Pacira BioSciences, Inc. (NASDAQ:PCRX) Q4 2022 Earnings Call Transcript

Pacira BioSciences, Inc. (NASDAQ:PCRX) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good day and thank you for standing by. Welcome to the Quarter Four 2022 Pacira BioSciences, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Susan Mesco. Please go ahead.

Susan Mesco: Thank you, Chris, and good morning, everyone. Welcome to today’s conference call to discuss our fourth quarter 2022 financial results. Joining me on the call are Dave Stack, Chairman and Chief Executive Officer; Roy Winston, Chief Medical Officer; and Charlie Reinhart, Chief Financial Officer. Additional members of our executive team are here for today’s question-and-answer session. Before we begin, let me remind you that this call will include forward-looking statements based on current expectations. Such statements represent our judgment as of today and may involve risks and uncertainties. For information concerning risk factors that could affect the Company, please refer to the Company’s filings with the SEC, which are available from the SEC or our website. With that, I will now turn the call over to Dave Stack.

Dave Stack: Thank you, Susan. Good morning, everyone, and thank you for joining us. We’ll start today’s call with prepared remarks covering recent business highlights before turning to your questions. 2022 was another strong year for Pacira as we continue to outperform the elective surgery market, operating from a position of financial strength. We posted record revenues of $667 million in 2022, a 23% increase over 2021. Our growing top line, combined with ongoing operating discipline drove significantly positive adjusted EBITDA of $213 million for the year and $59 million for the quarter, and adjusted diluted earnings per share of $2.59 for the year and $0.80 for the quarter. Our performance allows us to fund internal and external growth initiatives while also optimizing our balance sheet with the planned prepayment of our term loan B.

This marks our ninth consecutive year of positive adjusted earnings and impressive records that we are proud of. Turning now to some specifics for our EXPAREL franchise, where I am pleased to report we have now treated more than 12 million patients in the United States. Regional analgesia techniques performed by surgeons and anesthesiologists continue to be a substantial growth driver. EXPAREL is fostering a significant paradigm shift in patient care by enabling same-day surgeries and accelerating recovery times. Surgical market procedures continue to migrate from inpatient to outpatient settings and increasing rates. The most recent rolling 12-month IQVIA procedural data from July 2022 further illustrates this shift. For hospital inpatient procedures, the market experienced a year-over-year decline of 7%.

EXPAREL was flat year-over-year, but with growing interest in women’s health, the use of EXPAREL for C-sections grew by 26% in the hospital inpatient setting. The outpatient procedure market demonstrated a year-over-year increase of 5%. EXPAREL continues to enable this growth and significantly outpace the market with 13% year-over-year increase. Across key outpatient procedures, we continue to see strong EXPAREL growth, including: Total joints, with a 22% increase; spine, with a 17% increase; breast and gynecologic oncology, each with greater than 10% increases; while both shoulder and general surgery experienced a near 10% increase. For your reference, these IQVIA data points are summarized in our investor deck, which is available on our website.

In 2023, we will continue to support the market’s ongoing migration through several patient-centric initiatives. On the manufacturing front, we have optimized our capacity to supply more than $1.4 billion worth of EXPAREL annually at the current price. Improving gross margins is a top organizational priority. We have addressed different supply chain and manufacturing issues that negatively impacted our margins for the last three quarters of 2022. We expect to see full year margins to improve in 2023 with an aim of reaching the mid-80% range over time. Some product-specific updates, including the following: for EXPAREL, we expect to secure FDA approval in the coming weeks for an enhanced product release assay that will improve our back failure rate, benefit margins and support additional intellectual property protection.

EXPAREL test batches from our 200-liter manufacturing facility in San Diego are underway, and we remain on track for a supplemental new drug application in 2023; our new ZILRETTA fill line is in the qualification phase, we expect this line to improve future quality and yield to support anticipated CRE growth. For ioveraº, with our new contract manufacturer fully online, we are now seeing lower unit cost and volume expansion, which benefit margins. With expanding manufacturing capacity and improving margins, we are advancing new programs to drive EXPAREL volume growth and expand use in outpatient settings. Starting with patient access. In October, we rolled out 340B pricing for EXPAREL. Participation in 340B provides the opportunity to expand access to uninsured or low-income patients.

