Pacira Pharmaceuticals' CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: Pacira Pharmaceuticals, (PCRX)

Pacira Pharmaceuticals, Inc. (NASDAQ:PCRX)

Q1 2014 Results Earnings Conference Call

May 01, 2014, 09:00 AM ET

Executives

Jessica Cho - IR

Dave Stack - President, CEO and Chairman

James S. Scibetta - SVP and CFO

Analysts

David Amsellem – Piper Jaffray

Douglas Tsao – Barclays

Corey Davis – National Alliance

Patti Banks – Discern Securities

Operator

Thank you for joining Pacira Pharmaceuticals’ First Quarter 2014 Financial Results Conference Call. At this time all participants are in a listen-only mode. Following the formal remarks Pacira 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. Joining me on the call today from Pacira are Dave Stack, President, Chief Executive Officer and Chairman; and Jim Scibetta, Senior Vice President and 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, including those regarding EXPAREL, Pacira’s plan to expand the indications of EXPAREL, including for nerve block and the related timing and success of an SNDA, Pacira's plans to evaluate, develop and pursue additional DepoFoam based product candidates, clinical trials in support of an existing or potential DepoFoam-based products, production in Suite A and Suite C, our manufacturing relationship with Patheon, anticipated fixed cost and gross margins 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 Reports 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, Jess. Good morning everyone and thank you for joining us today. The primary focus of today's call is EXPAREL, the first and only long-acting multivesicular liposome local anesthetic for use in the peri- or postsurgical setting. EXPAREL utilizes our proprietary DepoFoam technology that provides local anesthesia for up to 72 hours acting as the foundation for a multi-modal postsurgical pain management strategy that significantly reduces the use of narcotics and narcotic-related adverse effects.

Coming off seven successful quarters of EXPAREL sales at the end of 2013 we prioritized not only making and selling EXPAREL in the first quarter but also putting in place the ground work needed to meet the marketplace demand that we expect over the next several years. Jim will discuss in his remarks the approved and planned production capacity expansion for EXPAREL as-well-as the related capital raise through a public offering but let me begin by providing the commercial perspective.

As pre-announced in April we reported $34.4 million EXPAREL sales in the first quarter, up 13% from the previous quarter. For Q1 we continue to see our base business increase to 346 new accounts ordering an average of 27 new customers per week. As of March 31, 2014 our total is 2,452 distinct customers have ordered since launch with approximately 330 accounts ordering more than $100,000 worth of EXPAREL.

Quarter-over-quarter growth is impressive given the 53% growth in Q4, 2013 over Q3, 2013. Recall that we have discussed during the last earnings call the need to understand the market driven surgical procedure dynamics for the first quarter of 2014 due to year-end seasonality. Patients who satisfy their annual deductible move to have elective surgical procedures done in Q4. In 2013 this market driver was exacerbated by the uncertainty around the Affordable Care Act.

What we did not foresee in Q1 were hospital closings and delays as a result of a particularly harsh winter, which especially impacted several markets in the southeast where we're particularly strong. Overall we expect to gain market share in each quarter going forward. In Q1 and Q3 we anticipate growth will be primarily from incremental growth and in Q2 and Q4 the high procedural volume quarters we forecast a benefit from incremental share as-well-as procedural volume growth.

The steady growth trajectory of EXPAREL sales in the first quarter was bolstered by several persisting trends. The majority of EXPAREL revenue remains in the soft tissue procedures but with orthopedic surgeries and trans versus abdominal plane infiltration procedures remaining the fastest growing market segments.

Coupled with increasing awareness about the benefits of narcotic reducing treatment strategies where we have surgeons, anesthesiologists and nurses sharing their experiences with EXPAREL resulting in early adopters removing restrictions and new adopters gaining formulary access without restrictions. In soft tissue beyond the early adoption in gastrointestinal and gastro urinary procedures users continue to grow in cosmetic surgery procedures such as abdominoplasty and success in these typical procedures has widened to oncology and cosmetic reconstruction a large and important market opportunity.

