Pacira BioSciences, Inc.

Good day, and thank you for standing by. Welcome to the Q2 2023 Pacera Biosciences, Inc. Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Mesto, Head of Investor Relations. Please go ahead.

Thank you, Gerald, and good morning, everyone. Welcome to today's conference call to discuss our second quarter 2023 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer, and Charlie Reinhart, Chief Financial Officer. Ron Ellis, Chief Strategy Officer, and Roy Winston, Chief Medical Officer, are also here for today's question and answer session. Before we begin, let me remind you that this 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. 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 are entering the second half of the year with positive momentum after seeing a meaningful uptick in year-over-year ex pro growth in June and July. In addition, recent data indicate an improving elective surgery market that we believe will continue through the remainder of the year. As the economy moderates and soft tissue elective surgeries come back, we are well positioned to get back to more robust top-line growth rates. While we are encouraged by improving trends, today we are adjusting the full year's sales and gross margin guidance to reflect an updated view of market conditions and procedural cadence for the year. Charlie will discuss guidance in greater detail later in the call. In the second half of the year, we will continue to focus on three priorities, growing revenue, improving gross margins, and expanding market access. Second quarter revenues of $169 million include X per L sales of 135 million driven by solid volume growth and in a slowly recovering market. In addition, we continue to build awareness around Zaretta and Iovera with our field-based team now promoting all three of our products. Second quarter Zaretta sales exceeded $29 million and Iovera sales grew to more than $4 million. Our significant top line combined with ongoing operating discipline is driving strong and durable cash flows that allow us to further solidify our financial condition by recently prepaying $25 million of outstanding principal under our term loan aid facility. The second quarter also marks our 25th consecutive quarter of significantly positive adjusted EBITDA of $54 million. We continue to focus on improving gross margins and we are moving in the right direction with second quarter margins improving to 73%. Our San Diego facility is now outperforming volume targets and achieved second quarter margins of 76% for XPREL. We have also made significant improvements in the quality of the 200 liter process in Swindon that we expect will begin to positively impact XPREL margins later this year. Bottom line, we believe that the foundation is set for gross margins to return to the high 70% range as we exit 2023. On the regulatory front, we remain on track to submit a supplemental new drug application for our 200-liter facility in San Diego later this year. This will be another critical milestone towards improving Expirel gross margins. In addition, the FDA recently completed its review of our application for an improved product release assay for Expirel and has requested additional information to support an approval. We will submit a meeting request to define the most efficient path forward with the agency. Importantly, this shift in timing does not impact our ability to improve gross margins this year. Turning now to more specifics on the commercial portfolio, starting with our XPREL franchise. We are pleased to report that we continue to outperform the broader elective surgery market with second quarter XPREL sales of $135 million, which was essentially flat versus the prior year as volume growth of 4% was offset by 340B pricing and other discounting. Our investment in these programs has continued to provide meaningful access to XPREL for a larger and growing procedure base, setting the stage for meaningful inflection in the implementation of the No Pain Act in 2025. As a reminder, our performance last year was particularly strong with XPREL sales at near record levels with the second quarter of 2022 being the third highest quarter ever for X4L. Importantly, year-over-year growth rate improved as the second quarter progressed and into July, leaving us optimistic for a higher second half of the year as the market continues to normalize. We also expect that growth initiatives that we have put in place, such as continued volume expansion from 340B and TRICARE reimbursement, as well as initiatives in oral maxillofacial plastics and outpatient surgeries, and sports medicine will contribute to revenue growth in the second half of this year. Turning to market access, we continue to expand our Expirel user base, adding more than 350 first-time purchasing accounts so far this year. We are seeing a growing level of Expirel interest among oral and maxillofacial surgeons fueled by last year's rollout of the partnership with CeraVident. We expect to launch a similar partnership in the coming months with another large dental support organization with more than 1,000 offices across 46 states. Together, we will support training and education around best practice for optimizing patient recovery after oral surgery using an XPREL-based opioid sparing approach. As expected, our 340B pricing program is contributing to volume growth in both existing and new business as it helps alleviate cost challenges by offering a reduced price to eligible entities where opioids are often most problematic. For the first half of the year, XPREL 340B volumes were roughly 25%, with recent weekly 340B volumes at roughly 20%. Gross to net remains a highly favorable level for our industry at roughly 86%, and we also expect the 340B discount to improve from roughly 28% to 25% in the second half of the year, with the 2023 price increase taking effect for government orders where pricing runs with a two-quarter lag. All in all, the 340B program is doing what it was designed to do, expanding the XPREL user base and growing volumes within existing and naive businesses. This investment advances our mission to provide an opioid alternative to as many patients as possible, regardless of income level or insurance status. Further, 340B is paving the way for us to leverage no pain since we are accessing a significantly larger pool of patients and their surgeon providers who want to perform more outpatient procedures. CMS recently issued their proposed