These two populations are particularly vulnerable to the surgical gateway of opioid addiction and can benefit greatly from EXPAREL-based, opioid-sparing regimens. After 17 weeks, we are exactly where we thought we would be with an increase in both 340B and non-340B purchasers and an aggregate 5% discount to our overall net selling price. We believe this program will drive significant volume expansion within existing and naive 340 business representing nearly 10 million EXPAREL-relevant market procedures. We expect the 340B pricing program to be neutral to slightly accretive to the net revenues by the end of 2023 as we accessed a significantly larger pool of patients and their surgeon providers who want to perform more outpatient procedures.

Importantly, 340B will pave the way for us to leverage on the new NOPAIN Act. This important legislation will mandate CMS reimbursement for non-opioid postsurgical pain treatments in outpatient settings beginning in 2025. NOPAIN was signed into law in December and will provide a reimbursement pathway for nearly 20 million EXPAREL-relevant market procedures, with commercial and self-insured payers expected to follow CMS. We are actively monitoring efforts to accelerate implementation prior to 2025, either through a technical amendment or regulation. We believe policymakers in Washington, D.C. will appreciate the urgency for improving access to non-opioid options given the more than 107,000 Americans who died of a drug overdose in the 12-month period ended March 2022, with more than 2/3 of these deaths involving opioids.

NOPAIN and 340B are especially meaningful to hospitals as they continue to migrate lower-margin soft tissue procedures to help hospital outpatient sites. Both programs will assist eligible health care systems and affording the opportunity to offer non-opioid pain control for these procedures while advancing our mission to provide a non-opioid pain management solution to as many patients as possible while positioning opioids for rescue use only. We are also supporting significant — the significant need for opioid-sparing pain management at our Pacira Innovation and Training Centers as well as our infield educational events. In 2022 alone, our educational programs provided ultrasound-based training to more than 6,000 physicians for select regional blocks with erector spinae, transverse abdominis plane and pectoralis the most highly requested EXPAREL workshops.

Our ioveraº workshops are also accommodating the market’s growing interest in long-acting drug-free nerve blocks. These educational programs for EXPAREL and ioveraº also provide increased visibility to expand ZILRETTA awareness among our customer base of surgeons seeking an alternative for non-opioid, office-based osteoarthritis pain management solutions. With last month’s opening of our second innovation and training center in Houston, we now have more than doubled our capacity to host meaningful education program. This state-of-the-art facility features a 125-seat adaptive lecture hall, broadcast studio in both wet and dry lab space for cadaver labs and other interactive workshops, as well as advanced ultrasound with artificial intelligence trading software.

In fact, it is the only facility in the United States featuring simulation-based block training with computerized phantoms for user training and scoring. Our EXPAREL growth initiatives are supported by a strong and growing patent estate. As a reminder, we currently have eight Orange Book-listed patents, and any potential generic would have to successfully overcome each claim within every one of our patents to get to the point of establishing bioequivalence at commercial scale. With no commercially viable alternative for a long-acting non-opioid postsurgical pain management, we are highly confident that EXPAREL will maintain its well-entrenched position as the branded market leader for many years to come. Outside the United States, we continue to make steady progress.

We recently appointed a new international General Manager, and our team has been further developing the business by securing approval for EXPAREL access from hospital pharmacy departments. Long wait list for elective surgeries are overwhelming health care systems across the United Kingdom in Europe, and we believe EXPAREL can help improve this dynamic by enabling more rapid recoveries. In Latin and South America, our partner EuroPharma submitted for regulatory approval for EXPAREL in Brazil in December, and we are now focused on submitting the approval in other countries. On the regulatory front, last month, we submitted our supplemental new drug application to the FDA, seeking expansion of the EXPAREL label to include lower exterminator block procedures.

