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Pacira Pharmaceuticals, Inc. (PCRX) Q2 2019 Earnings Call Transcript

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Pacira Pharmaceuticals, Inc. (NASDAQ: PCRX)
Q2 2019 Earnings Call
August 8, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the second quarter 2019 Pacira BioSciences Inc. 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. If anyone should require operator assistance to today's conference, please press * then 0 on your touch tone telephone.

As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Miss Susan Mesco, Head of Investor Relations. Ma'am, please go ahead.

Susan Mesco -- Head of Investor Relations

Thank you, Michelle and good morning, everyone. Welcome to today's conference call to discuss our second quarter 2019 financial results. Joining me on today's call are Dave Stack, Chairman and Chief Executive Officer, Max Reinhardt, who recently joined us as President, and Charlie Reinhart, Chief Financial Officer. Dr. Rich Scranton, Chief Medical Officer, is also here and will be available for questions following our formal remarks.

Before we start, let me remind you that today's call will include forward-looking statements based on current expectations. Such statements represent our judgement 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.

Dave Stack -- Chairman and Chief Executive Officer

Thank you, Susan. Good morning, everyone and thanks for joining. Before we review the progress made over the last quarter, I'd like to begin by welcoming Max Reinhardt as our recently appointed President. Max brings extensive global and device experience to Pacira and he shares our passion for bringing non-opioid options to patients. He hit the ground running, making a terrific impact leading our J&J joint steering committee and integrating iovera into the Pacira commercial offering. Max will share some updates on both fronts later in the call.

We are particularly excited by the exceptional second quarter we've posted. We reported topline revenue growth of 22%, which was largely driven by EXPAREL penetration and existing expansion into new procedures. We continue to see strong growth for the 10 mL and 20 mL vials.

Enthusiasm among anesthesiologists continues to grow as EXPAREL-based regional approaches become the mainstay of enhanced recovery after surgery or ERAS protocols that enable reduction in the length of stay and shifting of many painful procedures to 23-hour environments such as hospital outpatient and ambulatory surgery centers.

Our customer base continues to expand with a 24% year over year increase in ordering accounts. Finally, we've made significant progress integrating iovera into our commercial offering and we are confident that it has the potential to cross the $100 million net sales mark within our five-year plan. With EXPAREL now firmly positioned for long-term market leadership and the addition of iovera to our portfolio, we are well on our way to realizing our vision to become the global leader in innovative non-opioid pain management and regenerative health solutions.

To achieve this, we are advancing three global pillars to improve patient journal along the neural pain pathway. First, enabling EXPAREL as the foundation of opioid-sparing protocols across key inpatient and outpatient surgical settings. Second, advancing our clinical pipeline -- this includes leveraging our proven DepoFoam platform to efficiently advance new product candidates. And third, pursuing innovative assets that complement our commercial infrastructure and meet the needs of our surgical and anesthesia audiences in the United States and select global markets.

I'll start with our first pillar, expanding the use of EXPAREL. We are very pleased with the strong trends we are seeing and remain on track to deliver full year net EXPAREL sales of $400 million to $410 million. This represents a growth of more than 20% over 2018. In June, we were delighted to have our marketing authorization application for EXPAREL validated by the European Medicines Agency.

With this validation, our application is complete and the review process is under way, with an opinion expected in the second half of 2020. This is a major step forward in our geographic expansion effort to provide an opioid alternative to as many patients as possible. We believe select European markets offer significant revenue opportunity as there is great interest in the economic benefits of an opioid-sparing regimen.

For the rest of the world, we anticipate submitting our new drug submission to help candidates soon and launching our pharmacokinetic study in Hong Kong with our partner, Nuance Biotech, in China later this year. To remind you, we are advancing go alone strategy in Europe and Canada rather than pursuing a commercial partnership.

The team is also making great progress, advancing two Phase 3 trials intended to broaden the EXPAREL package insert. First, our pediatric study, which is progressing according to plan and actively enrolling patients. This study, known as PLAY, is a top priority for Pacira, given the urgent need for non-opioid alternatives for managing severe post-surgical pain in this vulnerable population. We have seen considerable interest from our academic institutions looking to get involved in the trial, further underscoring the urgent need here. We remain on track to complete this trial later this year.

Second, we are launching a lower extremity nerve block study that will compare EXPAREL with bupivacaine in patients undergoing lower extremity surgeries. We expect the market opportunity for lower extremity nerve block to be at least as meaningful as the brachial plexus nerve block with anesthesia-driven protocol, regional protocol approaches using the nerve block and field blocks continuing to take hold in institutional protocols.

As we look closer, we are seeing three key drivers working synergistically to advance EXPAREL within and across a wide range of procedures. One, the ongoing integration of EXPAREL is the foundation of opioid-sparing ERAS protocols, two, the growing level of engagement and enthusiasm from anesthesiologists, and three, increasing penetration on the orthopedic side of the business through our partnership with Johnson & Johnson, which has provided focused effort with procedures such as shoulder, hip fracture, and spine surgeries.

We are working every day to maximize the value of this partnership. With respect to ERAS protocols, Pacira is recognized as the go-to partner of choice. ERAS protocols are becoming the accepted strategy to optimize care in many healthcare systems as a means to optimize protocols, by procedure, to shift surgeries from inpatient to outpatient environments.

