Pacira Pharmaceuticals' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Mar. 7.13 | About: Pacira Pharmaceuticals, (PCRX)

Pacira Pharmaceuticals Inc. (NASDAQ:PCRX)

Q4 2012 Earnings Call

March 7, 20123 9:00 am ET

Executives

Dave Stack – President, Chief Executive Officer

Jim Scibetta – Chief Financial Officer

Jessica Cho – Investor Relations

Analysts

David Amsellem – Piper Jaffray

Richard Lau- Wedbush Securities

Corey Davis – Jefferies

Douglas Tsao – Barclays

Cliff Murray – Empire Asset Management

Patti Banks – Discern Securities

Operator

Thank you for joining us for the Pacira Pharmaceuticals Fourth Quarter 2012 Financial Results conference call. At this time, all participants are in a listen-only mode. Following the formal remarks, Pacira’s management team will open the lines for a question and answer period. Please be advised that this call is being recorded at the company’s request and will be archived on the company’s website for two weeks from today’s date.

At this time, I would like to introduce Jessica Cho of Pacira Pharmaceuticals. Please go ahead.

Jessica Cho

Thank you and good morning everyone. Welcome to Pacira’s fourth quarter 2012 financial results conference call. Joining me on the call today from Pacira are David Stack, President and Chief Executive Officer, and Jim Scibetta, Chief Financial Officer.

Before I turn the call over to the management team for their prepared remarks, I would like to remind you that certain remarks made by management during this call about the company’s future expectations, plans and prospects constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements about the company’s future expectations, plans and prospects include statements regarding the company’s plans to develop and commercialize Exparel, the success of commercialization of Exparel, the rate and degree of market acceptance of Exparel, the size and growth of the potential markets for Exparel and the company’s ability to serve those markets, Pacira’s commercialization and marketing capabilities and other statements containing the words believes, anticipates, plans, expects, and similar expressions. Any such forward-looking statements are based on assumptions the the company believes are reasonable but are subject to a wide range of risks and uncertainties. Actual results may differ materially from those expressed or implied by such forward-looking statements. Many of these and other risks and uncertainties are described in the risk factor section of Pacira’s most recent annual report on Form 10-K for the fiscal year ended December 31, 2012 and in other filings with the SEC, which are available through the investor section of the Pacira website at www.pacira.com or on the SEC website at www.sec.gov.

All of the information in this conference call is as of today, March 7, 2013 and should not be relied upon as representing the company’s views as of any subsequent date. While the company may elect to update these forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so; therefore, you should not rely on these forward-looking statements as representing company views as of any date subsequent to today.

I will now turn the call over to Dave Stack. Dave?

Dave Stack

Thanks, Jessica. Good morning everyone and thank you for joining us for this review of our fourth quarter 2012 results. On the call today I will review our commercialization success to date with Exparel followed by an update on our manufacturing capabilities and also our continued Exparel label and commercial expansion efforts, then Jim will provide a summary of our fourth quarter 2012 financials and discuss general updates. We will then open up the call for questions.

On the call today, we will be primarily talking about Exparel, our novel treatment for post-surgical pain management which we launched commercially in the United States in April 2012. The first and only multivesicular liposome local anesthetic for use in the peri- or post-surgical setting, Exparel utilizes our proprietary DepoFoam technology to provide local analgesia for up to 72 hours with a reduced need for opioids. Approved for single dose administration into the surgical site to produce post-surgical analgesia, Exparel uses the same infiltration technique as currently marketed local anesthetics such as bupivacaine. Of the 75 million surgical procedures performed annually in the United States, we believe this indication provides a target market of 40 million surgeries appropriate for Exparel, 10% of which equals a revenue opportunity of approximately $1 billion.

With three full quarters of Exparel sales under our belt, we continue to be pleased with the launch of Exparel and our ability to expand its use within a wide range of surgical specialties. The new marketing initiatives we launched in the fall have continued to drive accelerated sales growth. For the months of September through December, we saw month-over-month outgrowth of average daily box sales totaling 13%, 23%, 26% and 39% respectively. We reported net sales of $7.8 million for Exparel in the fourth quarter, up 70% from the 4.6 million in the previous quarter and year-end net sales of $14.6 million for Exparel. As of December 31, 2012, 819 customers have ordered Exparel. Of this total, 191 customers ordered six times or more while 110 customers ordered 10 times or more. As of the end of the fourth quarter, we averaged 22 new customers per week.

This progress derived largely from access in orders in 75% of the top 100 target hospital accounts and 53% of the top 500 target hospital accounts. We expect that first quarter sales trends will remain positive as we continue with major formulary approval and experience expanded use with surgery and anesthesia customers in accounts where these clinicians have had access and gained experience with Exparel.

As we discussed during our last call, our customers have been requesting professional support from Pacira on the use of Exparel. To ensure that we can respond to our customers’ needs, our professional services team of nurse educators, scientific affairs, and medical affairs personnel now number approximately 25. These professionals work to support our sales force, recently transitioned from our Quintiles contract to be Pacira employees, providing the critical mass resource to fully educate customers on the appropriate use of Exparel, especially in hospitals with recent formulary approvals.

In terms of manufacturing, we remain on track with our progress in expanding our manufacturing facility and overall capacity. As we reported to you last quarter, the new manufacturing facility known as Suite C was fully installed ahead of schedule. Upon receiving FDA approval, projected to be sometime in early 2014, this facility will significantly increase our manufacturing capacity and ability to meet the growing demand for Exparel.

