Okay, good afternoon, everyone. David Amsellem from the Piper Sandler Pharma team. Welcome again to the thirty-fifth annual Piper Sandler Healthcare Conference. And with us, we have the team from Pacira, led by CEO Dave Stack, and Ron, I don't know your title.
Chief Strategy.
Chief Strategy. Okay, Ron Ellis—excuse me, Chief Strategy Officer. So, thanks for joining us, and—
Thank you for the opportunity, Dave.
I wanted to start at a high level. There's a lot to go through. So, you know, we've seen some degree of recovery in elective surgical procedure volumes, particularly in orthopedics, but fairly sluggish EXPAREL volume growth. So I guess broadly, what do you think have been the issues over the last, call it, year or so for EXPAREL?
I think. Well, the market is 5% growth, procedure growth.
Yep.
and we are as well.
Yep.
You know, orthopedics, which you mentioned, we're growing at 9%, a little over 9%.
Mm-hmm.
So we're again, you know, in line with the rest of the market. I think the difference between those two numbers, David, is that 45% of our business is in soft tissue-
Yep
which has continued to be in a negative scenario on for year-on-year growth for three years now. So, you know, the issue and the big answer to your question is that it's the issue is cost. You know, the hospitals have the procedures have moved to the outpatient environment.
Mm-hmm.
For hospitals, that's largely been the large profitable procedures, the spine and the joint and the bariatrics.
Mm-hmm.
So, you know, they're really not equipped to do the colorectal and the abdominal procedures. You know, so the hospitals are having some financial pressures. In the ambulatory world, which is, you know, especially hospital outpatient, which is where these soft tissue procedures and the lower margin orthopedic procedures should be being done, the reimbursement is just not very good.
Yep.
So really, the answer on both sides, the pressures on both sides are related to cost.
Mm-hmm.
As we've gone through 2023, we've heard for the first time that, you know, they're really feeling the pressure on in finances. We've had folks say to us, "Look, I'm not crazy about what I'm doing, but I don't have any choice given the financial pressures that I have. And good enough is good enough.
Yeah.
And so what we're working hard at is maintaining the balance of access and solving the cost issue, which-
Sure
I'm sure we'll get into as we go through that.
So, to be clear, you've been seeing some declining utilization of EXPAREL among existing customers?
No. Um-
You haven't.
No. What we've seen is that all of the growth is sort of the other side of that coin.
Right.
The growth is where we have contracts-
Mm-hmm.
- or where we have 340B representation.
Okay.
Where there is some level of price protection, we are growing-
Mm-hmm
- and that's our 5%, you know, across the spectrum. Where we don't have any kind of price protection, you see that we are either static or down-
Right
- you know, 0.5%.
Right.
So it isn't like there's a wholesale loss.
Right.
So, again, you know, that's the puts and takes here are, you know, helping our customers get over this hurdle of cost while we provide opportunities to be able to offset those costs, and then in this case of NOPAIN , to have it be no cost.
Why, why do you think soft tissue's been so tough?
I think, you know, when we look at soft tissue specifically, there's a couple of reasons, David. One is the And we've seen this before.
Mm-hmm.
When we went through 2006, or 2006, 2007, and 2008, we saw exactly the same thing, that financial pressures on the patient side, when you have things like hernias and hysterectomies and things that patients believe they can put off-
Mm-hmm
that's what they do, you know?
Mm-hmm.
And that's exactly what we're seeing. If you look at women's health, for example, every single women's health procedure is down year on year, and it was last year, which is a little bit scary when you start to get to where this is all going.
Sure.
Right? So it starts out there, and then it's an access issue because, as I mentioned already, you know, these - nobody's fighting to get to do these soft tissue procedures-
Right
because of the margin pressure, right?
Mm-hmm.
The hospitals don't wanna do them, and in many cases, the HOPD, the ASCs are not doing them because if you're a physician-owned ASC, and you're gonna make $5,000 on a knee and $300 on a hernia, you're using it as a fill-in, but you're not. That's not your business model, right?
Mm-hmm. Mm-hmm.