outpatient prospective payment system rule for 2024, with Expirel continuing to qualify for separate reimbursement in the ambulatory surgery center under reimbursement code C9290. Their preliminary rule also notes that the agency will implement the No Pain Act, which mandates CMS to begin reimbursing separately for non-opioid products for post-surgical pain in all outpatient settings on January 1st, 2025. No pain will provide a reimbursement pathway for nearly 20 million Expirel-revelant marker procedures, and we expect commercial and self-insured payers to follow the lead of CMS. Reimbursement in the hospital outpatient setting, as well as ambulatory surgery centers, will cover more than 70% of the current total addressable market for Expirel. In parallel, we are seeing expanding access to non-opioid pain management for government employees, our military, and their families through efforts like No Pain. In October of this year, TRICARE will adopt the CMS Medicare reimbursement methodology for ambulatory surgery centers and begin providing separate reimbursement for Expirel in this setting. We would expect TRICARE to also mirror CMS policy in the hospital outpatient setting with the implementation of No Pain. There are roughly 10 million members enrolled in TRICARE for primary or secondary coverage. Importantly, No Pain, TRICARE, and 340B are especially meaningful to the migration of lower margin soft tissue procedures to the hospital outpatient settings. These programs will assist eligible healthcare systems in affording the opportunity to offer non-opioid pain control for these populations. Our state-of-the-art training and innovation centers continue to support the market's demand for best practice knowledge transfer to accelerate surgical migration to outpatient sites of care. In the first half of the year, our educational programs provided training in more than 140 on-site and in-field events to more than 4,200 healthcare providers who want to be at the forefront of opioids-bearing pain management. In pediatrics, interest continues to grow as new data are generated. Our commercial organization is focusing on top pediatric institutions, and expo use continues to significantly expand at influential hospitals such as the Shriner System and Wisconsin Children's. We also have secured several recent wins in spine programs at other centers of excellence, including Cincinnati Children's Hospital, CHOP in Philadelphia, Children's Hospital of Colorado, Mercy Children's in Kansas City, and Seattle Children's. We will look forward to building on our success and to initiating our registration study later this year to support the expansion of XPREL label to include patients age zero to six years. On the regulatory front, we are advancing the FDA review process for our supplemental new drug application to expand the XPREL label with a PDUFID action date of November 13th. To remind you, this application is seeking expansion of the XPREL label to include two key lower extremity nerve block indications that we expect will significantly extend our reach into surgeries of the knee, medial lower leg, foot, and ankle, representing more than 3 million annual procedures. Finally, our phase one study in Expirel for intrathecal administration continues and is on track for completion around the end of this year. Switching gears to Zoretta and Iovera, while our full 200-person field-based team is broadening education and awareness around these complementary and standalone non-opioid solutions for managing osteoarthritis pain. So far this year, the team added more than 270 new first-time purchasing Zoretta customers and over 100 new Iovera customers. Several milestones are on track for the next year in current and new indications for both products. For Zaretta, we expect to initiate two new label expansion studies. These include a shoulder osteoarthritis study and a diabetes safety study in knee osteoarthritis. Importantly, if our shoulder study is successful, Zaretta should become the first and only approved corticosteroid specifically for shoulder OA. Both studies will evaluate Zoretta versus Triamcinolone with the goal of adding a superiority claim to the Zoretta label. For Iovera, we recently announced our newest partnership with renowned professional golfer Lexi Thompson, who will be advocating and educating athletes, their families, and fans about non-opioid solutions like Iovera. We also have a new broadcast TV commercial that started running last month on the Golf Channel and other select networks, to drive viewers to learn more at iovera.com. On a clinical front, we continue to be excited about the prospects for iovera as a potential game changer in spasticity. Last month, Dr. Gerald Francisco from the University of Texas Health Sciences Center highlighted iovera and cryoneurolysis as promising technologies in his keynote address entitled, Looking Exciting Prospects in Spasticity Management at the 2023 International Society of Physical and Rehabilitation Medicine Conference. Our registration study of Iovera for the treatment of spasticity remains on track to launch later this year. As you know, this is a highly dissatisfied market with inadequate treatment options currently limited to phenol and toxins. Our Iovera expansion activities also include a new Iovera Smart Tip for medial branch blocks for low back pain, which we expect to have on the market in 2024. Beyond our commercial portfolio, we have an exciting earlier stage portfolio of new product development opportunities that include PCRx201, a novel intraarticular gene therapy product candidate that produces IL-1 RA for osteoarthritis. As you may recall, data from our first phase one study were very encouraging with the greatest level of efficacy observed at the lowest dose studied. Based on this positive data, we are planning to launch a second phase one study for PCRx201 and osteoarthritis of the knee. We are currently finalizing our protocol after receiving input from the FDA. We also continue to advance Phase I readiness activities for our internal multivasicular liposome pipeline, which includes a multivasicular liposome dexamethasone formulation for low back pain and a multivasicular liposome bupivacaine formulation as a nerve block or field block for longer-lasting chronic pain where patients are most at risk for becoming addicted to their pain medications. And with that, I'd like to turn the call over to Charlie for his financial review. Charlie?

