Pacira BioSciences - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $187.3M (+3% YoY); GAAP diluted EPS $0.34 and non-GAAP diluted EPS $0.91; adjusted EBITDA $62.5M; non-GAAP gross margin 79%.
• Full-year 2024 revenue reached a record $701.0M; GAAP net loss was $99.6M due to a $163.2M goodwill impairment; non-GAAP net income was $157.7M; adjusted EBITDA $223.9M.
• Management introduced 2025 guidance: total revenue $725–$765M, non-GAAP gross margin 76–78%, non-GAAP R&D $90–$105M, non-GAAP SG&A $290–$320M; stock-based comp $56–$61M; depreciation expected ~$30M; uptake from NOPAIN expected to be more meaningful in H2 2025.
• Strategic catalysts: NOPAIN separate reimbursement and a product-specific EXPAREL J-code effective Jan 1, 2025; new EXPAREL composition patent expected to protect into 2044; iovera° SmartTip FDA clearance for chronic low back pain; PCRX-201 Phase II underway with encouraging 2-year data.

What Went Well and What Went Wrong

What Went Well

• EXPAREL, ZILRETTA, and iovera° all grew YoY in Q4: EXPAREL $147.7M (+3%), ZILRETTA $33.1M (+15%), iovera° $6.5M (+7%).
• Non-GAAP gross margin was strong at 79% in Q4; adjusted EBITDA was $62.5M; operating cash flow positive with cash/investments ~$485M at quarter-end.
• Management emphasized the 5x30 plan and early positive indicators from NOPAIN and J0666 J-code: “We’re sharply focused on executing our 5/30 strategy… early indicators… formulary wins… rising awareness around the J code”.

What Went Wrong

• GAAP diluted EPS fell YoY ($0.34 vs $0.50 in Q4 2023) and adjusted EBITDA down ~4% YoY ($62.5M vs $65.4M) as SG&A rose with commercial/market access investments; GAAP net income also decreased YoY.
• Full-year GAAP net loss of $99.6M driven by a $163.2M goodwill impairment tied to generic dynamics and patent ruling in Q3 2024.
• CFO commentary indicated price increases were offset by discounting (GPOs) and vial mix; near-term NOPAIN uptake will take time (claims data lag, customer learning curve), with more meaningful impact in H2 2025.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to Pacira BioSciences' fourth quarter 2024 conference call. At this time, all participants are on a listen-only mode. After this speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automatic message advising you your hand is raised. Please note that today's conference is being recorded. I would now like to turn the call over to Susan Mesco, Head of Investor Relations. Please go ahead.

Susan Mesco (Head of Investor Relations)

Thank you, operator, and good afternoon, everyone. Welcome to today's conference call to discuss our fourth quarter and full year 2024 financial results. Joining me are Frank Lee, Chief Executive Officer, and Shawn Cross, Chief Financial Officer. Kristen Williams, Chief Administrative Officer; Tony Molloy, Chief Legal Officer; Jonathan Slonin, Chief Medical Officer; and Brendan Teehan, Chief Commercial Officer, are also here for today's question-and-answer session. Before we begin, let me remind you that this call will include forward-looking statements subject to the safe harbor provisions of federal securities laws. Such statements represent our judgment as of today and may involve risks and uncertainties. This may cause our actual results, performance, or achievements to differ materially. For information concerning risk factors that could affect the company, please refer to our filings with the SEC. These are available from the SEC or the Pacira website.

Lastly, as a reminder, we will be discussing non-GAAP financial measures on today's call. A description of these metrics, along with our reconciliation to GAAP, can be found in the news release issued earlier this afternoon. With that, I will now turn the call over to Frank Lee.