In orthopedic surgeries we see the base growing from hips and knees to include hand and wrist, shoulder, foot and ankle, spine, fracture and more recently trauma. In order to properly educate and train this diverse and growing customer base we plan to increase our 70 surgical accounts specialists by roughly 15 fold during this year and next with approximately a 100 hospital specialists by the end of 2015. Our clinical and scientific affairs team of 45 nurses, PharmD's and physicians will provide the hands on clinical technique and best practice expertise and institutional training require to experience the maximum benefits of EXPAREL for each procedure type will rise to approximately 60 by the end of 2015.

We see these resources as unique strategic assets which are atypical to our industry but specialized high-end geographically dispersed team of healthcare professionals to provide local education and training to our healthcare customers is critical to long-term success of EXPAREL and Pacira.

Our customers want to learn not only best practice with EXPAREL but specific dose, volume, timing and infiltration technique but also how they can expect to improve patient care and hospital economics with the reduced narcotics strategy.

Earlier this year we added to our growing volume of clinical evidence both sponsored and non-sponsored data through a combination of publications and presentation given at key national congresses. An independent study laid by Dr. Sandor from Hallmark Health Center for weight management and weight loss surgery in Medford, Massachusetts reporting TAP infiltration with EXPAREL in 90 patient undergoing laparoscopic pediatric surgery the population particularly vulnerable to narcotic related adverse events.

In contrast to the control groups the EXPAREL arm eliminated the use of more PMPCA pumps and saw roughly a 60% in reduction in narcotic use at the end of post-op day two and generally a smoother recovery and reported overall increased satisfaction with the hospital care.

The data on EXPAREL via TAP infiltration is reinforced by data presented at the 39th Annual Meeting of the American Society for Regional Anesthesia and Pain Medicine or ASRA. In the case reported by Dr. [Aaid] at Fairview Hospital Cleveland clinic a 52 year old male patient experienced severe abdominal pain nausea, vomiting and abdominal distinction was administrated EXPAREL via TAP infiltration as part of the multimodal post-surgical analgesic regiment during an emergency abdominal surgery.

The patient reported low pains scores and extreme satisfaction with this whole surgical pain control and Dr. Aaid noted delayed first use of opioid rescue few medication and the reduction in overall opioid use EXPAREL when compared to similar cases without EXPAREL.

Another case study presented by Dr. [Claybone] at Saint Elizabeth Center in Florence, Kentucky showed intensive results in a 42 year old female patient with CMI of 586.8 undergoing ventral hernia repair. The patient had a history of three abdominal surgeries as well as multiple comorbidities and chronic vaccine for which she was taking oxycodone and methadone daily up to the morning of the surgery.

Due to the difficulty in locating the [inaudible] traditional EXPAREL infiltration was performed under correct visualization by the surgeon. Collaboration between anesthesia and surgery resulted in a good post-surgical outcome for the patient who emerged out of surgery with low pains scores and was discharged two hours after arrival in the -- with no surgical complains or problems recorded.

On the orthopedic front two studies were presented at the 2014 Annual Meeting of the American Academy of Orthopedic Surgeons or AAOS. The first by Dr. John Barrington and second by Dr. Roger Emerson, orthopedic surgeons at the Texas Center for joint replacement.

The first study a prospective case control analysis of a 1,000 arthroplasties performed with the standard of care management regimens versus 1,000 successive total joint arthroplasties using an EXPAREL base multimodal treatment regimen. The results favored EXPAREL in terms of hospital stay, team scores, incidence of accidental calls, opioid consumption, hospital cost and length of stay.

The second study retrospectively analyzed 72 total knee arthroplasty procedures comparing patients receiving an EXPAREL based multimodal therapy versus the continuous Femoral nerve block with similar nerve block. A regional anesthetics technique where the patient receives a femoral nerve catheter to deliver an anesthetic to provide pain control to the knee. The EXPAREL patients showed comparable pain control with significantly lower narcotic requirement.

