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Pacira Pharmaceuticals Inc. (NASDAQ:PCRX)

Q4 2013 Earnings Conference Call

February 25, 2014, 9:00 AM ET

Executives

Jessica Cho – IR

Dave Stack – President and CEO

Jim Scibetta – CFO

Taunia Markvicka – SVP and Chief Commercial Officer

Analysts

David Amsellem – Piper Jaffray

Richard Lau – Wedbush Securities

Corey Davis – National Alliance

Douglas Tsao – Barclays

Patti Banks – Discern Securities

Operator

Thank you for joining the Pacira Pharmaceuticals’ Fourth Quarter and Full Year 2013 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 from Pacira Pharmaceuticals. Please go ahead.

Jessica Cho

Thank you and good morning everyone. Welcome to the Pacira fourth quarter and full year 2013 financial results conference call. Joining me on the call today from Pacira are David Stack, President, Chief Executive Officer and Chairman; Jim Scibetta, Senior Vice President and Chief Financial Officer and Taunia Markvicka, Senior Vice President and Chief Commercial 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 including those regarding EXPAREL, Pacira’s plan to expand the indications of EXPAREL including for nerve block and the related timing and success of SNDA, serious plans to evaluate, develop and pursue additional DepoFoam based product candidates, clinical trial in support of an existing or potential DepoFoam based products, production in Suite A and Suite C, approval of Suite C, anticipated fixed cost in gross margins and potential conversion of the company’s convertible debt and other statements containing the words believes, anticipates, plans, expects, and similar expressions constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are based on assumptions that 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 Factors section of Pacira’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and in other filings with the SEC, which are available through the investors and media section of the Pacira website at www.pacira.com or on the SEC website at www.sec.gov.

During the course of this call we will also refer to certain non-GAAP financial measures including adjusted EPS. Definitions of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in the earnings release for the quarter.

And with that, we will hear first from Dave. Dave?

Dave Stack

Thanks, Jessica. Good morning everyone and thank you for joining us today. The primary focus of our call today is EXPAREL, our novel multimodal treatment for post-surgical pain that surgically reduces – significantly reduces the reliance on narcotics and the potential for narcotic-related adverse events.

The first and only long-acting multivesicular liposome local anesthetic for use as a peri- or postsurgical setting, EXPAREL utilizes our proprietary DepoFoam technology that provides local anesthesia throughout the setting two hours.

Characterized by consistent quarter-over-quarter growth, 2013 demonstrated the successful execution of our two-fold commercial launch strategy make and sell EXPAREL. As pre-announced early last month, we record $30.5 million of EXPAREL sales for the fourth quarter, up more than 50% from the third quarter and $76.2 million of EXPAREL sales for the full year, up more than 420% from full year 2012.

We also saw 374 total new customers in the fourth quarter, a 27% increase from the previous quarter which translated to an average of 29 new customers per week.

As of the end of the year, 2106 distinct customers have ordered EXPAREL since launch. While the breadth of new customers adapting EXPAREL contributed to the base of product sales, the vast majority of the business grew out of customers who have had access to EXPAREL for a longer time was approximately 250 hospitals each ordering more than $100,000 worth of EXPAREL.

We believe the numerous intersecting market dynamics influenced this robust fourth quarter. Our customers continued to utilize EXPAREL for an evolving broad range – broad spectrum of procedures with soft tissue surgeries, especially hernia repair, cholecystectomy, Anal/Rectal procedures, Colon

Hysterectomy and Laparotomy surgery constituting the bulk of EXPAREL markets today.

In addition, orthopedic procedures in soft tissue infiltration into the Transversus Abdominus Plane surgery, which importantly widens the EXPAREL audience to anesthesiologists, represented the fast-growing segment of the EXPAREL market. With both new customers and steady growth within existing accounts, we saw the continuing trend of earlier EXPAREL adopters dropping restrictions and new customers gaining formulary approvals without restrictions.

We also continue to see the adoption of the technology within hospitals based on surgeon-to-surgeon word of mouth sharing their experience of how EXPAREL help to improve patient care utilizing a non-narcotic based multi-model pain strategy.

For example, success in cosmetic surgery abdominoplasties and breast augmentation provided the experience in techniques for physicians to expand their use of EXPAREL and reconstruct their procedures. Success in reconstructured procedures is beginning to expand the general urinary reconstructured procedures and surgical oncology.

In the fourth quarter, our procedure-driven quarter, also came with the usual end of year macro factors. December saw patients who had satisfied their deductibles within the calendar year schedule electric procedures, especially prominent in 2013 given the uncertainty in 2014 healthcare coverage based on the Affordable Care Act.