Frank Lee (CEO)

Thank you, Susan, and good afternoon, everyone. The considerable progress we made in 2024 leaves us well-positioned for 2025 and beyond. Key highlights from last year include record revenues of $701 million, the high end of our guided range, separate CMS coverage, and product-specific reimbursement codes for both Exparel and iovera. Our RMAT designation from the FDA for PCRX-201. And the readout of compelling two-year data from our 72-patient phase I study. And importantly, establishing a best-in-class commercial market access and medical powerhouse to drive top-line growth. Looking ahead, the year is off to a strong start. We're sharply focused on executing our 5x30 strategy and becoming an innovative biopharmaceutical organization. We believe executing on this strategy is the best way to achieve growth and value creation as a leader in musculoskeletal pain and adjacencies. The plan focuses on five key objectives that we intend to achieve by 2030.

These objectives support two broad strategic imperatives. First, accelerating growth in our strong commercial-based business, and second, advancing an innovative pipeline of potentially transformative assets like PCRX-201. To summarize our 5x30 goals: Patients: We expect our products to be benefiting more than 3 million patients annually by 2030. Products: We plan to grow product revenues by double-digit CAGR over the next five years. Profitability: We expect to achieve a 5 percentage point expansion in gross margin over 2024. Pipeline: We anticipate having five novel programs in our clinical development pipeline. And partnerships: We plan to establish at least five clinical or commercial partnerships. When we look at Pacira's commercial-based business, we have a solid foundation. Our three best-in-class products are generating significant cash flow. Each of these franchises has ample room for increased penetration and market expansion, with multiple key growth drivers starting to kick in this year.

For our flagship product, Exparel, the NOPAIN Act is now in effect. This means we have reimbursement pathways for 18 million outpatient surgical procedures. Approximately six million of these procedures have CMS coverage, and 12 million have commercial coverage. Exparel now has its own product-specific J code with a reimbursement rate of average selling price plus 6%. Securing this code was a particularly important milestone as it will expand patient access to best practice opioid-sparing care. In addition, the J code will streamline the reimbursement and billing process. It is also more likely to be recognized and covered by commercial payers. While it's still early days, our field teams are seeing evidence of progress since the rollout of NOPAIN on January 1st. This includes recent formulary wins as well as a rising level of awareness around the J code.

While we're pleased with the positive early indicators, it will take time for our customers to adopt this new reimbursement. In addition, the IQVIA claims data can take up to four months to process. We look forward to sharing future updates as more data becomes available. On the payer front, we continue to highlight the Exparel value proposition with real-world evidence. In addition to CMS, we now have commercial payers beginning to recognize the importance of reimbursing Exparel outside of the bundled payment. Recent progress includes several national payers adopting NOPAIN-like policies. This represents roughly 40 million covered lives and more than doubles our previous commercial coverage map. Our teams will continue to focus on expanding coverage, and we'll keep you apprised on future calls. Along with favorable patient outcomes, separate reimbursement helps our customers navigate financial challenges.

At the same time, it gives them the opportunity to be at the forefront of opioid-sparing pain management. This is especially relevant for those accounts receiving discounted pricing through 340B or GPO Networks, and the benefit is mutual given the anticipated Exparel volume expansion. We launched two GPO partnerships last year. Both are performing according to plan, with volumes up and only modest impact on net sales dollars. Our third and final GPO agreement is expected to go live in the first half of this year, and once completed, more than 80% of our current Exparel business will be under contract. Given our progress on the market access front, along with our learnings from market research, we believe it's the right time to invest in targeted direct-to-consumer marketing.

We expect this DTC investment to expand utilization by driving patient demand for Exparel to be a part of their treatment plan for post-surgical pain. We will begin with targeted pilot programs in the first half of the year and adjust our investment accordingly based on the ROI data. These patient-focused programs augment the Exparel value proposition we are presenting to physicians and other key stakeholders. Turning to Zilretta, a best-in-class product that is commercially sensitive, this year we are focusing on generating additional share of voice, increasing our reach, and driving awareness around its key advantages. It is the first and only long-acting single-shot corticosteroid injection for osteoarthritis knee pain. Zilretta has demonstrated high patient satisfaction, up to four months of reliable pain relief, and fewer office visits. Zilretta also has a strong safety and pharmacokinetic profile as it remains localized in the knee.

