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Pacira Pharmaceuticals Inc (PCRX -0.38%)
Q4Â 2018 Earnings Conference Call
Feb. 28, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Q4 2018 Pacira Pharmaceuticals Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference, Head of Investor Relations, Susan Mesco. Ms. Mesco, you may begin.
Susan Mesco -- Head of Investor Relations
Thank you, Josh, and good morning everyone. Welcome to today's conference call to discuss our fourth quarter and year-end 2018 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer; Dr. Richard Scranton, our Chief Medical Officer; and Charlie Reinhart, our Chief Financial Officer.
Before we start, let me remind you that today's call will include forward-looking statements based on current expectations. Such statements represent our judgment as of today and may involve risks and uncertainties. Please refer to our filings with the SEC, which are available from the SEC or our website for information concerning the risk factors that could affect the Company.
With that, I will now turn the call over to Dave Stack.
David Stack -- Chief Executive Officer and Chairman
Thank you, Susan. 2018 was an outstanding year for Pacira. We reported record revenues for EXPAREL, making us financially stronger than we've ever been. And as we look ahead to 2019 and beyond, we see tremendous growth opportunities for EXPAREL and Pacira before us. As you all know, our country is in the midst of an opioid epidemic with wide-ranging effects on patient's quality of life and devastating economic and social consequences to our communities. Government, payers and healthcare systems alike are mandating solutions to address the mounting crisis by driving significant change in pain management practices. It's the only non-opioid, single dose, long-acting, local and analgesic approved for infiltration, field block, and brachial plexus nerve block.
Pacira is uniquely positioned to be at the forefront of the fight to stem the tide of post-surgical opioid misuse and abuse. With EXPAREL, a comprehensive clinically proven solution for managing pain or reducing or eliminating opioids. Strategically, we are focused on playing a broader role and the pain management continue. EXPAREL is on a robust growth trajectory across multiple existing and planned indications. With a solid operating foundation, we aim to further solve our leadership position -- evolve, I'm sorry -- we aim to further evolve our leadership position and providing innovative non-opioid pain management and regenerative health solutions. We believe that we can achieve this goal by leveraging our core competencies to advance three growth pillars.
First, the continuing expansion of EXPAREL and key surgical settings; second, leveraging our DepoFoam platform to rapidly advance new clinical candidates; and third, pursuing innovative partnerships and acquisitions targeting products, assets or technologies that align directly with our strategy and complement our EXPAREL commercial infrastructure and physician audiences.
Let me begin with EXPAREL. We are thrilled with the momentum we are seeing and we are well positioned to deliver robust growth in 2019 with year-over-year net sales expected to increase by at least 20% to $400 million. As we look back at our strong performance in 2018, three key drivers are working synergistically and delivering impressive results. One, the ongoing integration of EXPAREL is the foundation of opioid-sparing pain management protocols at influential academic centers of excellence, as well as in leading healthcare organizations such as MEDNAX, a national medical group comprised of more than 4,000 healthcare professionals.
Two, the nerve block launch. This has triggered a growing level of engagement and enthusiasm from anesthesiologists. Anesthesia is at the forefront of innovation for the non-opioid post-surgical pain management through regional approaches that utilize peripheral nerve blocks and field blocks is the core of a multimodal strategy. And three, our significant partnership with Johnson & Johnson, which continues to support uptake by integrating EXPAREL across its world-class educational programs and orthopedic procedural solutions.
Taking a closer look, enhanced recovery after surgery or ERAS protocols are becoming the gold standard for perioperative care. These patient-centered opioid-sparing approaches, improved patient recovery while reducing complications and cost. They typically involve a multi-disciplinary team that is often led by a regional anesthesiologist. Together, they develop and implement a standardized approach by surgical specialty or procedure to improve the patient's post-surgical experience and facilitate a faster recovery.
Our partnership with MEDNAX is a great example of how we are expanding the role of EXPAREL as the core of procedure-specific ERAS protocols. We are working with the MEDNAX team of maternal-fetal specialists, anesthesiologists, obstetricians and perioperative nurses to implement an innovative platform for cesarean sections that features EXPAREL as a Transversus Abdominis Plane or TAP block, for targeted long lasting opioid-free pain management. Our TAP involves an infiltration field block with EXPAREL, expanded in volume with saline into the plane between internal oblique muscle and the transversus abdominis muscle using ultrasound guidance.
Through this collaborative, we're breaking new ground in terms of how we are interacting with our anesthesia customers. We are also initiating a national ERAS educational initiatives, where hospitals will be certified as ERAS centers of excellence. More on this, in the next couple of months. These programs are driving interest from national practice management and consulting companies to implement comparative collaboratives with Pacira. We're excited to be establishing ourselves as the go to partner for building out successful ERAS protocols and opioid minimization strategies for best practice inpatient and ambulatory procedures.