One of the drivers of this growing demand is our strategic initiative investigating additional therapeutic indications for Exparel. During the fourth quarter, we announced new data supporting use by infiltration into the transverse abdominis plane, or TAP, in robotic prostatectomy patients. One hundred percent of these patients were either satisfied or extremely satisfied with their pain control throughout the study, supporting the reduced reliance on opioid analgesics for post-surgical pain management. We are currently planning a Phase IV clinical trial of Exparel in-TAP infiltration for lower abdominal procedures and expect to have this data in late 2013.

Last quarter, we also continued to build upon the wealth of data demonstrating efficacy and safety and the pharmaco-economic opportunity with a platform of Exparel as part of a reduced opioid treatment strategy. Recently the data from the first of our Phase IV Improve studies, an open study conducted by Dr. Stephen Cohen of Southern Regional Medical Center, was published in the Journal of Pain Research. The study compared total opioid consumption, hospital cost and length of stay of an Exparel-based multi-modal regimen to a standard opioid pain management regimen. The Exparel regimen resulted in a 60% reduction in hospital stay from 4.9 to 2 days, mean hospital cost savings of over $3,000 per patient, and over a 50% reduction in opioid use. We expect three more Phase IV Improve trials to be published over the next few months, a laproscopic colectomy study and two ileostomy reversal studies.

This past weekend, the online version of one of our opioid sparing programs was published in the Journal of Pain and Palliative Care Pharmacotherapy. This article concludes that in this national study of patients undergoing common in-patient surgeries, the majority of patients receive an opioid post-surgery and a sizeable proportion of these patients experience one or more opioid-related adverse events. These opioid-related adverse events were associated with a marked increase in the cost, length of stay and need for readmission. These findings support the need for a new paradigm for post-surgical pain control.

In the next couple of months, we also expect to publish additional data on the true cost of opioids to achieve post-surgical pain control along with articles on time to onset, a study showing that liposomal bupivacaine exhibits time to onset characteristics similar to traditional bupivacaine hydrochloride, an article on program-wide safety where this paper aggregates safety data from 10 wound infiltration studies, an additional article on program-wide wound healing, a review of 10 clinical trials demonstrating that Exparel has no impact on wound healing across a number of different surgical models.

We are also very active at significant medical meetings of interest to our customers. We will be active at SAMBA, the Society for Ambulatory Anesthesia; the Aesthetics Meeting in New York where we will have a hot topic presentation; the American Society of PeriAnesthesia Nurses, or ASPAN, where we will host symposia; the American Academy of Orthopedic Surgery and the American Academy of Colorectal Surgery, where we will also host symposia; and the American Society of Regional Anesthesia where we will have an abstract data presentation. We have held a series of national simulcast programs since launch. We are planning to hold the next of this series of educational symposia in April for our surgery and anesthesia healthcare providers.

Additionally, we are in the process of conducting two pivotal Phase III studies, a femoral nerve block study for total knee arthroplasty and an intercostal block in posterolateral thoracotomy. In doing so, we hope to present a viable long-term single dose pain control option, replacing the need for the perineural catheter, drug reservoir and pump characteristic of the current standard of care with all of the attenuated costs and issues. These nerve block models will compare the effect on motor and sensory function of Exparel versus placebo, and they are enrolling now. We expect to have these trials completed in late 2013 or early 2014, and this data will form the basis of an SNDA for a new indication in the package insert for Exparel.

During the fourth quarter, we also entered a global licensing agreement with Aratana Therapeutics for the development and commercialization of bupivacaine liposomal injection suspension for animal health indications. Aratana will develop and seek approval for the use of the product to manage post-surgical pain in veterinary surgery, focusing initially on cats, dogs and other companion animals. Veterinary development of this product may address the estimated 33 million surgeries performed every year on companion animals in the United States.

Before I turn the call over to Jim for a detailed discussion of the fourth quarter financials, I do want to highlight our completion of a convertible debt offering in early January. This financing enabled Pacira to repay in full our $30 million senior secured credit facility. It has strengthened our balance sheet and is a driving force the continued growth of Exparel, as well as our strategic initiatives for expanding its use in 2013.

This is a time of transformational growth for Exparel and Pacira. We are on track to break even during 2014 and we continue to believe that Exparel represents a blockbuster platform for post-surgical pain control.

On that note, I will turn the call over to Jim for a review of the fourth quarter financials. Jim?

Jim Scibetta

Thanks, Dave. With this truly exceptional year behind us, I’m pleased to report on our 2012 financial results and also touch on what to expect for 2013 and beyond. To orient you for the year and our path moving forward, I’m going to start with some broad comments on our financial model. First, I want to reiterate that with Exparel revenue trajectory we have experienced now emanating from the three fiscal quarters of launch, we expect the company to be cash flow positive at some point in 2014, and we now have well in excess of the cash we need to get from here to there with the completion of the convertible note financing where we set out to raise approximately $50 million of new money over what we needed to refinance our debt, and that was almost entirely to serve as a cushion to ensure path to achieving profitability, and then we upsized the deal by 40 million due to very positive feedback and demand. Finally, once profitable, we expect to quickly drive significant EBITDA and EPS given our scalable manufacturing infrastructure and modest-sized specialty field force targeting a large market opportunity, coupled with a restrained G&A infrastructure and measured and entirely discretionary R&D outlook.