Thank you, Dave, and good morning, everyone. To remind you, I will be discussing non-GAAP financial measures this morning. A description of these metrics, along with our reconciliation at GAAP, can be found in the news release we issued this morning. I'll start with an update on sales and margin trends. Starting with XBRL, we had a solid second quarter with net XBRL sales coming in at $135.1 million. Second quarter average daily volume growth of 4% was offset by the impacts of our investment in the 340B program and other contracting activities. As Dave mentioned, we were encouraged to see improved year-over-year growth in June and July. These data leave us optimistic the second half of the year will be stronger than the first half of the year. For Zulretta, second quarter sales were $29.3 million. With our 200-person field force now promoting education and awareness, we continue to see encouraging uptick in the first-time customers and expect Zulretta growth will accelerate over time as the team continues to grow our user base. For Iovera, second quarter sales came in at $4.4 million. Here, too, we are seeing strong growth in our customer base and expect demand and sales to gain momentum with the full field-based team generating awareness around the advantages of a drug-free nerve block with Iovera. We also expect our sports initiatives with NFL alumni, the PGA, and the LPGA to drive awareness around Iovera as an innovative, opioid-free option for managing pain. Turning to gross margins, on a consolidated basis, our second quarter non-GAAP gross margin percent was 73%. This is comprised of non-GAAP gross margins of 72% for Expirel, 82% for Zolretta, and 78% for Iovera. As Dave mentioned, our San Diego facility is performing in line with expectations and achieved Expirel margins of 76% for the second quarter. For Swindon, while we've made significant improvements in the 200 liter process at this facility, these changes did not take hold quickly enough to drive a more favorable impact to the overall mix of XBRL units sold in the second quarter, with units produced at the higher-cost San Diego 45-liter facility representing a significantly greater proportion of total units sold versus units from the lower-cost Swindon facility. The good news is that the Swindon production is now on track, and we expect to exit the year with margins in the high 70% range as we shift to a more favorable mix of commercial products sold. Turning to expenses, non-GAAP R&D expense for the second quarter was $17.1 million, down from $24.8 million last year. The year-over-year decline primarily relates to completion of our two lower extremity nerve block studies, which was partially offset by production development and capacity expansion costs for the 200-liter facility in San Diego. We expect to see an increase in R&D expense in the back half of the year with the launch of new clinical programs. Non-GAAP SG&A expense came in at $57.1 million, which is in line with the $56.5 million reported last year. We expect to see a decline in SG&A expense in the back half of the year. Second quarter interest expense improved significantly to $3.9 million versus the $8.8 million reported last year. This was driven by the interest expense savings associated with the retirement of our term loan B on March 31st, using a new term loan A and cash on hand. As you know, the Pacira leadership team is constantly assessing the best use of capital and ways to optimize our balance sheet. To that end, last week we made a $25 million principal prepayment on the term loan A, and we continue to fully expect our significant cash flow outlook will enable early retirement of the remaining Term Loan A balance of approximately $122 million. For modeling purposes, the $25 million prepayment will result in interest expense savings of roughly $1 million in the second half of the year. And lastly, despite some challenges, we delivered another quarter of significantly positive adjusted EBITDA of $54.3 million. As for guidance, as noted in today's release, we are updating our full year guidance for the following P&L line items to reflect our current views of market conditions and actual results for the first half of the year. XBRL net sales of $550 to $560 million versus previous guidance of $570 to $580 million. With respect to cadence, the first quarter of 2023 appears to have shifted away from typical seasonal trends and will represent a slightly higher percentage of the full year than it has historically, similar to 2022 when we had one quarter outlier with the second quarter at near record levels. We now believe the first three quarters of the year will be more evenly balanced in terms of percentage contribution to full year XBRL sales. With the market showing signs of normalization and 340B hitting its one-year anniversary in October, we continue to believe that the fourth quarter will be the strongest performer and the largest contributor to full-year XBRL sales. Zolretta net sales of $110 to $115 million versus previous guidance of $115 to $125 million. non-GAAP gross margins of 73% to 74% versus previous guidance of 76% to 78%, and stock-based compensation of $46 million to $49 million versus previous guidance of $51 million to $54 million. Today, we are also reiterating our full-year 2023 guidance for the following. I have error net sales of $17 million to $20 million, non-GAAP R&D expense of $70 to $80 million, non-GAAP SG&A expense of $220 to $230 million. In summary, we remain bullish in our five-year plan with year-over-year top-line growth returning to more robust rates as economic conditions improve and the elective surgery market normalizes. Gross margin improving, 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?