Our field-based team continues to see a high level of engagement and enthusiasm from the anesthesia community and they are reporting daily wins within this space. Of note, we remain squarely in the launch mode for brachial plexus nerve block. We are seeing strong and steady growth in the size of our active customer base with nearly 1,000 new accounts added since launching the nerve block indication. So we see great upside as regional approaches become more widely accepted by anesthesiologists, surgeons, patients and administrators.
The literature continues to feature the benefits of regional nerve blocks and field blocks, along with a multimodal regimen for eliminating pain during and after surgery. With a single dose long-acting EXPAREL block, analgesia is being targeted directly at the region of pain and providing days of pain relief, while eliminating the use of cumbersome and costly delivery technologies like catheters and pumps. Most importantly, EXPAREL provides a clinically proven statistically significant improvement in pain control, while avoiding opioid use and preventing side effects such as nausea, vomiting, urinary retention and delirium, and resulting in reduced length of stay, decreased cost, fewer postoperative complications and improved patient satisfaction.
Finally to come full circle, we are observing the successful experiences with brachial plexus nerve blocks are triggering anesthesiologists to expand their use to regional field blocks such as TAP, which can be used across -- which can be used broadly across multiple soft tissue surgeries, including bariatric, colorectal, C-Section in hysterectomy procedures.
For C-Section, we recently announced positive top line results from our Phase IV study, the comparative TAP block with EXPAREL to a TAP block with bupivacaine. EXPAREL achieved a statistically significant reduction in total post-surgical opioid consumption and pain intensity scores through 72 hours with a p-value of less than 0.05. The study has been submitted for presentation at the Annual Meeting of the Society of Obstetric Anesthesia and Perinatology or SOAP and we plan to submit the full study results for publication in a peer-reviewed medical literature later this year.
Finally on the EXPAREL front, our important partnership with Johnson & Johnson continues to drive uptake through our mutual shared passion for delivering opioid-sparing procedural solutions, and of course, J&J's tremendous commercial and medical reach. The J&J team has marshaled substantial resources behind EXPAREL, including integrating EXPAREL across their world-class educational programs which attract thousands of healthcare providers and including EXPAREL as a key component of J&J's non-opioid procedural solutions for widely carried out orthopedic procedures such as rotator cuff spine and hip fractures.
Looking ahead, EXPAREL is in terrific shape for 2019. We are focused on building on our 2018 success by driving multiple growth opportunities, including using EXPAREL as a catalyst for shifting inpatient procedures to the outpatient setting. As you may recall, on January 1st, the Centers for Medicare and Medicaid Services or CMS began providing separate Medicare reimbursement for EXPAREL when used in an ambulatory surgical center or ASC, through the product-specific billing code of C9290. This code provides payment for EXPAREL at $1.22 per milligram, and sets national Medicare reimbursement rates. This reimbursement code provides us with a crucial element to expanding the use of EXPAREL in the ambulatory setting. Last year, ASCs made up roughly 10% of our business and that was without reimbursement. Consequently, we see significant growth opportunity here and our team is working with commercial payers to follow Medicare's lead and reimburse for this effective non-opioid option.
In parallel, the American Dental Association also implemented a new reimbursement code, which took effect on January 1st for infiltration of a sustained-release therapeutic drug in oral surgery procedures. Many teens and young adults are exposed to opioids for the first time following wisdom tooth extractions. So having access to non-opioid -- to a non-opioid option like EXPAREL, it is critical for these vulnerable populations. We are seeing a high level of engagement from dental payers with Aetna, a large national dental payer, as well as regional payers like Dominion National and even Connecticut Medicaid Dental Plan, covering the use of EXPAREL for oral and maxillofacial procedures. While it's still early days, the leading indicators are around these positive reimbursement changes are highly favorable with ambulatory and oral surgery centers, both key drivers of EXPAREL new business.
The last item I quickly cover on the reimbursement landscape is the December report issued by the Department of Health and Human Services Pain Management Task Force. The report recommends the use of non-opioids as first-line therapy whenever possible in both in and outpatient settings. This report is now in the 90-day public comment period after which the task force will finalize their guidance and submit it to Congress.
Turning now to our second pillar of growth, leveraging the proven safety, flexibility and customizability of our DepoFoam Technology for acute, sub-acute and chronic pain applications. The current opioid crisis was triggered by a pain epidemic. Eliminating opioids will not address the significant unmet need for new tools and strategic approaches for managing pain.
Following readouts from pre-clinical and feasibility studies, we have selected two DepoFoam-based programs to rapidly advance into the clinic. First, the intrathecal or subarachnoid delivery of a DepoFoam-based local anesthetic other than bupivacaine for acute and chronic pain. Here we have the opportunity to provide an alternative to the use of intrathecal or subarachnoid opioids, typically delivered by pumps and catheters. We have substantial experience with the technology here as the DepoFoam technology was used successfully in the intrathecal setting for more than 15 years in connection with our previously marketed product DepoCyt(e) or cytarabine for lymphomatous meningitis.