And then it is a bit of a pathway, right? If you're doing spine surgery or total joint or arthroplasty, you have a surgeon, right? If you're going to your primary care guy, and that person tells you you need hernia surgery, you have to go to a surgeon, you have to get bloods and an EKG
Right
And you have to then get on the OR schedule, and there's a significant amount of fallout as you go through that process in this labor environment and inflation environment.
Okay. Can you talk about the mix for EXPAREL between hospital inpatient, hospital outpatient, and ASCs currently?
Yeah. We don't get the information perfectly that way.
Mm-hmm.
The best way to discuss it is 25% of our procedures are done in the hospital, and 75% are done outside of the hospital.
Mm-hmm.
The way the IDNs buy, David, it makes it very difficult for us to be able to tell you specifically whether it's in an ASC or in an HOPD, but it's 75-25
Got it
basically.
Okay.
Just to give a little bit more texture to that, if you see in the hospital, it's slightly weighted towards ortho. If you see in the HOPD, it's slightly weighted towards soft tissue. If you see the ASC, it's 80% ortho.
Yep.
- because the Uniteds and the Aetnas of the world are sending their patients there as a cost reduction measure.
Yep. So, speaking of cost, wanted to walk through pricing erosion since you implemented your pricing initiatives, particularly 340B. So, let's just, I guess, look back and, you know, what that's been like, and then looking forward, how should we think about, you know, your net pricing as we move through 2024?
Yeah. I'll ask Ron to comment here.
Yeah
If there's something that could use some color. So when we got into 340B, there were a couple of strategic imperatives, right? One was, we thought that our manufacturing issues were gonna be solved well before they actually were. So we thought we were gonna have a gross margin in the 80% range, and there were 10 million patients in these indigent and low-income hospital opportunities, they where they didn't have access to a non-opioid therapy.
Mm-hmm.
So we thought that there would be a 20% conversion from our current customers over to 340B.
Mm-hmm.
It turned out that that was actually closer to w ell, it's today, it's 23, so it's coming back to 20%. It got up as high as 25, 26, and so we calculated a 5% gross to net as a result of that, that we thought would be offset over time by new accounts.
Mm-hmm.
That is in fact happening, but it's slower than we thought it was going to be. The realization now is that many of these hospitals have financial pressures, that even at a 24% statutory discount, still can't afford to buy a non-opioid.
Mm-hmm.
So, again, NOPAIN is a solution to these issues that we continue to face in the marketplace.
How much of your business now comes from these 340B institutions?
23% year-over-year.
Twenty-three percent.
Over the last few weeks, it's been, with the exception of last week, which was a little bit higher, again
Yeah
Have been closer to 21.
Okay. So these cost pressures, you know, this is a common theme. You've talked about compounding as something that has y ou know, we're seeing with increasing frequency. I wanted to get your thoughts on where that can go.
Right.
How, you know, significant is it, and what is the extent to which you could benefit if that kind of activity is tamped down upon?
Yeah. It's a. There's a series of things that are ongoing in the marketplace right now-
Yeah
- both with regulators and with law enforcement.
Yep.
We've been dealing with the FDA now for some time on the issue of compounders and the illicit nature of combining these generic drugs and saying that they're FDA approved. They are not.
Mm-hmm.
Having black box-based products with no notification and controlled substance with no notification.
Sure.
And so, if you follow on what's happened with the GLP-1s, the injunctive relief that they got, that's, that said, there had to be a sticker that said, "Not approved for human use." They countersued, and the FDA had to step in and say, "No, these aren't," because they said that the legal system can't determine what products are on the market, only the FDA can.
Sure.
The FDA came back and said, "These are not FDA approved," and they gave them 30 days to take them off the market, or they're gonna close the factories, right?
Right.
We are in the process now of looking for injunctive relief, which would stop them from comparing themselves to EXPAREL and saying that they provide opioid-free therapy. They don't have any data to say that they do anything, right?
Right.
At the same time, the FDA is now opining that these are not FDA-approved products, and we continue to work with law enforcement on some other issues. We think at a minimum, you will see a notification that these are not approved for human use.
Yeah.
The-
Do you expect that communication from the FDA to happen in the near term, or?
Well, yeah.
Like
Yeah. The list-- This first notification would be through the judicial system, and for injunctive relief
Injunctive, okay
Y ou have to go into each state where these illicit manufacturers actually are located, and we're in that process right now.