Thank you. We will now conduct the question and answer session. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Ansellum from Piper Sandler. The line is now yours.

Hey, thanks. So just had a few questions. I know you talked about underlying electrosurgical dynamics, but with improvement, I guess I would have thought we would see more robust volume growth in for Expirel and it doesn't seem to be there. So I'm just wondering out loud, is there something else that we're missing on the volume side? Is there something regarding underlying commercial execution that we're missing? And just help enlighten us as to what is happening here and why Expirel seems to be lagging in the overall recovery of the elective surgical space. So that's number one. Number two, you talked about margin expansion and operating leverage for a number of years. Here you are guiding down for gross margins. I get your remarks on Swindon. But at what point can you take more aggressive measures to deliver on the operating leverage that you've talked about, again, for a number of years and is there a sense of accountability that the margin expansion and operating leverage that you've cited in the past just hasn't come to pass yet? So I'm wondering if you can give us some thoughts on that. Thank you.

Good morning, David, and thanks. First, on the first question, you know, as we came into and out of Q2 of this year, April was very soft, David, and actually one of the worst months that we've seen since the pandemic. And so, you know, we saw that that increased as the market conditions improved, at least related to X per L, as we got into June and July. So, you know, as we look at commercial execution, I don't believe that there's any issues in the marketplace related to how we're being viewed. I think the marketplace continues to be financially strained, especially in the hospital marketplace. And we do talk to folks regularly about the HOPD marketplace and these low-margin soft tissue procedures that are difficult for the providers to do because of the low-margin aspects of what they're doing and trying to move these procedures from the hospital inpatient to the hospital outpatient environment, which is helpful but still doesn't provide the kind of return that would provide comfort to people who are using 30 minutes of their OR time for a very low return on investment. What I'm trying to point out here is that the issue here really is that people are struggling to be able to provide their patients with a low opioid alternative, and we cure that with the institution of the No Pain Act. You know, so I don't believe that this is a commercial execution story as much as it is a macro story with customers and patients who are being squeezed and the cost of a non-opioid treatment therapy is quite a bit different than the ability to use Expirel and opioids. And many of our patients are being treated with bupivacaine and opioids purely because either the system or the patient can't afford the more costly non-opioid therapies. So hopefully that provides some color to Q1. On Q2, all fair comments on your part, David. And we've struggled. And if you go back to the first quarter of 2020, 2022, our gross margin was in the 79% range. And then we ran into a series of issues that have been well described. we thought we were coming out of those issues and that we were going to have some more significant recovery in 2022. And then we had yet another acute issue in Swindon that caused us to improve, but not at the level that we were expecting with the guidance that Charlotte just gave. So, you know, the lowered guidance is really a conservative measure to make sure that we meet these new milestones. What will happen here over the next, what, several quarters, is the cadence is we have to fix swimming. I mean, that's number one. As we sit here today, Science Center is the most reliable material that we produce, but it's also the most expensive. So we need to fix swimming because it's the least costly material that we can make. And so that is high on the list. And we think that we've achieved that for the most part. It's not perfect yet, but we've made great progress over the last two months. We will also open the 200-liter facility in San Diego, and that will provide us the opportunity to have significant capacity and, again, lower the cost. And then I think slightly underappreciated is the fact that when those two facilities are running efficiently and we can depend on them, we will close at least one of the 45-liter facilities in San San Diego, and the cost associated with that, the savings associated with that is material. And so that's the plan, and that should all happen here, you know, as we get into the first part of 22, or 24, we should start to see material that's been produced in these lower cost facilities, and that will enable us to get into this, you know, 80-ish percent range that we've been talking about for quite a while. And it is also, David, a revenue story, right? I mean, you know, obviously we need more revenue in order to be able to make more material to have a lower gross margin, but that I think is obvious to everybody. But that's the cadence of what we're doing here.

Okay, thanks. If I might just sneak in a follow-up, why are you continuing to invest further significantly in Iovera?