As reported, our total revenues for the year were 39.1 million compared with 15.7 million for the year 2011. Total revenues for the fourth quarter were 10.5 million compared with 4.2 million for Q4 2011. A substantial portion of the increase in revenue was of course driven by product sales of Exparel, which totaled 7.8 million for the fourth quarter of 2012 and 14.6 million for all of 2012. As a reminder, Exparel was commercially launched in April 2012. Exparel sales emanate from the sale of product shipped directly to end users, including hospitals and ambulatory surgery centers. In 2012, we also recorded 18.4 million of collaborative licensing and development revenue primarily due to the recognition of deferred revenue associated with the termination of agreements for DepoDur and Novo.

Total operating expenses in 2012 were 88.4 million, and let me break that down. Cost of revenues was 32.1 million. While we don’t break this out in our reported financials, I think it’s helpful to convey that approximately 26 million was attributed to Exparel COGS and the remaining 6 million was mostly DepoCyte COGS. I should note, however, that we were building inventory in 2012 so some of the fixed and variable costs that we incurred were capitalized into inventory. Many of you have heard us discuss that our COGS and gross margin story is about scaling our Exparel revenue growth on a fixed cost manufacturing infrastructure of approximately 30 million plus a variable cost per unit of approximately 10 to 15% of revenue. We did in fact incur that 30 million of Exparel fixed cost in 2012 plus our variable cost, but the 2012 reported Exparel COGS is lower than that 30 million number only because of the capitalization of cost into inventory that I just mentioned. Looking forward, this should tick up a little in 2013 as later in the year we expect to be running Suite A 24/7 in parallel with the preapproval operations of Suite C that Dave referenced, and also we invest in systems to support Exparel to become a major brand.

Our R&D spend for the year was 9.9 million. We’d previously disclosed that our pivotal nerve block studies are expected to cost 12 to 14 million to be spent over the six quarters from Q3 of 2012 through Q4 of this year, 2013. I can update that by noting that we spent about 3.5 million in 2012 and have approximately 10 million of costs remaining in that endeavor.

G&A was 16 million in 2012. We don’t expect that increase materially in 2013, and for that matter we will always try to keep that in check and focus our resources on value-generating activities. Selling costs were 30.3 million in 2012 with a little less than half of that attributable to our field force. As a reminder, our Phase IV health economic studies, like the Improve Exclaim studies and TAP studies, and support of the approved indication for Exparel, are accounted for in our selling costs. For modeling purposes, a field force increase of approximately 15% in 2013 is appropriate, and we do expect to be even more aggressive with additional commercial programs in 2013 to maximize Exparel growth opportunities. I do want to highlight that if you look at our 2012 SG&A of 46 million, that is very materially lower than that of comparable peer play hospital-based companies, even at similar stages of launch.

CAPEX for 2012 was 18 million, most of which was related to the deployment of Suite C. We expect to complete that Suite C capital spend in early 2013 with approximately 5 million of remaining investments and we’ll also leverage some of the additional financing resources in 2013, as I mentioned, to prepare our manufacturing facilities and support systems for growth.

Net loss for 2012 was 52.3 million or $1.72 per share based on 30.3 million weighted average shares outstanding. As of December 31, 2012, there were 32.6 million basic shares outstanding.

We ended 2012 with cash of 42.6 million, but as mentioned, in mid-January we completed a private offering of 120 million of convertible notes, providing net proceeds so approximately 115.3 million after deducting offering expenses. Pro forma cash as of December 31, 2012, including the net proceeds of the convertible notes and after the repayment of our Oxford Finance credit facility, was 127.8 million.

Let me provide a little color on that convertible note financing as we believe it really sets the state for Pacira to be about plan execution in 2013 and beyond. While there is some complexity to the convertible debt product, I like to describe our financing as simply a very straightforward debt financing with an equity kicker component. The debt financing component is as stated – 120 million of principal with a 3.25% coupon, so we incur interest only for six years until maturity in February 2019, at which time the bullet principal payment is due. To be clear, this principal component is by design a straight debt instrument in all circumstances as we chose going into the deal the quote-unquote fixed net share settlement feature, meaning there is no circumstance where that 120 million principal could or would be settled in Pacira stock. We were not interested in what would be under any condition in fact or perceived as a highly dilutive equity financing because at this stage of our company’s evolution, now that we are beyond the scheduled binary events of Phase II, Phase III, FDA approval, and even the launch which while it doesn’t play out in a single day is, from an investment thesis, in essence a binary event. So we stayed away from the optional net share settlement feature that is sometimes employed in convertible deals.

In terms of cash flow related to the financing, our annual interest payment on this 120 million of debt is 3.9 million, which amazingly is only about $1 million greater than what we were paying on the $27.5 million term loan that we incurred prior to the Exparel launch when we were obviously perceived to be a different risk profile.

For the equity component of the deal, the conversion price is $24.82, which was a healthy 32.5% premium over where our stock was trading when the deal was done in mid-January. The dilution to current shareholders only occurs above that conversion price and so it does not materially impact shareholder returns, even in positive, rosy scenarios. So for example, at a PCRX stock price of $42 per share, the total conversion value is approximately $80 million, which amounts to dilution of only 2 million shares or approximately 6%. By the way, we retain the right to settle that conversion value at the time of conversion in either shares or cash.