Got it.
That could happen over the next couple of weeks, couple of months. Then, you know, we continue to work with these folks and with the FDA on, you know, what a longer-term solution would be. It goes from
Mm-hmm
Y ou know, something that identifies that these folks are actually using products that have not been approved, to having them not be on the market at all.
Yep. Okay.
Um-
Do you have a sense of what the sales impact could be?
What we disclosed on the third quarter call was
Yeah
A nd this, we're, we know more now than we did then, of course.
Mm-hmm.
But, the simple calculation was, we think there's roughly 1 million of these multi-drug combinations that are gonna be sold in the United States this year. If we take a 25% penetration of that, which we think is conservative, and we say they're all the 10 ml low dose, then it would be about a $40 million transaction
Mm-hmm
I n 2024.
Mm-hmm.
That's at a 24% or 25% conversion.
Okay.
If they were somehow forced off the market, it could be much more significant than that.
Yeah. Let's switch gears and talk about the label expansion in lower extremity. And, you know, a couple of questions here. So number 1 is, you know, how many procedures do you believe that would encompass? You know, how do you think about the opportunity for, I'm losing my voice here.
Yeah.
For Exparel.
Yeah.
S o let's start there.
I was gonna say, let me go with that while-
Yeah.
-you get a drink of water. So roughly, lower extremity in its full extent is about 3 million procedures, and that's broken out. 1 million would be for knee procedures, and 2 million of that would be lower leg, foot, and ankle.
Right.
In the knee, we are currently used in roughly 25%-30% of that 1 million patients for an adductor canal block today.
Mm-hmm.
Right. We think that roughly that same number of patients are being done in an adductor canal block, but using bupivacaine or ropivacaine. So the lowest hanging fruit, because they're already using imaging in order to be able to, you know, inject into the adductor canal-
Mm
is to take the bupivacaine, bupi, or ropi out, put EXPAREL in, stop writing for 60-90 opioids, write for 6. That's the, that's the shortest way. That we think will happen in a, in a, you know, over the next couple of years. And we think that the 2024 impact will be mid-single digits on those numbers.
Okay.
Then longer term, the 2 million in lower leg, foot, and ankle are, you know, pain management docs, podiatrists, people that we don't have a franchise with as we sit here today. We think that that opportunity will be much more linear and look like a product launch.
Yeah. So what, what's the extent to which you've already been seeing, you know, lower extremity blocks? I mean, is there a significant audience of docs who have been doing this already?
Oh, yeah.
Yeah.
Yeah, about 250,000-300,000 patients a year-
Yeah
in knees. Yes.
Okay.
Yes, and it largely is driven by whether they have anesthesia support or not. In a lot of the smaller communities, or countries, or counties around the country-
Yep
A nd in many ASCs, especially on weekends, they don't have anesthesia support, and so a surgeon is gonna struggle with imaging and doing a nerve block.
Okay. So I wanted to talk about NOPAIN and implementation and, you know, I'll start off generally in getting a sense of how you think that's gonna drive, you know, an acceleration in volume growth. Or maybe I'll ask the question a different way, which is, you know, how. What portion of your business do you think directly would be impacted?
So we think that, you know, of a 35 million patient TAM, 20 million of those will be appropriate for outpatient therapy, which is what the NOPAIN Act is geared towards. So if we were going to look at TRICARE and CMS and where we already have commercial payer approval in the outpatient environment, about half of that market would be appropriate for a relatively immediate conversion-
Sure
-from a 340B stipend to a full reimbursement. So, I mean, to try to structure that without giving guidance-
Yeah, yeah
Right, is if you think that in the United States, that we're gonna treat about 2.2 million patients this year, that simple calculation would say that there's 10 million patients where you would have full reimbursement starting on 1/25 or 5x.
Okay.
We think that the commercial payers, once there's a reimbursement pathway that is, the same for everybody, rather than having all the different insurance carriers-
Mm-hmm
have a different set of codes and stuff that you have to use, that the commercial payers will follow relatively quickly.