These patient-centered opioid-sparing approaches improve patient recovery while reducing complications and cost. They typically involve a multidisciplinary team that is often led by a regional anesthesiologist. We recently further strengthened our high caliber partnership network through a new educational initiative with ERAS USA. This is the US chapter of the International ERAS Society.

ERAS International was founded to improve perioperative care and enhance post-surgical recovery and provides our collaboration with more than a decade of best practice procedure-based guidelines. Our collaboration is dedicated to improving post-surgical agent outcomes and reducing reliance on opioids.

The initiative will utilize US-based hospitals that are accredited by ERAS International as centers of excellence to train healthcare institutions across the country on the implementation of ERAS programs to reduce opioid utilization. Using multidisciplinary training teams, ERAS USA centers of excellence will deliver formal onsite training seminars. Curriculum will conclude the most current information about ERAS protocols, including opioid-sparing, multimodal pain management strategies, and best practices in abdominal and other field blocks.

Upon completion, participating hospitals will be designated and listed as qualified centers of excellence for opioid-sparing by ERAS International. This will be an important competitive differentiator that hospitals can use given the growing number of patients seeking non-opioid approaches to post-surgical pain management. It is also of great interest to payers and self-insured employers who prefer to send their members and employees to centers with established expertise as opioid minimization centers of excellence. We look forward to launching this program this quarter.

Now, let me turn to our second growth driver, expanding interest and engagement we are seeing from the anesthesia community. We continue to see one anesthesiologist success with brachial plexus nerve block drive expanded use within an institution. Anesthesia is taking a lead in non-opioid post-surgical pain management through EXPAREL-based regional approaches that utilize peripheral nerve blocks and field blocks as the core of a multimodal approach for a wide range of procedures.

The enthusiasm within the anesthesia community is driving strong and steady growth in the size of our active customer base. We were leveraging more than 90 customers, new customers, every month with over two-thirds of these new customers coming from non-opioid hospital accounts.

We see great upside ahead of regional anesthesia approaches becoming more widely accepted and institutional protocols driving a shift to a 23-hour ambulatory setting, which is now a second unbundled reimbursement for EXPAREL. Our Phase 3 study of EXPAREL as a brachial plexus nerve block is now published in the peer reviewed journal Pain Medicine.

In this study, EXPAREL demonstrated highly statistically significant results versus placebo with a 78% reduction in opioids while providing significantly better pain control and 13% of patients opioid-free. In short, this study showed improved pain control and a reduction in opioid use without the need for cumbersome pumps or catheters.

Notably, caesarian sections remain an important growth driver as awareness within the OB anesthesia community around the opioid-sparing benefits of EXPAREL TAP block. Earlier this year, we reported topline results from our Phase 4 study that demonstrated the superiority of an EXPAREL TAP block to a bupivacaine TAP block in patients undergoing caesarian sections. EXPAREL achieved statistically significant reductions in opioids and pain scores through 72 hours.

Importantly, the study also demonstrated a statistically significant higher percentage 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 have been invited to submit this study for publication to a prestigious peer-reviewed journal and development of the manuscript is under way.

Our section C-section study, which is known as CHOICE, remains on track for completion this year. To remind you, this next generation study is designed to completely opioid free in the EXPAREL arm. We believe EXPAREL administrators of TAP block will be a key component in transforming the standard of care for mothers undergoing C-sections.

On the reimbursement front, we continue to see growth drivers take hold. CMS is now reimbursing for EXPAREL used in the AFC under a specific billing code at $1.22 per milligram. Likewise, the American Dental Association has recognized a critical need for non-opioid options by introducing a new reimbursement code for the infiltration of sustained therapeutic drug in oral surgery procedures. Both codes took effect on January 1st and our team is working closely with the ambulatory and oral surgery centers as well as commercial payers to overcome upfront administrative hurdles and facilitate reimbursement on a payer by payer basis.

Our Aetna ASC pilot program is delivering strong results and the national expansion is under way, with proactive carve out agreements that we expect will be delivered to ASCs in the next few weeks. Cigna is now covering EXPAREL nationally and several of the large Blues have also included it in their fee schedule and are now working through the mechanics of adjusting ASC contracts. From our discussions with other major national commercial payers, we expect EXPAREL coverage to continue to expand for the remainder of this year.

The dental community interest in EXPAREL remains high and healthcare providers and patients recognizing the need for non-opioid options for young adults undergoing wisdom tooth extractions. The leading indicators around reimbursement remain highly favorable and we are now seeing large self-insured employers calling their third-party administrators and instructing to add EXPAREL to their listing of covered medications.

The final item to discuss on the EXPAREL front is orthopedics, where we are seeing expanded use of EXPAREL and shoulder, spine, and hip fracture surgeries. Here, our J&J partnership has served to solidify the role of EXPAREL through their substantial commercial presence and world class educational programs.

These have enabled thousands of healthcare practitioners to learn about the benefits of EXPAREL in reducing or even eliminating opioids for painful orthopedic procedures, like total knee replacement and shoulder surgeries. Max, who is now the point on the Pacira side for the J&J steering committee will share some additional reports shortly.

Turning now to the second pillar of growth, advancing our clinical pipeline and leveraging the proven safety, flexibility, and customizability of our DepoFoam platform for sub-acute and chronic pain applications. Here, our strategy is built around a global pain epidemic, which has fueled the current opioid crisis in the United States. Eliminating opioids will not address a significant unmet need for new tools and strategic approaches for managing pain.

