Pacira BioSciences, Inc.

Good day, and thank you for standing by. Welcome to the first quarter 2025 Spacira Biosciences Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you will need to press star 11 on your telephone keypad. You will then hear an automatic message advising your hand is raised. To withdraw a question, please press star 11 again. Please be advised that this conference is being recorded. I would now like to hand the conference over to our first speaker today, Susan Meskel, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to today's conference call to discuss our first quarter 2025 financial results. Joining me are Frank Lee, Chief Executive Officer, Jonathan Slonin, Chief Medical Officer, and Sean Krause, Chief Financial Officer. Tony Malloy, Chief Legal and Compliance Officer, and Brandon Tehan, Chief Commercial 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 subject to the safe harbor provisions of federal security laws. Such statements represent our judgment as of today and may involve risks and uncertainties. This may cause our actual results, performance, or achievements to differ materially. For information concerning risk factors that could affect the company, please refer to our filings with the SEC. These are available from the SEC or the Cicero website. Lastly, as a reminder, we will be discussing non-GAAP financial measures on today's call. A description of these metrics along with our reconciliation to GAAP can be found in the news release issued earlier this afternoon. With that, I will now turn the call over to Frank Lee.

Thank you, Susan. And good afternoon, everyone. I'm pleased to say 2025 is off to a solid start. We start the year by introducing our 5 by 30 path to value creation to advance our transition into an innovative pharmaceutical company. To remind you, the plan supports two broad strategic imperatives. First, accelerating growth in our strong commercial-based business. and second, advancing an innovative pipeline of potentially transformative assets like PCRX201. In just a few short months, we've achieved early and meaningful 5x30 milestones. With respect to growing our commercial-based business, we successfully settled our patent infringement litigation for Xperil. This agreement recognizes the strength of our IP and establishes We expanded our ex-boreal patent estate and listed our 18th patent in the FDA's Orange Book with additional patents forthcoming. And our legal team recently secured a favorable court ruling that eliminates our RDF royalty obligation for ex-boreal. This will benefit ex-boreal gross margins by a low single-digit percentage. As for the pipeline, here too, we saw strong progress. First, we added a novel platform, a preclinical portfolio, and a talented research team with the acquisition of GQ Bio. Second, multiple new PCRx201 datasets are reading out this year. The new data continue to underscore the promise and disease-modifying potential of PCRx201 and the HCaD platform. Finally, patient dosing is officially underway in our Phase 2 ASCEND study of PCRx201 in osteoarthritis of the knee. I'll start by expanding a bit more on the settlement of expiratorial litigation. We believe this positive outcome recognizes the strength of our expiratorial patent portfolio. It also provides important short and long-term visibility to confidently advance our 5 by 30 plan and fortify our leadership in musculoskeletal pain. Importantly, the agreement is volume limited with no pricing restrictions. qualities, or technology transfer. Fresenius and his partners are solely responsible for the future manufacture and import of the generic product. As a reminder, this is a sole generic and a filer. Any future filer would have to overcome a significant number of legal hurdles given our growing number of Orange Book listed patents. In short, the agreement sets the stage for long-term XBRL growth and market expansion for the next 14 years. And with only one generic and ample room for increased penetration, we expect XBRL to generate significant cash flow for the foreseeable future. This provides a perfect segue to no pain. We have an important opportunity to significantly expand XBRL utilization. As you know, NoPain provides a reimbursement pathway for 18 million outpatient surgical procedures. Approximately 6 million of these are CMS procedures, which are now covered under NoPain. The remaining 12 million procedures are covered by commercial plans, where we expect NoPain-like coverage and policies will be implemented over time. As a reminder, it will take time for the market to broadly adopt a new reimbursement. That said, we're seeing encouraging leading indicators in this early phase of the launch. First quarter average daily XBRL sales and volumes were up approximately 7% over 2024 after adjusting for two fewer selling days in 2025. This is more than double the low single-digit year-over-year growth rate reported in the last two years. Beyond XBRL sales, other positive early indicators include an increase of more than 30% in both new and reactivated XBRL accounts with customer expansion across all sites of care. Mounting utilization of the new XBRL J-code indicating a rising level of awareness around enhanced reimbursement policies. Growth within community hospitals and ambulatory surgical centers, these accounts, which typically have fewer decision makers, are embracing the no pain value proposition. We're incorporating best practices from these early wins into our discussions with larger health systems. And formulary wins are starting to come in for integrated delivery networks. We expect these wins to grow as the year progresses while we navigate the numerous stakeholders within these large-scale networks. While we're encouraged by the early positive trends, it's important