With lots of data demonstrating the utility and efficacy of EXPAREL in infiltration and a broad base of surgical procedures we also announced clinical evidence in support of nerve block indication for EXPAREL. We reported that our Pivotal Phase III clinical trial in femoral nerve block for total knee arthroplasty met its primarily efficacy end point demonstrating statistical significance with the P value of less than .0001 for cumulative pain scores over 72 hours.

We also presented the trial secondary end points at ASRA showing that the EXPAREL group compared to the placebo arm experienced a 24% reduction of total narcotic consumption, high patient satisfaction comparable safety and a statistically significant higher percentage of pain free patients.

We expect to submit a supplemental new drug application or sNDA for the nerve block indication in the second quarter of this year with a ten months PDUFA timeline. The value proposition of nerve block indication for EXPAREL if approved extends past simply adding the potential for more procedures. With the nerve block indication we can fully execute on the strategy to replace the catheter and a [grid] reservoir with a single administration into the surgical site to produce post-surgical anesthesia eliminating old and cumbersome delivery technologies. The nerve block indication is of significant indication to anesthesiologists the gate keepers of pain management strategies in many institutions.

A nerve block indication allows for discussion on how we can address patient requirements for post-surgical patient control with EXPAREL whether it be an infiltration or nerve block alone or in combination to enhance patient care.

Additionally our nerve block indication for EXPAREL makes way for increased clinical development and adoption in Cardiothoracic and many orthopedic surgeries which may be performed with both infiltration and nerve block. This same patient centric rationale will form the basis of a chronic pain initiative, we are exploring chronic pain with the initiation of chronic toxicology and clinical development programs.

In the meantime with plenty of opportunity via EXPAREL infiltration we expect to continue to provide the marketplace with customer -- end customers with clinical evidence to support use across an increasing number of surgical models at our upcoming national congresses. This schedule clearly demonstrates the broad procedures opportunity available to EXPAREL. As we continue to work with our healthcare and payer customer to provide data on this issue.

In the next couple of months we will be at Beckers Hospital Annual Meeting, International Society for Minimally Invasive Cardiac Surgery where Dr. Husam Balkhy will present his retrospective study on the impact of EXPAREL on post-surgical pain management and robotic coronary valve and ablation cardiac surgeries. This is the first representation of use of EXPAREL in cardiac surgery. At the American Society of peri-anesthesia Nurses, the International Anesthesia Research Association or IARF the Southeastern Society of Plastic Reconstructive Surgery where we have an oral presentation, the American Neurological Association, The America Society of Colorectal Surgeon, the American Society of Metabolic and Bariatric Surgery, the 12th Annual Spine Orthopedic and Pain Management Conference, and in addition we will be presenting at 10th specialty meetings in orthopedics for shoulder spine risk and total joints.

With approximately 1% market share of the estimated 40 million plus procedures appropriate for EXPAREL for infiltration we are confident that we have a blockbuster platform for post-surgical pain management.

As mentioned education and training are critical to deliver on the potential of EXPAREL to reduce the reliance on narcotics and related adverse events and thereby lower hospital resource consumption and cost increase ambulation and enhance patient care and satisfaction, ultimately changing the way medicine is practiced across hospital and ambulatory centers. In this regard we are planning multiple educational programs both national and regional to bring together acute care practitioners, surgeons, anesthetisiologists and nurses as we expand our understanding of best practice in infiltration techniques and we prepare for the launch for the nerve block indication.

In addition, we continue to create value for the stakeholders through strategic investments. We are broadening the market opportunity for EXPAREL via nerve block and chronic pain expansion opportunity and given the consistent proven performance in cost savings with EXPAREL we implemented a 5% price increase effective today.

As Jim will discuss in detail shortly we are building out the necessary manufacturing capacities for EXPAREL to meet the anticipated demand for the next few years and beyond EXPAREL we are also in the process of bolstering our DepoFoam based pipeline, the plan to receive clearance investigational new drug application or IND for a [inaudible] safe product around the end of this year or early 2015.

Through the public offering that we completed recently we have the resources to pursue these value drivers in parallel. And with that I will turn the floor over to Jim for an overview of our financial and recent manufacturing milestones. Jim?