This allows for fewer systemic effects, including significantly lower blood glucose spikes and important benefit for diabetic patients. 14% of patients with osteoarthritis also have diabetes, so this represents a meaningful opportunity. In parallel with our commercial efforts, our phase III registrational study is advancing in shoulder OA and is on track with top-line results next year. If approved, Zilretta would be the first and only long-acting steroid approved for use in shoulders. This is a sizable market with approximately one million intra-articular injections administered each year. Switching gears to iovera, we have a key growth driver kicking in this year with separate CMS reimbursement now in effect via the product-specific code C9809. This is important as physicians are eligible to receive up to $256 for iovera using this new code. This payment is in addition to the procedural fees they are receiving.

We're also launching a new iovera Smart Tip. This innovative tip was approved late last year and is specifically designed for use as a medial branch block to relieve low back pain. Millions of Americans suffer from chronic low back pain. It often leads to poor quality of life, disability, lost wages, and persistent prescription opioid use. Lastly, our registrational study of iovera for treatment of spasticity is advancing with top-line results expected next year. There is a significant lack of innovation and patient satisfaction in this debilitating condition. We believe iovera represents a novel approach for patients with moderate to severe spasticity seeking better treatment options. Turning now to our second strategic imperative, advancing an innovative pipeline. Here, we're focused on becoming a therapeutic area leader in musculoskeletal pain and adjacencies. These are large markets significantly lacking innovation.

Nearly one in four Americans are living with chronic pain and seeking new interventions addressing its underlying cause. As we look to new product development, we'll prioritize mid to late-stage de-risk opportunities, more specifically product candidates with validated mechanisms and established reimbursement pathways. We'll also look to leverage our long-standing market leadership in treating pain in precise targeted ways. Our recently announced acquisition of the remaining ownership stake of GQ Bio is a perfect example. It directly aligns with our 5x30 Strategy by adding an exciting, first-of-its-kind, high-capacity local delivery platform for genetic medicines. This transaction also brings us a preclinical portfolio with disease-modifying potential in prevalent musculoskeletal diseases and research and development talent. Further, it eliminates future milestones and builds upon the process development activities we've been advancing with GQ Bio since 2023. In short, we know this technology very well.

We believe there's a great potential for this platform to position us as a leading developer of novel treatments for underlying cause of chronic pain using a targeted molecular approach. We have a clear understanding of the safety and tolerability of the high-capacity adenovirus, or HCAD, viral vector, which is based on Ad5. This is a well-understood serotype that is very common in community circulation. We also have strong data suggesting it is not susceptible to pre-existing neutralizing antibodies. This allows for the possibility of redosing. This platform solves many of the challenges that have made gene therapy inaccessible for common diseases. The HCAD vector is much more efficient at delivering genes into cells compared to many other gene therapies that rely on the adeno-associated virus, AAV vectors. As a result, the direct effect can be achieved with much smaller doses.

The vector used in the HCAD platform can carry up to 30,000 base pairs of DNA, which enables gene therapy with multiple or larger genes compared to AAV vectors. It is locally delivered and sustained. This differs from systemic approaches requiring much higher dosing to achieve the desired effect. Lower dose levels coupled with efficient manufacturing support have a favorable and commercially viable cost of goods profile. Another key advantage over other gene therapies: PCRX-201 is a lead program from this platform, which we believe underscores its promise given its encouraging data in osteoarthritis. Last year, we reported compelling results from a robust phase I study of PCRX-201 in 72 patients with moderate to severe osteoarthritis. A single intra-articular injection demonstrated unprecedented pain relief and durability across all levels of disease severity for at least two years. The greatest efficacy was observed in the steroid pretreated group.

