earlier stage pipeline opportunities where we continue to make progress. We expect to initiate a phase two study of Expirel and some arachnoid analgesia later this year. In addition, we are defining clinical programs for our proprietary multi-vesicular liposome formulations of dexamethasone for inflammation and low back pain, and high-dose bupivacaine for longer-acting pain management of five days or more. Lastly, we remain active in the business development front and recently made a strategic investment in Carthronics to support the final stages of preclinical development of CX011, an intraarticular injection designed to slow joint degeneration by mediating the IL-6 cytokines. In closing, we started 2022 in a position of strength, and we continue to feel great about where we stand today. We have the wind in our sails and across multiple non-OPI franchises and remain highly confident in our outlook for strong revenue and earnings growth. With a significant patient need for opioid sparing options and limited commercial competition, we are more confident than ever that we have the right team, the right products, and the right strategy to cement our leadership position in delivering patients innovative non-opioid solutions along the neural pathway while building significant shareholder value. And with that, I'll turn the call over to Charlie for his first quarter financial highlights.
spk04: Charlie? Thank you, Dave, and good morning, everyone. I'll start with a quick update on sales and margin trends, starting with Expirel. We remain very pleased with the ongoing success of Expirel as the clear market leader in non-opioid post-surgical pain management. We saw a year-over-year increase of 13% for the first quarter, and we exited the quarter on a high note with record high monthly sales for March, despite persistent regional disruptions and labor shortages resulting from the pandemic. We have seen no impact from new market entrants on our X4L-based business or our ability to generate new business. which is not surprising given the market's ongoing shift to regional analgesia and outpatient sites of care. Having treated more than 10 million patients in the U.S., we are confident that our well-established efficacy, pristine safety profile, and more than a decade of physician experience will continue to be key advantages for X4L over other extended release bupivacaine formulations. As expected, Zulretta is a perfect fit within the Fasero product portfolio. The product is off to a great start and performing according to plan. We have successfully replenished commercial inventory with appropriate dating and implemented a simplified discounting program to better support our customers. We continue to expect improving Zulretta sales trends throughout the year as we broaden education and awareness to our commercial expertise and established relationships. For Iovera, first quarter sales were impacted by a delay in the roll-up of the Gen2 device, as Dave mentioned earlier, as well as short-term variations in regional reimbursement policies. We expect the product to return to more robust year-over-year growth as the year progresses. We remain very optimistic in the Iovera opportunity within its current as well as new indications, such as spasticity and stellate ganglia blocks. which we are making new clinical investments. Turning to gross margins. On a consolidated basis, our first quarter non-GAAP gross margin percent improved to 79% versus 75% for the first quarter of 2021. This is comprised of non-GAAP margins of 82% for Expirel, 73% for Zulretta, and 58% for Iovera. First quarter Zulretta margins were impacted by the write-off of an out-of-spec batch that was manufactured pre-acquisition, and Iovera margins were impacted by overlapping expenses as we transitioned production to our San Diego facility and a new contract manufacturer, along with our investments in the Gen 2 device. Looking ahead, we continue to expect to see margins improve for all three products and to reach the mid-80% range by the end of 2024. While we are currently not providing 2022 revenue or gross margin guidance, given the continued uncertainty around COVID-related disruptions and the pace of recovery for the elective surgery market, we remain committed to the transparency of reporting preliminary monthly product sales for Expirel and Iovera to share inter-quarter trends with you. For Zulretta, we are not currently reporting preliminary monthly net product sales, as the required adjustments for the Legacy rebate program are calculated after the end of the quarter. We expect to begin including preliminary Zoretta sales in our monthly updates in the second half of this year as we transition away from the Legacy rebate program and implement our simplified discount structure. We will consider adjusting this practice for all three products as the year and visibility progresses. Turning to expenses, First quarter non-GAAP