The seasonal trend of plastic surgery peaking during the holiday month was also apparent, so proportionally less impactful when compared to last year’s Q4 due to an increase in EXPAREL procedure volume across a broad range of procedures. As we proceed into 2014, our eighth quarter since launch, we expect that the high surgical procedure quarters will be Q2 and Q4, with the Q4 being the highest procedure opportunity of the calendar year.

To ensure that we continue to educate and train our expanding customer base, we will be increasing the 70 surgical health specialists by kind of 15 additional FTEs this year and again in 2015 capping it approximately 100 FTEs. In response to customers’ acute care demand for specialized clinical expertise and best practice transfer needed to maximize the benefits of EXPAREL per procedure type, we will also increase the scientific and medical care’s team of 40 nurses pharmacies and physicians to 50 to 55 over the next two years.

This clinical education team also works together with our promotional partner in orthopedics and science CrossLink Life Science which acts as a general contractor for several hundred orthopedic representatives in strategically selected territories across the country.

In 2014, we see our customers remaining interested in learning best practice with EXPAREL, specifically the dose volume timing of infiltration and technique of use. All of which are critically important especially in orthopedics and spine surgery. Our emphasis will remain on education for different procedures to ensure patient safety and optimal outcomes.

We have a strong emphasis on using EXPAREL in procedures known to be highly dependent on heavy narcotic burden to achieve pain control. For example, in spine fusions or laminectomies, we have developed with our customers the technique that demonstrate meaningful outcomes and our clinical and education resources transfer this knowledge and experience to others.

During the fourth quarter, further clinical evidence showing EXPAREL utility was provided through both our own Phase four studies as well as several independent non-Pacira sponsored studies across orthopedics, pediatrics, plastic, colorectal and neurology in anesthesia specialties just to name a few.

In the last few weeks, we published a review of compatible drug products in commonly used implant materials that can be used together with EXPAREL. We anticipate this manuscript will be a great resource to surgeons and anesthesiologists who may want to know the effects of administering EXPAREL contemporaneously with – cortical steroids antibiotics and saves transysemic acid and opiods as well as a number of commonly used surgical implant materials.

Additionally, data was presented by Dr. Dr. Andras Sandor from Lawrence Memorial Hospital in Medford Massachusetts at the 2013 American Society of Metabolic and Bariatric Surgery Meeting in November showing our EXPAREL infiltration into the transverse abdominal pain during bariatric surgery allows for total elimination of PCA in these patients and a 60% reduction in narcotic use at the end of post-op day two support the poster generally these patients experienced a smoother recovery and reported overall increased satisfaction with the hospital care.

We have also been speaking with hospital CEOs who understand the impact of HCAPs at CMS program, where total hospital reimbursement is governed by patient satisfaction. The interest level in EXPAREL is high with these hospital executive customers since pain is the only clinical area currently addressed in the HCAPs patient satisfaction questionnaire. For this reason, you can expect to see a continued focus on patient satisfaction as we build the EXPAREL brand.

Looking ahead to the next couple of months, we expect new data and a number of new publications and abstracts to be presented at upcoming national congresses all of which add to the growing body of work supporting news of EXPAREL.

In March and April, we anticipate presenting data at the American Academy of Orthopedic Surgery where we have a symposium as well as a podium and poster presentation on the use of EXPAREL in total joint arthroplasty and specifically in total knee arthroplasty.

The American Hernia Society with a podium presentation assessing inguinal hernia repair patients who receive EXPAREL versus the standard of care, the Association of Association of Perioperative Registered Nurses where we will present a risk where model to identify high-risk patients pre-disposed to opioid related adverse events in addition to the resulting negative hospital economics such as longer hospital length of stay, higher readmission rates and greater hospitalization costs.

The American Society of Regional Anesthesia where we will have six posters both Pacira sponsored initiatives and independent programs on both nerve block and TAP infiltration datasets. The Plastic Surgery and Research Council where a podium presentation will show the use of EXPAREL as part of an enhanced recovery pathway and patients undergoing breast reconstruction at the Mayo Clinic.

The Society of Gynecologic Oncology where a presentation on EXPAREL in TAP infiltration and robotic assisted hysterectomy procedures, looks at pain scores, the use of narcotics length of stay and post-op nausea and the International Society for Minimally Invasive Cardio Thoracic Surgery, a poster entitled Liposome Bupivacaine and the management of early preoperative cardiac surgery impact of a novel longer-acting local anesthetic agent. This presentation is the first reported use of EXPAREL in cardio thoracic surgery.

We continue to see a significant number of datasets available from investigator IND-driven trials being done without Pacira participation, demonstrating the intense interest in the medical community to reduce narcotics and improve patient care.