So in summary, if we execute on our plans, current shareholders will be minimally diluted while convert holders have the opportunity to receive a meaningful equity kicker on top of their coupon return.

Looking ahead, we do not believe it is appropriate to provide revenue guidance for Exparel at this stage of launch. We’d previously provided guidance on non-Exparel revenue but are discontinuing that practice given the diminished materiality of those activities relative to Exparel.

In closing, from a financial perspective 2012 was indeed a transformative year where we de-risked the company by generating 14.6 million of Exparel revenue in the first nine months of the launch and in the process put Exparel on a trajectory to become a major brand. We begin 2013 with the resources we need to focus on execution on our plans to drive us to profitability in 2014 and beyond.

I’ll now turn the call back to Dave.

Dave Stack

Thanks, Jim. Catherine, can you see if there is any questions?

Question and Answer Session

Operator

Certainly, thank you. First question is from the line of David Amsellem from Piper Jaffray. Please go ahead.

David Amsellem – Piper Jaffray

Thanks. I have just a few. I wanted to just clarify how we should think about the Exparel gross margin in 2013 under the old suite, and then just remind us what kind of gross margins you’re expecting on the product when the new suite comes on line, how we should also think about fixed and variable costs once Suite C is up and running. Thanks.

Jim Scibetta

Sure. Thanks, David. So if you look out broadly, as we’ve communicated, we’ve got that fixed cost infrastructure, and when we’re driving significant revenue we’ll have quite compelling gross margins as we’ve got—you know, what we talked about is the 30 million-ish fixed cost manufacturing infrastructure and 10 to 15% variable costs. In 2013 and 2014 as we’re putting Suite C online, that fixed cost number may move around, may tick up a little bit, as I indicated, because we’re doing those two things in parallel. But as we get beyond into ’14 and we’re operating only in Suite C, we should have just a fixed cost number that might be in the 30, $35 million range. We’ll have to see as we go forward here.

David Amsellem – Piper Jaffray

Okay. And then how should we think about the variable cost specific to Suite C? Is it also that 10 to 15%, or is it lower?

Jim Scibetta

You know, we’ve said 10 to 15% because that’s what we’ve experienced. As we’ve gotten into this a little bit more, David, I’d like to think it’s going to be at the lower end of that range, or we’ll keep people apprised of that as we make some progress. Last year, we were really just focusing on making product that we could sell. We’re now starting to do some efficiency activities internally, and then in addition as we get to a larger scale and we’re just buying things in bulk, you would expect us to be able to squeeze some savings out of that as well.

David Amsellem – Piper Jaffray

Okay. And then just turning to the commercial performance, can you maybe, David, quantify the volume mix for Exparel among orthopedic surgeries, soft tissue, and also how much of the business is cash pay, how that’s changed over the past quarter, and then also talk about what kind of specific surgeries where you’re seeing the most growth since the new year. Thanks.

Dave Stack

Thanks, David. The vast majority—the easy answer is that the vast majority of our sales remain in soft tissue surgeries. The two components of that are plastics, where we’ve done pretty well, and these are soft numbers, David, because of the way that plastics is practiced. Some of it is in ambulatory surgery. Some of it we can measure very specifically when a box goes directly into a plastic surgery office, and some of it is in the hospital where the drug has increasingly been used in reconstructive procedures. But if you put that data together as best you can, our projections are that plastic surgery is roughly 15% of our net sales, and it’s growing and we expect that to be an important component of sales.

As you know, we launched off of our hemorrhoid data set into abdominal soft tissue, and when we got into the fourth quarter that was virtually all of our revenue. So the other indications where the clinicians have started using the product really is a fourth quarter event, and so I would expect that orthopedic, as we reported the numbers in 2012, was a very small percentage of sales – something less than 10% for sure. The interesting thing about orthopedics is that when people start to use the product in earnest, you see a shift away from the other opportunities to produce post-surgical analgesia in a way that it almost becomes an all-or-nothing. And so unlike any of the other opportunities that we’ve seen, we see centers adopt Exparel in 100% of their cases, and so it’s very interesting to us. It’s one of the strategic things that we are focusing on, but as a percentage of total revenue as we sit here in March, David, it still is a modest percentage of our total revenue. One of the reasons we are focusing on it is the significant growth factor.

Does that make sense?

David Amsellem – Piper Jaffray

Mm-hmm, that does. Thank you.

Dave Stack

And I should also say, David, just for the sake of completeness, the marketplace is also using the product in these TAP infiltrations in a very interesting way, and so in addition—so maybe if I characterize it in just one sentence, we see abdominal soft tissue and plastics continuing to grow at a trajectory that you would think was appropriate for a launch, and then on top of that the more aggressive growth scenarios are the TAP infiltrations where the product really does change the way medicine is practiced, and orthopedic surgery where, again, we see these explosive growth opportunities.

David Amsellem – Piper Jaffray

Okay, thank you.

Operator

Thank you. The next question is from the line of Richard Lau from Wedbush Securities. Please go ahead.

Richard Lau- Wedbush Securities

Good morning, guys. So my question is about the—I believe when you guys launched, some hospitals had restrictions in terms of what types of surgeries Exparel could be used in. I was wondering if those restrictions have lessened over time, and in particular if the adoption among the orthopedic surgeons has helped that at all.