to keep in mind that we're driving change for more than a decade of established processes within complex delivery systems. As you know, claims data can take four or more months to process, and we look forward to sharing quarterly updates as more reliable market data become available in the second half of the year. On the payer front, we continue to highlight XBRL's value proposition to commercial plans with real-world evidence. We're pleased to see an increasing percentage of claims coming in from those plans that have adopted no pain-like policies. This too indicates a rising level of awareness among healthcare providers and organizations about the enhanced reimbursement that's now available. Since our last call, additional commercial plans have adopted no pain-like coverage, and we anticipate more to follow suit in the months ahead. Now turning to our other products, Zoretta and Iovera. As a reminder, late last year, we restructured our field-based teams to prioritize expirill and maximize the opportunity of no pain. As part of our plan to establish a commercial, medical, and market access powerhouse, we pivoted our existing sales force to focus on expirill. In parallel, we onboarded new sales teams to focus specifically on Zoretta in Iovera given specific capabilities required to service these customers. As a result, first quarter sales were impacted by the transition given that both products are promotion sensitive. This should naturally subside with some time as the team strengthens relationships and begins to hit its stride in the second quarter. In addition, our three sales force structure now has the capability and capacity to carry additional products. For Zulretta, we're rolling out several new programs this spring. Among these are establishing value-based contracts with large accounts that have demonstrated interest and are capable of driving volume growth. Broadening use within Medicare population where we have a very good access and coverage. There is no prior authorization requirement for CMS patients in contrast to most commercial plans. This allows Zulretta treatment to be administered during the same office visit that a provider decides to treat. Driving awareness around Zaretta's unique delivery mechanism and strong safety and pharmacokinetic profile. This allows for fewer systemic effects such as blood glucose spikes, a key advantage for diabetic patients and their healthcare providers. And assessing strategic partnerships to expand our breadth and depth of customer coverage. In parallel with our commercial activities, our phase three registration study is advancing its shoulder OA and on track for top-line results next year. If approved, Xereta would be the first and only long-acting steroid approved for use in shoulders. This is a sizable market with approximately 1 million intra-articular injections administered each year. Switching gears to Ayurveda, as you might recall, this year we're launching an innovative smart tip, specifically designed for use as a medial branch block to relieve low back pain. Billions of Americans suffer from chronic low back pain. It often leads to poor quality of life, disability, lost wages, and persistent prescription opioid use. We're pleased with what we're seeing from the first phase of the launch. Initially, we're focusing on a small group of spine key opinion leaders to gather insights and feedback before expanding to a broader targeted audience. The Medial Branch Smart Tip stands to grow the number of eye of error procedures in the second half of the year or beyond. Lastly, our registrational study of Iovera for the treatment of spasticity is advancing with top-line results expected next year. There is significant lack of innovation in patient satisfaction in this debilitating condition. We believe Iovera represents a novel approach for patients with moderate to severe spasticity seeking better treatment options. In addition to our label extension studies for Zolretta and Iovera, We're evaluating other opportunities with near and mid-term path to revenue accretion. We're also evaluating commercial partnerships in certain key markets outside of the U.S. where we believe our products can deliver value. Turning now to our clinical pipeline where we're focusing on becoming a therapeutic area leader in musculoskeletal pain and adjacencies. These are large markets significantly lacking innovation. Nearly one in four Americans are living with chronic pain and are actively seeking new interventions that address its underlying cause. As we look at new product development, we're prioritizing mid to late stage de-risked opportunities. More specifically, product candidates with validated mechanisms and established reimbursement pathways. PCR-X201 is a great example that we believe has the potential to revolutionize the treatment of osteoarthritis. Before I turn the call over to Jonathan for review of our PCR-201 program, I'd like to highlight our recently announced stock repurchase program and continued focus on disciplined capital allocation. This $300 million authorization doubles the amount authorized under the previous stock repurchase program. This decision underscores our commitment to delivering shareholder value and the confidence we have in our growth outlook. We believe the SARA shares offer an attractive opportunity at the current valuation, particularly in light of the settlement of XBRL patent litigation. This settlement agreement solidifies a strong cash flow-generating profile of our business with the certainty of an exclusivity runway to 2039. We believe this will drive significant growth and value as we advance 5x30. With that, I'd like to turn the call over to Jonathan to provide additional details on PCRX201 and our recently acquired HCaD platform. Jonathan?

