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Pacira Pharmaceuticals Inc (NASDAQ:PCRX)
Q3 2019 Earnings Call
Nov 7, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning ladies and gentlemen and welcome to the Q3 2019 Pacira Biosciences Earnings Conference Call. [Operator Instructions] As a reminder this conference call is being recorded.

I would now like to turn the conference over to your host Susan Mesco Head of Investor Relations.

Susan Mesco -- Head of Investor relations

Thank you Whitney and good morning everyone. Welcome to today's conference call to discuss our third quarter 2019 financial results. Joining me on today's call are Dave Stack Chief Executive Officer; Dr. Richard Scranton Chief Medical Officer; and Charlie Reinhart 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 -- Chairman and Chief Executive Officer

Thank you Susan, Good morning everyone and thanks for joining. 2019 continues to be a terrific year led by significant growth in our core EXPAREL business along with an important asset acquisition in iovera. I'll start by calling out a few key highlights. Broad adoption is accelerating with five consecutive quarters of 20 plus percent year over year growth, validating our trajectory and placing us on a clear plan path to achieve average annual top line growth rates in the high teens for at least the next five years. Our significant partnership with Johnson and Johnson is solidifying the role of XL and painful orthopedic procedures. And we expect this relationship to continue to deliver great value through the conclusion of the agreement in 2021. We are in a terrific position with EXPAREL plus iovera to offer providers and patients a multimodal solution for opioid-sparing pain management before during and after TKA surgery. Our Phase III label expansion studies are on track and designed to add pediatrics and lower extremity nerve block procedures to our already broad label. Our Phase IV opioid-free C-section study which is known as CHOICE we'll read our top line results in January 2020. We are delighted to have Governor Chris Christie join our Board of Directors.

His long time unwavering commitment to the opioid crisis makes them a well suited and valuable member of our board. All in all this strong forward momentum leaves us well positioned to achieve long-term market leadership in non-opioid pain management and regenerative health solutions. To achieve this goal we remain focused on 3 global growth pillars: first driving top line growth through the continued expansion of EXPAREL in key surgical settings and the rollout of iovera as a preferred procedural solution for opioid-free pain management throughout the osteoarthritis patient journey; second leveraging our deep -- our DepoFoam platform to rapidly advanced new clinical candidates; and third building out our product pipeline through innovative partnerships and acquisitions that align directly with our mission infrastructure and physician audiences. Let's start with the top line. I'll begin with EXPAREL. EXPAREL continues to deliver significant growth with increased year-over-year sales of 23% for the third quarter. As a result of its established efficacy and excellent safety profile we are seeing strong expansion across all procedures. I'm pleased to report that EXPAREL has now been used in more than 6 million patients since its approval. Inpatient utilization continues to grow across important surgical segments such as orthopedics abdominal cardiothoracic and women's health.

The momentum to support and direct surgery out of the inpatient setting to hospital outpatient departments or HOPDs and Ambulatory Surgery Centers or ASCs present significant opportunity for CMS and commercial payers to realize cost savings. CMS rule changes supporting surgery migration and new insurance policies and benefits that significantly incentivize and reward providers for delivering cost-effective care in the ASC setting are growing. For example on November 1 UnitedHealthcare implemented a site-of-service policy require -- requiring prior authorization of medical necessity for 65 musculoskeletal procedures in the hospital outpatient setting and directing these cases to the ASC setting. These procedures represent surgery types that commonly use EXPAREL and present a growth opportunity in the ASCs. As a result we see continued robust uptick in our business from HOPD and ASC procedures driven by the ongoing migrate -- migration of orthopedic and abdominal surgeries to the 23-hour stay environments. In fact roughly 55% of EXPAREL procedures are taking place outside of the hospital impatient setting and we expect ongoing growth from this segment.

On November 1 the final ASC rules were published and include adding total knee arthroplasty to the approved list of procedures for Medicare. Based on historical Medicare trends there are more than 500000 TKA procedures performed in Medicare patients in the hospital setting. The opportunity for savings to the Medicare program with just a 10% to 30% shift to the ASC setting is valued at $186 million to $558 million per year. We continue to see strong and steady growth in the size of our active customer base with a 23% year-over-year increase in ordering accounts. We are averaging 95 new customers every month with over 2/3 of these new customers coming primarily from ASCs. As a result of these highly favorable market dynamics we remain confident in our ability to deliver net EXPAREL sales within our guided range of $400 million to $410 million which represents year-over-year growth of more than 20%. One of the key contributors to EXPAREL utilization is our significant orthopedic partnerships with Johnson & Johnson. This relationship continues to establish strong demand in multiple procedures including shoulder hip fracture joint reconstruction and spine surgeries.

As we have said before advances in pain medicines such as EXPAREL-based regional approaches and opioids-bearing protocols are enabling the shift of painful orthopedic procedures to the ambulatory setting. The key to achieving early recovery and emulation is ensuring that post surgical pain is well controlled protocol driven clinical experiences. together our colleagues at Johnson and Johnson we are with our colleagues at Johnson and Johnson we are successfully and effectively adopting our marketing strategies and resource allocation to support key procedures. Moving to the ASC setting driven by a significant reduction in the total cost of care, as well as this cancer CMS and commercial reimbursement of XL. We expect this alliance to remain and important strategic contributor through the remaining term of the agreement. We will benefit from J and J's world class educational resources to meet the growing level of physician motivation around standardized protocol multimodal protocols that enable more complex, painful and profitable procedures to be performed in the ASC setting. This will support improved patient outcomes patient satisfaction financial performance and physician lifestyle.