In all three doses, more than 70% of patients saw at least a 50% improvement in pain versus baseline at week 16 and 78. PCRX-201 was also well tolerated with no serious treatment emergent adverse events. We continue to follow these patients and look forward to reporting exciting three-year follow-up data later this year. While there's typically a placebo phenomenon within osteoarthritis pain studies, we are encouraged by our data. The magnitude and durability of efficacy far exceeds the placebo effect reported in published randomized studies. Patient enrollment is now open for our phase II double-blind two-part study of PCRX-201. The study will include an active steroid comparator. We will share additional details on the study design in the coming weeks with top-line data from part A expected late next year. Beyond PCRX-201, the GQ transaction brings us several exciting product candidates in preclinical development.

We've also identified numerous well-validated cytokines for musculoskeletal pain and adjacencies that will be strong candidates for this platform. We're planning to share more details on the potential of this exciting platform through an educational webinar in the spring. For those areas outside of our strategic focus, we see great potential for partnering. This could extend the HCAD platform into other conditions of high unmet need where localized treatment with a therapeutic protein is warranted. Fittingly, this brings us to the last component of the 5x30 plan, forming five clinical or commercial partnerships over the next five years. As you know, our products are currently only marketed in the U.S. We believe there is a meaningful opportunity in certain key markets outside of the U.S. where our products can be financially viable and deliver value to patients. We will be actively seeking commercial partners to realize that potential.

In parallel, we will also look to identify ways we can partner on development programs to balance portfolio risk. Before I turn the call over to Shawn, I'd like to formally welcome two new additions to our executive team, Brendan Teehan, our newly appointed Chief Commercial Officer, and Krys Corbett, who joined as our Chief Business Officer. These two executives bring extensive experience to Pacira at an important stage in our evolution. The board also recently appointed Laura Brege as Chair of the Board, while former chair Paul Hastings and Andreas Wicki have both retired. As a reminder, our board refreshment began 15 months ago with the appointment of five new directors.

These changes also significantly reduced the average tenure of our board to less than five years compared to nearly 12 years in 2023. We thank Paul and Andreas for their many contributions to the company. Moving forward, I have every confidence Laura, Brendan, and Krys will be key contributors to our next phase of growth. With that, I'll turn the call over to Shawn for a review of the financials.

Shawn Cross (CFO)

Thank you, Frank. I'll start with an update on sales and margin trends. Fourth quarter Exparel sales increased to $147.7 million versus $143.9 million in 2023. Volume growth and a 2024 price increase were partially offset by a shift in vial mix and discounting associated with GPO partnerships. Fourth quarter Zilretta sales increased to $33.1 million versus the $28.7 million reported in 2023. For iovera, sales were $6.5 million compared to $6.0 million in the fourth quarter of 2023. Turning to gross margins, on a consolidated basis, our fourth quarter non-GAAP gross margin was 79%. This was driven by improved margins for Exparel and Zilretta.

For non-GAAP R&D expense, the fourth quarter increased to $22.0 million from $16.6 million reported last year. This increase relates to product development and clinical study costs. Non-GAAP SG&A expense came in at $78.6 million for the fourth quarter, which is up from $57.4 million last year. This increase is largely due to investments in our commercial, medical, and market access organization, as well as NOPAIN readiness. All of this resulted in another quarter of significant Adjusted EBITDA of $62.5 million. As for the balance sheet, we exited the fourth quarter in a position of strength with $485 million of cash and investments. With the business that is producing significant operating cash flow, we believe we are well equipped to advance our 5x30 Strategy and create shareholder value. We are taking a disciplined approach to capital allocation where we are focusing on four areas.

First, accelerating growth in our best-in-class base business. Second, advancing an innovative pipeline and becoming the leader in musculoskeletal pain and adjacencies. Third, managing our balance sheet and planning for the repayment of debt. We have a convertible note due in 2025, a term loan due in 2028, and a second convertible note due in 2029. And fourth, returning capital to shareholders. We have $125 million remaining of our share buyback authorization, which we put in place last year and runs through the end of 2026. Going forward, we will continue to be highly strategic, balancing favorable operating margins while advancing our 5x30 Strategy. This includes carefully investing in a best-practice commercial, medical, and market access powerhouse and targeted direct-to-consumer marketing. In parallel, we will advance a pipeline of potentially transformative assets like PCRX-201 as we transition into an innovative biopharmaceutical organization.