Thank you, Frank, and good afternoon to all joining us today. I'm excited to share a few highlights on the progress made with PCRX201, which we believe has the potential to be an important disease-modifying therapy for osteoarthritis. PCRX201 targets the IL-1 pathway, which triggers inflammation in response to pathogens and cellular stress. Importantly, this is a well-validated B-risk target. There are two FDA-approved drugs targeting the IL-1 pathway that are effectively used to treat other inflammatory conditions. These drugs are not practical for osteoarthritis, as they would require very high doses or daily injections directly into the joints. IL-1 RA is a core regulator of this pathway and helps to keep inflammation in balance by turning it off when it's not needed. As we get older, our bodies have a more challenging time maintaining that balance. As a result, we develop chronic IL-1-driven inflammation that eventually causes joint damage and pain. With PCRS201, we are rebalancing the inflammatory scales by mimicking the body's natural response to inflammation at the cellular level. This targets the root cause of osteoarthritis rather than just alleviating symptoms. We remain highly encouraged by the data from our large 72-patient study in OA of the knee. We continue to follow these patients and have multiple new data sets reading out this year. Last month, we presented encouraging data at the Osteoarthritis Research Society International Meeting. In this subgroup analysis, a single injection demonstrated two years of improvement in pain, stiffness, and function. Importantly, clinically meaningful efficacy was observed across all structural severity subgroups. This included the most severe with a KL grade of four. Most osteoarthritis studies do not include KL grade four patients as this advanced stage particularly challenging to treat. Next week, the team will be presenting at the annual meeting of the American Society of Gene and Cell Therapy. Our presence will include a podium presentation where we will be sharing immunogenicity data. These data will provide important insights into the potential for redosing. As you know, this would be a key feature given that many OA patients have multiple joints in practice. We will also be hosting a clinical symposium to highlight the advantages of our high-capacity adenovirus, or HCaD, platform. In June, we will be at the annual meeting of the European Alliance of Associations for Rheumatology. Here, we will be presenting the three-year follow-up data from our Phase 1 study. As you know, we are advancing our Phase 2 ASCEND study in NeoA, and patient dosing is underway. We expect to report top-line data from Part A of the study late next year. This study is generating a high level of interest from investigators, which underscores the significant unmet need and lack of innovation in osteoarthritis. To fully describe the ASCEND study design, we have made an educational webinar available in the Investor section of our website. We invite you to watch and learn more about our development program for this exciting asset. As you know, PCRS201 is the lead program for our recently acquired HCaG gene therapy vector platform. This platform solves many of the challenges that have made gene therapy inaccessible for common diseases. The HCaG vector is much more efficient at delivering genes into cells compared to many other gene therapies that rely on adenovirus-associated virus, or AAV, vectors. As a result, the desired effect can be achieved with much smaller doses. The vector used in the HCaD platform can carry up to 30,000 base pairs of DNA. This enables gene therapy with multiple or larger genes compared to AAG vectors. It is locally delivered and sustained. This differs from systemic approaches requiring much higher dosing to achieve the desired effect. Lower doses covered with efficient manufacturing support a favorable and commercially viable cost of goods profile, another key advantage over other gene therapies. In addition to this novel local delivery platform, this transaction brings us key research talent and a promising preclinical portfolio. The team is carefully looking at these opportunities, which may have disease-modifying potential in other prevalent musculoskeletal diseases. We also have identified numerous well-validated cytokines that would be strong candidates for the HCaD platform. For those areas outside of our strategic focus, we see potential for partnering. This could extend the HCaD platform into other conditions of high unmet need where localized treatment with a therapeutic protein is warranted. Bottom line, the HCaD platform directly aligns with our 5 by 30 objectives having five novel development programs and five partnerships by 2030. It offers great potential to position us as a leading developer of novel treatments for the underlying cause of chronic pain. It also presents the opportunity for Pacira to be a strategic partner of choice and drive value through future royalty revenue. We look forward to sharing more details on the advancement of PCRx201 and other HCaD-based product development opportunities on future calls. With that, I will turn the call over to Sean for a review of the financials.