The second clinical compound we have selected is Depo Dexmedetomidine. With this product, we see a targeted market as the end-of-life pain and painful conditions in the elderly. Dexmedetomidine has complementary analgesic and sedative properties with fewer neurocognitive effects versus other sedatives. It is also demonstrated opioid-sparing effects and reduced delirium in the elderly. We believe the extended delivery of a therapeutic dose of dexmedetomidine has the potential to offer patients mental acuity and quality of life, while also providing adequate pain control. As for DepoMeloxicam, we have made the strategic decision to no longer invest in this clinical program, given the current competitive landscape with oral formulations in the clinic for similar therapeutic uses.
Finally, let's move on to our third pillar of growth, evolving our leadership and providing innovative non-opioid and regenerative health solutions. As we've discussed previously, we see a vast opportunity in building a differentiated non-opioid portfolio focused on improving the patient journey along the neural pathway. We are thoughtfully pursuing innovative opportunities in osteoarthritis, orthopedic surgery and additional products and technologies that are highly complementary to EXPAREL and of great interest to the surgical and anesthesia audiences we are calling on today.
To take osteoarthritis as an example, the average time from onset of osteoarthritis pain to knee replacement surgery is roughly 19 years in the United States. There are tremendous opportunities for us to provide patients with non-opioid and regenerative solutions, along the pain treatment continuum well in advance of the surgical intervention.
In the case of spine, we aim to provide patients with several months of non-opioid pain control, to allow them to present to surgery opioid-free. We believe we can greatly enhance our post-surgical experience and outcomes with this prehabilitation approach. We are well positioned to partner -- to be the partner of choice, given our financial strength, deep clinical and commercial expertise in the hospital and ambulatory markets, significant partnership network and proven track record for improving market access to opioid-sparing strategies. As we look ahead, we remain committed to executing our strategy and advancing our mission of providing an opioid alternative to as many patients as possible.
With that overview, I'll now turn the call over to Rich, to provide an update on our clinical and regulatory activities. Rich?
Richard Scranton -- Chief Medical Officer
Thanks, Dave, and good morning to all joining today's call. Over the last several months, we've continued to make great progress executing on our commercial, clinical and regulatory strategies. Given EXPAREL's established efficacy and excellent safety profile, we are seeing strong expansion among surgeons and anesthesiologists. I'm happy to report that EXPAREL has now been used in more than 5 million patients since its approval.
On the clinical front, we are advancing a number of initiatives to support its use across key surgical settings and within new indications. I'll start with pediatrics, which is arguably the surgical population most vulnerable to opioids adverse side effects, and where there is an urgent need for opioid-free options to manage post-surgical pain. This is particularly true for children 6 to 12 years of age where the only FDA-approved option for managing moderate severe pain today is through the use of opioids, which we know are brought with unwanted and potentially life-threatening side effects.
We have seen tremendous interest in our pediatric study or the Play study, which is now under way. This interest is not surprising, given the limited number of options available in the pediatric setting. Adding pediatrics to the extra level to provide our youngest patients with the benefit of a low or no opioid post-surgical recovery experience is a top priority at Pacira.
The Play study is a Phase III extended PK safety study in children undergoing cardiovascular or spine surgery. The study will enroll approximately 90 patients and evaluate the pharmacokinetics and safety of EXPAREL for two patient groups, patients aged 12 to less than 17 years and patients aged 6 to less than 12 years. The study will include bupivacaine as an active comparator arm for the older patient population. We expect this study to conclude before the end of this year. Positive results would form the basis of a supplemental new drug application, seeking expansion of the EXPAREL label to include children aged six and over.
Next, let's move to our cesarean section studies where we continue to see great interest from both patients and healthcare providers. As you may know, there are approximately 100,000 C-Section procedures performed each month in United States. As a result, there is a significant need for a non-opioid paid regimen to help eliminate the negative side effects and allow new mothers the ability to recover faster and spend more time with their babies.
Last month, we reported top line results from the first of two C-Section studies. The results demonstrated that a targeted TAP block with EXPAREL was superior to TAP block with bupivacaine for patients undergoing cesarean section. This study achieved its primary endpoint with a statistically significant reduction in total postsurgical opioid consumption through 72 hours with a P value point of less than 0.05. EXPAREL also achieved statistical significance for improving pain scores through 72 hours. And importantly, the study also achieved statistical significance for relevant secondary endpoints, pre-specified in the statistical analysis plan that better characterize the clinical benefit of the observed reduction in opioids, including total opioid consumption at one and two weeks following C-Section and the percentage of opioid-spared patients, a pre-specified composite endpoint defined as patients who took no more than one oxycodone 10 milligram tablet and graded their bother from opioid as not at all according to pre-defined metrics.
As Dave mentioned, these data have been submitted to the Annual SOAP meeting for presentation and we will also seek publication in the peer-reviewed medical literature. TAP blocks are being used more and more by anesthesiologists as part of their opioid-sparing approaches to managing post-surgical pain. When added to a multimodal regimen, an EXPAREL TAP block provides a superior long-acting field block for controlling pain and reducing opioids.