James S. Scibetta

Thanks, Dave and good morning everyone. So let me first provide an update on our EXPAREL manufacturing status and then address the financial results for Q1.

Just to recap, there were two material events related to EXPAREL manufacturing that we recently announced. First, in late March we received FDA approval of our prior approval supplement for the additional EXPAREL manufacturing suite, Suite C in our Science Center Campus in San Diego. While we were confident that we would receive this approval and on a timely basis this obviously removes the binary event that could have prevented us from keeping up with the rapidly growing demand for the products. I want to publicly thank everyone at the Pacira Science Center Campus in San Diego for their tremendous commitment to the greater cause of improving patient care as it is by the timely approvals that we see and the 24/7 production in Suite A this brings us to a greater capacity.

When operating at full capacity the two identical and fully automated skids in Suite C will increase our annual manufacturing capacity by approximately 300 million over the roughly 100 million capacity of Suite A for a total of approximately 400 million capacity. While this provides a respite from inventory concerns for a period of time we expect that we will need to put additional manufacturing capacity in place in order to meet EXPAREL demand in excess of 400 million.

To address that future demand on April 7th announced entering into a strategic co-production partnership with Patheon, which is the pharmaceutical services business owned by the recently formed and named DPX Holdings. Under the partnership agreements we’ll collaborate with Patheon to construct two dedicated EXPAREL manufacturing suites at Patheon's sterile manufacturing facility in Swindon in the United Kingdom, which is about 60 miles away from London.

The first EXPAREL manufacturing suite at Patheon which is expected to come on line in two to three years' time is design to mirror our Suite C manufacturing facility. So it will provide approximately 300 million of additional capacity for an aggregate 700 million of overall EXPAREL production capacity. We’ll determine the design and production scale of the second manufacturing suite at Patheon at a future date.

In terms of who is responsible for activities Patheon will be responsible for the construction of the dedicated manufacturing suites, installation and validation of the manufacturing equipment and of course ultimately the commercial manufacture of EXPAREL. We’ll oversee the design and purchase of a dedicated EXPAREL manufacturing equipment to be installed at Patheon and lead the tech transfer of the manufacturing process.

In addition an important component of the collaboration for us is that we will govern with our onsite personal at Patheon reporting back to our product development team, the oversight and optimization of our proprietary DepoFoam based manufacturing process. That’s the secret sauce if you will that allows us and only us to manufacture at commercial scale drugs and [inaudible] related in multi-vesicular liposomes.

Our total capital commitment to acquire the process equipment and pay for the construction of the two Patheon suites is estimated to be $40 million to $50 million. We’re accelerating these CapEx outlays for a very good reason of course which is the rapid EXPAREL sales growth we've experienced and expected to see ahead. This EXPAREL capacity expansion was the primary impetus for the recently announced follow on offering. We expect gross margins from the production of Patheon to be at least 80%.

I’ll now turn to our financial results for the quarter.

We’ve pre-announced our Q1 EXPAREL revenue which Dave elaborated on, so the only thing I’ll add is that Q1 was the eight quarter of our EXPAREL launch and at $34.4 million of sales we remain ahead of where [inaudible] sales were at that point in its launch. And that drug of course went on to become the standard bearer for hospital based branded drugs is a $900 million plus product today. We continue to caution against relying on the monthly EXPAREL sales estimates released by the data tracking services which have shown historic trends that led to incorrect conclusion.

We guided EXPAREL gross margin for product made in Suite A and Suite C will be 75% to 80% at peak and greater than 60% in Q4 of 2014. Q1 gross margins for the company increased to 49% and surpassed 50% for EXPAREL. We anticipate gross margin improvement quarter-to-quarter simply as a consequence of higher production as we work our way toward production at capacity in Suite A and Suite C.

As for other operating expenses our $5.2 million of R&D expense was fairly consistent with Q4, our 22.6 million SG&A expense were comprised of $15.2 million of selling costs and $7.4 million of general and administrative expenses both modest increases from the previous quarter.