This time line places us on track for approval in the fourth quarter of this year. Complementing EXPAREL, ZILRETTA and ioveraº are serving attractive pre-surgical segments of the market. Last month, we held our annual national sales meeting, during which we formally aligned and trained our full 240-person field force base team as a single unit with all account managers now selling all three products in our portfolio. With this realignment, sales territories are smaller in size, and we are significantly increasing our reach and frequency with a threefold anticipated increase in ZILRETTA and ioveraº sales calls. We also have several value-creating milestones on track for the next 12 to 24 months for ZILRETTA and ioveraº. For ZILRETTA, we are now promoting safety data showing its advantages for diabetic patients with osteoarthritic knee pain.

The data showed clinically meaningful reductions to glycemic spikes and will be presented at the Osteoarthritic Research Society World Congress taking place in Denver next month. Roy will share more on these data momentarily. For ioveraº, this quarter we are launching new commercial initiatives for the cash pay market following the concept of platelet bridge plasma or PRP and stem cell injections. This is a large and important lifestyle market for drug-free nerve blocks, which provides immediate pain control that can last for several months for patients who simply want to play golf, walk on the beach with their grandchildren or dance at their child’s weddings. We also recently signed a multiyear deal for ioveraº to become the official non-opioid a management partner of the Ladies Professional Golf Association, or LPGA.

Through this direct-to-consumer initiative, we will be driving awareness of the benefits of ioveraº and how to access the product using commercial broadcast, digital advertising and in-person presence at tournaments in key markets nationwide. Our customers are also using ioveraº for treating pain related to spasticity, which is an on-label use. We are on track to begin the registration study for the treatment of spasticity around the middle of this year. In spasticity, ioveraº has the potential to be a game changer. There are approximately 10.2 million patients in the United States currently diagnosed with spasticity. 2.6 million of these patients have moderate to severe spasticity, while 42% of these patients have received at least one treatment modality, only 150,000 are currently receiving treatment with a toxin.

This underscores the highly dissatisfied market, with current treatment options that are inadequate. Beyond the advancing label expansion programs for our commercial portfolio, we have an exciting earlier-stage portfolio of new product development opportunities that include PCRX 201, a novel intracellular gene therapy product candidate that produces IL-1 RA for neo-osteoarthritis. Our preliminary Phase 1 data safety and efficacy data findings were compelling. Importantly, the greatest level of efficacy was observed with the lowest dose. These data will be presented at orthopedic and gene therapy meetings in the coming months. We continue to advance our internal multi-visit liposome pipeline. Our Phase 1 study of EXPAREL for intrathecal administration continues and is on track for completion this quarter.

We will also initiate Phase 1 studies later this year for our multivesicular liposome dexamethasone formulation and low back pain and a 20-milligram multivesicular liposome bupivacaine formulation as a nerve block or a field block for longer-lasting or chronic pain. In addition to our internal programs, we have a portfolio of externally sourced innovation that offers us the opportunity to participate in the development of several exciting product candidates addressing pain along the neural pathway while targeting our current customer base. These opportunities include strategic investments in spine biopharma, Genosense, GQ Biotherapeutics and Cartronics. With that, I’d like to turn the call over to Roy Winston, our Chief Medical Officer, to summarize some more detail on some of the upcoming near-term value drivers from our clinical programs.

Roy?

Roy Winston: Thanks, Dave. This is an exciting time, not only for us at Pacira, but for patients, providers and payers seeking safe and effective opioid-free options for pain management. I’ll start with our lower extremity nerve block. As Dave mentioned, our supplemental new drug application has been submitted to the FDA, and we are awaiting official acceptance, which is expected to come by a standard 74-day letter which will include our PDUFA date. To remind you, the basis of the submission are two Phase 3 studies. The first study was a single dose femoral nerve block in the adductor canal for total knee arthroplasty, and the second was a single dose sciatic nerve block in the popliteal fossa for bunionectomy. Both utilize the 10 ml dose, which is 133 milligrams.