In the second quarter since launch, our daily interaction with healthcare providers continues to confirm that EXPAREL is a blockbuster platform for post-surgical pain management. We also see this demonstrated in published case studies, where clinicians are addressing real-world patient care issues.

For instance, a recent independent case report published in the Journal of Medical Case Reports, evaluated EXPAREL as part of a multimodal regimen in an obese woman with chronic pain and multiple co-morbidity who receive laparoscopic sleeve gastrectomy surgery.

Following surgery, the patient had no adverse events and was discharged on the same opioid regimen she used before surgery to control her pre-existing chronic pain. Another case study recently published in pain medicine, assess the patient undergoing an emergency laparoscopic cholecystectomy with hernia mesh repair from a previous surgery.

After reporting a pain score of 8 out of 10 in the TAP queue that was administered to control her postsurgical pain approved inadequate. After receiving a rescue TAP infiltration with EXPAREL, her pain score dropped to 2 out of 10.

In addition, over the next several weeks, we expect to receive data from our pivotal Phase III femoral nerve block study in total knee arthroplasty. Assuming all goes well, we anticipate being on track for an SNDA submission in Q2 for a nerve block indication.

As you all know, we are the only manufacturer of multivesicular liposomes, our delivery technology DepoFoam with no present generic competition inside. With strong franchise protection in place, we have begun to look at the next stage of growth internally to evaluate further opportunities for EXPAREL in response to customer feedback, increasingly in applications we hadn’t previously considered.

For 2014, we intend to further define a specific procedure opportunities to reduce narcotics and improve patient care and patient satisfaction with additional TAP infiltration procedures for abdominal surgery, our pharmacokinetic initiative to provide information on pharmacokinetics associated with repeat dosing in a second dose trial, additional Phase IV nerve block trials to provide additional information and support our planned launch into this indication, initiate a chronic toxicology program and our Phase IV approval commitment for a pediatric trial in these pediatric population.

Since our April 2012 commercial launch, we have come a long way in developing EXPAREL brand through clinical trials commercial initiatives and strategic partnerships not only broadening the use of EXPAREL across specialties and procedures, but also providing adequate access and resources to key hospital and ambulatory surgery audiences, all with an eye towards patient satisfaction.

With EXPAREL effectively launched, we are turning an eye towards additional DepoFoam based pipeline assets. Our first candidate will be a DepoNSAID, we are currently working through the next steps for manufacturing a clinical development.

We look forward to providing an update on these activities over the next few quarters. With that, I will turn the call over to Jim for a review of the fourth quarter and full year financials as well as an update on manufacturing. Jim?

Jim Scibetta

Thanks, Dave and good morning everyone. I’ll briefly cover three topics as Dave alluded to. First, the financial results for the recent quarter and year-ending December 31, second an update on our manufacturing capacity and third our financial outlook for 2014 and beyond.

Obviously, the outstanding EXPAREL revenue growth in Q4 speaks loudly for itself, in terms of total revenues, we reported $33.6 million in the quarter, and $85.6 million for the full year. We continue to caution against relying on the monthly EXPAREL sales estimates released by the Data Tracking Services which showed distorted trends and lead to incorrect conclusions.

You've heard us reiterate this statement every quarter since launch, but this assessment was particularly pronounced in Q4 and was a primary factor in our decision to preannounce EXPAREL revenue in order to provide the investment community with accurate information. While we don’t report monthly sales and we don’t intend to do so going forward, we can confirm that the estimated October EXPAREL sales numbers reported by the Tracking Services was materially misleading.

Gross margin for the quarter, for the company, increased to 43%. Today, all EXPAREL sales are relate to product manufactured and what we refer to as Suite A and product made and sold that is Suite A alone, the gross margin in the quarter was 50%. The differences related to DepoCyt(e) revenue and costs, as well as expenses incurred in our new manufacturing suite, Suite C, which has been put in place and is generating operating expenses including depreciation, although that activity in Q4 was expense rather than capitalized in the inventory.

As for our other operating expenses, our $4.8 million of R&D reflects a couple million for the pivotal nerve block studies, a little more than $1 million for stock-based comp and the rest for the clinical and product development staff and ancillary activities. Our $20.2 million SG&A expenses are comprised of $13.9 million of selling costs, a $3.9 million q-over-quarter increase reflecting additional scientific affairs staffing and commissions to our ortho partner CrossLink.

And $6.3 million of G&A, a modest increase from the previous quarter reflecting company growth.

Non-GAAP net loss for the quarter was $7.6 million or $0.23 a share after deducting $1 million of non-cash debt discount amortization related to our convertible debt and $3.3 million of non-cash stock-based compensation. We haven't done an annual stock-option grant to all employees since 2012, so these additional expenses are ironically a consequence of a materially higher stock price employed in the Black Scholes calculation for vesting options and new employee grants.