Non-GAAP net loss for the quarter was $6.5 million or $0.19 per share after deducting $1 million of non-cash debt discount amortization related to our convertible notes and $4 million of non-cash stock-based compensation. Cash used in operations was $4.7 million for the quarter along with $3.8 million of CapEx. We ended the quarter with approximately $65 million of cash and of course added approximately $110 million to that amount in our April public offering. We also just completed a deal this week where we’ll shortly receive an additional $8 million upfront payment from Mundy Pharma, our European DepoCyt(e) distribution partner for extending the duration of our partnership as well as expanding our geographic reach to sell DepoCyt(e).

We now have the resources to not only fund the additional EXPAREL manufacturing capacity built out at Patheon as discussed but to also develop additional indications for EXPAREL, in the nerve block and potential chronic pain and pursue internal product development candidates for our next DepoFoam based opportunities. As of March 31, we have 33.0 million shares of common stock outstanding. On a pro forma basis including the 1.84 million shares from the April public offering and 5.1 million of potentially diluted shares we have 40.8 million diluted shares outstanding.

Recall that we’ve guided that we expect to be profitable on a non-GAAP reported basis no later than the second half of this year. So from that point forward the diluted share count that I just referred to calculate using the treasury stock method will be employed for our non-GAAP EPS calculation. I’ll close with a reminder that we’re humbled by our tremendous value driving opportunity ahead of us, which can be summarized as combination of four key factors and we’re on a successful launch of our hospital based products with high key sales potential expected as indicated by the sizeable addressable market in managing the post-surgical pain and chronic pain.

Number two, high gross margins expected when EXPAREL manufactured at scale. Three, high operating margins expected due to the high gross margins and the ability to service this large opportunity with a compact specialty sales force. And four, a durable product lifecycle owing to a compelling combination of formal patent protection, the unique delivery properties of our DepoFoam technology and the technological and economic barriers to entry that are endemic to EXPAREL manufacturing clinical development in the education heavy selling process.

So with the positive Phase III nerve block study results and Suite C approval now in the rearview mirror we believe we simply need to execute on our plans to drive value. I’ll now turn the call back to Dave.

Dave Stack

Thank you for joining us today. We look forward to updating you on EXPAREL as we go forward. Coming up we will be presenting on May 13th at the Bank of America Merrill Lynch healthcare conference in Las Vegas. We’ll also be presenting in June at the Jefferies Global Healthcare Conference in New York City. With that I’ll turn it over to Q&A. Sam.

Question-and-Answer Session

Operator

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

David Amsellem – Piper Jaffray

Thanks and just a couple. So first with the recent capital raise I know that there is a big component that’s going to be dedicated to capacity. But are you potentially going to also use the capital to assess business development opportunities that can leverage the sales organization? And give us a sense of how much of a priority that is? And then secondly I wanted to touch on the Depo NSAID program, can you tell us if you settled on which NSAID you are going to move forward? And are you looking at this as primarily a post stop pain product or possibly a product for another indication say like osteoarthritis of the knee? Thank you.

Dave Stack

Thanks David. Let me go the BD route first, your first question. We have a strong bias towards developing products in DepoFoam and so that will always be what we look at first. And but with that said we do have products in the market place where we think we can incur either a product benefit or an IT benefit by putting different products opportunities in DepoFoam. And so we are looking at products outside of our broad innovation both for as candidates for DepoFoam-based products and as standalone products. I think the other strong bias we have towards value add is that as far as we can tell we are the only pharmaceutical company or spec pharma company that has this team of regionally dispersed nurses and physicians et cetera.

And so we also have a strong business development bias towards products that have a high educational component. So the kinds of products that might scare other companies because they require local anesthesia or they require using that and acute care setting we actually think that we are the perfect opportunity for those products to be launched effectively. So that’s where we are looking with most intensity but yes we are looking at a number of things.

On the second product we believe that we’ve locked on a DepoFoam based NSAID, David but the issue with the NSAID as we know from all of the history of all the others is the manufacturing is a critical component of getting one of these products to market. And so until we are a 100% certain that we can manufacture at commercial scale quantities I think we’re probably in the best position to just keep working on these things and make sure that we know where we stand before we put anything like that out on the public domain.