Dave Stack

Yes, Richard. We still have the full gamut of different opportunities in terms of access. We do have places where the product is allowed for specific surgeons and/or specific surgery groups. Generally the thought process there is that they will do some type of a drug utilization evaluation and demonstrate in their patient mix that the product really does what they say it’s going to do, and then the restrictions are taken off; and indeed, that’s what we’ve seen, especially in some of the very big centers on the east coast, so that’s working well.

You are right in your second characterization also that when we are involved in orthopedics, and especially when we have KOL orthopedic folks that are largely in an orthopedic center of excellence, it does appear to us that the formulary approval process and the adoption of the product moves much faster than it does in the scenario that we launched into with the colorectal surgery and with abdominal soft tissue.

Richard Lau- Wedbush Securities

Okay, great. That’s helpful. Thanks, guys.

Operator

Thank you. The next question is from the line of Corey Davis from Jefferies. Please go ahead.

Corey Davis – Jefferies

Thanks very much. A couple questions. When you have success at a certain center and a lot of folks are using it, does that help or hurt you in negotiating with, say, a new center that’s going through the P&T process that may look at that and say, wow, it’s a good drug but all of a sudden it become a big line item for them.

Dave Stack

Yeah, it’s an interesting question, Corey, and of course we have to be careful that it doesn’t hurt us. We have this team of professional folks that I referenced on the call, have all of the tools for data collection and statistics and data management, et cetera, to empower our folks in order to evaluate the product on the total economic package and the opioids bearing package. So I think increasingly as the data set and the marketplace and, more importantly, as the experience of the KOLs lead to patient satisfaction and an earlier discharge and a reduce resource consumption inside the hospital because these people are not nauseous and having pruritis and some of even the more simple things associated with the use of opioids, folks start to understand that the story here is not a simple line item, pharmacy budget.

I would also say, Corey, that the environmental issues that are pretty important in the marketplace in gaining traction also help us in that regard. The joint commission, in their missives on the use of opioids and the fact that hospitals should be endeavoring to reduce the use of opioids, especially in certain patient populations known to be most problematic, clearly helps us, and as people gain experience with Exparel and realize that we really do solve that problem, that helps us. And increasingly over the last several months, the whole HCAHPS program where hospital pain scores are readily available on the Internet, and in our discussions with C-Suite executives, especially CEOs, they are acutely aware of their pain score and we see more C-Suite initiatives to improve pain scores largely because of the impact that that will have on total hospital reimbursement, et cetera.

So we’re seeing stuff at the local level but we’re also getting help from different regulators and regulatory bodies, and a lot of their activities have helped us in our C-Suite discussions, and so that gets back to the whole idea of how we’re approved. And I would tell you that the recent big formulary wins are much more likely to be unrestricted all access than the big formulary wins we had six months ago.

Corey Davis – Jefferies

Okay. And there’s a lot of discussion into penetration within orthopedics. The question is how important is getting the formal nerve block indication to really accelerating that penetration, and also excuse my ignorance, are all orthopedic procedures, do they involve the nerve block procedure?

Dave Stack

They used to, so it’s an interesting scenario that you pose. It’s not an ignorant question at all, Corey; actually it would require a long discussion. But the interesting scenario that we’re finding ourselves in here is that when orthopedic folks, and I’m focusing primarily on the knee here, which is where we have the bulk of our experience to date, once they start to use Exparel in an injection technique that has been largely driven by our KOLs and some of the real influence molders in this space, they stopped doing femoral nerve blocks and the result of that is that they can reorganize the way their OR operates in terms of staffing. So what you realize is a lot of the staffing and a lot of the ancillary activity that went with a total knee was related to the quad weakness and the fact that they were doing a femoral nerve block. So by replacing that femoral nerve block with an infiltration with Exparel, we not only see all of the benefits of LOS and opioid reduction that we’ve seen with all of our other strategies, but you can see personnel savings and you see earlier ambulation and you see earlier discharge – all of the things that are a result of a reduced femoral nerve block.

Now it’s very early in that adoption cycle. There are still millions of femoral nerve blocks done, but one of the areas of focus at the symposia at the American Academy in a couple of weeks in Chicago will be folks talking about how their patients have responded when they’ve been able to not do a femoral nerve block, and so it puts us in an interesting strategic scenario here as we get the first set of our nerve block data.

Corey Davis – Jefferies

Does that remove the need for an anesthesiologist to be involved, and are there political implications with that for them not getting paid?

Dave Stack

It does not—there would still be an anesthesiologist for a total knee – this is a pretty severe surgery – but it does have an impact on their ability to directly bill for the femoral nerve block, and it does have an impact on staffing that would be required not only for the femoral nerve block, which generally would involve an anesthesia tech, but also a CRNA who would be largely responsible for making sure that the morphine PCA machine was operating correctly and the PAC-U and all of that stuff. So again, another insightful question, and one of the offsets we hope here is that our TAP block program is largely done through anesthesia.

So while we could have economic impact on their practice as we have an impact on femoral nerve blocks in knees, we also think that the major opportunity in abdominal soft tissue surgeries is with Exparel used in TAP infiltrations, and so we come right back to them and we’re working with them aggressively on that program.

Corey Davis – Jefferies

Sorry for all these questions, but do you still want a J-code? Do you need one?