That's an easy one for me, David. Iovera you know, it to me remains a opportunity to change patients' lives. When we see what we're doing on the market and we see the response to how the product is being used in the marketplace, it truly is a game changer. And, you know, again, we've got to be able to do the studies and provide the data that allows us to have a label that can turn the sales force onto these things But we are seeing real growth in cash market opportunities. We're seeing physicians who are opening Iovera-only cash pay facilities on the outside of the organization, both in the U.S. and in Europe. We now have spasticity hospitals who are using Iovera. Many of these programs are quite nascent but real. And as we do the spasticity trials, and we think that that trial can be done reasonably quickly, and because it's a device, it can be approved reasonably quickly as a 510K, that this product in spasticity will be a very important asset for iOVERA for the company and for our shareholders, and that is a 25 event. So it's not something that we have to wait a long period of time for, but we're seeing you know, significant interest in the marketplace, not only from physicians but from societies, and people are starting to really understand the value of cryoneurolysis. And so I think it's a fair question, clearly, on the amount that, you know, how long it's taken us to get going here. But I think that we're in a tipping point where Iovera will start to really change lives and add significantly to the value of Pesura as a company.

Thank you.

Thanks, David.

Thank you.

One moment, please.

Our next question comes from the line of Gregory Rinza of RBC Capital Markets. Please proceed.

Great. Good morning, Dave and team. I appreciate all the color. Thanks for taking my questions. Dave, just maybe for you and for Charlie, just on the revised guidance, I'm just curious, as you set the full year earlier in the year and leading to where we are now, I know you've acknowledged potentially this tail of two halves for the year, but are you and Charlie applying a more cautious methodology? Are there newer inputs that I think are informing the potential predictability? Just walk us through just that process and how you've really incorporate some of the new data points and how it sort of changed maybe your degree of confidence. And then just, Dave, maybe broadly for you as you're commenting on that degree of optimism for the second half of the year. Just curious, if you could just build on that a little bit, maybe just put the other way. What is your level of concern that the disconnect that you've covered earlier between XPearl and the broader market can persist or, you know, maybe more relevantly that the gap can close and Exprol can sort of, you know, certainly outsize in growth here. Thanks so much for the questions.

Yeah, no, thank you, Greg. So, when we set out the annual goal, we were looking at the expectation that procedures would be a six to eight percent growth analysis for the period of the year. What we saw, Greg, was 6% in the first quarter, 4% in the second quarter, and so the second quarter is where we start to take a look again, and it's largely an analysis around soft tissue procedures. We've got a lot of data now, Greg, on what the issues are related to patients getting these elective surgeries, especially soft tissue elective surgeries, and the impact of of inflation is real, labor is real, mortality as it relates to looking backwards at the patients who expired as a result of the COVID pandemic. So, you know, as we're looking forward here, we've taken that six to eight number down to 4% for the third quarter. And then we make it up in the fourth quarter with something that approaches, you know, the high end of what we originally thought at 8% or in the range of 8% plus. So as we move into the back half of the year, we do have a number of things that we think will help us close this gap. First is TRICARE. We've got a million patients. We are increasingly strong at the military installations themselves. And so we do see VA business picking up. And the military year closes at the end of September. So for SSS and DOD, we should have a strong influence in the third quarter from the military accounts. We also have TRICARE kicking in on December 1st. In the east, that will largely be for XPREL. In the west, we expect to have a positive impact across the entire portfolio. So that is a relatively strong opportunity for us, located in several states where we are the strongest So there is an allocation of new business coming from those places. The new OMFS site that we, or partnership that we cited in the script, is a major player. And when we mirror that against the CeraViden experience, we saw that those organizations, those dental service organizations, have the opportunity to move very quickly to have their members adopt this new strategy and be educated on this new non-opioid strategy. And then, you know, a modest benefit, but a benefit nonetheless from the 340B pricing, which, you know, provides a 1% tailwind for the year and a roughly 3% tailwind as we go into the second half of the year. So, you know, when we roll those things together, Greg, you know, we're comfortable that we can meet the the opportunity that we have to get into the 550 range that Charlie talked about in between 550 and 560. So I hope that answers your question, but please come right back if it doesn't.

No, that's very helpful, and, David, I appreciate the additional color.

Thank you. One moment, please. Our next question comes from the line of Glenn Santangelo from Jefferies.

Please proceed.

Oh, yeah, good morning, and thanks for taking my question. Hey, Dave, not to beat this expo horse to death here, but, you know, when I look at the full six months sort of coming into this year, we thought we entered the year with you seemingly giving somewhat conservative guidance, and now, you know, you're taking the guidance down mid-year, and I appreciate the last couple months seemingly looks better, but when you look at the first half of the year, I mean, what played out differently relative... Bless you. Relative to what you would have thought, is it just that the pricing dynamic of Expro versus Bupivacaine and the opioids is just creating a much larger headwind than you thought? Is that the primary issue here? Because it sounds like 340B, the volumes there are playing out as expected and the pricing related to that is kind of as expected. So I'm just trying to really figure out what's gone different relative to what you thought at the beginning of the year.