Both studies achieved the primary and key secondary endpoints of statistical significant reductions in postsurgical pain and opioid consumption from zero through 96 hours when compared to the active comparator, bupivacaine. These data provide strong evidence for label expansion to include these two new indications and should support a superiority claim for EXPAREL over bupivacaine in the new label. We believe adding these two additional nerve block indications will significantly extend our reach into surgeries of the knee, media lower leg, foot and ankle, representing more than 3 million annual procedures. Working with key opinion leaders, we’ve begun to publish these data to deliver strong evidence in the literature and incorporate them into society practice guidelines to use EXPAREL as a nerve block in lower extremity procedures.

We were also on track to begin the pediatric study later this year that is designed to support the expansion of our U.S. and EU label to include patients from zero to six years of age. We look forward to minimizing exposure to opioids in this very vulnerable population. Turning to ZILRETTA. In March, investigators will present the results of a Phase 2 study of patients with knee OA and type 2 diabetes. Participants were randomized to receive ZILRETTA or immediate-release triamcinolone and compared glycemic spikes for the two groups. ZILRETTA was associated with a clinically meaningful reduction in hyperglycemia versus triamcinolone, suggesting that ZILRETTA treatment leads to fewer short-term hypoglycemic-related adverse events. In addition, the ZILRETTA group had significantly longer duration in the target glucose range, which helps improve glucose management, improve patients’ well-being and reduce complications and health care utilization.

Remember that approximately 50% of patients being treated for OA knee pain also have type 2 diabetes or are pre-diabetic, which is especially important for those needing repeat corticosteroid dosing or those that have bilateral knee disease. We also expect to initiate a new ZILRETTA label expansion study around the middle of this year. This includes a Phase 4 diabetes safety study in knee OA and Phase 3 Shoulder OA study. Our shoulder study would position ZILRETTA as the first and only approved corticosteroid for shoulder osteoarthritis. Both studies will evaluate ZILRETTA versus triamcinolone with the goal of adding a superiority claim to the ZILRETTA label, and equally as important to place ZILRETTA into orthopedic and pain management society guidelines as the new standard of care.

Turning to ioveraº, we are excited about what we are seeing in using ioveraº for the treatment of spasticity itself. As Dave mentioned, treating the pain associated with spasticity is already on label, and we are now educating physician specialists around the value of ioveraº in this setting. In parallel, we are launching a registration study to evaluate ioveraº as a revolutionary new treatment for spasticity itself. This is based on strong data from the research of Dr. Paul Winston, President of the Canadian Association of Physical Medicine and Rehabilitation. Dr. Winston and his team recently presented data from his ongoing work in spasticity at the Annual Meeting of the Association of Academic Physiatrists, which was held in Anaheim last week.

Presentations included data from 59 patients participating in an ongoing study evaluating cryoneurolysis as a treatment for upper extremity spasticity, demonstrating progressive functional improvement over a 180-day follow-up period. Data from three ongoing observational studies evaluating cryoneurolysis for managing upper and lower extremities spasticity were presented to characterize the safety profile of cryoneurolysis. Data from 113 patients demonstrated low and easily manageable side effect profile. A case study report of a 42-year old male with spastic hemiplegia following a medial cerebral artery stroke, the patient had a 10-year history of physical therapy and botulinum toxin injection therapy. After receiving ioveraº treatment one- and three-month follow-up showed a highly clinically significant improvement in shoulder movements, elbow and risk extension and ankle dose inflection.

The patient also reported immediate pain relief. We have met with the FDA and expect to kick off our spasticity-label expansion study in the second quarter of this year of 2023. The study will evaluate ioveraº versus in adult patients, and enrollment is expected to conclude before the end of the year. Because ioveraº is a 510(k) device, we anticipate a review time line of three to six months, which would place us on the market for the treatment of spasticity as early as the second or third quarter of 2024. We are also planning a second active comparator study in spasticity designed to demonstrate the superiority of ioveraº versus toxic. It is our belief that iovera can completely disrupt the current spasticity treatment paradigm, bringing tremendous relief to patients and value creation for Pacira shareholders.

Lastly for ioveraº, we have completed the study evaluating ioveraº versus radiofrequency ablation as a medial branch block to treat low back pain. We expect to present these data at a scientific conference before the end of 2023. With that, I’ll turn the call over to Charlie for his financial overview. Charlie?