Yep. Kind of like what happened with ASCs when CMS came out with its rule. I mean, is that the-
It's-
Are we or should we think about it as sort of, you know, history repeating itself just
Yeah
As a, with a different population?
Well, what happened, I hope. Yeah, in the early days, yes. So what happened is we got, we were the first company, and for many years, we were the only company that broke the bundle for ASCs.
Yeah.
That happened in 2018-2019, and then in 2020, CMS said they would pay for total knee arthroplasties.
Sure.
In the first quarter of 2020, we saw the use of EXPAREL go straight up. Then the big insurers realized that we could actually do a knee outside of the hospital, and they came in, and the $300 savings that we were providing through reimbursement were meaningless to United, who was saving thousands of dollars.
Yeah.
Basically, the commercial payers hijacked the capacity. That, we don't expect that that's gonna happen in HOPD. We think that NOPAIN will be much more important to these lower-margin procedures.
Yep.
But at the same time, we'll provide not only the patients' access, but we'll improve throughput, and we'll lower the cost of doing those procedures because opioids, all the nausea and vomiting and the other things that they cause.
Sure. Let's talk about manufacturing. So seemed like there was good gross margin recovery in Q3. So talk to what changed between Q2, which you saw margins come in pretty weak, and you talked about the issues in Swindon. What changed between Q2 and what you were able to put up in the third quarter?
Yeah, well, so there's a couple of things going on
Yeah
R ight? So the facility, the EXPAREL facility in Swindon, just outside of London, had a miserable Q2.
Yeah.
Didn't do much in Q3, which actually was a best-case scenario relative to Q2. And at the same time, the facility in San Diego had a really a very, very strong Q3.
45 liters?
The 45 liters.
Okay.
Yeah, their gross margin was actually 86%.
Okay.
Now-
Does that ever happen for that facility?
I don't think it'll ever happen again, either.
Yeah, I've covered you guys a long time.
Right.
I don't think I've ever seen that, yeah.
No, just to give you a sense, there was $18,000 worth of scrap in that entire month in a sterile manufacturing facility. That's unheard of.
Okay.
In the interim, the Swindon facility has made good progress on making three batches a week.
Okay.
We don't see 86% coming out of San Diego, but it continues to perform at a very high level. So we've said publicly that, you know, we think that we will exit 2023 in the high 70% gross margin across the portfolio, or for EXPAREL, I'm sorry, and very close to that for the portfolio.
Yeah.
It was 77% in Q3. Then going forward, right, we get the 200-liter facility in San Diego, and once we have some reliability that we can make three batches a week on that facility as well, couple of months, then we decommission the two 45s, and that is a very significant opportunity that we believe takes us beyond 80.
That sort of leads me to my next question about the 200-liter facility. When is that fully online, and when do you— Well, put it this way: When do you think you'll be in a position to make three batches a week out of that facility?
In San Diego?
Yeah.
My guess is that, you know, mid-year.
Okay.
You know, you always say, well, we always say, "You know, we've already done it once in the U.K. It should happen quickly." Nothing in sterile manufacturing happens quickly.
Sure. Going back to Swindon now, do you feel confident that the issues that you saw there earlier this year put behind you?
Yeah, fundamentally, it's the biggest single issue, frankly, is a change in leadership.
Yeah.
And so we have a new head of manufacturing, and he has brought in a new head of manufacturing who really understands how to work with a CMO.
Mm-hmm.
I think a lot of our issues, looking back, things that we should have been able to fix quicker, were, we just didn't have the right kind of working relationship with Patheon, our fault, and those are all rectified now. So when we do have an issue, it's fixed very quickly.
Okay. So I'm not gonna try to pin you down on guidance or anything like that on margins for next year, but maybe I'll ask a different way. Is your exit in this year in terms of gross margin a good way to think about margins for 2024?
Yeah. You want to take a shot, or you want me to keep going here?
Go ahead.
Yeah. No, yes, absolutely, David.
Okay.
I think.
3Q is a bit of an outlier.
3Q. I think 3Q.
Yeah
I s pretty predictable going to go forward-
Mm-hmm
B ut for slightly different reasons.
Sure.
Diego, or, you know, the 45 liters won't be as strong, but Swindon will be picking up the slack.
Okay.