Consequently, our pipeline is focused on addressing areas of significant unmet need for opioid options for managing pain where opioids are the current standard of care. For DepoFoam, we are advancing initiatives to take new programs into the clinic. First, the intrathecal or subarachnoid delivery of DepoFoam-based lipo bupivacaine.

Here, we have an opportunity to provide an alternative to the use of intrathecal or subarachnoid opioids, typically delivered by pumps or catheters. Of note, we have substantial experience here as the DepoFoam technology was used successfully in the intrathecal setting for more than 15 years with our previously marketed product DepoCyt or cytarabine for lymphomatous meningitis.

The second clinical candidate is Depo dexmedetomidine. Dexmedetomidine has complementary analgesic and sedative properties with fewer neurocognitive effects versus other sedatives. It also has demonstrated opioid-sparing effects and reduced delirium in the elderly. We believe a long-acting therapeutic dose has the potential to offer patients mental acuity and quality of life while also providing adequate pain control.

As Max will discuss shortly, our clinical team is designing studies that we believe will greatly add to the commercial value of iovera. Our clinical development strategy will demonstrate the synergy of EXPAREL and iovera used together to successfully manage pain while significantly reducing or eliminating opioids. We will also investigate additional clinical utility for iovera cryoanalgesia as the component of opioid-sparing ERAS protocols to support the development of health outcomes and messaging.

This brings me to our third growth pillar, pursuing innovative product technologies that align with our strategy and are complementary to EXPAREL. Here, I would like to highlight our increasing confidence in the technology behind the recently acquired iovera system. Iovera is highly complementary to EXPAREL as a non-opioid therapy to deliver cryoanalgesia via handheld device to alleviate pain by disrupting pain signals being transmitted to the brain from the site of injury or surgery.

We believe iovera will benefit greatly from our financial strength, established commercial infrastructure, partnership network, and deep domain experience and opioid-sparing strategies. That transaction closed in the second quarter and integration is well under way. Max is leading the charge and I will let him share the details. Max?

Max Reinhardt -- President

Thank you, Dave. It's been just seven weeks since I joined Pacira and I am delighted to lead a commercial team that is dedicated to delivering solutions that improve clinical economic outcomes and reduce our nation's reliance on opioids as the primary solution to post-surgical pain.

Additionally, as the Pacira lead for the J&J partnership, I am committed to building on the historic success of this alliance and I'm confident that together we will continue to bring opioid-sparing solutions to patients in need.

As leaders in the field of pain management, we recognize that the market is evolving and we are well-positioned to advanced our product offering to align to those changes. In this context, we will adapt the focus of our J&J partnership as necessary to reflect the market's transition from inpatient surgery to the ASC site of care, with anesthesiologists having an increasing role in administering pain management solutions. We are confident that we can lead in this market transformation by leveraging both our J&J relationship and our Pacira commercial infrastructure.

Turning now to iovera, a technology that takes advantage of the body's natural response to cold. To provide safe effective immediate long-lasting pain relief without the need for any narcotics. I share our team's enthusiasm around the addition of this innovative product to the Pacira commercial offering.

We believe the combination of iovera and EXPAREL will become the preferred procedural solution that will empower patients and their healthcare providers to take control of the patient's osteoarthritis journey, while minimizing the need for narcotics. Iovera is a perfect strategic fit with EXPAREL that further solidifies our leadership position in non-opioid pain management by offering healthcare providers an effective multimodal procedural solution for TKA procedures.

As you know, our initial go to market strategy will focus on two broad patient categories. Our first priority is iovera and EXPAREL for opioid-sparing pain management for the total knee arthroplasty patient. With the iovera treatment being administered before surgery and EXPAREL during surgery. As many as 30% of presurgical patients with end stage knee osteoarthritis use prescription opioids. With iovera, our goal is to provide patients with several months of opioid-free pain control to allow them prepare for surgery with an appropriate prehab regimen.

EXPAREL for surgical pain control and EXPAREL plus iovera to control post-surgical pain provide an environment for rapid functional recovery and return to daily activities, including normal sleep. Int his setting, we have an existing reimbursement pathway using a CPT code and key opinion leaders are already using iovera in combination with EXPAREL to achieve near opioid-free results for total knee replacements. In fact, training is under way as a major integrated delivery network for the use of EXPAREL plus iovera with the goal of opioid-free surgery.

The second target market would be osteoarthritis patients hwo have failed conservative treatments such as NSAIDs or viscosupplementation who are seeking drug-free opioid-free, surgery-free pain management for several months. Here, we are targeting those patients seeking an active lifestyle such as golf, tennis, hiking or simply walking with their grandchildren, as well as patients who desire to delay surgery for family events, such as vacations or weddings.

There are 14 million individuals in the US who have symptomatic knee osteoarthritis and when we look at the market potential for osteoarthritis, we believe this is a billion-dollar opportunity where iovera can capture a meaningful share. With iovera, healthcare providers can control pain by delivering precise, controlled doses of cold temperature to the targeted nerve through a handheld device. The extreme cold is delivered using Smart Tips or closed end needles so no fluid, chemical, or drug is injected in the body during the procedure. Results can be felt immediately and pain relief can last three or more months as the nerve regenerates over time.

Historic iovera pricing has not reflected the value this technology delivers. In this context, we are executing a new price volume discount matrix that will increase our average selling price, above $450 per Smart Tip within 12 months. We will be investing in key clinical studies to demonstrate the value proposition of iovera.