Charlie Reinhart: Thank you, Roy, and good morning, everyone. I’ll start with some commentary on our 2022 results and then walk through our outlook for 2023. To remind you, I will be discussing non-GAAP financial measures this morning. A description of these metrics, along with our reconciliation to GAAP, can be found in the news release we issued this morning. Let’s begin with an update on sales and margin trends. Starting with EXPAREL, where we continue to outperform a flat surgical market, with net EXPAREL sales coming in at $536.9 million for the year and $138 million for the quarter. Fourth quarter average daily volume growth of 6% was partially offset by a lower net selling price due to our implementation of 340B drug pricing in October 2022.

ZILRETTA continues to be a highly meaningful and accretive addition to the Pacira portfolio, adding $105.5 million post-acquisition sales to our top line in 2022. We saw improving sales trends for ZILRETTA as we exited the year, which we expect to accelerate as we broaden education and awareness around its value in treating patients, especially those with unique care needs such as diabetic patients. For ioveraº, full year sales of $15.3 million. We expect demand and sales growth to gain momentum in 2023 and beyond, with the launch of new commercial initiatives in the cash pay and spasticity pain market, as well as education and awareness collaborations with professional sports organizations like the NFL Alumni Association, the PGA Tour Champions and the LPGA.

We also remain optimistic in ioveraº within new indications such as the treatment of spasticity and media branch blocks where we are making new clinical investments. Turning to gross margins. On a consolidated basis, our total non-GAAP gross margin percent was 74% for the full year and 72% for the fourth quarter. Fourth quarter gross margins by product were 71% for EXPAREL, 82% for ZILRETTA and 58% for ioveraº. EXPAREL gross margins in the fourth quarter were negatively impacted by new operational challenges including slightly higher-than-anticipated batch failures and the scarcity of one disposable part used in our manufacturing equipment. The supply of this part have now been replenished and we have not experienced elevated batch failures since early in the first quarter of 2023.

Fourth quarter non-GAAP R&D expense was $15.7 million, reflecting ongoing investments in label expansion studies as well as our clinical stage pipeline. For full year, non-GAAP R&D was $78.2 million and in line with our guided range of $75 million to $85 million. Our fourth quarter non-GAAP SG&A expense was $54.7 million. For the full year, non-GAAP SG&A expense was $219 million, slightly below our guided range of $220 million to $230 million. Interest expense was $11 million for the fourth quarter of 2022. To remind you, most of the interest expense relates to our term loan B finance, which has a floating interest rate of SOFR plus 700 basis points. The remainder of interest expense primarily related to our convertible notes. In December, we made a $50 million prepayment of outstanding principal under our term loan B, and we expect to use strong cash position to make another significant prepayment around the middle of 2023.

We are also actively evaluating options to refinance the remainder of the Term Loan B by the end of the year. For modeling purposes, based on current interest rates and the current outstanding balance with only the required minimum payments of principal of $9 million per quarter, full year interest expense will be approximately $37 million. As discussed in today’s press release, we are returning to our pre-pandemic standard practice of providing annual financial guidance, and we are discontinuing monthly sales updates. For sales, full year product guidance is as follows: for EXPAREL, we are currently guiding to 2023 global sales of $570 million to $580 million, which is in line with the year-over-year growth rate in 2022. Given ongoing macro uncertainties outside of our control, we believe this is very achievable given several growth initiatives that we expect to kick in as 2023 progresses such as volume expansion for existing for new 340B customers, as well as new initiatives with OMFS, plastics, outpatient, sports management and pain management and rehabilitation health care providers, and our ongoing expansion in European markets.

With respect to cadence, we anticipate 2023 EXPAREL sales to be more heavily weighted to the second half of the year with historical trends of roughly 20% in the first quarter, 25% for both the second and third quarters and nearly 30% in the fourth quarter. Importantly, we remain very bullish on our long-term EXPAREL growth prospects and fully expect that once we are on the other side of the current macroeconomic challenges and elective procedure market normalizes, EXPAREL will return to steady double-digit year-over-year growth. For ZILRETTA, we are guiding to 2023 sales of $115 million to $125 million. And for ioveraº, we are guiding to full year sales of $17 million to $20 million. On the expense side, full year guidance for 2023 is as follows: non-GAAP gross margins of 76% to 78%.