It's really two things, Glenn, and you're accurate in your assessment. I mean, 340B has been slightly heavier for the first six months of the year than we anticipated as we came into the year, although, you know, net impact on the bottom line is modest. It really is, you know, the discussions we have with customers, and a lot of these are based on our discussions relative to TRICARE and TRICARE and no pain, where the pharmacy is being squeezed is not the right word, but it's the word that comes to mind. I mean, there's demands being made in the hospitals and in many of the treatment centers on cost savings and where can they save money relative to their budgets. And what we hear from these folks is that the CFO and the CEO are less aware of the issues of opioids and consider opioids to be free, actually, because the prescriptions that they write are filled outside the hospital under Part D, so there is really no cost to the use of opioids. And so our clinicians don't like the way that this is being done, but really have no choice but to use the lowest cost alternative. And so they're using bupivacaine and they're supplementing that with opioids as the only treatment option that's available and many treatment centers. And so we've seen that in the past, of course, but I think the pressure on pharmacy and on hospital systems from a cost perspective has been intensified. And so, you know, again, another reason why we are so hopeful, you know, when we get no pain approved and as we roll TRICARE out there and as we put 340B in front of folks, that we've got solutions to this cost issue that will allow us to improve patient care and offer non-opioid alternatives. But, you know, Glenn, we're not massively behind where we thought we were going to be. We're behind and we're restating for sure to be conservative, but we think we're in a good spot relative to everything that's right in front of us with TRICARE, low extremity nerve block, and no pain as we get into 2025.

I appreciate those comments. And so now sort of looking forward, it's, I guess, hard to think that anything changes in the next 18 months. So isn't this all kind of window dressing ahead of no pain coming in 2025? And have you started to think about, you know, how much of an impact no pain can have in 2025? And, you know, my follow-up and then I'll hop off is, you know, with no pain, you know, less than 18 months away, does that change Depending upon your view of the opportunity, does that change how you think about capital allocation priorities, maybe shifting away from business development and maybe focusing on repurchasing some of your own stock here, you know, in the low to mid 30s, just given, you know, the seemingly large opportunity, you know, just 17 months away now. And I'll stop there.

Sure. No, fair enough, Glenn. So we have a very significant product launch around a PDUFA date of lower extremity nerve block on November 13th. That brings another 3 million patients to be under the protection, I guess, of a package insert. It is surprising to us that many of these situations that I just described to your first question are are a result of not having a direct package insert that allows our physician customers to show to a pharmacist or to a CFO that we have a direct label for a lower extremity nerve block, and that's the guise under which many of these access denial programs are built. We cure that with a lower extremity nerve block, and we have some confidence that that will happen in November. So that'll be a very important launch later this year and into next year. We also do see that there are some early signs that there is recovery in some of the areas that have cost us some issue. Inflation modestly, labor modestly, the restocking, if that's not an inappropriate word for the the number of patients who are now chronically ill and having acute soft tissue surgeries as a result of their chronic illness. And I raise that point because one of the issues that has caused the soft tissue market to be soft is that the patients who would have done and would have had many of these soft tissue procedures that we're not seeing, expired during the pandemic. And so we do believe that the market is slowly seeing the recovery of those things coming on, those patients coming back, and we'll be getting more of these soft tissue procedures as we go forward through this year and next year. So we don't believe that 2024 is anything but a year to focus on all of the good things that are going on with lower extremity nerve block and TRICARE It is also a year to get ready for no pain. I mean, we are talking to many of our customers about the impact of no pain and showing them the blended rate of how important no pain will be to them. So I'll give you a specific example. We will show a hospital that 60% or 70% of their business is outside the hospital and will be totally reimbursed. And when we do that, that the average cost of Expirel for these accounts is going to be in the $70 range. which purely, that's blended, of course, across all of their sites of care, and that makes it comparative to almost anything that is out there. The other piece of that is when we have no pain, Expirel will be the only zero-cost opportunity to treat pain. Even bupivacaine will have a cost that will be not appropriate with Expirel. So that's the first part. The second part is We still have a term loan A, and we want to retire that using cash. And we have a convert that comes due in August of 25. We have the option of using cash or stock. And depending on the share price, you know, you rightly point out that the share price is, in our view, inappropriately low today. We will pay that off as cash to the extent that that's possible. And we continue to believe that that's the best use of cash today. as we go forward. So those are our two priority focuses. We really have put back burner or slow burner for the BD opportunities so that we can address those two opportunities to de-lever as we go forward.

Thanks for the comments, Dave.

Thanks, Glenn.

Thank you. One moment, please. Our next call comes from Les Seleski from Truist Securities. Please proceed.

Good morning. Thank you for taking my questions. Just to go back to XPREL, on the 4% volume growth, can you just give us a little bit of a dynamics of what portion of that was on 340B and then the existing channels, how they perform? And then also on trends from 20 mil to the 10 lower dosage. Any impact on the margin side there and then perhaps give us the latest on the paragraph for filer and they have a follow-up on Nevada. Thank you Good.