Thank you, Jonathan. I'll start with an update on sales and margin trends. First quarter XFRL sales increased to $136.5 million versus $132.4 million in 2024, driven by volume growth. On an average daily basis, XFRL sales and volumes were both up by approximately 7% after adjusting for two fewer selling days in 2025 versus 2024. First quarter Zulretta sales declined to 23.3 million versus 25.8 million reported in 2024. As Frank mentioned, this was largely attributable to transition to our new sales forces for Zulretta and Iovera. Looking ahead, we believe the foundation is set for a return to growth the remainder of the year. For Iovera, Sales were slightly up at $5.1 million compared to $5.0 million in the first quarter of 2024. Turning to gross margins, on a consolidated basis, our first quarter non-GAAP gross margin improved to 81% versus 72% last year. Gross margins continue to benefit from the improved costs and efficiencies of our enhanced larger scale manufacturing process that went live last year in San Diego. As Frank noted, we had a recent win in the Nevada court that will benefit future export growth gross margins by a low single-digit percentage by eliminating RDM royalties. For non-GAAP R&D expense, the first quarter increased 23.1 million from 16.4 million reported last year. This increase relates to startup activities for the Phase II study of PCRX201 expenses associated with the Loretta Shoulder Study and product development. Non-GAAP SENA expense came in at $76.2 million for the first quarter. This is up from $63.8 million last year. This increase is largely due to the investments in our commercial, medical, and market access organization, targeted marketing initiatives, and the expansion of our field force. All of this resulted in another quarter of significant adjusted EBITDA of $44.1 million for the first quarter. As for the balance sheet, we continue to be in a position of strength with $494 million in cash and investments. The business that is producing significant operating cash flow, we believe we are well equipped to advance our 5x30 growth strategy to create shareholder value. We're taking a disciplined approach to capital allocation we're focusing on three areas. First, accelerating growth in our best-in-class-based business. Second, advancing an innovative pipeline of becoming the leader in musculoskeletal pain and adjacencies. And third, opportunistically returning capital to shareholders. As Frank highlighted earlier, the board recently authorized a new share repurchase program of $300 million. Given what we believe to be a significant disconnect in our current market valuation, this buyback authorization will run through the end of 2026. Going forward, we will continue to be highly strategic, balancing favorable operating margins while executing our 5 by 30 growth strategy. We expect to prioritize opportunities that benefit operating margins to further enhance value for shareholders. This includes carefully investing in a best practice commercial, medical, and market access powerhouse and targeted marketing initiatives. In parallel, we will work to advance a pipeline of potentially transformative assets of PCRX201 as we transition into an innovative biopharmaceutical organization. That brings us to our full year P&L guidance for 2025, which today we are reiterating as follows. Total revenue of $725 to $765 million. As Frank mentioned, we are pleased with the positive early signs and growing level of awareness around no-paying. That said, it will take time for broad adoption, and we expect a more meaningful uptake to begin in the second half of the year. Non-GAAP gross margin is 76% to 78%. Non-GAAP R&D expense of $90 to $105 million. Non-GAAP S&A expense of $290 to $300 million. of $56 to $61 million. Lastly, for those modeling adjusted EBITDA, we expect our full year 2025 depreciation expense to be approximately $30 million. Lastly, and not surprisingly, we've recently been asked several questions about the impact of potential tariffs. As a reminder, all of our intellectual property is down in the south in the U.S. The majority of our manufacturing takes place in the U.S. And we have the capacity to allocate more expert manufacturing to the U.S. Based upon everything proposed today, we do not expect material impact on our operations. Recognizing this is an evolving situation, we're closely monitoring developments and committed to minimizing any potential impact on the business.