We also value J&J's significant commercial expertise in spine and sports medicine as we prepare for commercial expansion in the pediatric and lower extremity nerve block settings and generate new Phase IV data in important orthopedic procedures like spine and hip fracture. For pediatrics enrollment in our Phase III registration study has concluded and we are on track to report top line results before the end of this year we will submit a supplementary new drug application soon thereafter. Strategically pediatrics will be a very important addition to the EXPAREL label if there is an urgent need for non-opioid options for managing moderate to severe postsurgical pain in this vulnerable population. If approved EXPAREL will be the only local analgesic approved for use in children and thus will be an imperative formulary listing. We are also working with FDA to define a Phase III registration study of EXPAREL as a nerve block in the pediatric setting. In parallel we are preparing to launch our STRIDE study. This is a Phase III registration trial evaluating EXPAREL versus bupivacaine as a nerve block in adult patients undergoing lower extremity surgeries.

We expect the market opportunity for lower extremity nerve blocks to be at least as meaningful as the brachial plexus block where there are more than 1 million shoulder procedures performed annually in the United States. This indication continues to drive great interest among anesthesiologists who are implementing EXPAREL-based regional approaches to eliminate cumbersome pumps and catheters and improve pain control and patient satisfaction while reducing opioid exposure with a single EXPAREL injection typically using ultrasound guidance. Our clinical team is also advancing a number of Phase IV studies and ex-U.S. regulatory activities to support our expansion of EXPAREL in key markets. Rich will walk through these details shortly. Turning to iovera. Since closing the transaction in April we are even more excited about the technology behind this innovative system and the significant patient care and commercial opportunity it represents. Consequently we expect annual iovera sales to approach $200 million within the next five years. Last week CMS significantly improved the 2020 Medicare reimbursement for iovera in the HOPD setting.

We believe this change will materially enhance the growth of iovera with total Medicare reimbursement for hospital and physician increasing approximately $1000 to nearly $1900 for iovera procedures targeting the genicular nerves around the knee. As we outlined last quarter we are increasing the base price per treatment to over $400 for our best customers with a list price of over $600 as we are -- and we are making great progress on that front. We have been encouraged by the sticky nature of this business and continue to build a robust pipeline of quality prospects for new business within large health systems. Consistent with many other medical device companies we are offering volume-based discounts to customers with a strategy to use iovera plus EXPAREL to maximize the ability to reduce or eliminate opioids for painful TKA procedures. As we discussed last quarter our initial focus is on 2 broad patient categories. The first is a combination of iovera plus EXPAREL as a multimodal procedure solution for total knee arthroplasty. In this setting iovera would be administered before surgery for rehabilitation EXPAREL during surgery to provide patients with the opportunity for several months of opioid-free pain control.

At the recently concluded American Society of Anesthesia Meeting in Orlando we have live patient demonstrations on iovera cryoanalgesia and generated great interest from the anesthesia community. We have also begun training initiatives at 3 integrated delivery networks all of which are seasoned EXPAREL users. We are planning to use these networks to define standardized protocols and workflow. As we generate proof-of-principle data we will replicate this training program nationally in early 2020. Our team led by President Max Reinhart will be hosting a symposium later today at the American College of Hip and Knee Surgeons Annual Meeting in Dallas titled Cryoanalgesia and Periarticular Infiltration a Multimodal Solution to Manage TKA Pain. The event will feature presentations on iovera a discussion of optimized multimodal pain management protocols and an overview of recent real-world evidence in published clinical data. Surgeon presentations will highlight their experience integrating these multimodal protocols that have helped them enhance out -- clinical outcomes improved postsurgical recovery and reduce costs.

Our second target market is osteoarthritis patients. Here we offer an iovera cryoanalgesia procedure to provide drug-free opioid-free surgery-free pain management for several months. We are targeting those patients seeking an active lifestyle such as golf tennis hiking or simply walking with the grandchildren as well as those choosing to delay surgery for family events like vacations or weddings. On the manufacturing front we have made considerable progress and expect to be able to supply over 100000 iovera Smart Tips for sale in 2020. In addition we are developing clinical data to maximize this opportunity and position iovera and EXPAREL as the leading multimodal solution for opioid-sparing pain management before during and after surgery. Our initial focus will be on TKA and ACL repair with iovera in combination with EXPAREL to highlight the complementary effects of these 2 products. Turning now to our second pillar of growth leveraging the proven safety flexibility and customizability of our DepoFoam platform for acute subacute and chronic pain applications.

As you know from the -- as you know DepoFoam is a flexible delivery system that offers an immediate-dose release followed by sustained delivery so we see the potential for broad product development in this area. On our last call we discussed 2 DepoFoam programs that we selected for clinical development. The first the DepoFoam-based local analgesic administered as a subarachnoid or spinal block. Anesthesiologists regularly use this technique for procedures below the umbilicus. Our strategy here is to provide an alternative to the use of subarachnoid opioids which are typically delivered via pumps or catheters with a one-time injection of a long-acting and non-opioid local analgesic. The program has been discussed with the FDA and we are preparing to initiate a study in healthy volunteers. To remind you we have substantial experience in this space and we believe DepoFoam is the only delivery technology that can be used safely in the subarachnoid space where we have specific experience with DepoDur as an epidural and DepoCyte as a -- in the subarachnoid setting where it was used safely and effectively for more than 15 years in the treatment of lymphomatous meningitis.