R&D expense of $20.1 million was in line with our guided range for full year non-GAAP R&D of $75 to $85 million, which we are reiterating today. We would expect second quarter R&D expense to track higher and then tail off in the second half of the year as we complete enrollment in our lower extremity nerve block studies. For non-GAAP SG&A expense, our first quarter spend was also in line with our guided range for full year non-GAAP SG&A expenses of $220 to $230 million, which we also reiterate today. Interest expense was $10.2 million for the first quarter of 2022. To remind you, last year we secured a term loan fee financing for $375 million with a floating interest rate of SOFR plus 700 basis points. Over 80% of this quarter's interest expense was attributable to this loan, with the remainder related to our convertible notes, including the 2.375% notes, which matured and were paid off on April 1st. For modeling purposes going forward, Based on today's interest rates, interest expense would be approximately $9 million per quarter for the rest of 2022. Our GAAP P&L reflects a first quarter effective tax rate of 6%, which benefited from the impact of a discrete tax deduction related to equity compensation transactions, often referred to as an equity windfall deduction. For non-GAAP purposes, our adjusted results reflect an effective tax rate of 25%, which we continue to believe is an appropriate effective tax rate for Passera's adjusted net income this year. And lastly, adjusted EBITDA continues to ramp and increased by 49% year over year to $53.8 million, a record for the first quarter and our second highest quarter ever. In summary, Passera continues to operate from a position of financial strength, Despite certain regions experiencing COVID-related disruptions and labor shortages, we continue to deliver impressive financial results and remain bullish in our long-term expectations for year-over-year top-line growth in at least the high teens, gross margin improvement to the mid-80% range, modest year-over-year increases in operating expenses, and adjusted EBITDA margins that exceed 50%. That concludes our prepared remarks. I'd like to turn the call over to the operator to begin our Q&A session. Operator?
spk02: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touch-tone telephone. Again, to ask a question, please press star then 1. One moment for our first question. Our first question comes from David Anselm of Piper Stanley. Your line is open.
spk01: Hey, thanks, and I apologize if I missed this, but can you, Dave, just frame how we should think about April and May for Expirel? I mean, seasonally it typically is better in the elective surgery environment, but can you talk about, you know, what you're seeing in terms of elective surgery, how you should think about, how we should think about the, not just the pace of procedures, but, you know, how you're thinking about the potential for uptick, you know, in overall volumes, you know, as we go more into the spring months? And then secondly, on Zolretta, can you just talk about how broadly you can get more out of the asset than your predecessors? And I'll leave it there. Thanks.
spk05: Yeah, sure. Thank you, David. First, on elective surgeries, you know, David, if we look at the first quarter even, I think it's – I just can't give you a really solid answer. I wish I could. We spent last weekend with a number of very high profile administrators and folks who run hospitals around the country and our discussions were very much mirror images of each other. I mean, if we think about the first quarter, 3% or 4% in January, 16% in February, and 17% in March is pretty much, you know, what we think we're going to see. You know, we saw something in the 9% range, you know, unaudited and early, but something like that in April. And, you know, we've only got a couple days in May so far, so I don't know what to tell you. But, you know, echoing in a more specific way what Charlie said, I mean, day-to-day, David, it's just all over the place. I mean, even this week, our daily sales for Tuesday were twice what they were for Monday, which is just highly, you know, we haven't seen that before. And we relay most of that. Some of that is COVID. Some of that is hospital systems that just don't want to do soft tissue procedures because of the finances involved. And you saw some of that with some of the big hospital chains that reported. But we think most of it, frankly, is labor, which is why we made the point around Easter and Passover. I mean, just inside the month of April, you had two really good weeks and two really bad weeks around the holidays. And so I just don't know what to tell you. I think what we're going to see is that orthopedic remains strong. And it's the basis of our ASC basis business. And in fact, if you look at these October numbers that we referenced earlier, 79% of the XPREL procedures that were done in the ambulatory