Thanks less so for 340 B You know we were we were running at you know something that was approaching 25% and then over the last I guess probably a month and a half now, we've seen that come back to something that's closer to 20%. So we think some of the activities that are going on externally outside the company and some of our own internal activities on appropriateness of 340B pricing are having some impact in the marketplace. And so I think we're on top of that less. I don't think that it's going to get higher than what we've seen in the past and I think we have some reason to believe based on our specific discussions with many of the people in the marketplace about 340 pricing and some of the activities that are going on in Washington that 20% our initial belief of conversion was appropriate. We also, it's been slower than we thought, but we are seeing new customers, meaning 340B hospitals who never purchased Expirel before, buying Expirel or purchasing Expirel now. And when you look at those accounts, there is a material portion of those purchases that are not being purchased under 340B. So there is some benefit to the overall franchise of selling the drug at a discount for a portion of those patients and also having the benefit of of those sales outside of 340B pricing. So that would be number one. Margins on 10 ml versus 20 ml less, they're about the same. We've taken a couple of price increases on the 10 to try to normalize the procedure value of four days of pain control so that the 10 ml, obviously the revenue is higher is lower for a 10 ml versus a 20 ml, but the margin associated with the 10 ml actually works out to be slightly higher than the 20 ml. So it's not half, it's better than the 20 ml on the same procedure, but the total revenue is materially less, if that's an answer to your question. I think that's what you were asking. And then last, paragraph four update, is pretty easy. There really is not much. I mean, since we had the Wexman hearings, we really don't have anything new to report to the marketplace on any activities here. It's just slow going in terms of what's required in order to meet the demands of a 340B filer are slow to progress. And so things are sliding backwards as timelines are not met. Not by us, by the way.

Very helpful. Got it. Very helpful. Thank you. On the Gloveta front, what is the latest progress on moving into specialty pharmacies? And what have been some of the adoption trends from naive patients versus those on repeat dosing? And I'll stop there. Thank you.

Yeah. Oh, thanks again, Les. So we are moving towards specialty pharmacy. There's a number of reasons to adopt this, you know. the HA market continues to be unsettled. And especially what we saw in June, where one of the more popular HAs from a ability to generate profit perspective took a pretty good hit on pricing. So the market is really cautious, I guess is the best way to put it, about buying a lot of stock because the price changes every quarter And if they've got a lot of inventory, they have to try to use it up while they still have the old price, and they don't have a lot of time associated with that. So there's some drivers in the marketplace that, frankly, didn't exist before these HA issues have taken hold. And so, you know, what we see is physicians would tell us that they have, you know, a lot of resource tied up in prior authorizations and cash tied up in inventory, and moving to the specialty pharmacy leaves both of those issues, and we can work with them then in some things around customers who would like to be buy and build, but when you have a product acquisition cost over $500, that's a difficult task for these, especially these small orthopedic procedures. So we can operate in a different way with the specialty pharmacies than we can with the physician accounts themselves on being able to address the customer needs in this marketplace. So this is in progress, Les. I don't think we haven't fully optimized where we're going with Zilready yet, but we expect to achieve that as we get into the later parts of this quarter.

Thank you.

One moment, please, as I prepare the next question. Our next question comes from the line of Balaji Prasad from Barclays.

Please proceed. Hi, good morning. This is Xiao An for Balaji. Thanks for taking our question. In our recent conversation with you back in June, you mentioned that there was a positive structural change in the demand for volumes. And how do we reconcile that with the low volume for XPREL with those comments? Thank you.

Yeah, what we saw is, you know, I think what we were talking about was that we were seeing strength in the back half of June. And that's accurate. We were. Unfortunately, we were coming off a, well, not unfortunately. I mean, the fact is that April was very soft. And as we got into May, we saw some normalization back to what we thought was going to be the case for every month and a quarter. and then we saw strengthening in the back half of June, and I think that was the reference, and so when you blend those things together, you get to what we reported as a 4% procedure increase, and that's the cadence, and so both things are true. We did see strengthening in the back half of June, and we had 4% volume growth, but it was a recovery from what was really a very soft April, and then recovery in May and then increasing strength as we went into the back half of June. Got it.

Very helpful. Thank you.

Thanks, Manal.

Balaji.

One moment, please.

Our next question comes from the line of Rohit Bahasan from Needham & Co. Please proceed.

Hi, this is Robidon for Surge. Thanks for taking our questions. Why do you think we haven't seen XBRL benefit from the improved procedure volumes that we've seen with med tech companies and hospital companies report in the first half of 23? And then also, can you provide an update on the European launch of XBRL and how that's going? Thanks.