Next we are currently optimizing formulations for dexmedetomidine and in parallel we will conduct a pilot study in healthy volunteers using a simulated release of dexmedetomidine that mimics the future DepoFoam-based profile. Finally let me discuss the third growth pillar pursuing innovative products or technologies that align with our strategy and are complementary to EXPAREL. iovera is just one example of how we intend to build EXPAREL as a leading provider of non-opioid pain management and regenerative health solutions. Looking ahead additional tuck-in acquisitions or licensures that align with our mission to remain -- will remain a key component of our growth strategy. We see a significant opportunity to build a differentiated non-opioid delivery portfolio focused on improving patient journeys along the neuro pathway and have a number of robust opportunities to consider from our business development team. The last item I'd like to touch on before returning the call to Rich is the future competitive landscape. Here we are in an exceptionally strong position. EXPAREL has considerable first-mover advantage over any other products that potentially enter the market. EXPAREL has been used in over 6 million patients with an excellent safety profile and proven efficacy track record.

In addition our strong network of strategic partnerships and academic collaborations and relationships have ensured that key players across the healthcare system have access to and experience with EXPAREL and its advantages including proven predictable opioids-bearing approaches which are essential in a 23-hour stay setting. In addition these -- the process for launching generating health outcome evidence and obtaining long-term reimbursement on new products is a particularly long and arduous undertaking. So we feel very good about where we stand with regard to any new product entry. We are very well positioned in the long-term market leadership as the only non-opioid single-dose long-acting local analgesic that is currently FDA-approved for infiltration field block and brachial plexus nerve block. We expect to expand this label to include pediatrics as well as lower extremity nerve block within the next two years. Additionally the ability to addmix EXPAREL with saline for larger procedures as well as with bupivacaine for immediate pain relief provides clinicians with important flexibility so that pain management can be tailored to individual patient needs across a broad range of small and large procedures.

With that I'd like to turn the call over to Dr. Rich Scranton to update you on our Phase IV EXPAREL programs as well as our ex-U.S. regulatory activities. Rich?

Richard Scranton -- Chief Medical Officer

Thanks Dave and good morning to all joining today's call. I'll start with a quick update on our EXPAREL Phase IV studies. With the women's health view we are seeing significant and growing demand for anesthesia-driven regional field block approaches as these continue to take hold as institutional protocols for procedures such as C-section mastectomy breast reconstruction abdominoplasty and gynecological-oncology surgery. Opioid addiction in women is growing at an alarming rate and studies have shown that women are 40% more likely to become newly persistent users of opioids following surgery. As such we expect this field to play an important role in our five-year growth trajectory. Cesarean sections are one of our top growth drivers and we would expect demand to continue to accelerate as awareness mounts within the OB anesthesia community around the opioid-sparing benefits of an EXPAREL TAP block. We believe EXPAREL administered as a TAP block will be a key component in transforming the standard of care for mothers undergoing C-section. We continue to expect our CHOICE study to complete enrollment later this year which places us on track to report top line results in January 2020. This next-generation study is designed to be completely opioid-free in the EXPAREL arm.

We are awaiting publication of the results of our first C-section study. And to remind you this study demonstrated the superiority of an EXPAREL TAP block to a bupivacaine TAP block in patients undergoing C-section. EXPAREL achieved a 52% reduction in opioid use while also reducing pain scores through 72 hours. Importantly this study also demonstrated a statistically significant higher percentages of opioid-spared patients in the EXPAREL group meaning they took no more than one opioid tablet and experienced no opioid-related side effects through 72 hours. We are also investing in orthopedic studies as this sector is a very important growth driver given the migration of many painful procedures to the 23-hour-stay environment. Enrollment is now under way in our FUSION study a multi-center active control real-world study comparing EXPAREL multimodal regimen with standard care in patients undergoing spine surgery. Looking outside the U.S. in June our Marketing Authorization Application or MAA was validated by the European Medicines Agency which means our application is complete and the review process is now under way.

We expect an opinion sometime in the second half of 2020. Our regulatory activities in Canada also remain on track with the next key milestone being the validation of our new drug submission by Health Canada. Our EU and Canadian submissions are robust with data demonstrating the efficacy of EXPAREL in infiltration field block and peripheral nerve block in both placebo-controlled and active comparator studies. We will be seeking approval of EXPAREL for local and regional analgesia in adults. As for China we are initiating a pharmakinetic study in Hong Kong with our partner Nuance Biotech. We will continue to keep you apprised of our progress in these expanding markets.

With that overview I will now turn the call over to Charlie for a review of the financials. Charlie?

Charlie Reinhart -- Chief Financial Officer

Thank you Rich and good morning everyone. Before I walk through the third quarter financial results I'd like to remind you that we will be discussing non-GAAP financial measures. The press release we issued this morning includes a description of these metrics and why we believe they provide additional insights into the financial aspects of our business. The press release also includes the reconciliation to gap for these measures. We ended the third quarter and very strong financial position with approximately 330 $6 million in cash and investments and significant and growing cash flow from operations. On the p&l side we have significant operating leverage with a rapidly growing top line that we are supporting with only modest increases in expenses. This underscores the tremendous opportunity we have to capitalize on our business while continuing to simultaneously ramp revenues and adjusted EBITDA. I'll now turn to more specific financial highlights for -- from the quarter. Total revenues increased by 25% to $104.7 million in the third quarter of 2019 versus $83.4 million in 2018. This growth was predominantly driven by net product sales of EXPAREL which increased by 23% to $101.5 million in the third quarter of 2019 as compared to $82.2 million in 2018. For iovera we reported net product sales of $2.6 million in the third quarter. Our non-GAAP gross margin for the third quarter of 2019 improved to 80% versus 79% in 2018. Non-GAAP research and development expenses were $19 million in the third quarter of 2019 versus $13.8 million in 2018.