Dave Stack

Oh, absolutely. Yeah, yeah. I don’t know if we need it, Corey, but we certainly want to get it. As you know, we did not—well, let me give you a little bit of history here. We actually filed for the J-code at the same time that the drug was launched, and so we had no data, no actual marketplace data to support that there was a need and a market request for the use of the product, and so we were turned down largely because it was impossible for us to reference that there was—you know, which surgical procedures docs were asking for it, and what the savings associated with the use of the drug in that setting were going to be. We now have all of that data and we will resubmit.

The way this works is you go to the regulators in April and you find out whether you were approved or not in November, and so we are going through that process, Corey, and we now have the data appropriate to support our request, and we’ll find out in November whether we got it or not.

Corey Davis – Jefferies

Last question – I certainly respect your not having revenue guidance for Exparel for 2013, but how much of that is internally do you really not know how much you’re going to sell, or is that just something you don’t want to publicly provide at this point in time?

Dave Stack

You know, it is a dynamic situation, Corey, and this is the first March 7 that we’ve ever sold the drug on, so we do continue to learn. I mean, I’ll give you an example. We were told by folks who have joined the organization from other folks that operate in this space that plastics were going to be very strong in December, but I would tell you that even with that warning, they were much stronger than I was thinking they were going to be. So there are some seasonality aspects to this that we want to make sure we understand, and then I would tell you as the CEO who is largely responsible for determining that we’re not going to provide any guidance, there’s 99 ways for us to be wrong and only one way for us to be right, and there doesn’t seem to be any obvious reason to put ourselves in that position, from my perspective.

Corey Davis – Jefferies

All right. So consensus is still too low for 2013.

Dave Stack

Ha! Now you’re going to hear from Scibetta!

Jim Scibetta

Corey, obviously we talk to all of our research analysts because the investment community does focus on what you guys say in absence of our providing guidance. But beyond that, I will say that your numbers are your numbers and we’re just going to focus internally on execution.

Corey Davis – Jefferies

Great. Thanks for all the time.

Dave Stack

And keep in mind, Corey, that we really would not have gone to orthopedics with the trajectory that the physicians have adopted the product, and I would say that even more so in the spine area. So we do continue to explore with our KOLs and our ad boards different places to use this product and that has at least the potential to have a material impact on the numbers on a quarter-by-quarter basis. So I think we’re better off just focusing on selling as much as we can and making as much as we can, and then the chips will fall where they may.

Corey Davis – Jefferies

Great. Thanks again for the time.

Operator

Thank you, Corey. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone telephone. If your question has been answered, please press star followed by two.

The next question is from Douglas Tsao. Please go ahead, Douglas.

Douglas Tsao – Barclays

Hi, good morning guys. If you could provide a little detail in terms of the timelines for the FDA signing off on Suite C.

Dave Stack

You know, as much as you can with the FDA as far as—you know, this stuff is described fairly specifically, so the process is we have to commission the suite and make sure that it’s working properly, and then make the appropriate stability batches. There are timelines associated with the stability batches that will guide the SNDA process, and then the FDA has four months to approve an SNDA or—it’s not actually an SNDA, it’s SBA-

Jim Scibetta

PAS.

Dave Stack

PAS – I’m sorry, PAS for the new facility. And so there is no such thing as a black and white timeline. We can work in blocks of a month or two, and when you put all that together, you would expect that your best guess is that sometime early in 2014 is when that facility would come online.

Douglas Tsao – Barclays

Okay, great. And then I was just hoping you could provide a little color in terms of operationally what it means that you’ve transitioned the sales force from Quintiles to internal, and how you’re now handling sort of additions and changes from the recruiting standpoint. Is that being done sort of on a contract basis externally, or are you trying to bring that in-house now?

Jim Scibetta

So I’ll just address the beginning of your question, Doug, and then maybe Dave will comment more broadly. So yeah, we did take on the sales force in the end of January, and it was a fairly large endeavor on an operational level. But I think from the outside world, it doesn’t really mean that much. We’re excited that they’re employees and they’re excited to be employees, and we had to do some mechanical things to make sure we could support them at the G&A level with expenses and so forth. But it’s more of a cultural thing from the way you should probably think about it, is that we always said to them that we would at the appropriate time transition them onto our headcount.

So as we go forward, we have full responsibility for managing that sales force and for hiring people to fill voids and so forth.

Dave Stack

Yeah, no that’s right, and we—our HR department, Doug, is doing all the recruiting. I mean, we do use outside resources to supplement their activity, but there is no Quintiles relationship for that.

Douglas Tsao – Barclays

Okay, great. And then just one final question – obviously I know December you saw this sort of surge, especially in plastics, I think you’ve spoken about. Just curious—and I think you confirmed earlier in the call, but how was January relative to December?

Jim Scibetta

Yeah, I think we can comment generally that we’re happy with the progress that we continue to make, but I don’t think it would be appropriate to comment specifically on what transpired in January. We’ll handle obviously all of Q1 in the May earnings call.

Douglas Tsao – Barclays

Okay, great. Thank you.

Operator

Thank you. The next question is from the line of Cliff Murray from Empire Asset Management. Please go ahead.

Cliff Murray – Empire Asset Management

Good morning. I have a few questions. The first one is that your label currently is extremely broad so that reimbursement doesn’t seem to be an issue for off-label utilization. Is that correct?