Our initial focus will be TKA and ACL repair with iovera in combination with EXPAREL. Our clinical strategy will focus on enhancing these data with new studies that highlight the complementary effects of iovera and EXPAREL. Our clinical initiatives are focused on enhancing the commercial value and positioning of iovera and EXPAREL as the leading multimodal solution for opioid-sparing pain management before, during, and after surgery. These studies will also be designed to demonstrate health economics and value to facilitate broader market access and reimbursement.

Looking more closely at ACL tear, one of the most common injuries to the knee, which often occurs in athletes who participate in sports such as soccer, football, and basketball, active younger patients and high-level athletes often opt for surgical reconstruction and severe post-surgical pain can persist for one to two weeks after the procedure. This is where we see the iovera and EXPAREL as an ideal match for providing a powerful non-opioid strategy for managing pain immediately after surgery and we see potential for enhanced rehabilitation while minimizing the need for opioids.

On the manufacturing front, since completing the acquisition, our team has done a tremendous job building our near-term capacity. We now anticipate being able to supply at least 100,000 iovera Smart Tips by the end of 2020. From a competitive standpoint, we believe that iovera is very well-positioned compared with other technologies, where healthcare professionals will schedule iovera treatment sessions with a physician assistant or CRNA trained in its use who can treat several patients per hour.

In summary, iovera is a safe and effective treatment that provides immediate pain relief that can last for several months as the nerve regenerates over time. The treatment is repeatable using a safe technology that does not risk damage to surrounding tissue. Iovera uses a convenient handheld device with a single-use procedure-specific Smart Tip. Therapy can be delivered precisely using ultrasound guidance or an anatomical landmark allowing medical practices to incorporate iovera as a new revenue generator.

We are actively executing our commercial plans, which include expanding manufacturing capacity, improving margins, and developing additional clinical evidence. As with EXPAREL, we will work with government and commercial payers to provide broad patient access to iovera.

With that overview, I'll now turn the call over to Charlie to discuss our financial results. Charlie?

Charlie Reinhart -- Chief Financial Officer

Thank you, Max. Good morning, everyone. Before I walk through the second quarter financial results, I would 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 a reconciliation to GAAP for these measures.

We ended the first half of 2019 in a very strong financial position. With approximately $318 million in cash and investments and significant and growing cash flow from operations, we are well-positioned to advance our vision of becoming a leading provider of non-opioid pain management and regenerative health solutions.

On the P&L side, we have significant operating leverage with rapid-growing topline that we are supporting with only modest increases and expenses. This underscores the tremendous opportunity we have to capitalize across our business while continuing to simultaneously ramp revenues and adjusted EBITDA.

I'll now turn to some specific financial highlights for the quarter. Total revenues increased by 22% to $102.6 million in the second quarter of 2019 versus $84.1 million in 2018. This growth was predominately driven by net product sales of EXPAREL, which increased by 23% to $98.9 million in the second quarter of 2019 as compared to $80.4 million in 2018.

In April after closing the MyoScience deal, we began marketing iovera and reported net product sales of $2 million in the second quarter, which does not include any impact from our new value-based pricing strategy that Max discussed. Our non-GAAP gross margin for the second quarter of 2019 improved 77% versus 76% in 2018. Non-GAAP research and development expenses were $16.6 million in the second quarter of 2019 versus $11.3 million in 2018.

The increase in R&D was primarily driven by the ongoing enrollment in our Phase 3 pediatric study, our Phase 4 opioid-free C-section study, as well as start-up expenses for the Phase 4 spine study and the Phase 4 hip fracture study. We have also continued to invest in the scale up of our manufacturing capacity at our production facility in the UK.

Non-GAAP SG&A expenses were $43.8 million in the second quarter of 2019 versus $39.2 million in the second quarter of 2018. This increase is attributable to increased sales and promotional activities 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 market.

Another key driver of this increase is our co-promotion with J&J, which as you know is directly linked to topline growth. All of this resulted in non-GAAP net income in the second quarter of 2019 of $17.5 million or $0.41 per diluted share versus $9.9 million or $0.24 per diluted share in 2018.

Our cash position remains strong as we ended the quarter with approximately $318 million in cash and investments. This figure reflects our investment of approximately $120 million of cash with the closing of the MyoScience acquisition in April.

Looking ahead, given that EXPAREL is on a significant growth trajectory, delivering significant 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.

The last item to cover is our financial guidance. As Dave discussed, we are very pleased with our financial outlook and feel very comfortable iterating 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.

As for iovera, we remain optimistic about its long-term prospects and continue to expect $8 million to $10 million of net product sales in 2019. Given the strong commercial synergies, we believe iovera will be a significant contributor to our business over time. We remain confident that 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 is expected to come in at the high end of our previously guided range of $60 million to $70 million as we begin to invest in iovera. We now expect non-GAAP SG&A to be between $180 million and $190 million versus our previously guided range of $165 million to $175 million. This increase is primarily driven by the inclusion of commercial infrastructure cost for iovera. Lastly, our guidance for stock-based compensation expense remains unchanged from our previous guidance of $30 million to $35 million.

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

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press * then the number 1 on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. To prevent any background noise, we ask you please place your line on mute once your question has been stated.

Our first question comes from the line of Randall Stanicky with RBC Capital Markets. Your line is open. Please go ahead.