The increase in R&D was driven by the ongoing enrollment in our Phase III pediatric study our Phase IV opioid-free C-section study as well as the launch of our Phase IV spine and hip fracture studies. For the third quarter of 2019 roughly 60% of our non-GAAP R&D expense is attributable to clinical and regulatory activities with the remaining 40% attributable to manufacturing and product development including the scale-up of our facilities in the U.K. For the third quarter of 2018 the split was roughly 60% attributable to manufacturing and product development with the remaining 40% attributable to clinical and regulatory. Non-GAAP SG&A expenses were $43.4 million in the third quarter of 2019 versus $38.4 million in the third quarter of 2018. This increase is attributable to increased sales and promotional activity for EXPAREL including the establishment of a field-based team of account managers who are driving growth and access in the ambulatory setting as well as the dental and plastic markets. Another key driver of this increase is our co-promotion with J&J which is directly linked to top line growth. All of this resulted in non-GAAP net income in the third quarter of 2019 of $20.2 million or $0.48 per diluted share versus $12.8 million or $0.31 per diluted share in 2018.

Looking ahead given that EXPAREL is on a significant growth trajectory delivering substantial operating leverage and cash flow we have tremendous financial flexibility to capitalize on internal and external growth opportunities that align with our commitment to evolving Pacira into a global leader in non-opioid pain management and regenerative health. Before turning to guidance I'd like to quickly cover 2 noncash items from our GAAP P&L: First during the third quarter we recorded a $5.4 million impairment in our investment in TELA Bio. This adjustment was calculated based on the evaluation range contained in TELA's recently filed IPO prospectus; second as part of the purchase accounting related to our acquisition of MyoScience earlier this year we recorded contingent consideration reflecting the forecasted value of a series of regulatory and commercial milestones. We are required by GAAP to reassess the value of these milestones each quarter and adjust the value of contingent consideration accordingly. During the third quarter of 2019 our reevaluation concluded that the total value of contingent consideration increased by $7.3 million resulting in an increase in our short-term and long-term contingent consideration liabilities and a charge to our P&L. Turning now to guidance.

As Dave discussed we are very pleased with our financial outlook and feel very comfortable reiterating our 2019 sales guidance as follows: EXPAREL net product sales guidance of $400 million to $410 million which we expect to follow a similar cyclical pattern to last year with the fourth quarter historically being the largest quarter of the year. To remind you EXPAREL growth is being driven by volume rather than price; as for iovera we remain optimistic about its long-term prospects and continue to expect to report $8 million to $10 million of net product sales in 2019. Given the strong commercial synergies we remain confident that the MyoScience acquisition will become accretive beginning in the second half of 2020 and accelerating thereafter. On the expense side of the P&L we continue to be on track to achieve non-GAAP gross margins of 75% to 76%. To remind you we expect margins to eventually improve to roughly 85% once our second dedicated suite in Swindon comes online and this location becomes primarily responsible for supplying EXPAREL. Our non-GAAP R&D continues to track to the higher end of our guided range of $60 million to $70 million. We now expect non-GAAP SG&A to be in the lower half of our guided range of $180 million to $190 million. Lastly our guidance for stock-based compensation expense remains unchanged at $30 million to $35 million. As Dave noted in his opening remarks our growth trajectory now puts us on a path to achieve average annual revenue growth rates in the high teens over the next five years.

With that I will now turn the call over to the operator to begin our Q&A session. Operator?

Questions and Answers:

Operator

[Operator Instructions] Your first question is from Randall Stanicky.

Ashley Ryu -- RBC Capital Markets -- Analyst

Hi, good morning. This is Ashley Ryu on for Randall. Dave can you talk a little bit more about your five-year targets for EXPAREL and iovera the $1 billion and the $200 million targets? While I realize it's not guidance can you just talk about the moving pieces to kind of bridge you from today to those targets for EXPAREL? How much of that is from geographic expansion versus kind of label expansions? And for ioveraI know you've of course recently expanded manufacturing or adding more reps better reimbursement but can you just kind of talk about the growth targets and you get you there?

David Stack -- Chairman and Chief Executive Officer

Sure. That's a lot Ashley. Let me start and come back and pick me up for pieces that I don't get the first time here. So we're -- what we see is very strong support from anesthesia especially regional anesthesia for EXPAREL and that is growing in not just in what we would call a classic nerve block but in their use of their product in field blocks. And we think we're very early in the adoption of these medical specialties using these regional approaches and getting rid of catheters and pumps etc. So that's one piece. The other piece is that we go into a single shot where we get rid of epidurals and pain pumps and all of the things that are required when you try to treat pain in an inpatient environment. The ability of a anesthesiologist to use EXPAREL as a single injection and achieve several days of pain control is a key element in moving those patients out of the hospital and into the ambulatory and HOPD settings as we talked about during the script. So if you look just at that you can see that you get the kind of growth that we have been talking about as the base of the high teens that we've talked about when we were working with you guys. Add to that then pediatrics which we think is a very viable procedure opportunity we see more than 1 million patients there.