surgery center were orthopedic. So you can see that the insurance companies are pushing soft tissue procedures towards the ASC to save money. The ASCs don't have capacity and the hospitals don't want to do them because of the profit margins against their cost structure. So I think the real weakness we're seeing in the marketplace, frankly, is more soft tissue related. But unless we can have reliable surgical teams that can support the surgeons and the anesthesiologists, especially in the ASC, and especially around expanded hours on weekends and longer days and things like that, I just don't know what to tell you, which is why I don't know what I would say if I was trying to reinstitute guidance today anyway. So that's sort of number one, right? And come back to me, David, if I raise more questions than answers. The second part of that is the whole Zorretta. Actually, it's pretty interesting, David. I think Zorretta's doing well. You know, I think the discounting program versus the rebates and the stocking and days, you know, all the other things that we can do to make it easier for our customers to have Zoretta available in their offices is sort of an operational issue. I think longer term, we hear a lot about repeat dosing, and we're working with representatives from the societies, you know, especially AOS. on developing algorithms of care. If we examine the marketplace in a little bit of a broader sense, the whole hyaluronic acid market is now in a dynamic state given the fact that they're not devices anymore and they have to report their ASP. So we think some of the things that were going on in the marketplace relative to what the true wholesale acquisition cost was versus the average selling price the scenario which the pharma industry has to operate under but which HA as a device was not operating under is going to cause many orthopedic customers to rethink their use of HA from a profit motivation perspective. So then we're left with immediate release corticosteroids and long release. And really what we're looking for first is that we need some algorithms from the societies In terms of how these various agents should be used that a normalized patient population and then as well as a, you know, a more specific population, like type 2 diabetes, especially as it relates to glycemic control with an immediate versus a long acting. Uh, so, um, you know, we are working on on these algorithms working with the. just starting, by the way. I mean, we've only owned it for a few months, but talking to insurance carriers about what the optimum way is to treat their patients, then doing a shoulder study, You know, we didn't actually call this out specifically, but you notice that we, instead of referring to specific timelines for our clinical programs, we said after meeting with the FDA. And the reason for that is, you know, the FDA is having its own labor issues and it's very difficult to know when we're actually going to have these meetings with the FDA. So we'll do a shoulder study. We're looking at glycemic control with type 2 diabetics, and we want to talk to the FDA about where that's positioned in the package insert. We will start a shoulder study. We've got the design of the study and the protocol. It just doesn't make any sense for us to go down that road without talking to the FDA, essentially, since it's a product that we just talked about or we just brought in. And then lastly, just last week, there were 24 first-time customers ordering Zilretta. So what we see is when people come here to the pit, that's where we're speaking to you from today, many of them have never heard of Xilretta. And when we talk about all the things that we just discussed here, we see people adapt that technology pretty quickly. And so if we could run 100 new customers a month, for several months here, you know, we're in a pretty good spot relative to the baseline that we acquired from Flexion. So overall, we're feeling really good about Zoretta. Slightly less impacted by labor because it's generally administered in the physician's office where they have a J code. And so Zoretta's in pretty good shape.
spk02: Thank you. Our next question comes from Gregory Renza of RBC Capital Markets. Your line is open.
spk10: Hey, good morning, Dave, Charlie, and team. Congrats on the progress, of course, and thanks for taking my question. Dave, maybe just following up on the previous question, and certainly some color around, I think, maybe the unpredictability and the turbulence that you've described, but maybe just from the angle of how the current environment aligns with where your expectations were at the start of the year. Certainly prior color had been the optimism around exiting each month with some degree of comfort and a return to, dare I say, normalcy. I'm just curious if you can comment on where you see this current lumpiness as it fits to where you thought we would be at this point in time. Thank you.