The last part of your question, we do see distinct market places for a locally administered Depo NSAID just to remind everybody on the call. The reason that we think that we have a market advantage here is that by administering the NSAID locally we can use a greatly diminished I am talking about between 5% and 10% of whatever the systemic goals would be. So we will have a black box for Depo NSAID driven adverse events there is no doubt about that.

But when we’ve done our primary market research the physicians are also pretty sure that if we use a dose that is just a small fraction of what they would use systemically that we will diminish -- we will have the appropriate diminishing effect on AV. That leads you to really distinct market opportunities. One is in an ambulatory care studying. We give a patient EXPAREL and an anti-inflammatory NSAID and send home hopefully on [inaudible].

The other is for local administration in the physician’s office where if a patient did something stupid over the weekend either on the ski floor or in the garden or something like that you could administer the drug locally and provide immediate relief while either the topical or systemic NSAIDs are doing their business. So that's really what we see as the protocol for the development pipeline and then there is other things behind it but they are even less developed.

James S. Scibetta

And if I can just David just add onto your first question. I mean we also as Dave talked about the biases we have, we also have a strong bias against doing anything that would be very dilutive to our current shareholder base given that we think if we can just execute on EXPAREL that we look at 2016-'17 EPS numbers that you don't have to have a real clever multiple on them to drive value.

So when we talk about business development opportunities in our own pipeline, we're talking about supplementing what we have but we're really at this point in the company definitely not thinking about transformative transactions that might dilute -- we need to do from an execution standpoint.

David Amsellem – Piper Jaffray

Yeah. Thank you.

Dave Stack

Thanks, David.

Operator

Thank you. Our next question comes from [inaudible] of Bank of America. Your line is now open.

Unidentified Analyst

Hi, good morning. Thanks for taking my question. I have a couple. It's been a good clip of picking up new accounts from your end and even if you take into account seasonality and weather impacts I was wondering if you could give some more detail on the 346 new accounts that you added in the first quarter. Are there a majority that are coming from a specific type of customer and do you expect that trend to continue going forward?

Dave Stack

It's a great question and as we've reported before we're a little surprised by the continued growth on a weekly basis ourselves. What we see largely is that especially as we grow in orthopedics and in the tap procedures and some of the soft tissue procedures different physicians and different physician groups who have been trained by Pacira in an academic institutional center. And as those physicians and as those groups go out to referral hospitals and associated hospitals they demand that the drug put be on formulary because they are using it at the mother ship, if you will. So it would be would this be really specific.

When we win a formulary approval at a say 20 bed hospital or 20 hospital chain our folks might only go into three or four of those hospitals and train in the OR and through the nursing staffs et cetera, what happens then is that those groups might have privileges on a Tuesday morning and a Thursday afternoon at a feeder hospital that is in a position where we won't resource that opportunity but they still want to use EXPAREL because it's the standard of care that's evolved in the major institution.

And so we continue to see the growth in that type of an environment. We're slowly picking up ambulatory care centers as well especially those ambulatory care centers that are associated with the hospital but it's pretty much the same story if you will.

Unidentified Analyst

Okay. Thanks. And then secondly once you get approval of the nerve block indication do you have a sense of what type of surgeries might be most amenable initially?

Dave Stack

We've had nerve block at boards now as you would expect and I would tell you that there is a level of excitement in the anesthesia community around the ability to replace catheters and drug reservoirs with EXPAREL that is stronger than I would have anticipated, especially a couple of years ago. I think they are mostly thinking orthopedic procedures right out of the box, things like knees and feet and shoulders. A lot of discussion around the very painful procedures, especially knees and shoulders. And then some of the places where they think that they can probably discharge a patient on a more rapid time frame, if they were able to not have the patients tethered to a catheter and drug reservoir et cetera like foot and ankle and wrist et cetera.