So just to give you a home base if you thought that we were going to get a 50% market share at $200 you're talking about $100 million over time. If you look at C-section as Rich outlined 1.2 million procedures at a market share of 30% at $300 is a $100 million opportunity over time. If you look at lower extremity nerve block we think it's bigger than upper extremity nerve block where we have 1 million procedures. And again it's predominantly a 20 ml dose. So you start to see that you've got multiple $100 million opportunities coming at us relatively over the next couple of years. And if you add that to the growth that we expect to get from patients moving to the ambulatory environment and from the adoption of ambulatory care you come to the kinds of numbers that we're talking about for EXPAREL. With iovera the -- if you're sitting around like at ASA when we were there in Orlando and we mentioned this in the script as well we're develop -- we're doing formal clinical programs in ACL repair where there's a lot of interest actually as well as TKA. But what the docs want to talk about and where people are using EXPAREL is in a whole series of ways to use cryoanalgesia for peripheral nerve pain. And so we have got folks that are looking at shoulders and hand and wrist and fractured ribs and even intracostals for mastectomy projects etc.

So you can really see how the use of iovera is another non-opioid opportunity for folks to turn the pain signal off. And the reason that we think it'll grow fairly quickly is these are customers that we -- where we have an immediate intimacy and there is high interest in this. And now with CMS nearly doubling the reimbursement for HOPD you can see how you could use these 2 products in the HOPD or in the ASC very cost effectively. And so you see this being an integral part of our overall offering. So that's the big piece of it for the 2 big products. That's the vast majority of what we're talking about. When you start talking about ROW over the five-year plan Ashley it becomes meaningful as a number but it is still way less than 10% of the total global sales of EXPAREL meaning that more than 90% of the global sales of EXPAREL are still in the United States at the end of our current five-year plan. We are putting more reps in the field largely because of iovera because of peeds because of C-section because of lower extremity nerve block. As an example C-section OB anesthesia is really a distinct group of customers that work in a distinct area of the hospital. So they wouldn't be in our normal call pattern unless we have something to talk to them about relative to female cancers or something else that they would be involved in. So we need additional firepower in order to get to all those areas. That's all I can remember of your question Ashley. So if there was something...

Ashley Ryu -- RBC Capital Markets -- Analyst

I think that was everything. No. I think that was everything. Thank you so much.

David Stack -- Chairman and Chief Executive Officer

Thanks,

Operator

Our next question is from David Amsellem.

David Amsellem -- Piper Jaffray -- Analyst

Thanks. So I just had a couple. First on the J&J partnership. Can you just talk about where things stand? And I guess more specifically what your vision for that partnership is going forward and how the role of J&J may or may not change? So that's number one. Number two is on the gross margins. You're seeing some margin expansion and that makes sense. I guess the question is how sustainable is that? And I know there's a -- they're only a sizable fixed cost component for EXPAREL. So I just want to get a better sense from you as to the directionality of gross margins as EXPAREL expands and just help us understand the moving parts there.

David Stack -- Chairman and Chief Executive Officer

Thanks David. Thanks for the questions. We're -- the J&J relationship is in full effect and we're benefiting from their professional services and all their professional education programs. For example ACA starts today. And for recon and all of the other things that would be orthopedic-oriented there is a huge presence for EXPAREL at August at the American Academy of Hip and Knee Surgery something way beyond anything that we could have done ourselves David. And they're very much committed to their training programs in Raynham as well as the peak programs as they call them which are regional education programs dinner meetings etc. So we think that as the world becomes more oriented around ambulatory care the audiences that we call on in conjunction with Johnson & Johnson are going to be primary sponsors of that move and so we really see the benefit of having all of these resources in the field working with these customers. If you add to that as we said during the script we expect to get a peds indication and fundamental in that peds indication is the scoliosis trial.

So their folks -- they have dedicated resources going to spine as well as the sports medicine into trauma. And so we see them launching EXPAREL into all of those products during the term of this agreement. So we think it's to our benefit to continue working with them aggressively until the end of this agreement in 2021. At the end of 2021 David there is no sunset. There is no residual and the agreement would end. And doubling back on Ashley's question we are adding some people to the field. iovera allows us to start to have relationships with the big orthopedic practices and this two-year interlude between now and then. And so we're very comfortable that we can get the maximum value out of this strategic partnership over the next two years and then be prepared to do it on our own but I have no idea what's going to happen two years from now right? So that's just -- it is what it is. On the gross margin side I'll go quick Charlie and you can pick me up?

Charlie Reinhart -- Chief Financial Officer

Sure.

David Stack -- Chairman and Chief Executive Officer

So anytime we're producing at full scale David we get better margins. And so as the product continues to grow aggressively you start to see that we are -- we have peak times of best gross margin opportunity. I'll remind everybody that there are times of the year when we close the facility for cleaning and maintenance and all of those things. And so 80% is not anything that we can -- that we could promise to you on an ongoing basis. To answer your question specifically we will have sustained gross margins over 80% and approaching 85% once we have the 200-liter facility come on and start producing commercial material in Swindon and that's scheduled for 2021. So Charlie if I -- was that wrong there [Indecipherable]?

Charlie Reinhart -- Chief Financial Officer

No. There's nothing wrong Dave. The only thing I would add is obviously manufacturing capacity is a fixed investment. And so we doubled capacity and therefore we started to reduce the utilization of the total combined. And as we ramp up demand that we'll start to see improvement in those as well so [Indecipherable] with that.