spk05: Yeah, thanks, Greg. And, you know, I think the easiest way to say it is, you know, it's, I mean, I guess the difference is we were thinking that largely labor would be at least more sorted out than it appears to be. And, you know, even when we came out of February and March with plus 16, plus 17, we thought actually that we were seeing a normalization in the marketplace. But when you spend time with the physicians and you really get into the nitty-gritty of what's keeping them from doing more surgeries in all sites of care, but specifically in the ambulatory environment, it's over and over again. It's just a willingness of nurses and support staff in general. But, you know, we're usually talking about nurse teams and you know, it's probably a more difficult scenario, Greg, than it first appears because, you know, we just can't get five PRNs on a Saturday and open an ambulatory surgery center and do six or eight needs that day. And so the issue is that, you know, we're, the nurses after the, you know, the COVID-19 experience just are taking vacations and you know, that there's not much we can do about that. And so, you know, around holidays, around spring breaks, that's what we attribute the April discussion around is really it was more around spring break and the fact that while they were willing to defer in the COVID-19 experience, now they're saying this is going to be here for a while and I have to take care of myself and So that's one big piece of it. The other piece of it that's got the hospitals in a difficult situation is nurses have left their traditional employment to become travelers. And astonishingly maybe for the purposes of this discussion, some of these travel nurses are getting north of $40,000 a month. And so the hospital cannot then do low margin soft tissue procedures with a nursing staff that's making $40,000 a month. And some of the hospital system numbers that you've seen in the last two weeks are exactly that scenario. So, you know, that's why I focused on, I think we can take the majority of ortho procedures and do them in the ASCs as the payers would largely expect. When we get to soft tissue, we don't have the capacity in the low-cost environment in the high-cost environment, can't afford to do them. And so that's where we think we see some of this forecastable, I don't even know if that's a word, Greg, but you know what I mean to say here, opportunity to look forward and see where this is going. I honestly don't know. I mean, we're going to be holding our breath around the next holiday, I can tell you that.
spk10: Got it. Very helpful. And maybe just if I may shift just quickly to the training center that's standing up in Houston. Just with respect to that versus or in addition to Tampa, Dave, can you just talk a little bit how you're going to get additional leverage or effectiveness out of really what is that important network effect as you message the best practices and the expert opportunity for physicians? I think simply put how that investment is really going to potentiate those opportunities even more so than just a single Houston facility. Thanks again, Dave.
spk05: Sure. Yeah, yeah. No, thanks, Greg. First, I mean, just to give everybody the understanding, we can't satisfy the demand or even close in the Tampa facility. And just this past weekend, the New York Society of Regional Anesthesia held their national meeting from our pit facility here. So, you know, and the fact that we had 84 requests for training in the first quarter alone would tell you, and most of these folks want to come on Friday, Saturday, Sunday morning, you know, we just can't even come close to satisfying the demand. So in addition to that, there's some things that we think we can add that will make this facility, you know, more appropriate even for some of this high-end training that we're doing, not only for XPREL but for IOVERA as well. And, you know, imaging has come a long way. And we're looking at imaging techniques, for example, that when you run the cursor over the patient, the actual software identifies the nerve. So as a training tool, we can do a lot of things in an improved environment that weren't even available two years ago when we opened this facility. And then I think maybe the most obvious thing, at least from our perspective, Greg, is that Texas, some weeks, is 20% of our business. And so it's entirely appropriate that we go and support the folks that are within driving distance that don't have to get out of plane to come here. And in fact, some of the hospitals in Texas have already asked us if they could take a weekend and brush up on their use of Expirel. And in many cases, I think it'll help us have more direct impact on how we roll out Iovera in a state that's by far the most important to us. And so a lot of tangential reasons that come together around a relatively modest discussion or investment, right? This is only a few million dollars to get this thing done. It's not 10 or 20 million bucks.
spk10: Great. Thanks for taking my questions.
spk05: Thank you for the questions. Thanks.
spk02: Our next question comes from Greg Frazier of Truist Securities. Your line is open.
spk03: Good morning, folks. Thanks for taking the questions. On IAVERA, you sound increasingly bullish on the potential of the technology. I think there are numerous reasons for that, including new indications that you've talked about. But the commercial performance has lagged a bit, the sales down in the first quarter. You mentioned the transition to Gen 2 and variations in reimbursement policies. Can you just expand on what happened with reimbursement in the first quarter? And can you also talk about your initiatives to expand the use of IOVERA for the current indications and the hurdles that you have to overcome to broaden adoption. Thank you.