Dave Stack

We don’t believe that we have any off-label utilization. Our label is for a single dose (inaudible) for post-surgical pain, so we don’t—anything that we talked about today, other than the femoral nerve blocks where we’re doing a formal Phase III program for inclusion into the package insert, is on label.

Cliff Murray – Empire Asset Management

Oh, that’s a great answer, and I appreciate it; and it’s a perfect segue for the next part of my question. So was it really necessary to perform the pivotal trials for TKA and the posterolateral thoracotomy approach? And finally, if you would provide me with a little more color on the potential TAP indication and exactly what trials are ongoing, and when we can expect some data on that. I’m guessing that you’re going to make some sort of application for an additional indication, which doesn’t seem necessary. It’s obviously a promotional asset to have the data. Is that your primary focus?

Dave Stack

Well, there’s a whole bunch of questions in there, so let me see if I can answer them in a way that will make sense. There is, in our view, a significant need/requirement for us to get a formal package insert claim for nerve block. It is currently a contraindication in the package insert, and so there’s two sides to that, and we clearly have significant interest in the medical community on the use of this product in nerve blocks. So keep in mind, Cliff, that today if you wanted to provide several days of coverage for a nerve block, you would put a perineural catheter next to the wound, hook that patient up to a drug source – either bupivacaine or ropivacaine – and then a pump, and you would continually pump the drug up into the nerve area to achieve pain control, and we can get rid of all of that with a single injection of Exparel. So there is a reason to have a nerve block claim for sure, in my view.

Specifically, if you’re talking about an intercostal block, cardiothoracic surgeons and trauma surgeons and people who generally would be putting in chest tubes in various ways to improve the surgical regimen, are very interested in how to control pain, especially in the PAC-U and in this immediate post-surgical environment, where patient respiration is many times impaired by the fact that there is so much pain associated with a chest tube that the patients actually have a delayed recovery profile. So we know from some of our previous work that an intercostal block with bupivacaine is used there fairly often. You don’t need an ultrasound machine because you can put the drug directly on the nerves under direct visual examination, and we can improve the pain profile of patients in that surgical setting, we think that’s a great advance and something that is difficult or impossible to do in an infiltration technique. So that’s sort of the nerve block story, if you will.

On the TAP side, the way the art is practiced today is under ultrasound guidance, you would go in and fill the channel in between the muscle strata of the abdomen and you would fill that channel up with bupivacaine, a true infiltration technique because you are not specifically targeting any one nerve like you would in a femoral nerve block or an intercostal nerve block. And so the issue with that is that while the commissions believe that you can extend the duration of bupivacaine activity from eight hours to 12 to 14 hours, you still have a finite opportunity to control pain and so generally you would wait until a patient awakes from their surgery in pain, and then you would do what they call a rescue TAP and take care of the pain in the post-surgical environment. Because of the improved profile of the duration of action with Exparel, what we want to study is, is it possible that you could provide post-surgical pain control before the patient ever has an incision, and so the patient does not awaken then in pain and require a rescue TAP. We would do the TAP in the pre-surgical environment because the profile here gives us several days of post-surgical pain control.

And so that’s really interesting to the clinicians. It allows you to have a broad opportunity with a pre-surgical procedure to do virtually anything in the abdomen, and from the patient’s perspective, at least based on the early work that we’ve done, having an abdomen that’s numb for several days after a significant surgery is absolutely okay with the patients. And so that will be inside our current label, and we will do the TAP program for a manuscript and largely for our ability to work with the marketplace and determine what the best technique is for the use of the product in that procedure, meaning volume, how do you dilute it, what kind of coverage do we get, those kinds of things.

Cliff Murray – Empire Asset Management

That’s a great answer, and I appreciate it. And if you could just give me a little bit of guidance as to when I can expect to see some of the nerve block data and some of the TAP data?

Dave Stack

So nerve block is enrolling now, Cliff, on both sides, and we’re expecting that these trials will be done either very late this year or early next year. TAP is working its way through the steering committee and the protocols are being commented on by the KOLs in the space, and people are doing a lot of these procedures now, anesthesiologists almost entirely. And so we’re learning from all of their guidance and making sure we answer all of their questions, and we expect that we would kick that trial off in the next few months and, again, have data by the end of the year or very early next year.

Cliff Murray – Empire Asset Management

Okay. I have just one final question, if you will. There are some problems with long-term local anesthesia, most notably the fact that patients won’t be able to report or feel pain that may be associated with an adverse post-surgical event. Surgeons do come by postoperatively and examine the belly of a patient for pain, rebound tenderness, et cetera. So the bottom line is do you see any procedures where Exparel really should not be used?

Dave Stack

In terms of the TAP infiltrations, Cliff, or in general?

Cliff Murray – Empire Asset Management

Well you know, in general. I think it’s a more general question here.

Dave Stack

Yeah, we’re taking our lead largely from the marketplace here. I think that there are procedures where the precise and meticulous nature of the injection technique is critically important, and you’ll see that we’re going very slow there and working with professional resources – you know, our teams of nurses and physicians, et cetera – to make sure that we take those practices and those opportunities on in a very measured way, one practice and one physician at a time. Our experience so far at least is that when clinicians have used this drug, as long as we stay in the bounds of—you know, we don’t have a pediatric claim, we don’t have a nerve block claim, we don’t have an epidural claim. We don’t think that the drug should be used, for example, in an environment of a sinusitis or something like that. I mean, obviously that would be silly. We’ve had people ask us about—how about the pain associated with a pacemaker, et cetera? Even though this drug, the cardiotoxicity profile of this drug is really safe from our perspective and the label states as such, there are clinical areas where common sense just says you wouldn’t use a product that has any potential for upsetting the cardiac rhythm, et cetera.