David Stack -- Chairman and Chief Executive Officer

Yes.

David Amsellem -- Piper Jaffray -- Analyst

Dave can I come back to the -- your comments on J&J? Are you discussing an extension of the relationship? I think from your comments and gleaning that you don't know where things will be after 2021 but is there a dialogue regarding like with J&J and the decencies beyond 2021?

David Stack -- Chairman and Chief Executive Officer

I wouldn't expect that we'd be having a discussion with them David 2-plus years before. I think we wouldn't -- I mean that wouldn't be a good use of our time and my experience from now. The world is changing so fast that I think we want to use these next two years to get a view of the world of what 2022 looks like relative to ASCs and anesthesia and all the rest of the things that we're working on. So I would say -- I mean you can take that as if there's no discussions ongoing but I wouldn't expect that there would be any of this far ahead of the time line of the relationship.

David Amsellem -- Piper Jaffray -- Analyst

Okay, thanks.

David Stack -- Chairman and Chief Executive Officer

Thank you, David.

Operator

The next question is from David Steinberg.

David Steinberg -- Jefferies -- Analyst

Thanks and good morning, I have a couple of questions. The first revolves around business development. So hopefully Obviously there's a lot going on. You're going to launch in Europe next year. You're ramping up with iovera. You have some new extra indications. And so what sort of capacity do you have for acquisitions? And if you do how do we think about near-term versus long-term activity? And what are the major buckets of potential acquisitions in licensing to -- you're contemplating? And then secondly you've painted a pretty robust outlook for the next five years. Curious what you thought about consensus estimates. EXPAREL growth next year is projected to be I think about 12% followed by 6% the following year. What do you think of those? I know you haven't given guidance just some broad-brush strokes into the future but what's your view of that -- those estimates? And what do you -- if you think they're low what do you see as the major disconnect?

David Stack -- Chairman and Chief Executive Officer

Yes. Thank you David. Let me start off with business development and capacity. Right now we're growing into EXPAREL plus iovera and I don't think that would be anything that's unexpected. And the national meeting in early 2020 will be the kickoff of all of those things. So I think we're right-sized for those 2 opportunities today David. Most of what we're looking at are not things that we would have to worry about launching immediately. And in the rare occasion where we are looking at commercial assets they have a sales organization that comes with them. So you wouldn't see any kind of a broad displacement across our organization or the J&J relationship in any case. What we're looking at really falls into a couple of buckets. One is drugs typical pharmaceutical products. We mentioned a couple of DepoFoam products.

There are some other API assets where folks have not been able to use them because of toxicity or site of delivery or the requirement for a pump or things like that where we think that marrying that -- their technology with DepoFoam technology could actually lead to a viable clinical candidate. More likely David or from an M&A perspective we're looking at things that block inflammation are somehow involved with non-opioid pain. It's -- in many cases it's not acute pain as we're focused today. We've got a number of discussions ongoing talking about peripheral pains neuropathic pain chronic pain. There's a number of opportunities where we not only use the commercial organization that you guys are all familiar with but we've got a very viable clinical team here and which understands pain implicitly. So that is a very valuable asset to us. When people start to come to us and talk about how you develop a pain portfolio. It's more than just the commercial assets and our relationship with KOLs and with care people.

So on the drug side you would think about more pain assets anti-inflammatories that can block the inflammatory process all of those kinds of things that an anesthesiologist and a orthopedic surgeon would be directly interested in. On the regenerative medicine side lots of things in the marketplace around MSL or about meniscal repair ACL repair growing cartilage growing bone a number of things that we're looking at again because of the relationship and the people that use those assets who are clinically interested in the use of those assets. As the patient journey along the OA life cycle goes we have what we think is a very robust opportunity because we know those folks very very well and in some cases we're helping those folks in the early stages even before we get to have any kind of an interest in the product. So you can see a lot of different opportunities. They fall pretty much along those 2 guidelines driven primarily by the fact that the customers are the same for both buckets at the end of the day. Next.

So I'll go to your second part David if there's no follow-up from you on that. And so we said that we see a five-year trend of high teens for our portfolio. We've run consistently in the low 20s for the last 5 quarters. How anybody would project that we would go from the low 20s to 12% from the fourth quarter of this year to the first quarter of next year you'd have to ask them. That makes absolutely no sense to me. And if the worry in the field force or in the world in general is that there's competitive pressures there would be a good reason why there would be a disconnect because they're -- we're not worried about that at all.

David Steinberg -- Jefferies -- Analyst

Okay. And just a couple of quick follow-ups. Speaking of the competition Heron says they're going to run a head-to-head study of 011 versus EXPAREL. Any thoughts on the -- their protocols? And then secondly on C-section I think there's 1.2 million procedures a year. How are you thinking about market share there?

David Stack -- Chairman and Chief Executive Officer

Yes. We -- it would be higher than normal David largely because when we talk to these folks the interest in opioid-free C-sections is way beyond anything that I would have anticipated. And the relationships we have with the anesthesia groups around the country confirms that this is really an area of intense interest to them. So as I said in an earlier response of 1.2 million procedures if you had a 30% market share at $300 a patient as the median average cost of EXPAREL it would be a $100 million opportunity with time. Obviously it's not going to be a $100 million opportunity next year. But over the five years of the plan we don't think that that's an unreasonable expectation at all. Relative to Heron they've had eight years to do a trial head-to-head with EXPAREL if they wanted to do it. If he was going to do it why hasn't he done it? And I think we both know why and I'll just stop there.