As a follow-on to this study, we are currently enrolling the CHOICE study. This next generation C-Section study is designed to be completely opioid-free in the EXPAREL arm, including opioid-free spinal anesthesia. The CHOICE study will capture patient reported outcomes to measure the benefits of reducing or eliminating the need for opioids administered via an epidural catheter. Linking opioid reduction to patient benefit will help define clinical meaningfulness in support of an opioid-sparing claim. We expect to report top line results from CHOICE near the end of this year and believe these data will help transform the standard of care for mothers undergoing C-Section.
As for other programs, we are in the process of activating sites for both our Phase IV spine study and Phase IV hip fracture study. The spine study will be an observational design, collecting patient reported outcomes for today's opioid-based centered care versus an EXPAREL-based multimodal regimen. In our hip fracture study, we are targeting a small number of leading clinicians already experiencing very positive real world results using EXPAREL administered as a fascia iliaca field block for hip fractures presenting in the emergency room.
Let's now turn to the progress we've made advancing EXPAREL in international markets. The European Medicines Agency has approved our Pediatric Investigation Plan or PIP, and we expect to submit our marketing authorization application around the middle of this year. We will be seeking approval of EXPAREL for local and regional analgesia in the acute pain setting for adults. We are also planning to submit a new drug submission to Health Canada within that same time frame.
In China, we recently discussed the regulatory requirements for securing approval of EXPAREL with the national medical products administration. We believe we have the clarity needed and we are in the process of finalizing our path forward with our partners at Nuance Biotech.
With that overview, I'll now turn the call over to Charlie, to walk through our financial results. Charlie?
Charles A. Reinhart III -- Chief Financial Officer
Thank you, and good morning everyone. I'll start by summarizing our 2018 financial results, and then walk through our outlook for 2019. 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.
We ended 2018 in a very strong financial position with $409 million in cash and investments, and significant cash flow from operations, we are well positioned to advance our evolution into a leading provider of non-opioid pain management and regenerative health solutions. On the P&L side, we have significant operating leverage with rapidly growing top line and we are supporting this only modest increases in operating expense.
EXPAREL net product sales were $94.4 million for the fourth quarter and $331.1 million for the year, which was above our guided range of $325 million to $330 million. Our non-GAAP gross margin was 76% for the fourth quarter and 75% for the full year. This full year gross margin was in line with our guided range of 74% to 75%. Non-GAAP research and development expenses were $13 million for the fourth quarter and $51.8 million for the year. This was at the lower end of our guided range of $50 million to $60 million.
The $2.2 million decrease in our full year R&D expense for 2018 versus 2017 was largely due to the completion of our Phase III studies in nerve block, which were partially offset by increased product development costs related to the scale up of our manufacturing capacity in the UK.
Our non-GAAP selling, general and administrative expenses were $38.7 million for the fourth quarter and $154 million for the year. This was within our full year guided range of $150 to $160 million, due to the modestly lower spending across a number of functions.
The $15.3 million increase in our full year SG&A expense for 2018 versus 2017 was primarily driven by the following: marketing and educational initiatives to generate product and opioid-sparing awareness in key surgical markets; increased selling and promotional activities, including the addition of our outpatient account managers focused on the ambulatory dental and plastic surgery markets. Expenses related to our co-promotion activities with J&J and additional marketing expenses for the commercial launch of EXPAREL as a brachial plexus nerve block. Our non-GAAP net income was $19.8 million or $0.47 per diluted share for the fourth quarter and $43.5 million or $1.04 per diluted share for the full year.
Let's turn now to our financial expectations for 2019. We are guiding the total EXPAREL net product sales of between $400 million and $410 million in 2019. We expect our non-GAAP gross margin percentage to be between 75% and 76% for 2019. To remind you, commercial manufacturing is now under way at the first of two suites in our manufacturing facility in the UK. As additional manufacturing capacity becomes available and this facility becomes responsible for supplying a significant proportion of total EXPAREL demand. We expect non-GAAP EXPAREL margins to improve to roughly 85%.
For non-GAAP R&D expense, we expect to be in the range of between $60 million and $70 million. In addition to costs associated with the 200-liter scale up of manufacturing capabilities in the UK, key drivers of 2019 R&D expense are the CHOICE study, our pediatric development program and Phase IV studies in spine and hip fracture. Non-GAAP SG&A, we are guiding to a range of $165 million to $175 million. The key year-over-year driver here is the cost associated with our co-promotional activities with J&J.
Finally our 2019 stock-based compensation is expected to be in the range of $30 million to $35 million. So looking ahead, EXPAREL's on a significant growth trajectory that is delivering substantial operating leverage and cash flow. This provides us with the financial flexibility to capitalize on internal and external growth opportunities that align with our commercial focus on non-opioid pain management and regenerative health.
That concludes our prepared remarks. I'd now like to turn the call over to the operator to begin our Q&A session. Operator?