So there is a few, but in all the places that the drug has been used by clinicians, we haven’t had any experience where somebody has come back to us and said, I don’t think the drug would be used there. Most of the time when the drug—when we’ve cautioned against the use of the drug, it had been places where we have a direct contraindication in the package insert and we don’t have data.

Cliff Murray – Empire Asset Management

That’s great, and congratulations on a great quarter and a great launch.

Dave Stack

Yeah, and I’ll expand that a little bit too, Cliff, if you don’t mind. We think that we have got an IP profile here that extends for many, many years, so we really want to be patient and thoughtful about how we continue to work with the KOLs and the clinicians in the marketplace about additional uses of this drug. So I think you’ll see that the last thing this management team will do will be moved by a quick sales opportunity. I think we’ll be very thoughtful and move very cautiously into areas where we don’t have good data.

Cliff Murray – Empire Asset Management

Thank you very much.

Operator

Thank you. The next question is from the line of Patti Banks from Discern Securities. Please go ahead.

Patti Banks – Discern Securities

Good morning. Just two brief questions. One – Dave, can you talk a little bit about pricing? I know that you’re still in the access phase, but at one point you had said there was some sensitivity initially around maybe the $300 mark. Can you just kind of talk about whether that’s maybe changed a little bit now that the doctors have had the good initial success on the efficacy side with the drug?

Dave Stack

Yeah, so just for everybody, Patti’s reference is when we pre-launched, when we did our pricing studies, on the initial analysis from over 600 doctors and pharmacists, what we heard is that we should price the drug into the $250 range unless we had strong pharmaco-economic data. When we got the health outcomes data and all the opioid sparing data, et cetera, we had sequestered and escrowed that group of people and we went back to them and said, now with this data, what do you think the price point should be? And we got up into the 400’s, with the exception of where a clinician was asked if they would be a champion and take the drug to the formulary committee in their hospital. So in other words, they would use it if it cost $450, but they wouldn’t go fight for it to be approved in the hospital.

So we launched at the $285 price point with the idea that we needed as broad an access opportunity as we could to get to $100 million in net sales as rapidly as we could. Now that we’re publishing all of the data, and you’ve seen the Steve Cohen data, you will see the lap colectomy data, the ileostomy reversal data that is all highly positive, you’ll see the Exclaim data that’s the same thing in plastic surgery and then we’ll start to report on some of the hospital experiences and drug utilization with orthopedics, and all of those things demonstrate that we have savings of several thousand dollars when you use a $285 drug.

So we do see the opportunity to have some increased leverage going forward, but I still think that we’re in the phase of ensuring that we get access and that we have an opportunity to get this product used by as many different clinicians as we can. So I wouldn’t expect anything on the short term, Patti, but a longer term answer to your question is yeah, we think all of the data that’s been assembled here over the last 18 months, as you see it published, will give us a lot more opportunity to take some strategic pricing actions going forward.

Patti Banks – Discern Securities

So if I look at 2013, we shouldn’t necessarily assume a 5% increase in there at this point?

Dave Stack

I wouldn’t assume anything until we continue to visit. One of the other aspects of this, frankly, is as new physicians adopt the drug, we want to let them get comfortable and make sure that we’re on our break-even ’14 scenario that Jim talked about, and then we can talk about how we move against pricing going forward.

Patti Banks – Discern Securities

Okay. And then just one other brief question. I wanted to follow up on the manufacturing. If there is any kind of delay in Suite C coming online, is there any potential problem in meeting demand? And maybe you can remind me what the capacity is of Suite A.

Dave Stack

Yeah, we’ve said many times over the last few weeks and as part of the financing that we’ve got $100 million capacity in A. There is always a chance, depending what the delay at the FDA could be and might be. We don’t foresee any issue there, Patti, but we’re dealing with regulatory agencies and it’s impossible for us to actually put a firm timeline on when they’re going to come in and inspect our facility. If we stay within the bounds of what would be traditional in terms of how the FDA handles these kinds of inspections, there should be no issue.

Jim Scibetta

Yeah, and also Patti, I want to remind everybody that Suite C broadens our capacity and is more efficient, but it is two 45-liter skids fully automated, just like the commercially approved Suite A is a 45-liter semi-automated. It’s the same process, it’s the same product, so from an FDA evaluation perspective this is not a different manufacturing process. It’s the same one at the same scale.

Patti Banks – Discern Securities

Okay, thanks.

Operator

Thank you for your questions. I would now like to turn the call over to Dave Stack for closing remarks.

Dave Stack

Thanks, Catherine. Thank you again for joining us today. We would like to note that coming up we will be presenting at the Barclays Billable Healthcare Conference in Miami on March 13, and we will be attending the Jefferies 2013 Denver Specialty Pharmaceutical Summit on March 21. We appreciate your time and support and look forward to updating you on our progress in the future. Thanks everybody.

Operator

Thank you for joining today’s conference. This concludes the presentation. You may now disconnect and have a very good day.

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Pacira Pharmaceuticals (PCRX): Q4 EPS of -$0.50 misses by $0.08. Revenue of $10.5M beats by $0.6M. (PR)