Cash used from operations was a little more than $6 million for the quarter along with $3.4 million of CapEx. We ended the quarter with approximately $74 million of cash and as of December 31, 2013, we had 33.6 million basic shares of common stock outstanding.

Before addressing the financial outlook for 2014, let me first update you on key issues related to our manufacturing capacity. As a reminder, we filed a prior approval supplement or PAS in December, seeking approval for the additional EXPAREL manufacturing suite, Suite C in our Science Center Campus in San Diego. The two identical and fully automated manufacturing skids contained in Suite C will allow us to increase our capacity from today’s $100 million plus level to over $400 million when approved and operating at full capacity.

The PDUFA date for Suite C is April 5, and we believe we are very much on schedule to receive approval on or before that date. With our 24/7 manufacturing as 2014 fully dedicated to the mission to improve patient care, our Suite A production in VAT release performance has been quite robust in recent months. And in addition, we are now making EXPAREL batches in Suite C, that are available for commercial marketplace upon approval.

So I just wanted to provide some reassurance that in spite of our unexpectedly strong sales, we believe that we have successfully bridged our anticipated EXPAREL supply requirements beyond the Suite C PDUFA date.

Finally, with regard to our financial outlook for 2014 and beyond, we continue to believe that if we focus on providing value to patients and customers in the marketplace, then we’ll generate shareholder value. So first and foremost, we will endeavor to maximize the value of the EXPAREL brand in 2014 and sales expansion in manufacturing productivity.

In addition, we will seek to identify and invest in the next generation of value-driving activities, principally, one, the additional opportunities for EXPAREL in nerve block and beyond, two, additional manufacturing capacity beyond the $400 million plus capacity potential at the Science Center Campus and three, pipeline products that leverage both our proprietary capabilities developed, products encapsulated in multivesicular liposomes and what we believe is our distinct knowledge in network advantage in evaluating commercial opportunities in the acute care space.

Consistent with our previous gross margin guidance, as revenue increases and leverages are mostly fixed cost manufacturing infrastructure of $50 million to $60 million along with 10% variable cost per unit manufactured, we expect EXPAREL gross margins to ultimately fall in the range of 75% to 80%, once Suite A and Suite C are both producing at full scale.

Specific to 2014, we expect gross margins to continue to trend upward quarter-by-quarter and what we don’t expect to reach that peak in 2014, we do expect EXPAREL gross margins to surpass 60% by the end of 2014.

We are also currently closing in on becoming profitable and cash flow positive, we expect to achieve both of these milestones no later than the second half of 2014 and with our current cash balance, we believe we have sufficient resources on hand to surpass the cash flow positive milestone.

As of December 31, we have NOL balance of $286 million, so we don’t expect to pay cash taxes this year. Please note that when I reported non-GAAP net income becomes a positive number, the calculation on non-GAAP earnings per share we utilize in the denominator, our fully diluted share count using the treasury method.

As of December 31, 2013, that number is 38.6 million shares consisting of the 33.6 million basic shares, 2.8 million shares representing the contingent conversion value of our convertible debt in excess of the principal amount and 2.2 million shares for options and warrants.

So while 2014 is the year we expect to crossover to profitability, which of course is a very significant milestone, our main focus remains on executing on our business activities and milestones as noted above and which we expect will result in a generation of significant cash flow and EPS in 2015 and beyond.

I will now turn the call back over to Dave.

Dave Stack

Thank you, Jim. Nicole?

Question-and-Answer Session

Operator

Thank you (Operator Instructions) Our first question comes from the line of David Amsellem of Piper Jaffray. Your line is now open.

David Amsellem – Piper Jaffray

Thanks, just a couple. So, first on the manufacturing, I just wanted to pose a hypothetical and if there is any major delay in approval, can you give us a sense of how many months of excess inventory you have on hand where that would enable you to meet demand? And then I have a couple follow-ups, thanks.

Dave Stack

Yes, thanks, David. So, you know, as I said earlier, we are quite confident that we will get approval on the timeframe. And we’ve been producing well on Suite A. We’ve talked about $100 million being the – roughly the number that we can produce in Suite A and frankly that includes periods of scheduled shutdown during the year which obviously were not in. So, we are continuing to go a lot in Suite A and we are quite comfortable with where we are from an inventory perspective.

I guess we need to get the Suite C approved eventually and on the timeframe to continue to meet the growing demand, but we are pretty comfortable with where we are.