Sure, sure. Thank you. I'm sorry, I didn't catch your first name. Sorry about that. So, I mean, the answer is, I'm glad you asked, actually. So, you know, the only two procedures that are growing, and this is true of 2022, and it's also true of the first six months of 2023, are foot and ankle. I'm sorry, I'm sorry, Jesus, knees and hips. And we have participated in that, and our knees and hips as a growth driver are in line with what you would have heard from the med tech companies. issue for us in relative to other ortho procedures like rotator cuff and foot and ankle and hand and wrist and things like that, those procedures are also soft enough that actually ortho overall is down. The marketplace for 22 in the first six months of 23 is actually down year on year using IQVIA data. And that is especially true of soft tissue. So the answer to your question, the specific answer to your question, is we are participating in hips and knees, mostly knees, by the way. Knees are the primary driver. Hips are growing, and those are the only two, as I said earlier. And we have a presence in all of the rest of ortho, which is not growing in line with hips and knees. And 45-plus percent of our business is actually in soft tissue ortho, which is not growing at all, in fact, has brackets around it for all of 22. And again, we only have data, our data for IQVIA is on a six-month lag. We only have January as it comes to this full report of site of care and procedures by site of care. But in that report, you can see very clearly that hospital procedures are down and soft tissue is down in that environment. Everything's down in that environment. And that soft tissue is down in outpatient environments as well. And so it's because our procedure base is much broader than the med tech companies that we have a slightly different profile as we look at how these procedures are done and how the cadence of procedures are done. So that's the first part. The second part is Europe. Europe has been slower than we thought. You know, they've had a lot of issues around the war and some of the negative implications in Europe of how the importance of, you know, getting new things approved on hospital formularies and things like that. I would tell you that recently we've had significant progress. We've had several major medical institutions approve Expirel and Iovera. for use in the last six weeks. Several spasticity centers of excellence have approved Iovera for use in Europe. And we've just, in the last 14 days, have won a 52-hospital chain and a number of major orthopedic hospitals in Europe, particularly in the U.K., but in many other European countries. And I would say, you know, we have IOVERA actually questions coming to us from a number of places in Europe that we have not staffed with individuals, but when folks are going to their national meetings, we're getting the calls wondering where they can train, where they can travel to to be trained across Europe on IOVERA. And, of course, that gives us an opportunity to talk to those same folks about XPREL. Europe was slow, but I think now we are catching up, and actually we expect that we're okay in Europe for the next six months and into 2024. So I appreciate the question. Thank you.

Thank you.

Thank you. One moment, please. Our last question comes from the line of Boris Peeker from TD Talent. Please proceed.

Great. Thanks for taking my question. First, I just want to know, so bupivacaine has been on the FDA drug shortage list, I think, for a while now. I'm curious what you're seeing in terms of bupivacaine availability and how that may be impacting Expiril. And my second question in terms of the lower extremity nerve lock, have you discussed with the FDA if you should be expecting an advisory panel on this or not? Thank you.

Yeah, thank you, Boris. You know, our experience with bupivacaine is that it had a much greater impact on the pumps than it had on Expirel. And the issue is we see it in our major Expirel institutions is not a bupivacaine shortage. It's a bupivacaine shortage of certain package sizes and certain dosage and certain strengths. And what I mean by that is, you know, if they have a protocol, for example, that says that they use 10 cc's of 0.25%, but they don't have 0.25%, then what they're concerned about is that there's going to be inappropriate administration when somebody just grabs bupivacaine and doesn't really take the time to understand that all of the dosage strengths that were previously available are now available. The net of that is that I can't tell you that I think there's any material benefit to Expirel because of a cocaine shortage. Because in a pharmacy, obviously, they would just grab a different dosage strength. And frankly, if there is anything they're making under 797 in a sterile environment, they would use the cheapest available form in any case, right? It's more the floor stock. And when people are taking stuff out of the you know, the on-site machines that they're worried about whether the nursing staff and the physicians are going to be able to follow the protocols that are written because all of the dosage strengths aren't available. On the second piece, we've had some extensive discussions with the FDA, and we do not expect that there was going to be an adcom.

Great. Thanks for taking my question.

Thanks, Boris.

Thank you. At this time, I'm showing no further questions, and I would like to turn the conference back to Dave Stack, Chairman and CEO, for closing remarks.

Thank you, Gerald, and thanks to all on the call today for your questions and time. We are starting the second half of the year in a positive momentum, and we are excited about the opportunities that are ahead of us. Throughout the balance of the year, we will continue to work to transform the lives of patients who need non-opioid pain management, which is an ongoing plate throughout this country and around the world. Next up for us is the Wedbush Conference in New York. Thank you all, and stay well. Goodbye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.