Questions and Answers:
Operator
Thank you. (Operator Instructions) Our first question comes from Randall Stanicky of RBC Capital Markets. You may proceed with your question.
Ashley Ryu -- RBC Capital Markets -- Analyst
Hi, good morning. This is Ashley Ryu (ph) on for Randall. I was just wondering if you could talk a little bit about the moving pieces to your guidance. So at the midpoint, it looks like it implies over 22% year-over-year EXPAREL revenue growth. How much of an impact does this anticipate from potential competitive approval versus kind of the growth drivers like ASC and bundling and nerve block and some of the other kind of larger swing factors that we should be thinking about. And just to clarify, the low end of your guidance also include HTX-011 in July and how much impact does that include? Thanks.
David Stack -- Chief Executive Officer and Chairman
Yes, thank you for the question. So we have tremendous momentum in the marketplace and frankly we have a waterfall that leads from all of the initiatives that we have in place and the growth that we see associated with those initiatives in the marketplace. And when you add all of that stuff together, we still only have a modest percentage of the total opportunity that's available to EXPAREL. So our forecast is driven by what we see for EXPAREL and frankly doesn't really anticipate any negative impact from what we're seeing on the other side. This is -- this is a EXPAREL forecast of $400 million to $410 million and we think we can achieve that with or without a competitor.
Ashley Ryu -- RBC Capital Markets -- Analyst
Got it. Okay. And then, it sounds like there is an increasing focus on building out the pipeline and potential for (inaudible) to augment this, but how much urgency is there? So you mentioned potential for business development in the past and Dave I think about a year ago, you said that you didn't see any transformational deals that you thought would be appropriate? Has that view changed and if not transformational, are you seeing a robust set of smaller episodes there where valuations are making sense now?
David Stack -- Chief Executive Officer and Chairman
Yeah, thanks again. We don't see the need for a transformational M&A activity, meaning the business is very strong, it's profitable, I mean, we're doing extraordinarily well and really becoming leaders of the entire focus that's being driven by the opioid epidemic with ERAS protocols, all of the academic centers that have got pipeline programs that are -- that are geared at the opioid epidemic. So there's really no reason for us to be looking for anything that's transformative.
We have more than a robust opportunity from business development. Our folks have looked at well over 250 opportunities in the last couple of years. What we're really focused on as -- are things that can improve surgeons and anesthesiologists opportunity to provide opioid-sparing solutions and what we're really moving our focus toward is procedural solutions.
So we would like to have the opportunity to go in and talk to someone about end-to-end, how you treat a patient and how we bring them into surgery and out of surgery without the requirement from opioids and all of the expense and all of the dissatisfaction from patients during the time of surgery, and then of course, leading to the nearly 3 million patients who become persistent uses of opioids every year because of their interaction with opioids in the acute post-surgical settings. So we are -- we are flushed with opportunities and we look forward to telling you about those things as we go forward.
Ashley Ryu -- RBC Capital Markets -- Analyst
Great. Thank you so much.
David Stack -- Chief Executive Officer and Chairman
Thanks.
Operator
Thank you. And our next question comes from David Amsellem from Piper Jaffray. You may proceed with your question.
David Amsellem -- Piper Jaffray & Co. -- Analyst
Thanks. Just a couple. So can you talk about the sales mix or volume mix of both between inpatient, outpatient and ambulatory surgical centers for EXPAREL, where it is now and given the coding, where it's going to be, say, at the end of the year? So that's number one.
And then number two, regarding the competitive landscape. So as the competitive product enters the market, do you envision any kind of scenario where a P&C committee would have both products on their formulary or would you basically look at it as a zero-sum game as it relates to hospital formulary access for the two products? Thanks.
David Stack -- Chief Executive Officer and Chairman
Thanks, David. First, we said in the prepared remarks. So if you back out places where like, for example, plastics, which is a cash market. So really reimbursement doesn't have much to do with that. If you look at our 2018 numbers, our best estimate is that about 10% of our business last year was actually coming from hospital procedures that would have been done in the hospital but are now moving to an outpatient environment, largely driven by the payers themselves, frankly. And so, we see that as a massive opportunity for EXPAREL to go forward.
With that said, this stuff doesn't happen overnight. I've been in CMS coding and working with all of the folks who have to manage the businesses and require protocols and all of that will take some time. We see 2019 as an important year and our waterfall calls for multiples of that $10 million to be achieved with EXPAREL in an outpatient environment this year. But we really see that is setting the stage for much more aggressive growth in the period going forward. So -- and we're seeing that, David.
We're seeing payers lineup and we're having very significant discussions with large national payers, not only around specific procedures that they would like to see moved to the outpatient environment, but how do we train their people in more than one at a time. How do we treat, how do we prepare in ERAS protocol that can be instituted throughout an entire ambulatory payer system. So we have great plans for ambulatory setting going forward.