Jim Scibetta

Yes, David there is no point in us putting a number in the marketplace then if there is any changes we’ve got ourselves in advantage situation, the best way for us to handle this is just to allow everybody know that we are very comfortable that we’ve got enough inventory to get to the PDUFA date and beyond.

David Amsellem – Piper Jaffray

Okay. That’s helpful and then, switching gears towards nerve block, can you just remind us how you are thinking about the expansion in terms of – how do you think about the dollar amounts of the opportunity? I mean, you talked about peak sales for the EXPAREL franchise, potentially near $1 billion, how much of that do you think would be nerve block if any?

And then secondly, on these building outs, with this as and evaluating other opportunities where does the business develop and looking at acquisition opportunities that leverages your sales organization, where does that fit into the mix? Thanks.

Dave Stack

Thanks, David. So, three things, I think just to restate – we’ve got, I mean, we are expecting that we are going to have a positive outcome with the nerve block trial, but we believe that this is a significant product by itself with infiltration. We do think that nerve block is important for a couple of reasons.

The anesthesiologists typically use bupivacaine in their daily practice as a standard of care and so, you know there is a significant market opportunity all in its own right, at least in the numbers just they are currently constituted, David, nerve block is not as big infiltration, but it is a significant opportunity all in its own.

I freeze it that way, because I think the real value of getting nerve block to us is that there are a number of regional anesthesia opportunities where physicians are treating pain and frankly don’t have a real conscious understanding of what’s an infiltration and what’s a nerve block et cetera.

Having a nerve block indication for us will allow us to have discussions with those folks that are much more strategic in nature and we won’t have to be worried about the package insert in any issues around having infiltration and not having nerve block. We can have more strategic discussions about just playing taking care of a patient’s pain.

So from a strategy perspective, it’s important to us and adds to the overall cache of the brand as well as the dollars if you will. And then lastly, your question on total opportunity, you would expect that we are thinking differently about these things as we launched EXPAREL and we come out the other side of this and we can see profitability.

We routinely look at product opportunities, I would say that as Jim outlined, our first order business is to maximize EXPAREL and as we said during the call, there is a number of opportunities to do that not only through nerve block, but also with the institution of a product pain toxicology program et cetera. So we think EXPAREL itself has a long way to go.

We will always have a bias towards DepoFoam based products just because of the active profile and our ability to manufacture these products and we think we have a very significant proprietary position in the marketplace. But at the same time, we do look at BD opportunities, I would say it’s safe to say that we haven’t seen anything yet that convinces us that the lost opportunity cost against EXPAREL is worthy of us taking on anything additional, but that doesn’t mean we are not looking and we wouldn’t do that if the right opportunity came along.

David Amsellem – Piper Jaffray

All right, thanks, Dave.

Dave Stack

Thanks, David.

Operator

Thank you. Our next question comes from the line of Richard Lau of Wedbush Securities. Your line is now open.

Richard Lau – Wedbush Securities

Good morning guys.

Dave Stack

Good morning, Richard.

Richard Lau – Wedbush Securities

So, the first question I guess is, you guys are still adding new customers at pretty good cliff here and I had actually thought that it might come down over time as just because you guys would have less customers to target. So maybe if you can talk a little bit about what’s driving all these new customer adds?

Dave Stack

Yes, I think, the biggest piece of it Richard honestly is still word of mouth and people at major centers who are having real success with the product and, the medical groups that go into a lot of different places, not only smaller hospitals, but ambulatory surgery centers and different places where they might practice a day or week or half-a-day or week or the influence model is clearly working in that regard.

I would have to tell you that to be completely candid we are a little bit surprised that that number as well to be perfectly honest with you and I think as we look forward, and I’ve asked Taunia to comment here on a second if she has got anything that adds to this as well.

But as we look out and we see nerve block and we see the possibility of other opportunities to move in the ambulatory setting, where people have been trained in the hospital environment and we are in an environment where people are trying to move these patients from an in-patient opportunity to an outpatient opportunity. We think we might actually continue to see this over the next year especially if we are lucky enough to get the nerve block indication.

Taunia Markvicka

Yes, I would also Dave that, one of the things we are seeing is physicians that are training in centers where EXPAREL has had a history of utilization. They are now going into practice in other medical facilities and taking that experience with them and therefore pushing the adoption into these other facilities that have been slower to adopt the products.

And you’ll see some of our data coming out in the hysterectomy phase, really reinforcing what Dave mentioned about taking these procedures from historically being an in-patient procedure into an ambulatory setting and patients being able to successfully go home and recover after their surgery versus being held in the hospital setting. So you’ll see that continue to drive our ambulatory efforts as well.