And with that, I'll turn the call back to Frank. Thanks, Sean. In closing, I want to emphasize the transformative journey our company has been undergoing. With our 5x30 strategy, we have a clear path for future growth and value creation, while on our way to becoming a pioneering biopharmaceutical company and a leader in the musculoskeletal pain and adjacencies. Our best-in-class commercial-based business is generating significant cash flow and is poised for accelerated top-line growth. This is anchored by Exproil, which developed a position to continue to set new standards in patient care in the near and long term. PCRs 201 are a novel locally administered gene therapy product candidate for common diseases like osteoarthritis. This exciting asset continues to demonstrate its potential to revolutionize the treatment of osteoarthritis. Our phase two development program is enrolling and on track for the first data readout next year. And our proprietary first of its kind HCaP platform has the potential to unlock gene therapies for common diseases affecting millions of patients. Thank you again for joining us today and for your continued support and trust in our mission to deliver innovative non-opioid therapies to transform the lives of patients.

With that operator, we're ready to open the call for questions.

Thank you, dear participants. As a reminder, if you wish to ask a question, please press star 1 1 on your telephone keypad and wait for your name to be announced. To withdraw a question, please press star 1 1 again. Please stand by, we'll compile the Q&A roster. This will take a few moments. And now we're going to take our first question. And it comes from the line of Gregory Renza from RBC Capital Markets. Your line is open. Please ask your question.

Hi, Frank and team. It's Anish on for Greg. Thanks for the updates this quarter and for taking our questions. Just a couple from us. First, if you could just provide some color on what proportion of patients on average are are covered with Medicare and would no pain be applicable for within each surgical segment? Are there any covered trends within that you're taking notice of? And second, on 201, what are you hearing from docs and patients with respect to what needs to be shown to encourage wide adoption should a therapy such as it enter the market? Thanks so much.

Thanks, Sean. It's Frank Lee here. Thanks for the question. So your question was about the proportion of patients covered by Medicare. And let me turn it over Here to Brian, our chief commercial officer, and he can speak to that. Sure. Thanks for the question. As you would suspect, there is a little bit of a difference between inpatient and outpatient. We have more commercial coverage in the inpatient segment, a little over 50%. But in the outpatient, hospital outpatient setting in ASC, it skews a little bit more towards the Medicare side on the HOCD side. And then for ASC, it's principally commercial. Almost three-quarters of our business would be found commercially covered in ASCs. The second question was around 201 and what we're hearing from clinicians on what we need to show for wide adoption. At a high level, what I'd say here is based on our market research and speaking with the community, Current standard of care provides roughly three to six months of benefit. And to the extent that we can provide a year or more, that's considered transformative and game-changing. And so that's why we're particularly enthusiastic about the two-year data we've been able to share so far. And as Jonathan mentioned, we'll be sharing our three-year data later on this year.

Great. Thank you so much.

Thank you. Now we're going to take our next question. And the question comes line of Gary Nackman from Raymond James. Your line is open. Please ask your question.

All right. Thanks and good afternoon. So first regarding no pain, you've talked about some of the logistical challenges with hospital systems benefiting from no pain. What are you doing to help expedite that from your end? the review programs that you have in place, and are you working with any third parties to help you get hospitals online faster? And then just talk a bit more about how overall education of no pain is going for physicians and hospitals in general and where awareness is now versus, let's say, the start of the year. And then I have a follow-up. Sure. Thanks for the question, Gary. And just at a high level, if I turn it over to Bren here, at a high level, we've said very, very consistently that it's going to be more the second half of the year until we really see traction for all the reasons we described. We are seeing some good early indicators, and certainly the things that we see in the smaller institutions and other settings we can apply to these bigger institutions. But let me turn it over to Brian to talk here a little bit more. Yeah, thanks for the question and I think Frank did really address where we've seen our early progress, which I think we've translated into a path forward for larger IDNs. I think things are going largely as we expected. So in the community hospital setting, in the ambulatory surgery centers, we're seeing significant growth in adoption. And the reason we're seeing that is there are fewer decision makers, easier to communicate the no pain message as well as the separate J code. But concurrently, we're also seeing formulary wins at IDNs where they're expanding lines of use for XBRL as a function of these conversations. Now, obviously, a lot of that's taken place over the last 90 to 100 days. I think the momentum you'd expect to see in IDNs would come, as has been suggested, in the latter part of the year as it works its way through the system. So let me just add to that, Gary, that, as I mentioned in my comments, we have prioritized our resources to Expro, Field Force, and other field-facing resources, as well as in-house resources. And so this is how we're ensuring that we have focus on this. And again, as more reliable market data become available as we progress during the course of the year, we'll be able to share with you some data that we can trend over time consistently. So the bottom line, as Bryn said, is we're, I think, right on track with where we expect it to be. And we expect that we'll continue to see the ramp with respect to no pain. Okay, great. And then just on the recent settlement agreement with Fresenius, now that you have line of sight of no generic XBRL through the end of the decade, just discuss your priorities a bit more in terms of allocating capital. So how much will you be spending on the commercial efforts to accelerate XBRL versus spending on the pipeline and also looking to expand the pipeline through in-licensing deals? And, you know, would you consider doing a larger transaction? for on-market products, and would you only focus on the paint space or potentially look at some adjacencies? Thank you. Yeah, thanks for the question, Gary. And before I turn it over to Sean here to talk about capital allocation, let me just say at a high level, we're very pleased with the settlement. This is a volume-limited settlement, provides visibility out to 2039. That's number one. And as you know, even in the first year, it's high single digits and it gradually goes up from that. And the last few years, it's steady at a high 30s is what we've stated publicly, right? So that combined with the fact that right now, as we've defined our market, our penetration is still relatively low. In fact, in the high single digits, if you aggregate it. So we have plenty of room to grow. and we've got visibility now out to 2039. So that says context, and now let me turn it over to Sean for our capital allocation priorities.