spk05: Sure. There was a letter that was up on a certain MAX website, Greg, that said that IOVERA was not paid for. This is a CMS, one of the CMS member organizations. That has now been taken down from that website, but it had a negative impact when it was up there, and folks thought that there had been a change in policy and that CMS was no longer paying for hospital outpatient use of Iovera. So that was a short-term issue. The other issue that we're on the other side of now is that when we started to roll out Gen 2, there were some... operational issues, some mechanical software issues with Gen 2 that we didn't see with Gen 1. And so we were in a position where we didn't want to send a lot of Gen 1 units to folks knowing that we were transitioning to Gen 2 in the short-term future. And we didn't want to send a Gen 2 unit that we thought could be optimized over the next couple of months. And so we went through the first quarter, frankly, you know, addressing a number of issues that we think are largely behind us. You know, going forward, we now have a Gen 2 device that is, at least on all the reports from our super users, is doing extremely well. As a matter of fact, one of the folks we were with last weekend made the comment to me that it was night and day from Gen 1. So you'll see us now be in a position to be able to ship those to new users. And one of the users is the U.S. government, frankly, that we didn't want to ship anything there. We didn't want to ship them to Europe, for example, because you didn't want to ship them out, have somebody have a bad experience, and then change it right away. So we're on the other side of all of that stuff now. And the major issue is going to be reimbursement. It will take us a while. Now, we're reimbursed in the HOPD. We are reimbursed by many commercial payers in the ASC and in the physician's office, but that reimbursement is much lower than it is in the HOPD, and in many cases, it's difficult for these folks to actually have the desired margin opportunity So, to accommodate that, as we roll out Gen 2, we're also going to have site of care pricing, where the pricing for the ASC and for the office opportunities will be lined up against the reimbursement that we're seeing for different commercial payers and workman's comp and those kinds of special opportunities where you see office practices and PM&R guys desiring to use the drug to address patient needs. but just require at least some margin in order to make that happen. So we've hired somebody who is from the insurance industry and is also an accomplished anesthesiologist to run our reimbursement program. As we said, we've got the IGAR program up and running in real time. We've got over 100 patients in that database now, so we expect to be able to work with the reimbursement folks on the value of Iovera and enhance the reimbursement around Iovera. That's a longer-term project. In the short term, we think some pricing things that have moved to Gen 2 will get us back on track, and you'll see a rebound from in Q2 and through the rest of the year. Great. Thanks for the color. Thanks, Craig.
spk02: Thank you. Our next question comes from Anita Deschamps of Beringer Capital. Your line is open.
spk09: Hi. Good morning. Congrats on the progress, and thanks for taking my question. I just wanted to focus and get some clarity on the RETA use. I know the study – I'm sorry. I know the use in type 2 patients has been somewhat not – entirely adopted, so I was wondering if there's, you know, what steps you're looking into to kind of increase Zyleta's adoption in this population. Maybe some conversations with the FDA or some efforts to kind of change language on the label. Thank you.
spk05: Thank you, Anita. You know, Flexion positioned Zyleta as a downstream option for the treatment of these patients. And I'm sure you're aware, but only 75% of OA patients respond to a corticosteroid. So fair enough that you're gonna wanna use an immediate release product to establish that the patient is a responder before you go to a longer-term therapy. But the discussion around after that single immediate release product, why would you go back to using something other than a corticosteroid and why would you only have a single administration of Xilretta in a patient population where we know there are regular issues in the marketplace around glycemic spikes and patients ending up in the intensive care unit because they're not stable. And I want to be really clear, Anita, that we haven't had a meeting with the FDA yet. It's not easy to get a meeting, even a phone call with the FDA right now. But the plan is to discuss type 2 diabetics, and how we make an accommodation in the package insert that discusses the fact that these patients should be treated separately from a more generic kind of approach to just patients with osteoarthritic disease. This is a special group of patients that have special needs that are not addressed by either hyaluronic acid or a short-acting corticosteroid. And that's sort of in lockstep then with a discussion with the FDA on what their requirement would be for a second dose. Now, in the package insert in the clinical development section, they do have wording around the advantages of a long-acting dose. for glycemic control, but it's not in the indication section. And so we can have a clinical discussion with a physician that really stretches a reimbursement discussion with a payer. And so, you know, those two things really are adjacent to each other in terms of how we'll discuss this with the FDA. it starts with patient care and improving patient care, and it ends up with a more practical mechanism of what do you actually want the physicians to do, right? If you're only going to pay for an administration of one of these products every three months, then you have to have some type of an algorithm of care that directs them to how that is actually affected in the marketplace. And to say that you're going to give something, an immediate release corticosteroid that you know doesn't last three months, but that you're only going to pay for an administration every three months, and you're forcing everybody through that care paradigm, that just doesn't make any sense. And the docs in the marketplace just shake their head and say, well, we don't know what the heck to do. But, you know, it's difficult for us to act in this environment if we're not going to pay for using a product with a whack acquisition cost of something in the neighborhood of $500. Does that make sense?