Randall Stanicky -- RBC Capital Markets -- Analyst

Thanks, guys. Dave, we've seen pretty robust EXPAREL growth in the first half and I know you said that can continue to accelerate going forward in the back half. Is that still the case? Can you common on how sustainable this level of growth is if we see a competitor able to get to market and enter.

Then one for Charlie, on the SG&A increase, is that a new step up so we should think of an annualized spend next year in the $20 million range? I think you said that's all associated with iovera. Can you confirm that? Thanks.

Dave Stack -- Chairman and Chief Executive Officer

Thanks, Randall. We don't see anything in the marketplace that convinces us that we shouldn't continue to see growth that is as we've seen so far this year. It's driven by anesthesia and by nerve blocks. We're doing an additional lower level nerve block trial. That will add an additional impetus when it's available.

We are just beginning to see the rollout of the ambulatory care coverage and reimbursement from all payers except for Aetna. Cigna and United and the Blues and a number are just beginning to have active scenarios where they are paying for EXPAREL. We continue to see the ambulatory care space growth rapidly.

So, as you look out over time and you see C-section data coming, there's no reason to believe we are anywhere near the end of a growth cycle. It looks pretty similar to us to what we've seen over the last several months. Come back to me if you have anything more specific than that. I'll ask Charlie to answer the second part of your question, Randall.

Charlie Reinhart -- Chief Financial Officer

Randall, from the SG&A perspective, the increase in guidance was primarily related to iovera and we would expect the same thing to look to happen next year as well. Remember, that's only nine months. So, that could be higher at 12 months. We'll wait and see how these plans shake out.

Randall Stanicky -- RBC Capital Markets -- Analyst

Thanks, Charlie. Dave, how are you thinking about the potential entry of a competitor? You've obviously had some time in some of your ERAS programs and I assume you're thinking about these relationships as sticky. So, for investors thinking about the potential 2020 entry of a competitor, how are you thinking about that?

Dave Stack -- Chairman and Chief Executive Officer

We've treated over 5.5 million patients now, Randall. We've had 750 peer reviewed articles that have been published. I think increasingly important is we see ERAS protocols grow, where the use of EXPAREL is a platform for non-opioid treatment. Post-surgical pain management is institutionalized as part of the EMRs.

So, when you look at all of that, you say we have had several years now to become embedded with our customers in the institutional practices. On top of that, a good deal of the growth is coming from these new market segments around the use of the anesthesiologists triggered by the brachial plexus block, but then pretty quickly moving into TAP blocks, which we highlighted several times in the script.

So, there's no reason to think a competitor is going to be able to challenge EXPAREL on any of those fronts. With the addition of P-data and very specific C-section data, we see ASC and the movement of a product to the outpatient setting as a growth driver. We see the lower extremity nerve block as a growth driver. I don't see any of those being really challenged by any of the competitors we see on the short-term horizon. So, we're very comfortable with our position.

A competitor that comes in and talks a lot about opioid-sparing approaches could actually be helpful to us. It's a very large market. We still have a relatively modest market share. Randall, I've known you for a longtime. Bring it on. Let's see what you've got.

Randall Stanicky -- RBC Capital Markets -- Analyst

That's great. Thanks, guys.

Operator

Thank you. Our next question comes from the line of David Amsellem with Piper Jaffray. Your line is open. Go ahead.

David Amsellem -- Piper Jaffray -- Analyst

Thanks. So, a couple of quick questions -- so, can you talk maybe qualitatively or even quantitatively about how the unique separate coding is driving or part of driving the growth of EXPAREL this year? I know you've talked about ambulatory, nerve blocking. Those are obviously big drivers, but in terms of the evolving reimbursement landscape, how much of a tailwind has it been to date. So, that's number one.

Then number two, on the iovera supply, can you just talk about your longer-term plans regarding manufacturing and ultimately where do you need to be? Where are you looking to be regarding your longer-term supply goals for the product and the extent to which that's a gating item to more aggressive promotion. Thanks.

Dave Stack -- Chairman and Chief Executive Officer

Thanks, David. On the first one, David, we started the Aetna pilot in December. So, that really is our beta study on what can happen as this rolls out across a broader platform, which I think is the nature of your question. Our same-store sales, if you will, of the Aetna ambulatory surgery centers in New Jersey and Florida have exceeded expectations. It has done extraordinarily well. We see that as a significant driver.

I think there is significant insight in your question because what's happened to date is when it's only Aetna that is paying, most of the centers have to have an opioid-sparing approach that Aetna will pay for and then a more normalized approach with the use of opioids where other insurances have not yet caught up with the C-code 9290 and are paying for EXPAREL.

As we get more payers paying, you see that you reach the tipping point and in some cases, we are seeing the tipping point where a Blue, Cigna, and Aetna are all paying and then the ambulatory care center says we are only going to have the opioid-free system. We're no longer going to support an opioid platform and a non-opioid platform. You're either going to pay for EXPAREL or we're going to stop taking your patients.

I think you're going to continue to see this movement over the rest of this year as additional payers come on. It is geographic-specific. There are places where the bigger Blues are covering EXPAREL and then there are places in some of the smaller markets where we have some work to do. Achieving that tipping point given the nature of your question is a big deal for us and will further accelerate the kinds of things we've seen from the Aetna pilot so far.