Yeah, thanks for the question. So similar to the last time we all got together, we're, just to reiterate, you know, regularly review the capital allocation strategy. As Frank mentioned, some key areas of focus, you know, Investing in the base business to capitalize on no pain with the goal of accelerating top line growth as we've articulated in the 5x30. Advancing very thoughtfully in innovative pipeline. Focus on musculoskeletal pain and adjacencies. And then as we announced earlier, returning capital to shareholders. Board authorized an increase in the share buyback, which is now at $300 million. and it runs through the end of 2026. With regard to that particular decision, it was part of our capital allocation continued evaluation. We performed extensive analyses to that end to get to that 300 number and also believe, based upon this positive settlement, that there is a significant disconnect in the current valuation of the company.

Thanks, Sean. Let me just bring it back to maybe adding additional color on a couple of other elements here. First is, as I mentioned, overall, we're low in terms of penetration as we define our TAM. And just to be really very specific, I mean, we've got, I think, a lot of room to further penetrate in lower extremity, GI, OBGYN, OMFS, plastics. and much of which is outpatient, if you take a look at the latter few. So we're optimistic about the potential we have to further penetrate these markets and grow as we get beyond 2030. So that said, I think that in terms of the kind of capital allocation, you see how we progress in a very disciplined way to focus on our growth and the GQ bio acquisition that we completed this quarter. I think it's a great sign of how we're being very, very disciplined with the kind of capital that we deploy. Okay. But it sounds like you would consider on-market products. It sounds like you have some capacity within the sales force to potentially do that. Yeah, great point, Gary. As I made my comments, you know, this restructuring of sorts that we did prioritized Expiril, but it also, what it did was provide capacity now for the three sales forces to not only carry our products, but perhaps additional products that we bring into the bag, new products. So, I would say that that's a possibility. We'll be very, I think, disciplined in the way we look for these kinds of opportunities. And given the current market environment, I think we're in a very strong position financially to look for those kind of opportunities and find a deal in a very disciplined way.

Okay, great. Thank you.

Thank you. Now we're going to take our next question. And the question comes from Les Tulewski from Twist Securities. Your line is open. Please ask your question.

Hi, this is Jeevan on for Les. Thanks for taking our questions. Just a quick one for me. Are there any Xperil enhancements in your line of sight that could extend its life cycle or perhaps expand its label?

Yeah, thanks for that question, Steven. What I'd say at a high level is we continue to innovate Xperil. And as you can see from the recent patents that we've orange book listed, the 18th one, and we expect to continue that innovation going forward. So that's number one. Number two, as it relates to other, I would say, indications, we don't have plans for that. We currently do have some studies ongoing, but we don't have any new plans for additional indications for export.

Thank you.

Thank you. Now we're going to take our next question. And the question comes line of Hardik Parikh from JP Morgan. Your line is open. Please ask your question.