Operator

Okay, Your next question is from Tim Chiang.

Tim Chiang -- BTIG -- Analyst

Hi, David I wanted to get your thoughts on the brachial plexus nerve block indication. How is EXPAREL doing with that indication so far? And how do you sort of see usage on the upper torso expanding heading into 2020?

David Stack -- Chairman and Chief Executive Officer

It is -- the entire corporation took off Tim when we got the -- I mean it was sort of a -- it was a perfect storm of J&J being fully trained and up to speed in the marketplace the ASC code and CMS paying for EXPAREL. And then the brachial plexus nerve block was sort of the catalyst that took all of that and had it expand. It really is the reason that anesthesiologists have had an opportunity to use EXPAREL. The brachial plexus block was particularly interesting because as studied it was a 10 ml dose with some free bupivacaine. And so they -- anesthesia -- regional anesthesiologists got to see the efficacy and the ability to control pain in a very painful procedure for the price of a half a dose of our 20 ml bottle or nearly vial or nearly so and that really convinced them that this drug had some real efficacy and safety advantages over everything else that they were doing. What we were surprised at in the early days is that that really led to anesthesia converting to 20 ml field blocks like PEC blocks and TAP blocks and fascia iliaca blocks etc. way more quickly than we had any anticipation that it was going to do.

So that led to a number of hospitals putting EXPAREL on formulary because the anesthesiologist was so interested. It also led to a number of procedures like brachial plexus block being done with no opioids at all which led to the physicians and the patients asking why they were in the hospital at all if they didn't have any pain and they didn't require any opioids. So it was really almost a front-runner for moving these patients to an ambulatory environment. So from a strategic -- from a revenue perspective it's been very important. From a strategic perspective it's been way more important even than the revenue and it really has led the way to where we're going here. And so I think it's hard for us to over -- to say more about that than as actual in the marketplace. It's been a fundamental change to our company. So nerve block we think is very important and that's why we're so high on the lower extremity which would give us the opportunity to do things like adductor canal blocks etc.

Tim Chiang -- BTIG -- Analyst

And David just one follow-up. I mean it looks like your iovera peak sales potential basically doubled now with the CMS reimbursement rules. And I'm sort of wondering do you put more resources behind it heading into next year?

David Stack -- Chairman and Chief Executive Officer

No. We're still going to be bound Tim by our manufacturing capabilities. When we bought the asset the company had never made more than 10000 of these Smart Tips in a year. We've got that up to 100000 for next year. I don't think we can do much better than that. And when a hospital goes to iovera plus EXPAREL for things like TKA we really have to be careful that we don't run out of stock because that's a fundamental change in the way they do business. And so we could never put ourselves in a position where they had to somehow go back to an old paradigm of care an old protocol of care. So I think we're going to have to be very careful with how we approach this marketplace and make sure that we don't run out of tips. But I don't see that we need to put a lot more people out in the field. I think what we'd rather do is work with a relatively small number of high-end healthcare providers and really figure out how this product is going to be used in ACL repair in a number of these peripheral nerve opportunities like shoulder and spine etc. If we put more people out there I'd just be afraid if we get too far afield and we wouldn't be doing our self any favor in the long term.

Tim Chiang -- BTIG -- Analyst

Okay, great. Thanks.

Operator

Thank you, Your next question is from Serge Belanger.

Serge Belanger -- Needham and Company -- Analyst

Good morning. Just a couple of questions for me and I apologize if you covered this before. Can you just give us time lines on when we should see data from the pediatric trial as well as I guess STRIDE 1 the lower extremity study and when they could generate a label expansion? And then second question is related to the CMS changes. I think you discussed some of the recent changes that will impact iovera but do you foresee anything further impacting EXPAREL usage from recent CMS decisions?

David Stack -- Chairman and Chief Executive Officer

Yes. Thanks Serge. So we expect to have top line data on peds by the end of the year. We would expect that that would lead to a sNDA because peds -- well let me make a distinction here. Peds and lower extremity nerve block we want to extend the label. That will require sNDAs in both cases. Opioid-free C-section is a currently approved indication so that we're just waiting on publications. So I'll go through the 3. So for peds we'll talk about top line data sometime in the next couple of months here and then file the sNDA and then you'll see the papers and all the other things that come out over the course of the -- probably mid-year next year. If we get -- so we would expect -- I won't go into all the gory details of all the different aspects of this but I think what we're planning on is that we would expect to get an indication a ped indication sometime before the end of next year. So with C-section we expect that the first C-section trial which has 0.001 p-values for a number of different primary and secondary endpoints will be published this month or early in December.

We expect that we will have the top line data for the opioid-free C-section study sometime early next year likely in the JPMorgan time frame and that that would lead to a publication probably around the SOP the society meeting which is scheduled for May of next year. And then for lower extremity nerve block we're doing a normal -- a healthy volunteer study. We expect that that will lead us to a formal trial in the lower extremity and lower-extremity nerves. Assuming that that trial gets up and running early -- late this year early next year like we expect we expect to finish sometime in the third quarter. You'd put together an sNDA and that you have a 6-month review cycle. So the plan would be sometime around the 2021 national meeting you would train on lower extremity nerve block and expect it sometime in the second quarter of next year -- of 2021. I'm sorry. Okay. And let me talk about -- I'll talk about CMS Serge as well. So we will continue to work with FDA on a HOPD reimbursement for EXPAREL. I think as EXPAREL continues to grow in that environment I think our chances of actually getting reimbursement actually are not as good next year as they were this year but that doesn't mean we're not going to keep trying.