Richard Lau – Wedbush Securities

Okay, great. Good to hear. And then, one last question is, you mentioned doing exploring new areas with chronic tox package and repeat dosing. So I was wondering if you can maybe go into a little bit more detail about that market opportunity and what surgery types that’s currently being used and where it might see that being beneficial?

Dave Stack

Yes, we really don’t know much about it yet. We are just putting some add ports together. Some of the initial discussions came from folks and some of the combat area is frankly where you know there was a desire to be able to use the second dose largely around transfer the ability to get somebody from a battlefield to a triage hospital and then from a triage hospital to a more official medical treatment center.

That sort of got us thinking in that direction and now we are getting significant input from the marketplace regarding different areas where they would like to see some support from the company in terms of repeat dosing. So, again to be completely candid, our chronic tox package in this scenario will take a couple of years and so, we are starting the chronic tox package now.

I can’t tell you that we’ve got a solid formed idea about what we are going to do with that once we get it. So we figure the market is changing so fast, that even if we did, it probably wouldn’t hold up over the next two years. So we are going to get the background support of a chronic tox package and then we will do a lot more work to specifically identify what the opportunities are inside of that as we get closer to being able to do some of that work.

Richard Lau – Wedbush Securities

Yes, thanks very much. Thanks for taking my question.

Dave Stack

Thanks, Richard. Thanks for your help.

Operator

Thank you. Our next question comes from the line of Douglas Tsao of Barclays. Your line is now open.

Douglas Tsao – Barclays

Hi good morning. Jim and Dave, I was just curious in terms of the capacity expansion, have you already had an FDA inspection as part of the DAS process?

Dave Stack

So, the – just for everybody’s knowledge base, it’s a four months process for the PDUFA goal and it does have both an inspection component of it and sort of the Washington review of the actual filing of the information in it. And we don’t think it’s particularly constructive to provide details of sub-components of the overall process in terms of our activity, but I can very much confirm what I said earlier which is, we have an April 5 PDUFA date and we think we are very much on schedule with receiving approval by that.

Douglas Tsao – Barclays

Okay, and then, when we think about the adoption right now, we’ve obviously seen in recent months a lot of strength from orthopedics as well as ITAP, when you think about the key drivers for adoption in 2014, are those going to be the sort of key focus areas or do you see right now, new indications sort of in the same place where ortho and ITAP were at this time last year meaning ones that are relatively small there really growing like a weed?

Dave Stack

No, I think, a little bit of a broader answer maybe Doug, so, we continue – the soft tissues remains today the majority of our business and TAP infiltrations are embedded inside of soft tissue. So, we do see TAP infiltrations as being important for two reasons. One is, it gives us a place where several days of pain control in the abdominal area really separates us and gives us the unique selling opportunity in the marketplace.

But it also gives us an opportunity to interact with anesthesia in advance of getting a nerve block indication since most of those procedures are done by anesthesiologists. So, TAP infiltrations in terms of not only EXPAREL being used, but it is a relatively new procedure.

So we are working with a lot of the folks in the education space in training physicians and their teams how to do appropriate TAP infiltrations with ultrasound guidance. So, it is a fairly broad initiative. Doug, it is, when you talk about orthopedics.

And I know you know a lot about orthopedics and where we are, it is still growing the fastest and really interesting to us because we’ve got a reasonable market share and these – but what we see in orthopedics is, a formal initiative in spine is now leading to what we believe is growing use there and then once you get into spine then you start to see trauma surgeons start to use the product.

So, while the more advanced orthopedic indications are leading the charge if you will inside orthopedics, you continue to see a lot of growth and so I think that those two will remain the major focus for this year largely because of the stature of those surgical groups inside the hospital.

It makes it easier for us to get in the hospital if we can train those high-end customers on the appropriate use of the product, things go more smoothly in terms of adoption across a broader spectrum and that’s – and so we sort of get into soft tissue in a different kind of way. But those two lead the way and that will be the key components of this year.

Douglas Tsao – Barclays

Okay, and then you made a comment in the prepared remarks that the seasonality or the seasonal strength in the fourth quarter that you typically see with electric procedures although you did note that plastics was not a huge driver this year, bigger driver this year, on a percentage proportional basis.

Just curious how you are thinking or perceptive going into the first quarter, because typically we see in the third quarter some seasonal softness although – just given where you are in terms of your launch you were able to go through that this past year. So, how should we be thinking about some sequential trend going into the – into 1Q? Thank you very much.

Dave Stack

Thank you, Doug. I think, we just like everybody else. I mean, this is only our second – first quarter of being on the market, so we’ve got to run that trend line. So we are a little bit dangerous in this regard. But what you are hearing from others is pretty much what we are seeing as well.