Hey, thank you very much for taking the question. I just had a question about the gross margins, and I apologize if I missed it in the middle. You mentioned about how the royalty to RDF is going to get eliminated, and that was about low single digits. That should help improve the gross margins. I was wondering... you know, how that was incorporated into the four-year guide in terms of you reiterating it. Thank you.

Sure. Thanks for the question, Harding. As you might know, this litigation has a long history, and our legal team did a great job here of getting to a favorable resolution. And as you mentioned, this is low single-digit impact for XBRL. This is overall for XBRL. And so we're very pleased about this. And going forward now, this will help us improve margins for sure. But I want to come back to we think that overall margins will improve as we sell more product. So, you know, as we drive volumes, margins will continue to improve. So that said, Sean, you can speak to a little bit of the impact this quarter versus, you know, going forward.

Yeah, we were very pleased to see the strong first quarter margins. that exceeded our guided range of 76% to 78%. We're getting good volume output from both our XFRL sites, San Diego and the UK. As we just discussed, the markets benefited from favorable RDF royalty ruling. But just as a reminder, there's a number of manufacturing variables that can result in a pretty significant quarter variability. but based upon the performance of this quarter and what we're seeing from the teams, that we'll, of course, look at more just again after our second quarter landing and determine if an update is needed for a full guidance, fuller guidance range at that point.

And I guess just to add, this quarter, it's a minor impact to this quarter. It's really more going forward that we'll have a more significant impact and carry over hard, yeah. Yeah, so already it was incorporated. Yeah, I think that was your question, wasn't it, Hardy?

Yeah, yeah, correct. Basically, why not raise a guide? And then the second question is just more around... Just one other thing about that, just for the guide.

You know, the other thing is, obviously, there are a number of headlines about tariffs these days. And so, of course, we've been diligent at looking at that, analyzing that. And so we're comfortable with the guidance that we provided. So we're not lowering guidance. We're comfortable with the guidance that's provided. And then as we get better visibility on truly how these tariffs might, if and how they might manifest, then we can sharpen guidance as needed.

Okay, great. Thank you. And the second question is just around pricing. So if I understand your comments correctly, I'm interpreting as pricing was mostly flat, maybe slightly down. uh when you adjust for uh the those lower number of selling days so one is that correct and then how do you see pricing progressing for the rest of the year as gpo contracts come online yeah so let me uh turn this over to sean we've pursued price as we normally do uh and obviously gpo contracts are you know slowly coming online so uh sean

Sure. Yeah, with regard to XFRL, it was gross final volume growth for the period. So it was all volume, effectively. And then with regard to the GPOs, we talked about this previously, that there will be a mid-single-digit impact for the first year when we bring on board, knock on wood, the next final GPO. final GPO agreement. We'll be lapping the second one this coming fall, and that's how to think about a good single-digit impact.

Thank you. Thank you. Now we're going to take our next question.

And the question comes to the line of Serge Belanger from Needham. Your line is open. Please ask your question.

Good afternoon. Thanks for taking my questions. Apologies if you already covered this earlier in the call. Just regarding surgery volumes, can you just give us a little color on what you're seeing so far, first quarter and, I guess, the first month of the second quarter, and if the macros impacted those volumes? And secondly, regarding competition, I think you mentioned that you're still at low penetration on your overall TAM. Curious if you're seeing more competition now from other players like Zinrillef. That's it.

Thank you. Thanks for the question. Let me take a little bit of the competition question and then turn the surgery volume to Brent. Right now, we don't see any new competition that's significant. So we have a lot of room to grow. There's largely the... Bupivacaine, short-acting bupivacaine, and the various cocktails that are out there, pumps, et cetera. But all that said, we really think the room, we have a lot of room for penetration going forward. So that's what I'll say to that. Nothing has changed with respect to the competition and intensity. All right. Yeah, thanks for the question. In the first quarter, we saw nominally a decline in surgical surgery room hours, low single

Thanks, Serge. Anything more? No, that was it. Thank you.

Thank you. Dear speakers, I don't have further questions for today. I would now like to hand the conference over to Susan Mesko for any closing remarks.

Thank you, Operator, and thanks to all on the call for your questions and time today. We are excited about the opportunities that lie ahead for us. Throughout the remainder of the year, we will continue to ensure we are well positioned for long-term success by executing our 5x30 plan to advance our mission. Thank you and be well.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.