In terms of the competitive entry, we don't really know what the label is going to read. It will be hard for a pharmacist to justify having a another product on formulary if it doesn't have broad application. And so I think we'll have to wait until we see what kind of indication comes with a competitor and then you'd see whether they really have any opportunity to compete with a product that has the broad label for infiltration, field blocks and then nerve blocks. And so I would have to say, wait and see, but I think it's going to be highly unusual for a pharmacist or a hospital institution to carry more than one.
David Amsellem -- Piper Jaffray & Co. -- Analyst
Okay. And maybe just a clarification. So you said 10% of your 2018 business was in hospital procedures that are new -- that are now moving to outpatient. Is that correct? And then, when you mean outpatient, you mean ambulatory centers, not hospital outpatient?
David Stack -- Chief Executive Officer and Chairman
No, that's right, David. I'm sorry. Yes. So what's going on in the marketplace right is we're segmenting the market to the procedures, and knee is a good example, right. Knee inpatient five years ago that would have been very rare that you would have had an outpatient knee, right. Now is relatively common place we think something like 20% of the patients will be done in an ambulatory environment this year and we also expect that next year CMS will allow for outpatient needs.
And so you see the way the marketplace is moving and our strategic discussions with the payers is about which procedures are we ready to move to an outpatient environment, what is the -- what's the driver of that in terms of patient satisfaction, like, physicians wanting to be in the ambulatory environment, and of course, the significant cost savings that a payer can achieve by moving a procedure from an inpatient environment to an outpatient environment.
David Amsellem -- Piper Jaffray & Co. -- Analyst
Got it. Okay. That's helpful. Thanks Dave
David Stack -- Chief Executive Officer and Chairman
Thanks, David.
Operator
Thank you. And our next question comes from David Steinberg of Jefferies. You may proceed with your question.
David Steinberg -- Jefferies & Co. -- Analyst
Yeah, thanks a lot. On gross margin, you've had a pretty substantial increase from 2017 to 2018. Last couple of quarters were kind of flattish in the mid 70s and your guidance is also in the mid 70s. And I think you said that it will be -- you won't get to the mid 80s until you have the new capacity. Should we assume pretty much flat mid 70s until then, and could you remind us the timeline until you reach that new capacity?
And then secondly, on nerve block. Can you say what -- the percent in terms of the incremental revenue growth this year over last year. What percent would be from nerve block or could you actually give us the actual percentage of the total revenue generated thus far from nerve block? Thanks.
Charles A. Reinhart III -- Chief Financial Officer
David, this is Charlie. I'll take the first half of that question related to the gross margin side. So as we look forward to 2019, as we guided, it is a little bit better than 2018. I do think that 2020 is likely to be better than 2019. And part of the reason is, we just -- we announced recently that the first suite in our new UK manufacturing facility came online officially in Q1. As that suite gets a little more experienced and get higher volume put through it, it will drive cost down somewhat. So we would expect that some of the benefits that we are going to generate from an inventory costing perspective will actually flow through the P&L in 2020.
The other point that is probably worth noting is that we recently announced that the shelf life is back to 24 months. That now allows us to build inventory, so that in this year, we expect to manufacture -- to meet the -- both the top line demand and take inventory from the two to three months range back up to what we had been prior, which is roughly six months. And so, as we increase volumes, generally that leads to unit cost reduction, but those unit cost reductions will -- much of that will flow into 2020, because it will be on the balance sheet at the end of '19.
David Stack -- Chief Executive Officer and Chairman
Okay. I'll take your second half, David. There is no clear -- there is not a number that would be a specific answer to your question. Let me -- let me see if I can explain exactly what's going on in the marketplace and why nerve block is really important above and beyond what you would actually get from a brachial plexus nerve block indication itself.
So first, and I know you know this, David, but the observation is that we've had 20% growth from third quarter forward and that is largely being driven by the nerve block procedure, but it's strategically way more important than that, because the brachial plexus nerve block procedure allowed us to have a very specific discussion about appropriate dosing and administration of EXPAREL. How you -- whether you can see it or not under ultrasound guidance? All of the important questions that an anesthesiologists would like to have and the benefit that they gain from having that product in their hands and being able to provide several days of pain control through a brachial Plexus nerve block. The reason I frame it that way David is, what we've seen in the marketplace is that the 10-ml dose for a EXPAREL brachial plexus nerve block is giving the anesthesiologists great confidence that EXPAREL indeed does provide several days of pain control and used as a nerve block. And so, they've moved fairly rapidly from the 10-ml dose to 20-ml doses associated with field block like TAP blocks and PEC blocks and fascia iliaca blocks and all the things you've heard Rich talked about.
And so, we've got a number of situations now where we've seen an ambulatory surgery center by EXPAREL 10-ml for a brachial plexus block. Within a couple of weeks, they start buying the 20-ml dose, which you obviously know that is being used for something more the brachial plexus block, and then a couple weeks after that we see the hospital in the same geography by EXPAREL for us in the hospital marketplace.