That brings us to our full-year P&L guidance for 2025 as follows: total revenue of $725 million-$765 million. As Frank mentioned, we are pleased with the positive early signs and growing levels of awareness around NOPAIN. That said, it will take time for our customers to integrate this new reimbursement. We expect more meaningful uptake to begin in the second half of the year. Non-GAAP gross margins of 76%-78%, non-GAAP R&D expense of $90 million-$105 million. At the midpoint, this represents an 11% increase over our fourth quarter 2024 annualized run rate. The key drivers are increased costs associated with clinical studies. These include the following: our phase II study of PCRX-201, investments to support the PCRX-201 and HCAD commercial manufacturing process, as well as other activities related to our acquisition of GQ Bio.

A new pilot study of Zilretta and hip OA, and ramping costs for the Zilretta and iovera registration studies, which we anticipate will read out in 2026. For non-GAAP SG&A expense, we are guiding to a range of $290 million-$320 million. At the midpoint, this represents an 8% increase over our fourth quarter 2024 annualized run rate. Key drivers of this increase are new marketing initiatives, including our DTC pilot programs that are beginning in the first half of the year. As Frank mentioned, we believe these DTC investments will drive increased patient demand for Exparel. As always, we will be prudent and adjust spend accordingly based upon the data. Stock-based compensation of $56 million-$61 million. And lastly, for those modeling adjusted EBITDA, we expect our 2025 depreciation expense to be approximately $30 million.

This increase over 2024 is largely driven by our 200-liter suite in San Diego, which began producing commercial supply in mid-2024 and is a new Zilretta fill line. With that, I will turn the call back to Frank.

Frank Lee (CEO)

Thank you, Shawn. In closing, 2024 was a tremendous year of progress across the organization. All of the work completed has allowed us to enter 2025 sharply focused on 5x30 and our transition into an innovative biopharmaceutical organization. We are confident the steps we're taking position us for sustainable growth and success as a leader in musculoskeletal pain and adjacencies. With that, operator, we're ready to open the call for questions.

Operator (participant)

Thank you. Please don't jump in to ask a question at this time. You will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, simply press star one one again. Please stand by while we compile the Q&A roster. Our first question coming from the line of Oren Livnat with H.C. Wainwright & Co. Your line is now open.

Oren Livnat (Analyst)

Thanks. I got a couple of questions. Just big picture, can you just talk more about the assumptions for NOPAIN, both implementation on the customer side and uptake? You're obviously not trying to get ahead of yourself by talking about a second-half ramp, but I'm trying to understand what would be the impediments to sort of an aggressive, rapid uptake on the customer side given hospitals certainly would like to be making margins here. And I'll wait for the follow-ups. Thanks.

Frank Lee (CEO)

Well, thanks for your question, Oren. It's Frank Lee here. We're excited about NOPAIN. And as we've said consistently, it'll take time for our customers to really get traction around NOPAIN. And we think that's going to be starting in the second half. Some of the things that we've got to make sure we do with our customers is certainly raise awareness, get them comfortable with the J code. And in many cases, our customers are trying out the code to make sure that they're getting reimbursed. And so there's a learning period there. And so we have to go through that.

And we have some encouraging signs that we're seeing in terms of the use of the J code, the awareness of NOPAIN, and customers utilizing that code and starting to get reimbursed. And so the early signs are good, but certainly it takes time for us to get traction on something like this.