On the manufacturing side, David, we've put a second manufacturing line in the current facility, which is why Max was able to say in his part of the script that we're comfortable being able to provide 100,000 of the Smart Tips to the marketplace this year. The five-year plan in development will provide the opportunity to have many times that number and we just have outpatient or outsourced opportunities to increase that demand.

Those levers will be pulled as we see how this rolls out over the next several quarters. I can't tell you that I know exactly what the capacity is going to be after owning this asset for a few months. We can get many times the 100,000 units we deem next year inside the current five-year plan as required.

David Amsellem -- Piper Jaffray -- Analyst

Okay. If I may sneak in one additional question, there have been a lot of questions about the nature of the J&J relationship and how that's evolving. So, I guess the question here going forward is where do you want to go with your relationship with J&J, particularly given these folks are mainly hospital-focused and your growth is coming from outpatient ambulatory, particularly. So, help us understand your thought process going forward regarding that relationship.

Dave Stack -- Chairman and Chief Executive Officer

So, I'll ask Max to comment in a second. He's uniquely qualified to comment on this topic. The marketplace is changing, David, as you point out. There are huge opportunities that are verticals inside this. The professional education programs that J&J provides we can't match. That's just not possible. They have sports medicine salesforces. They have spine salesforces.

There's a number of things that even though the bulk of our growth is coming from anesthesia and ambulatory, there are places where Johnson & Johnson provides us an opportunity for leadership around new data development that would take us a long time to develop.

So, inside the context on that, I'll ask Max to comment. He is now in charge of the J&J relationship here for obvious reasons.

Max Reinhardt -- President

Yeah. What I would say is the partnership has contributed to our growth and improving growth trajectory over the last two years and we work very closely with Johnson & Johnson, who are responding to the changes in the marketplace, including the movement of total knee arthroplasty to outpatient and meeting unmet clinical needs in spine where they have a number two market share position as well as leveraging the professional education infrastructure and channels into sports medicine, which also is conducted in the ASC environment.

So, we are very happy with how this partnership has performed and we continue to work closely together to focus on our major opportunities for growth.

Dave Stack -- Chairman and Chief Executive Officer

David, just to be clear, what Max referenced, CMS has mandated that total knees be added to the ambulatory surgery center opportunity for 2020. We see that as a significant growth driver as well.

Operator

Thank you. Our next question comes from the line of David Steinberg with Jefferies. Your line is open.

David Steinberg -- Jefferies -- Analyst

Thanks. A couple questions -- first, on gross margin, I know that the first quarter is usually depressed, but you had a very significant uptick in the second quarter, perhaps a little better than expected. I was wondering how the sequencing and gross margin will look like for the rest of the year. Will Q3 be better than Q2 and Q4 be better than Q3? Then in terms of your objective with your new facility in the UK is to get the gross margins well above 80%. Would that be a 2020 event or more like 2021?

The second question is on new sources of growth for EXPAREL. I know that you indicated you have or will be soon filing your package in the EU. I'm curious in general, since you may get your first revenues next year, how would you quantify -- there are a lot of different territories, but just in general, how would you quantify the revenue opportunity ex-US and pricing as well? Thank you.

Dave Stack -- Chairman and Chief Executive Officer

I'm going to turn it over to Charlie to answer your specific questions, David. Let me go backwards, David -- we will be selective in the geographies where we launch, especially in the EU. There are countries where we see great benefit to this opioid platform and where ERAS protocols are the standard of care across the majority of the hospital systems and we think we can have great effect there. There are several territories where it is very difficult from a cost perspective. We're not going to bang our head against the wall. We're going to go where there's something to be done and address the opportunity.

Canada is an opportunity generally 8% to 10% of what is the US opportunity is available in Canada and generally speaking, Europe is four to five times that, just to give you a sizing. It will take us a while to get there. So, if you look at these launches that will be '20-'21 timeframe over the five-year plan, the vast majority of the revenue that will be generated around EXPAREL and iovera is in the US.

I'll turn it over to Charlie. But just to remind you, the delta of difference from Q1 to Q2 is largely driven by the fact that we have a several week shutdown in Q1. It's a fixed cost facility. So, we're paying those folks whether we're making it or not. That's why you'll always see that shutdown-driven difference between Q1 and Q2 and then Charlie can give you color on the rest of your questions relative to cost.

Charlie Reinhart -- Chief Financial Officer

David's Q1 comment is absolutely right on. It's historically consistent. Go back and look at last year. It's pretty much the same thing. This first quarter, we also had Patheon coming online. So, they were just starting and getting their feet wet as well. That impacted Q1. Q2, it's not really a surprise, frankly. It's pretty much on plan. We said 75% to 76% for the year and we started out with 71%. So, you have to be above 75% for the rest of the quarters in order to get back on track and we just reaffirmed that guidance.

The second half of the year, volumes will be stronger than they are in the first quarter, just like they always are and margins will be better in the first quarter, just like they always are. So, we don't see anything unusual, really, in that.

As far as the longer-term margins, what we really need to is to continue to transfer volume as total volume grows and transfer that volume into the Patheon space in the UK. We said a number of times that the total per-unit costs there are lower. There is also a little bit of a seesaw effect because if you take too much volume out of San Diego and put it into the UK, then the fixed costs of San Diego start to make those units go up. It's not a night and day or switch you can turn on and off.