And then that move once you sort of get in to the flow of the discussion if you will then you start to move to the cardiothoracic where they would like to cardiothoracic surgery by infiltrating the port size and chest tube et cetera but then also doing an intra hospital block. And so that becomes something of more interest to them than before we have the nerve block and then it's starts to get really interesting from there.

You know there are number of high end regional programs, the sort of avante-gard of anesthesia if you will where they look at regional surgery, a regional surgical anesthetic approach for mastectomies and breast reconstruction et cetera and [inaudible] blocks, not a lot of places doing them but sort of the next evolution of care that provided and we do have a number of trials ongoing in that environment as well. And then lastly the nerve block indication as I stated very simply in the script allows us to address the chronic pain opportunity which is almost entirely nerve block where you start to do things like the set point injection, where we will be put again as the standard of care and a lot of discussion at our anesthesia boards about if we could turn the pain signal off for three days could we expect even a greater benefit from the use of [inaudible].

A long winded question to your answer I apologize for that but there is a lot there.

Unidentified Analyst

No, I appreciate the color, thanks.

Operator

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

Douglas Tsao – Barclays

Good morning. Just curious in terms of the additions we’ve seen in terms of new accounts, you know it's actually accelerated from where you were in the first several month quarters of commercialization. If you could provide some color on the types of account that you are adding right now? I mean are they sort of largely Tier 2 organizations or is there still good opportunity to add some larger accounts in larger institutions?

Dave Stack

Yes, it's both Doug. You know we do still win major top 100 accounts and in the top 100 as the drug is been used in reconstruction for example which is a major initiative that was made by our efficacy and abdominal plasty. And now as folks experiment with the use of the drug in different open fracture and trauma institutions there are hospitals that we would have not had in our top 100 list two years ago that are now. So you know as we’ve talked about previously we’ve done well with access, and a lot of the Tier1 use of the product is driven by new customer groups and new surgical procedures that where EXPAREL is making in patient procedures and patient procedures and is allowing us to do things like bilateral knees which were not even possible or were done very rarely in a near or pre- EXPAREL l.

And then as I stated the Tier2 customers it's really hard for me to characterize Doug because every market place is a little bit different. But would say that in the Tier1 it's paths and reconstructive programs that are really opening a lot of doors in the Tier2 centers it would be orthopedic leading the way Tier1 for Trauma and open fracture et cetera Tier2 is where we see lot of growth still in hips and knees and then once folks see that you can take care of a knee and the patient goes home with little or no more morphine on day two then they start to think about you know can I use it in a shoulder, the reason why I am not using it in spine all of those kinds of things.

So it's not a very specific answer to your question but I would tell you as you and I have talked personally I mean we’ve got a [inaudible] down here it's a little bit hard to keep track of this on a day-to-day basis.

Douglas Tsao – Barclays

Then that’s great and I appreciate the color Dave. And then you know in terms of the composition of the hospitals that have now ordered over a $100,000 of products, is there any sort of team which is behind some of those big accounts that you are building? Or is it really represent the entire spectrum of centers that you are seeing right now?

Dave Stack

It's a great question and there is two answers. The thing that I am most interested in is the number one driver of those accounts is the time that they’ve had access to the technology. So there are several relatively small accounts who are early adopters of EXPAREL who are big users which continue to say to us that the more time we have in the OR the more places our customers find to use it effectively to improve patient care. I mean that’s really exciting to us. You know there is no doubt that when you got a 1,000 bed hospitals they are going to use more drugs than a 200 bed hospitals and so it is a mix again. But we keep pretty close track of some of the early -- some of the small hospitals that were early adopters and I am always happy to see that couple of those are still in our top 10 purchasers.

Douglas Tsao – Barclays

Okay, great. Thank you I’ll just hop back in queue for now.

Dave Stack

Thanks Doug.

Operator

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

Corey Davis – National Alliance

Thanks very much guys. I wanted to talk about a couple of P&L line items starting with gross margins, a nice uptick from Q4 to Q1, is that trend likely to continue into Q2 or with Suite C coming online will you see kind of a setback temporarily in the gross margin line? And then secondarily I heard you say that the Patheon manufacturing is 80% gross margins, how does that compare to your own current facility at say peak capacity will Patheon bring you up or bring you down in terms of overall corporate gross margin?