spk09: Yes, yes, thanks for that clarity. That was helpful. And then just one more question relates to the growth opportunities for this year. And you have about, you know, the pediatric indication and, you know, also the soft tissue procedures growing potentially. So among those, which sort of do you anticipate growth coming from at a higher rate than the others?
spk05: I'm going to give you two different answers to that because I think there really are two. I mean, we have things that we can depend on because they are either not being deferred or they can't be deferred. So you don't see anybody in pediatric deformity, for example, or scoliosis saying that they're deferring those patients because of anything, right? COVID would be one thing, but nursing staffs would be the other thing. So, you know, on the other side of the aisle, you've got C-sections, and those can't be deferred either, right? Those kids are coming one way or the other. It's just a matter of how we're going to treat them and where we're going to treat them. So I think, you know, we can predict PEDS pretty well, and PEDS is going well. We can predict women's health pretty well. The vast majority of soft tissue procedures actually are abdominal, colorectal, hernias, you know, hemorrhoidectomies, you know, those kinds of procedures. And those are the ones that, you know, there's patients who require those surgeries. If there's an ASC in the area or an HOPD in the area, the insurance carriers or the payers, whoever they are, CMS, is trying to move patients towards these lower cost environments. There's large places around the country and some states even where there just aren't any ambulatory surgery centers. And so the hospitals are trying to look like ASCs in the way that they're going to handle some of these patients. but we're just not there yet. And so, you know, we're just going to have to see how this market evolves. Now, there's a number of big ambulatory surgery sport spine facilities being built, and that will help a lot in terms of freeing up capacity for non-ortho procedures. You know, I don't know what to tell you about hospitals trying to become ASCs because the inefficiencies are just very difficult to overcome. We can strip out the overnight nursing staff, we can strip out dietary, we can strip out linens and all the things that are ancillary expenses, but at the end of the day, if you still have to call another facility or another function of the hospital to get an ultrasound machine down there so you can do a nerve block. I would tell you personally my own experience, I went to help a hospital understand what they need to do and we waited for the handheld ultrasound machine to come to the operating room for longer than the procedure was supposed to take. So, you know, it's not a simple thing to take a hospital and make it into an ASC. And so we're somewhere in the middle there. I think capacity will increase. Hospitals will have to figure out a way to do this because, frankly, if the insurance companies are going to direct ortho and spine to the ASC, they're the only procedures they're going to have left, right? So they're either going to do these as the basis of their operation or they're going to have to decide they're not going to. But, you know, right now, I think some of the excuse around COVID is actually more a desire for these centers to not do these procedures because of the profitability issue.
spk09: That was very helpful. Thank you.
spk05: Thanks, Anita.
spk02: Thank you. Our next question comes from Serge Bellinger of Needham & Company. Your line is open.
spk06: Hi, good morning. Hey, Serge. First question is around your plans for a skeleton ganglion block. I think you talked about a potential application for cardiac dysrhythmia. It seems like a departure from your current target focus, but maybe just talk about the market opportunity and whether it could have a halo effect to other procedures beyond that one.