There is some disruption in the marketplace from the affordable care act and we do have people that call looking for free drug because they’ve got patients who can’t find anybody that will take their insurance. We have not seen a lot of that previously and so there is a dislocation and we’ve had some weather issues. There is no doubt that when the City of Atlanta closes down, that doesn’t do us any good.

Now, how much of it is hurt and how many of those electric procedures are done in the next week and stuff, I think generally Doug, we are doing fine and we are satisfied with where we are. We just don’t have a lot to compare ourselves to and it’s what I am hearing in the marketplace about some of the issues people are facing. We don’t seem that we have any of those same issues at least to – adequate to any degree that we would be worried about.

Douglas Tsao – Barclays

Okay, great. Thank you very much.

Dave Stack

Thanks.

Operator

Thank you. Our next question comes from the line of Corey Davis of National Alliance. Your line is now open.

Corey Davis – National Alliance

Thanks very much. Just to follow on that last comment that you made and ask if you are ready to predict whether or not you think Q1 will be up sequentially over Q4 for EXPAREL sales?

Dave Stack

Yes, Corey, we’ve never given any guidance Corey, and there is no point in starting now. I think the best way for us to handle it is just to say that the brand is doing fine and we continue to grow both the ways with new customers as well as use within our existing accounts and quarter-on-quarter we continue to see all the metrics grow strongly and we are pretty confident on the future of EXPAREL.

Corey Davis – National Alliance

Thanks. Next question is, how would you characterize the quality of your sales force right now, given the need to move into more complex new techniques even in advance of the formal nerve block indication, is there a need to make new hires to augment the current existing sales force and what does that mean about directionality of SG&A in 2014 and 2015?

Dave Stack

Yes, I think, we’ve got – I think that, well, let me answer your question very specifically. Not only our sales force, but our commercial organization you can have whoever else you want I’ll take us.

I think we are as good as anybody in the industry and I think our folks are in terrific spot to be able to do what’s required to make sure that patients get the best available care. Just to remind everybody, we’ve got a little over 40 nurses, pharmacists, physicians out there now and their primary responsibility is best practice transfer and specifically techniques in some of these very technique-heavy areas.

We will increase that a little bit as we continue to get more customers and our folks are driven into more places. But I think substantially we can do what we need to do this year with what we’ve got out there now. In terms of our field organization Corey, we’ve got, I think a good mix of the leadership that’s required from folks that have been around for a while.

And some of the newer folks that have come in with very specific expertise in some of the device areas and some of the areas where we might have been a little bit soft a year ago. And so, I think right now we are in really good shape.

Jim Scibetta

And, Corey, let me just add to that too, that, our selling line went from $10 million to $13.9 million Q3 to Q4 and Dave talked about how in 2013 there was a big initiative to increase our staff which mostly has taken place. So, in terms of the SG&A going forward, we talked about 10 to 15 reps a year and very modest growth in that scientific better step but it’s mostly been built out today.

Corey Davis – National Alliance

Okay. When we first started this, there is a huge emphasis on opioid reduction and cost savings, but now that the drugs been out there as far as long as it has and the feedback is that use the drug just really works really well, where does that opioid reduction get in the overall schematic of selling points that resonate with new accounts?

Dave Stack

It’s the whole. I mean, it’s the story, Corey, and it remains the story.

Corey Davis – National Alliance

So, is it still important part of the …

Dave Stack

It is it, I will go to T in a minute here, but when you think about all the different ways that physicians who are using the drug, they all have their own sponsors. For a spine surgeon, it may be patients are backing up in the pack queue for an orthopedic surgeon, it may be time to first ambulation and preventing false, for a colorectal surgeon, now it might be time to first ball movement and those kinds, but they – when you come back to the root, everything is related to finding care pathways to allow us to treat those patients’ pain with fewer narcotics.

So, everything that we do we’re focusing now on patient satisfaction – it’s a reimbursement driver through wage caps and it allows us to sell into the C Suite. But everything we do in one form or another is related to our ability to control pain with fewer narcotics.

Taunia Markvicka

Yes, and I’ll just add to that Dave, we’ve been having a number of discussions with quality C Suite folks at various institutions and clearly they are recognizing the benefit of the active pain control with less opioid leading to enhanced recovery, improvements in patient care which obviously economic benefits to that. So that’s clearly the story. It starts with our product at the foundation and then being able to deliver on the promise of an enhanced recovery.

Corey Davis – National Alliance

And if there is overseeing, – welcome on the questions, last one would be, now that you are on a quarterly run rate that annualizes north of $100 million, how much do your customers think about that in capacity and potential for disaster scenario although unlikely that you run out a product for them? Or is that mainly just something that you are concerned about and they don’t think about it all? Obviously, what I am getting towards is, Q1 softness just holding back a little bit and do you actually get that approval and then factoring?