The next big jump in improvement in the gross margin comes with our 200-liter unit coming online. As you may recall, we currently use 45-liter batch process and the 200-liter batch process brings with it some significant additional efficiencies as well. We're hoping that that is commercially available kind of the end of 2021. So, if we're making product at the end of 2021, we probably won't sell it until 2022. You'll start to see a change in that timeframe.

Operator

Thank you. Our next question comes from the line of Liana Moussatos with Wedbush Securities. Your line is open. Please go ahead.

Liana Moussatos -- Wedbush Securities -- Analyst

Thank you for taking my questions. Congratulations on a strong quarter. The $2 million in sales for iovera, was that only for osteoarthritis, TKA? What indications were those sales for? A little clarity on the $450 per Smart Tip. There are different types of Smart Tips and some are more complicated. Is that just an average or are you planning to have different pricing for the different types of tips?

Dave Stack -- Chairman and Chief Executive Officer

Thanks, Liana. The $2 million was what MyoScience had achieved before the acquisition and it was almost entirely hospital-driven, associated with TKAs. So, it was where they had strong reimbursement in the HOPD session and that's really where the focus of their activity was and where the vast majority of their revenue was. On the $450 ASP, what Max said in his prepared remarks were the ASP is lower than that today and it will ramp up as contracts come due and as we generate new customers over the next 12 months. So, that will be a climb to that point over the next 12 months or so.

You're right -- there are several tips. We will limit manufacturing to two of the tips, a Smart Tip with the Triton, the three needle sites that's generally used when the physician is going by anatomical markers and using the broader application of the cryoanalgesia technology and then a 190 tip that looks almost like a spinal needle. It's like a 3.5-inch spinal needle that is used generally when the physician is using ultrasound guidance and identifies the nerve and then they go in and apply the application specifically to the nerve while we're looking at it on ultrasound.

We will limit manufacturing to those two tips, which is what allows us to make more tips, by making fewer different kinds of tips. The $450 is really a blend of those two, but we don't have any intentions of having dramatic differences in the ASP of the different tips. We want the reimbursement work that we do and the value-based pricing that we do to be easy for the customer to understand. So, the $450 represents a blend of the two that will be actually what the customer sees.

Liana Moussatos -- Wedbush Securities -- Analyst

Okay. When do you expect that your marketing efforts will start affecting iovera sales?

Dave Stack -- Chairman and Chief Executive Officer

So, we brought over a group of people from MyoScience and they are working with customers and working with some of the new strategies that will be employed. We will turn on a greater function of the use of our resources and any additional resources that are required. I should mention that every year at this time, we go through a review of what resources are required for next year. We're doing that for 2020 right now. So, Charlie mentioned that the guidance for SG&A is going up.

To answer your question very specifically, 1/1/20 is when we will have a formal soft launch, relaunch, if you will, with additional resources. Right now, the iovera folks that came over with the product are working with some of the physicians on our alliance team to make sure that customers are having a positive experience, etc. and then we'll add the Pacira resources once we're sure we're going to hit the $400 to $410 that has been promised for this year.

Liana Moussatos -- Wedbush Securities -- Analyst

Thank you very much.

Operator

Thank you. Our next question comes from the line of Oren Livnat with H.C. Wainwright. Your line is open.

Oren Livnat -- H.C. Wainwright & Co. -- Analyst

Hey, thanks for taking the question. Help us drug folks better understand this device side of iovera. Right now, there are existing CPT codes, which I understand vary across different settings and are probably for significantly lower amounts than the numbers you're talking about for the device sales themselves. How do doctors purchase and get reimbursed and cover their costs and make margins on these purchase of disposables? Is there a big upfront cost for the device itself? Help us understand the economics for a doctor.

Dave Stack -- Chairman and Chief Executive Officer

I'll ask Max to comment again here. I'll just get us started. You can purchase the handheld if you'd like or it can be included in the price of the tips. That's what we meant by value-based pricing and the team is still working on different approaches for how different customer groups will want to actually acquire the handheld device and the tips. Not to be too mysterious there, but there are some market segments where they cannot lease or have an embedded cost associated with the variable piece of the equipment. So, you've got a handheld. It's fixed equipment that plugs in and is used over and over again and then you've got the tip that's used once.

So, the $450 that Max was talking about really is the price that a physician would use to establish -- whether they were making money in a reimbursement environment or what their charge was going to be in a cash environment. The payment in the HOPD environment, the hospital outpatient environment, is actually between $950 and $1,000. So, the physician, that's the ASP price that mentioned actually can do very well.

The opportunity in the physician office and where you're using it for OA and the 14 million patients that Max mentioned, that we see largely as a commercial market or a cash pay market. In the work that's been done so far, we see a mix of the two. So, the reason the physicians have been interested is largely around the ability to have a cash pay market for these 14 million OA patients that Max mentioned.

I should mention also 2 million of those patients are under 45. There's a real need in this marketplace to provide something for pain control and a patient that's just too young to get a knee replacement given the actuarial tables that suggest you'll live to be 83 and you can only have this done twice. There are a bunch of different reasons why physicians are thinking about how they want to use this cryo technology. I don't know if Max has anything additional to add, but I'll turn it over if he does.

Max Reinhardt -- President

Yeah. Thank you, Dave. A few points to make is we, as described earlier today in the call, are targeting the TKA candidate, those patients that are in the last stages of their osteoarthritis journey. In doing so, we need to orthopedic surgeon to sponsor the use of iovera. The most advantageous site of care for our customers is the hospital outpatient department based upon the reimbursement.