spk05: Yeah, so, you know, the target indication is still a ganglia. And I'm glad you asked the question. I probably should have been more clear in the workup here. This will be an anesthesia administered procedure, Serge, under ultrasound guidance. So, you know, if you think about a stellate ganglia block, it has broad applications in a number of different areas. and is being used currently in an anecdotal way in case report studies for scleroderma and Raynaud's disease. If you think about any place that you want to increase the blood flow in plastic surgery, flaps, and in some more extravagant applications, it's being used in chronic pain syndrome and PTSD and a whole bunch of things. So think at the base of the thought process. Think about the brain sending an inappropriate action to the body. Just the opposite of what we've been doing for the last 15 years, right? We've been trying to turn the pain signal up from the body to the brain. Now with both stelae and with spasticity, we're talking about how the brain and the body interact around basically what it turns out to be sympathetic nervous responses. And so turning off the stellate ganglia will turn off the reaction to manipulation of the cardiovascular system that leads to the catecholamine storm that is so destructive to these patients around VTEC and longer-term AF and all of these different things that these patients go through. Dr. Shiv Kumar actually is an expert in sodium channel impulse transmission. And so he's the ideal person to help us through these. So it's actually not as far afield as it would appear. This is not going to be a cardiovascular use, and the trials will all be around an anesthesiologist administering this drug. So if you think about somebody who's treating patients in a block room, this won't be that application around an elective surgery like a you know, a tap or a peck or anything like that. But it's a very simple procedure to do. And, you know, and the impact on patients' lives could be profound in terms of a number of the actions we've had. And many of us here have spent considerable time with these clinicians reviewing patient charts and actually looking at animal labs in terms of how this actually transpires And so it's pretty exciting and it's another reason, frankly, along with PEDS and a lot of these different places where If a pharmacist is pushing back against us for orthopedics and for soft tissue, there is no way that you can use some of these pretender products for anything like this because you're putting this drug in close proximity to the brain and it has to be absolutely safe. And so none of the other things that folks are trying to use the marketplace with adjuvants and things like that are gonna work. So there's a couple of things at play here from a strategic perspective.
spk06: Thanks for the clarification. Just one more, and apologies if I missed this. Any update on the deflection early stage program FX301? I think it was in a proof of concept bunionectomy trial.
spk05: Yeah, so let me go back for both, Serge. So on 201, we've got some pretty good data, but the cost of goods is really high. And so our plan is to move 201 from an intraarticular injection in the knee, and we have a couple of other shots on goal in that environment, and to move it to a degenerative disc disease product that would be used at 1 100th of the dose in the knee. So the cost of goods we think is manageable at that level. In 301, we have recently received the data, and we haven't formally made a decision yet as to what we're going to do around 301, but there are a number of commercial issues around temperature and as well as some of the clinical evidence that we see, but we're still in the process of talking to the investigators and understanding exactly what we're dealing with before we make a formal decision there.
spk06: Got it.
spk05: Thank you. Thanks, Serge.
spk02: Thank you. Our next question comes from Gary Notchman of BMO Capital. Your line is open.
spk07: Edna Klaue Hi, this is Edna Klaue on for Gary Nachman. Thanks for taking our question. So first, I just wanted to get back on the labor shortage staffing shortages shortage issue. Based on your conversations with physicians, and from your perspective, what are some of the potential factors or solutions to help the labor shortages to recover? And is there any sense on how long that could take?