So the brachial plexus nerve block indication strategically has been way more important to us than just the revenue that you would get from a brachial plexus nerve block if that makes sense.
David Steinberg -- Jefferies & Co. -- Analyst
Yeah. Got it. Thank you very much.
Richard Scranton -- Chief Medical Officer
And honestly, David, we're looking at it more as the value of the anesthesiologist is the customer and that's the way we're -- when we're allocating resources, it's real more of a customer-based approach than it is a specific procedure-based approach.
Operator
Thank you. Our next question comes from Liana Moussatos from Wedbush Securities. You may proceed with your question.
Liana Moussatos -- Wedbush Securities -- Analyst
Hi, thank you. What is your procedure for choosing new DepoFoam candidate. You mentioned shelving meloxicam and you have two new ones. What's the thought procedure in that?
David Stack -- Chief Executive Officer and Chairman
So thanks for the question, Liana. The -- let me go backwards, right. So shelving meloxicam comes from the observation that there is some physiological understanding of how meloxicam acts in the body that frankly wasn't fully understood when we started the meloxicam program, but it appears that meloxicam actually sinks in the bursal fluid. And so that observation was married then e with the fact that there is a -- there is a number of oral meloxicam programs on ClinicalTrials.gov that give you the suggestion that they can do the same thing with an oral tablet that we can do with an intra articular injection. And so that obviates our advantage in the marketplace with DepoFoam-based products. So it will get that out of the way, right.
And then, the big observation, Liana, is that we have a pain epidemic, we have an opioid epidemic, because we have a pain epidemic and when we get rid of opioids, then there is a number of places where we -- where we require new tools and new strategic approaches in order to be able to address the fact that folks don't want to use opioids in these different scenarios. So we start talking to people in the marketplace, we have found folks (ph) who are using dexmedetomidine for these uses, for end-of-life scenarios, and for elderly, and in some cases and scenarios where you do want to have the delirium of all the things that come with the opioids.
And then I'll give you an example with dexmedetomidine. If you had somebody that was using that drugs subcutaneously and giving these patients, 100-mil doses on a bi-daily or an every other day basis, you'd say, well, wait a second, we can do that with EXPAREL. We look at places like and we've got some strong evidence now from the use of EXPAREL in chronic pain scenarios where folks are replacing bupivacaines or any other caines with pumps and catheters that are delivering drugs intrathecally, and so you start to say, well, wait a second, we can -- we can get into the chronic pain market using EXPAREL in animal studies and understanding how a local anesthetic works in an animal model.
But if you were us, I think you'd come to the same conclusion that you don't want to be using EXPAREL and putting it into subarachnoid, into intrathecal environments, if you have an opportunity to use a drug that might actually offer more potential as a local anesthetic than EXPAREL can in terms of potency or diminished side effects by using an isomer and all of those kinds of things.
So these are driven by very close discussions with the marketplace. In most cases, we try to -- they tell us where they would go if they had DepoFoam in all of our ad boards, and then we try to find somebody who is already doing what we want to do with DepoFoam, but they're using these more awkward approaches, because they don't have access to the same technology that we do.
So if you can replace the pump, if you can replace the catheter, if you don't have to give a patient a 100-mil or something subcutaneously, if you can give a straight intrathecal injection and it's going to last two weeks like DepoCyt(e) did, those are the places that we're looking and where we think we can really make a difference.
Liana Moussatos -- Wedbush Securities -- Analyst
Thank you.
David Stack -- Chief Executive Officer and Chairman
And there's more.
Operator
Thank you.
David Stack -- Chief Executive Officer and Chairman
I mean, we're only starting here. So I think the tools that are going to be required here, Liana, are going to require virtually everybody that works in the pharmaceutical space to really take a hard look at all of this stuff if we're going to -- if we're going to get rid of opioids.
Operator
Thank you. And our next question comes from Serge Belanger from Needham & Company. You may proceed with your question.
Serge Belanger -- Needham & Company -- Analyst
Hi, good morning. First a question on reimbursement in the ASC setting in a J-code. It's now been two months since the J-code took effect. Just wanted to know how that -- how sales have progressed in that setting and whether any payers started reimbursing the product before January 1st?
David Stack -- Chief Executive Officer and Chairman
Yeah. First, it's a C-code. So it just to be technically correct. So C9290, and the reason that CMS did that is, that is our previous C-code and so they knew that it was already in a number of payers billing systems and so they actually did us a favor and gave us the same code back again, so it didn't have to be changed.
Yes, Aetna started a series of pilots in December, and we've had a number of beta centers for other payers, where we've been working with them to understand exactly how that rollout will take place, what the kinks might be, and how we would address those kinks before we got into a broader launch application? Those have gone extraordinarily well. And we see -- it's still early days, 60 days for a national program in the United States is not a longtime at all, but all of the evidence is very positive and we're 100% certain that everything is heading in the right direction.