Dave Stack

Yes, it’s funny. Right, it is something that you guys worry a lot more about than anybody in that clinical marketplace does to be completely honest to get. The only time that I ever hear, again, I’ll let Taunia comment about it, comment as well is, if you are going to go to a formulary approval process or if you are going to educate for a large system where there is a considerable commitment on their time to changing nursing mode from change the pain protocol and changing the standing orders in the ICU et cetera.

Every once in a while, you will have a direct your promise you say only because there ought to be bupivacaine or out of so many drugs now. So, say to us, you guys have got plenty, so then if I go through this, you are not going to tell me you can’t make it right, but it’s never in a scenario where anybody is worried about our ability to supply relative to patient care. It’s more an investment in resources, et cetera at the time.

Corey Davis – National Alliance

Okay, and I’ll add one more, any flexibility to raise price or not there yet?

Dave Stack

Yes, no, I think we do – Corey, you know, I mean, there will be a day for sure, we are still looking, I’ll go back to Richard Lau’s question, we still got these – between 25 and 30 new customers every week and we want to make sure that we allow maximum access. We think that’s the key to getting this to be a very big product. And so, we are doing primary market research all the time trying to discern what is the point when the marketplace will accept the higher price, but we can still expect this expansion that we keep going through on a monthly basis.

Corey Davis – National Alliance

Okay, great. Thanks, and I know you pre-announced, but congrats on a great quarter.

Dave Stack

Thanks, Corey.

Jim Scibetta

Thanks, Corey.

Operator

Thank you. Our next question comes from the line of Patti Bank, DISCERN Securities. Your line is now open.

Patti Bank – DISCERN Securities

Good morning. Just following up on price. How much is that linked to Suite C approval? And then also kind of along with that, any update on discounting with EXPAREL, is there any?

Dave Stack

There is virtually no discounting of EXPAREL today. Well, we haven’t bought our way in any place if that’s the reference point for the question, Patti. And, I think you see in our gross to net we are giving – we’ve just got the standard returns and those kinds of things, 2% prop pays et cetera. In terms of pricing in Suite C, it doesn’t really have anything to do with Suite C.

In fact, it’s probably inversely proportional actually if we were going to raise the price to try to damp the demand, we would have done that already. I think we see Suite C more as an opportunity to be more aggressive and support the nerve block indication and all the other initiatives that we’ve got going on, especially all the meetings and all the congresses we are going at.

When you see the abstracts that come out at the American Academy of Orthopedic Surgery and at ASRA for example, you will see some astonishing stuff and it will be pretty good to get Suite C approved before all that good data comes out.

Patti Bank – DISCERN Securities

And then just one more question, any thoughts on – with now on with Mallinckrod soon to be in the market now, could that an indifferent just if you think that will expand the market or any change there?

Dave Stack

I’ll be true to my mother, raising me the right way and say if I don’t have anything good to say, I'm not going to say anything.

Patti Bank – DISCERN Securities

Okay. And then another topic that you might not have anything to say, but, on visibility with the prescription data and whether that we should see any changes there with them becoming more accurate, is there any hope for that this year?

Dave Stack

I have – let me go back on my last statement Patti, just for a second and I just thought everybody understands that we don’t view affirm as – is anything but, compatible and we think EXPAREL and affirm that frankly is the way to achieve a multimodal pain strategy and we do so opioid.

So we don’t see us being competitive at all. We liked working with the cadence guys and we just don’t know what level of emphasis that’s going to get in a new environment which is why I answered the question the way I did.

Right, I just want to make sure people don’t think that we think we are on a competitive situation with Mallinckrod the quite the opposite. In terms of the tracking agencies, I have no idea. You know, you are probably right, I shouldn’t say anything, but it’s astonishing to me that anybody could be that bad it sounds.

Patti Bank – DISCERN Securities

Okay. And then my question for asking that Mallinckrod was more just whether you think that could help a situation with a bigger voice or not. So…

Dave Stack

I just – I have…

Patti Bank – DISCERN Securities

I guess, we don’t know at this point.

Dave Stack

Yes, I have no information at all Patti. I would just be guessing.

Patti Bank – DISCERN Securities

Okay, thanks.

Dave Stack

All right.

Operator

Thank you and I am showing no further questions in the queue and now I would like to hand the call back over to Dave Stack for any closing remarks.

Dave Stack

Thanks for joining us today everybody. We look forward updating you on EXPAREL as we go forward here. We also like to note that coming up we’ll be presenting at the Barclays Global Healthcare Conference in Miami on March 13. All right, thank you very much for your time.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may disconnect. Have a great day everyone.

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