spk05: Yeah, it's really multifactorial. It's the labor shortage, but it's also which site of care the labor shortages are in. You come to different conclusions. When we talk to folks in the ambulatory environments, what we're trying to do is establish efficiencies so that you need fewer arms and legs in the OR, and one of those solutions are robots. Last weekend, there was some extensive discussion around do robots help or hurt in terms of labor? And can we get by with fewer folks if we organize in a slightly different way during the course of a procedure? So you're seeing people ramp up in ancillary activities. You know, the kinds of things that nurses are doing today, say in the PACU or when you go in, you know, the charge nurse is there and there. I mean, could somebody else be doing those kinds of things? Those are all the things that the outpatient providers are trying to do. And the inpatient, you know, frankly, there isn't a heck of a lot they can do except find more nurses or incent nurses to actually, you know, come back to the marketplace because an awful lot of them have just stopped working because of the COVID environment, you know, because of the pandemic. The pay discrepancy, actually, when you talk to these people, and again, you saw it in some of the numbers from some of the hospital chains, a number of the big-time good nurses, you know, the folks that people really covet, have actually gone to be travelers. And they're going into these different situations and zip codes where they might be able to interact with a specific surgeon or a specific group of surgeons. in procedures that are very high profit margin procedures where you can actually afford a $40,000 a month nurse. The issue at the end of the day is who's going to do the $200 net profit margin procedures, and for sure you can't do them with a $40,000 a month nurse. So I think in some cases it's going to be You know, the nurses that are saying no to overtime, and I think with time, you know, they will come back. I don't know that, but I think that's a reasonable expectation given the fact that, you know, they made a bunch of money. They can afford to go on vacations and do all the stuff they're doing in the short term after COVID-19. Over the longer term, we're expecting that more of these folks are going to come back. And then for sure, I can tell you I've talked to at least a half a dozen CEOs who are working with nursing schools to help with the educational curriculum and have more of these folks actually do more of their nursing school training in the hospitals so that the nursing schools can increase their enrollment without having to have additional facilities or faculty or staff that can train those folks. They'll actually train them. and the hospitals almost think about an internship program. So there is no good answer there. I'll say it before you do. But it's what we're working with right now.
spk07: Got it. And my second question, in terms for Iovera, would you be able to share some more color of what the feedback has been for the Gen 2 device versus Gen 1?
spk05: Oh, it's a whole other thing. The tip is brand new and the handheld is brand new. Frankly, it starts with what we acquired that was not, you know, it was the best mild science could do, but it was not anything that, you know, a more significant company from a financial perspective would have developed. And, you know, it started with ergonomics. You know, when you understand that almost all of myoscience's business was with orthopedic surgeons, the majority of our growth is actually with anesthesiologists. And so some of the things are relatively simple. You know, can you have an ultrasound probe in your left hand and be able to use the Iovera device with one hand? And with the Gen 1 device, the answer to that was no. With the Gen 2 device, the answer to that is yes, right? All of the buttons that they need to push, they can do with one hand. The more complex kinds of things that are done is... We've been able to make them significantly less expensively, which gives us a lot of options in the marketplace in terms of pricing, but also the NO2 cartridge is able to do at least twice as many procedures now as the old one could. So it's a series of more modest things like that that make it just a night and day opportunity. And then in the new device, we have a special or a new tip for video branch block for low back pain. We will have a tip that's more appropriate for things like digit utility, et cetera. You may have seen or you probably didn't see yet, but there was a paper that came out on Wednesday from a A physician in Los Angeles who treats many of the pro athletes, treating three Major League Baseball players with Iovera and their ability to begin playing again when they couldn't hold back because of a thumb injury. You know, so we're looking at a, well, we'll reintroduce a tip that is just for these more focal kinds of applications where, you know, you couldn't use a spinal needle and a thumb, for example. That would be very difficult given the flexibility of the needle, et cetera. So a number of different modifications in the new devices, the Gen 2 stuff, we can make a newer model, a newer tip, much more easily than we could have with the Gen 1 programs, the way bioscience developed the technology. So a whole series of little things that lead to a big thing in the end from a user perspective.
spk07: Great. Thank you. Thanks.
spk02: Thank you. Showing no further questions at this time, let's just turn the call back over to Dave Sacks, Chairman and CEO, for closing remarks.
spk05: I'd like to thank all of you for participating and listening to today's conference call. We look forward to keeping you up to date on our progress. Next up is the RBC conference later this month, followed by the Jeffries conference in June. Thank you all and stay well. Goodbye.
spk02: Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
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