Serge Belanger -- Needham & Company -- Analyst
Okay. And then on the dental side with the D-code, is that a little slower than what you typically see on with the C or J-code?
David Stack -- Chief Executive Officer and Chairman
No, I mean, dental code is sort of an (inaudible). There are mother blogs, there's mom blogs, they talk very aggressively about not having their child be -- having their first interaction with opioids in the dental department. I would tell you that of all of the public citations regarding the ability to go opioid-free and writing up in local newspapers and the national press, et cetera, the majority of those are Dental. And so I think that the dental community has really grasped the need for opioid-sparing and the use of EXPAREL for providing that opportunity with some energy.
Now you would know and everybody would know, right, it's a 5-ml per side. So this is never going to replace joints or spine or anything like that, but from a strategic perspective, again, the amount of momentum in the marketplace about the need for no opioids and the fact that we've got families involved now, because their children became addicted to opioids and then moved on to heroin because of the third molar extraction and the complete lack of any logic is to why that would even be a remote possibility that has put a lot of steam behind us in the marketplace and especially with patient advocacy groups.
Serge Belanger -- Needham & Company -- Analyst
Okay. And just one last one for Charlie. In terms of the OpEx guidance, what should we expect in terms of lumpiness, I know there's some investments for the new manufacturing facility and some clinical trial expenses in there?
Charles A. Reinhart III -- Chief Financial Officer
I missed part of your question. So...
Serge Belanger -- Needham & Company -- Analyst
How should we think about the quarterly progressions of the OpEx guidance?
Charles A. Reinhart III -- Chief Financial Officer
So I would break that down into two pieces. Historically, our SG&A expenditures are relatively consistent throughout the quarters. When I say relatively, the only exception is the fees we paid at J&J. So as sales go up in the quarter, so does that, but the rest of our SG&A is pretty flat. Our R&D is more focused on specific activities. So the investment in the 200 leader system is well under way. I suspect that will be relatively flat. And then we get back to the clinical side, and I think that there are enough things going on that there won't be any massive spikes in total clinical spend either, I don't think. So I'm looking for a reasonably consistent total R&D spend as well.
Serge Belanger -- Needham & Company -- Analyst
Got it. Thank you.
David Stack -- Chief Executive Officer and Chairman
Thanks Serge.
Operator
Thank you. And our next question comes from Gary Nachman of BMO Capital Markets. You may proceed with your question.
Raphael Yeung -- BMO Capital Markets -- Analyst
Hi, good morning. It's Raphael (ph) on for Gary. How large are the opportunities in Europe and Canada, and how would you compare the level of concern around opioid use in those markets relative to the US? And then which of the planned or recently completed Phase IV trials do you view as having the biggest potential to expand EXPAREL views?
David Stack -- Chief Executive Officer and Chairman
Thanks for the question, for starters. So generally, across all of the different marketplaces, we figure that Europe is about, I mean, I'm talking about peaks now, right, that you would think that Europe is between 60% and 80% of the peak sales of the United States and the Canada is 8% to 10% of the peak sales of the United States.
Canada has a very high on a per patient basis use of opioids. It looks actually very much like the United States and there are significant interactions with surgeons and anesthesiologists from Canada who come to the United States for all the big medical meetings, et cetera. And so there is great interest and we expect that the adoption in those markets will be faster than it was when we launched EXPAREL, because there is so much data out there and because of these folks, many of them went to school in the United States, and so they're actively positioning the regulators to provide access to EXPAREL.
Europe is a little bit different. There are at least on the numbers now, you have to take the numbers from Europe with a grain of salt. Those of us that have got significant international experience, the numbers are not quite as reliable in Europe as they are in the United States. And so you have to be a little bit skeptical of the way data is presented there, but there -- this is -- this will not be a pan-European launch. We will be selective and the majority of the opportunity here is in five or six key markets. And at least as we launch, we will go to those five or six key markets.
And so if you were thinking over the short haul, that the short-term opportunity is, half the 60% of what you would see as the opportunity in the United States, you'd be in the right ball yard.
Operator
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Dave Stack, Chairman and CEO, for any closing remarks.
David Stack -- Chief Executive Officer and Chairman
Thank you, Josh. Thank you for your questions and time this morning. We look forward to providing additional updates in the future. Next up for us is the Barclays Conference in Miami. We look forward to seeing you all soon. Thanks.
Operator
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a wonderful day.
Duration: 51 minutes
Call participants:
Susan Mesco -- Head of Investor Relations
David Stack -- Chief Executive Officer and Chairman
Richard Scranton -- Chief Medical Officer
Charles A. Reinhart III -- Chief Financial Officer
Ashley Ryu -- RBC Capital Markets -- Analyst
David Amsellem -- Piper Jaffray & Co. -- Analyst
David Steinberg -- Jefferies & Co. -- Analyst
Liana Moussatos -- Wedbush Securities -- Analyst
Serge Belanger -- Needham & Company -- Analyst
Raphael Yeung -- BMO Capital Markets -- Analyst
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