And in the ASC setting and in the office setting for iovera we will have a very formal campaign that looks a lot like what we did with ASC and EXPAREL a couple of years ago. So you can expect us to be very active in working with CMS on a -- especially in an ambulatory care claim. But increasingly we're having more and more discussions in the marketplace with docs who don't see any reason why they wouldn't be able to use iovera in their office because a patient comes in in pain it acts immediately. There's no cutting no opioids no -- and there's really -- it's as safe as it could possibly be. So there's a lot of interest in the use of the product in the office setting but we have to work out with CMS with that as well. And I would say by the way that with EXPAREL CMS affirmed use in 2020 and also increased the payment from $1.22 a milligram to $1.25 a milligram. So that's good news as well.

Serge Belanger -- Needham and Company -- Analyst

Thank you.

David Stack -- Chairman and Chief Executive Officer

Thanks.

Operator

Your next question is from Gary Nachman.

Rob Fay -- BMO -- Analyst

Hi, good morning. It's Rob Fay on for Gary. In the past you've talked about ASCs comprising 10% of revenues. Has that shifted at all this year? And where do you expect that to be over the next two to three years? And regarding iovera can you comment on how the product is differentiated from competing products like COOLIEF from Avanos? And is there an international opportunity for iovera?

David Stack -- Chairman and Chief Executive Officer

Yes. Thank you Rob. I'm sorry I'm blanking out what was the first one was?

Rob Fay -- BMO -- Analyst

ASC.

David Stack -- Chairman and Chief Executive Officer

Yes. So yes ASC -- so let me give a little bit of background information there. So if we use 2018 numbers the population folks tell us that about 30% of American procedures were done in an ambulatory surgery setting. And if you extend out to 2025 the expectation is that that number will change to 70% to 75%. So yes this is a huge expectation that this will change quickly not over the next three years but probably for the next five years. What we see that's just as interesting is that go -- looking backwards primary ASC procedures would have been relatively minor relatively small hernias and hysterectomies and things like that. What's happening and especially with CMS approving TKAs total knee arthroplasties into the outpatient space is that the ambulatory facilities are now gearing up to do very substantial surgeries like spine surgeries discectomies and laminectomies.

To do knees is quite a departure from doing a hernia. So we've not only moved a percentage of patients but we've moved patients who are -- have a much higher pain acuity to the ambulatory setting. And the reason that we are so excited about ambulatory surgery centers is we believe that it's EXPAREL that enables that move that in the hospital you can't use a thoracic epidural. You can't use a pain -- you can't use a PCA pump -- I'm sorry in the hospital you can use all of these different modalities right? Epidurals thoracic epidurals where the patient is immobile for several days pain balls pain pumps etc.

When you move that patient to an ambulatory environment you don't have access to a lot of other opportunities and you can't use huge doses of opioids. So we see the move to the ambulatory care as being fundamentally important and then we believe our market share inside that move around procedures like TKA and spine favors EXPAREL in a fairly dramatic way. So we see it growing very rapidly. And in fact this year actually it's much higher than the 10% that it was last year. And then iovera versus COOLIEF they're very different. iovera is a handheld device. So there is no piece of fixed capital equipment other than what looks like a Jetson family phone. And it goes into a little stand almost like a cellphone of the old days and it charges and the nitrous oxide cylinder and the tips screw on. So it is 100% mobile device. It doesn't require any fixed capital equipment or any space or anything like that. Fundamentally important is it doesn't use heat. It is -- it uses cold which is a much more natural approach to the body.

We don't have any bystander effect because we use cold instead of heat. It is reversible. So we use what's called a wellolian effect. Where once this nerve is frozen it grows back at roughly an inch a month. We don't kill the nerve. We stun the nerve so that it can't conduct a pain signal and it grows back over time so it can be used over and over again. We believe that the tips that we're selling these Smart Tips that we referenced to are significantly less expensive than the COOLIEF program. So there are a number of advantages in the marketplace especially as we start to talk about these patients and these procedures migrating to an ambulatory environment and potentially even to a physician's office environment where we think the system that's set up is at least as effective as COOLIEF and we like the way we're headed.

Rob Fay -- BMO -- Analyst

Thank you.

David Stack -- Chairman and Chief Executive Officer

Thanks.

Operator

I am showing no further questions at this time. I would now like to turn the conference back to Dave Stack Chairman and CEO for closing remarks.

David Stack -- Chairman and Chief Executive Officer

Thank you Whitney. Thanks for your questions and time this morning. We look forward to providing additional updates in the future. Next up for us on the IR calendar is the Jefferies Conference in London followed by the Piper Conference in New York. We look forward to seeing you all soon. Thanks.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Susan Mesco -- Head of Investor relations

David Stack -- Chairman and Chief Executive Officer

Richard Scranton -- Chief Medical Officer

Charlie Reinhart -- Chief Financial Officer

Ashley Ryu -- RBC Capital Markets -- Analyst

David Amsellem -- Piper Jaffray -- Analyst

David Steinberg -- Jefferies -- Analyst

Tim Chiang -- BTIG -- Analyst

Serge Belanger -- Needham and Company -- Analyst

Rob Fay -- BMO -- Analyst

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