And then it can only get better when we have the two 200s and we get rid of the two 45s.
Mm-hmm. So let's switch gears. We have 3.5 minutes left. Talk about ZILRETTA. I guess, this is one where, you know, you had to give it a lot of TLC
Mm-hmm
W hen you acquired the asset, we know all that. What are you doing now to try to drive more aggressive growth out of that product?
The biggest single thing on the short term is involving specialty pharmacy.
Mm-hmm.
You know, we know, I guess we knew, but we now know very specifically that smaller practices just can't do buy and build on a product with a WAC of over $600 bucks.
Mm-hmm.
And so, you know, we put specialty pharmacy out there end of September, early October, and we've had several hundred office accounts sign up for a specialty pharmacy that does the prior auth and, you know, purchases the product and sells it back in or in-
Mm.
And so the practice bills for the procedure, but gets rid of any risk that's associated with an expensive product
Mm-hmm
A nd a J code. So that's the short-term issue. We've had several hundred new customers this year, so, you know, bringing them along to be loyal users is where we are now in terms of the growth phase, grown by 9% this year.
Yep.
We think that's, that is, at least where we go next year.
Okay.
And so, you know, it's gonna be a grind. It's not EXPAREL.
Yeah.
We don't think it is EXPAREL, but it's a useful product.
But you have the clinical trials that'll kind of-
We're doing the shoulder trial.
Yeah.
It'll be the only product approved for the shoulder, not
Right
N ot steroid. It'll be the only product approved for OA of the shoulder.
And the shoulder readout next year, maybe?
Shoulder will read out probably in early 2025.
Okay
W e're looking at it now.
What about the diabetic study?
The diabetic, we've got site centers that think they can do it much more quickly, so we won't do that as a regulatory trial. We'll do it as a manuscript trial for-
Sure
E ndocrinology, largely, and that will be done in a shorter time period.
Got it. Let's switch gears to iovera. What do you think is the role of iovera in the business going forward, given that it hasn't quite performed out-
Well-
H ow you've expected?
We launched it into COVID times, too.
Sure.
Right? And right now, David, other than lower extremity nerve block, it is the most exciting thing that we're doing with customers. I mean, you know, we've started doing direct-to-consumer in places where we have a bolus of users, so we don't frustrate patients, and it's going extremely well. Now, it's a small end, but the growth opportunity is there, and it is a sea-change opportunity to improve patient care. And so we see cash markets improving. We will launch a medial branch block for low back pain in June of 2024. We're developing tips for pediatrics and for sports medicine. And, you know, the big, the big issue or the big opportunity here is around spasticity.
Mm-hmm.
A tremendously dissatisfied market, where anecdotally, and a number of papers will be coming out over the short term here, the results of freezing motor nerves and I mean, materially improving the lives of these spasticity patients, is something that I've had docs accuse me of setting them up, that what they just saw can't be true.
Yep.
I think that's a major opportunity. The first trial that we're doing will be adult stroke, and then we'll go from there. But that, the next EXPAREL, if we have one, is spasticity associated with alcohol.
Sure. So to be clear, iovera is still very much a core part of the business, and there's still significant R&D spend associated with the asset?
If you think that our R&D spend next year is something in the neighborhood of $70 million, it's 10% of that.
Okay. It's-
Yeah.
And one more question. I know we're out of time. Just broadly, it and I asked about R&D spend, but just in terms of the cost structure, how are you thinking about ways to control spend or even reduce spend?
A couple of things. I'm glad you asked.
Yeah.
So our manufacturing R&D is in that R&D line.
Yeah.
So 200-liter EXPAREL is in that line. The new fill line for ZILRETTA is in that line. Both of those will come out, as, you know, as we work through 2024. On the SG&A line, legal is in that line, and we've spent almost $10 million this year defending ourselves against the P IV.
Sure.
The number of people we've had to send to Asian countries to do discovery to protect ourselves from the P IV filer is borderline obscene.
Yeah.
That will all come out as well.
Mm-hmm.
So I think if you're looking just at clinical development, you'll see a more pure view of the world in R&D as we go forward.
Great. Well, we're out of time. Thanks, Ron, thanks, Dave, and thanks everyone in the audience.