James S. Scibetta

Thanks Corey. So I think we do expect to see quarter-over-quarter improvement in gross margins and I talked about the fact that there are two skids in Suite C and they come online separately but one of those skids now up and running and we’ve been making product before we got approved and we’re actually quite pleased with the productivity we have in that skid in terms of how many batches per week we are making and so forth. So with a little bit of caution because this is new to all of us I expect to continue to see quarter-over-quarter improvement in gross margin. And as I said earlier we’ve guided to have gross margins greater than 60% in Q4 so I think you see sort of a linear move toward that number in the next couple of quarters.

I'm sorry, what was your other question Corey?

Corey Davis – National Alliance

Does Patheon help or hurt your margin at full capacity?

James S. Scibetta

Yeah I mean we said that with Suite A and Suite C at full capacity we will be 75% to 80% and Patheon will be at least 80% because it's a new relationship I don’t really want to go on a limb for it but we certainly expect that gross margin there will be at least 80% for us so they will either take the company’s gross margins where they’ve already been modeled or improve them from there.

Corey Davis – National Alliance

Okay and then the second on the SG&A line, same kind of question sequentially should that continue to tick up then any change in your goal profitability by the end of the year?

James S. Scibetta

No change in the goal of profitability we expect to be non-GAAP EPS positive no later than the second half of the year and SG&A I think what we described to communicate is that the G&A portion of it we’re certainly focused on keeping that as limited as possible and we’re not a kind of company that takes our capital and puts into that type of activity other than limiting amount of activities to run the business and then the selling side Dave has talked about that we’ll add 10 to 15 reps mid-year for the next couple of years and we’ll continue to look at to program opportunities on the selling side, obviously there’s a great return on any dollar you put into the selling process. But we don’t expect any big quarter-over-quarter and short term here Corey.

Corey Davis – National Alliance

Okay, thanks very much. Go ahead.

Dave Stack

Thanks.

Operator

Thank you. Our next question comes from Patti Banks of Discern Securities. Your line is now open.

Patti Banks – Discern Securities

Good morning, just two quick questions. Dave wondering on the formulary process for the nerve block indication, once you get that is that pretty immediately accessible for that indication or is there a process that you have to go to with other round of P&T committees? And I have a second question.

Dave Stack

For the most part Patti the drug is approved on formulary, I mean there are still some places where it’s approved for certain uses and by certain surgeons et cetera and so mostly we believe that it will be available for use. There will be some situations where local restrictions will require that we have an additional meeting with some type of an express committee in the hospital, it’s not always the P&T at that level sometimes its safety. There are different groups inside the hospitals.

Patti Banks – Discern Securities

And are you able to gauge at this point how much off label you see this beyond infiltration?

Dave Stack

Very little. There is some for sure and we have to be careful forecast of it because you’ll hear a lot about some of the different uses of the product but in terms of the forecast we don’t believe that it's anything material, Patti.

Patti Banks – Discern Securities

And just real quick question maybe for Jim, was there any indications that hospitals were buying ahead of the price increase, any inventory that hospitals have maybe worked down this quarter?

James S. Scibetta

I guess Patti, what I can say is we don’t expect the quarter itself to be impacted by that and I think the price increase was modest enough that it wouldn’t change our month over month activities dramatically.

Dave Stack

Yeah I would say Patti, and you know we hit sales every morning. I don’t see anything here that would survive the quarter. So it would be the sort of on a day to day and a week to week basis but I don’t think you’re going to see anything that’s going to bleed into Q3 if that’s the nature of your question.

Patti Banks – Discern Securities

Okay, thanks, that’s helpful.

Operator

Thank you. And at this time I'm not showing any further questions I’d like to turn the call back to Dave Stack for any closing remarks.

Dave Stack

Great now I think we’re all set. Thank you Stan for helping us out. Thanks everybody. We look forward to seeing you all soon.

Operator

You’re welcome sir. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!