We expect margins to strengthen modestly during the year as sales volumes grow and acknowledge that first quarter margins may be slightly lower than our full year gross margin guidance range due to the late 2022 manufacturing challenges that spilled over into early first quarter operations. Non-GAAP R&D of $70 million to $80 million, which is consistent with 2022; non-GAAP SG&A expense of $220 million to $230 million, which is also consistent with 2022; finally, stock-based compensation, which is expected to be in the range of $51 million to $54 million. In summary, despite ongoing macro headwinds, Pacira delivered impressive financial results in 2022 with adjusted EBITDA of $212.7 million for the year and $58.8 million for the fourth quarter and adjusted diluted earnings per share of $2.59 for the year and $0.80 for the .

We remain bullish in our five-year plan with year-over-year top line growth turning to teens once elective surgery market normalizes. Gross margin is improving, modest year-over-year increases in operating expenses and adjusted EBITDA margins that exceed 50%. That concludes our prepared remarks. I’d like to turn the call over to the operator to begin our Q&A session. Operator?

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Q&A Session

Operator: Thank you. At this time, we will conduct a question-and-answer session. Our first question comes from David Amsellem of Piper Sandler. Your line is open. You may go ahead with your question.

David Amsellem: I just had a few. Regarding the guidance, can you talk about what that implies? And I apologize if I missed this earlier, but talk about what that implies in terms of the direction of net pricing and just the overall impact of the 340B pricing program and the discounts you’re providing? And then secondly, can you talk about what the guide implies regarding new customer adds? You’re saying that you’re expecting volume growth to drive top line accretion in ’23 and beyond. So I’m trying to get a better sense of what you’re baking in, in terms of new customer adds? And then the last question is on the surgical environment, with soft tissue in particular. What’s your general view on when you think that’s going to recover? Because as you look at the charts, I mean, obviously, it’s markedly different. Do you think there will be some normalization on the soft tissue side in 2023, or are you thinking about it as normalization — as a longer-term event?

Dave Stack: Thanks, David. So first with guidance and the implications of guidance, what we have right now, David, well, our forecast was that we would have a 5% discount in gross to net. And I think you understand that perfectly. What we see is that as we gained new customers from 340B, that there is a mix of 340B purchases and non-340B purchases. We’re actually modestly surprised by the fact that many of these hospitals split their purchases between the 340B program and regular ASP plus sales. So, we think that we weathered the worst of what we’ll see. In terms of the 340B purchasers we started buying immediately at the end of October, we are just seeing increased action with more 340B — non-340B — previous to non-340B hospitals purchasing.

And as I just said, many of those sales are actually not at the 340B pricing levels. So things are unrolling pretty much as we thought. And obviously, we’ve got work to do in terms of continuing that conversion. But we think that 5% is probably the worse than it will be if that’s an appropriate way to present it. And it will improve as we widen the base of purchasers. And also, David, just to make the case again from the script, we also see 340B as a way for us to get more customers with hands-on experience, both for their surgeons, anesthesiologists and the patient experience so that when we get NOPAIN, we shorten the time line of these same folks having access to EXPAREL and going through the formulary process, et cetera. So, I hope that answers your question.

If not, come back to me. Pretty much what I just talked about talks about the new customer adds. We do see — we have a group of customers that are almost 100% 340B, so that’s as anticipated. We do have the new customers that are coming in. And we also see that there are hospitals that have been purchasers of EXPAREL, who have either been less aggressive in restricting EXPAREL because of our 340B involvement. And in some cases, we’ve had people tell us that actually, they are now encouraging the use of EXPAREL more relatively as a short-term expense to them with 340B in certain situations, but also getting ready for NOPAIN when they will be able to treat all of their CMS patients in the outpatient environments and be fully reimbursed for those.