But what we're observing is that the orthopedic surgeon often delegates the treatment to a physician assistant or another healthcare provider in their practice. They can organize very efficient iovera sessions, where they apply these treatments prior to TKA or the latter stages of osteoarthritis, using a member of their team, a PA or CRNA. They really love the technology because it's safe, it's easy to use, and it provides immediate pain relief.

What we're finding for physicians who are using the technology is the advocacy the patients provide for that physician's service is very strong in the community because there are very few solutions that provide immediate pain relief that is long-lasting in nature.

Oren Livnat -- H.C. Wainwright & Co. -- Analyst

Should we think of this as similar to the HA market, which I assume you have some experience with, with regard to the use cases?

Dave Stack -- Chairman and Chief Executive Officer

Yeah, PRP, Oren, is the one that we've used. If an orthopedic group is doing PRP, they generally have a PRP day. They batch patients as a physician extender, as Max outlined, actually doing the procedures. We expect to see the same kind of approach with iovera.

Operator

Our next question comes from the line of Balaji Prasad of Barclays. Your line is open. Please go ahead.

Belaji Prasad -- Barclays -- Analyst

Good morning and thanks for squeezing me in. Just a couple of questions on the manufacturing capacities with EXPAREL and iovera. First, on EXPAREL, have you given an update on the capacity of both your current and upcoming Swindon facilities and how can I tie that up with the gross margin improvement you're speaking to? Secondly, on iovera, you spoke about 100,000 Smart Tips to 2020. Can you also please help me understand what's the limiting factor? How should we think about the supplier? Going by the guidance on the ASP you provided, am I right in understanding that the supply is pretty adequate for the next two to three years?

Dave Stack -- Chairman and Chief Executive Officer

I'm going to go quickly -- EXPAREL today, we can make between $800 million to $900 million worth at the current price. That would be wonderful if that was an issue in 2020. It won't be. We expect, as Charlie outlined, the 200-liter to come on. That gives us 4x what we could make. That would make another $900 million worth. So, between now and the end of 2021, if we've left all of the 45-liter facilities in place, which we probably won't, we can make between $1.8 billion and $2 billion worth of EXPAREL. We're in very good shape.

With iovera, the rate limiting issue is that these are put together by hand. So, the biggest component is actually people-based. So, it's just hard to keep hiring more and more people. We are looking at automating part of the process and we are looking at the opportunity to move the process to some less expensive environments and both of those things are in process. None of that is done yet.

So, I can't tell you that we know exactly what we're going to do. Really, we're focusing on 2020 so that we can get everything going in the marketplace and then we have to give you updates on where we're going to go from there in future Q calls.

Belaji Prasad -- Barclays -- Analyst

That's helpful. Thank you.

Operator

Thank you. Our last question comes from the line of Serge Belanger with Needham. Your line is open. Please go ahead.

Serge Belanger -- Needham & Company -- Analyst

Good morning. I wanted to talk about some of the label expansion activities, specifically the pediatric study and you announced a new lower extremity trial. Can you discuss the timelines for these trials and when you expect to be part of the label? Then maybe the market opportunity for each and how much off-label usage are you currently seeing in these indications?

Dave Stack -- Chairman and Chief Executive Officer

Let me go backwards, Serge. I want to be clear we only promote and nerve block for upper extremities. With that said, there are places where the physicians are 100% dedicated to what's in the package insert and there are places where an anesthesiologists will say to us a nerve is a nerve and I'm going to use it where it's in the best interest of patient care. We had a little bit of both. Clearly, having a lower extremity nerve block will work to our advantage. That trial is just kicking off. We've met with the FDA. We're clear on exactly what we're going to do.

I think the best estimate -- and I'm looking at Rich Scranton here to give me some help if I get off-base -- we would expect to have data sometime mid next year and then it will be a formal SNDA. So, it will have to go to the FDA for review. You would think in a normal course of events, we would have a lower extremity nerve block in the first quarter of 2021.

For peds, it's a little clearer. That trial is enrolling very well. We expect to have data by the end of the year. If we submit an SNDA under accelerated approval, we would have an approval early in the summer of 2020. If we did not get accelerated approval, it would add 60 days and it would be in mid-summer of 2020. So, in either case, it would be something where we would be hopefully in the market promoting pediatric use in the fourth quarter of 2020 and then the lower extremity nerve block would follow approximately by a year.

Operator

Thank you. This does conclude today's Q&A portion and I would like to turn the conference back over to Chairman and CEO, Mr. Dave Stack.

Dave Stack -- Chairman and Chief Executive Officer

Thanks, Michelle. Thank you for your time and attention this morning. We'll be presenting at the Wedbush Conference next week and hope to see some of you there. Have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duration: 61 minutes

Call participants:

Susan Mesco -- Head of Investor Relations

Dave Stack -- Chairman and Chief Executive Officer

Max Reinhardt -- President

Charlie Reinhart -- Chief Financial Officer

Randall Stanicky -- RBC Capital Markets -- Analyst

David Amsellem -- Piper Jaffray -- Analyst

David Steinberg -- Jefferies -- Analyst

Liana Moussatos -- Wedbush Securities -- Analyst

Oren Livnat -- H.C. Wainwright & Co. -- Analyst

Belaji Prasad -- Barclays -- Analyst

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