Oren Livnat (Analyst)

All right. And I guess you sort of segue into my follow-up, which was about what experience people are already having. Are you seeing successful reimbursement such that any cautious approach to using it for fear of not getting paid back is already starting to make some headway there? And have you had more access or penetration into accounts or geographies already that you hadn't at all before? Where obviously there are many accounts that don't use Exparel at all for financial reasons. I'm wondering if you've broken new ground with NOPAIN already with a broader set of customers.

Frank Lee (CEO)

Yeah, Oren, these are all really good questions. And as we get more and more data, we'll be able to answer them factually. All right? So as we mentioned, the IQVIA claims data takes some time to true up over time. That's lagging data. But you know what? We're seeing encouraging signs. And oftentimes these revenue cycles take a little while. It could take a couple of weeks to six, seven, eight weeks to see the revenue cycle be completed.

And so it's still very, very early days. And what I'd say is anecdotally, we're seeing good traction. And as we mentioned, commercial payers, we've had some wins there. And so as you know, it's not only the accounts, but also the payers that are very important. And we've always said that CMS is important certainly for the outpatient setting. But of course, they have a mix of CMS and commercial payers. And we find it encouraging that we've got some commercial payer wins out of the gate.

Oren Livnat (Analyst)

All right. And if I could just change gears a bit, I don't know if you want to comment at all on litigation going forward, but just big picture, you've been very confident in your optimism for a long Exparel runway with exclusivity, especially after your new IP issued late last year. I'm trying to reconcile your approach to capital allocation given your confidence there, especially with the market has only barely backed off its most dire concerns from earlier last year and bounced back a little bit. But there's a huge disconnect, in my view, between even the current business and what it's worth, let alone major growth potential from NOPAIN and upside optionality from a pipeline. Why wouldn't you be much more aggressive with potential buyback at these levels?

Yeah. So let me start by saying, as always, we value certainty as much or more than any other investor, right? And so that's an important part. We also value making sure that we have long-term value for our shareholders. And so that's our guiding principle. And in the background, we've been, as you mentioned, very active in making sure that we continue to innovate and drive forward with new patents and new IP. And I would expect that going forward. We continue to innovate, and we believe we'll be providing additional patent protections going forward. That said, now from a capital allocation, we're going through a very disciplined approach, as Shawn mentioned, a very disciplined approach to make sure that we're funding our current operations. And we have quite a few catalysts here, as we just talked about.

We also have some important pipeline additions with now the great news I really believe about GQ Bio. We can talk about that a little bit, just recent acquisition that we announced. And of course, managing the balance sheet. And we do have $125 million left on our buyback program. So all of those we're going to be managing in a very disciplined and balanced way. And so that's our approach. And we think that's going to get us to where we need to get to over the next five years.

All right. Thanks. Appreciate it. I'll hop back in the queue.

Frank Lee (CEO)

Thanks, Oren.

Operator (participant)

Thank you. Our next question coming from the line of Gregory Renza with RBC Capital Markets. Your line is now open. Great.

Gregory Renza (Analyst)

Thanks. Good afternoon, Frank and team. Congrats on the progress. Thanks for taking my questions. Frank, and maybe a question for Shawn. As you lay out the ranges and the guidance for 2025, just wondering if you could talk a bit about maybe the relative contributions of the product portfolio for '25 and how you're thinking about that across Exparel, Zilretta, and iovera. Also if there's anything sequentially over the year that we should be thinking about, just above and beyond what you've described when it comes to NOPAIN. Thank you.

Frank Lee (CEO)

Yes, sure. I'll let Shawn speak to that in a second. Obviously, Exparel is our flagship product, and we have a good catalyst here with the J code as well as NOPAIN. Certainly, we plan on putting a shoulder behind Zilretta and iovera as well. Shawn, you can speak a little bit to how we're thinking about that.

Shawn Cross (CFO)

Yeah. I think the relative mix, as Frank mentioned, Zilretta or Exparel is still, of course, the flagship product. And we think that we fully expect the commercial investments we've made in 2024 to bear fruit and enable the top line to achieve double-digit CAGR, really exiting the year and beyond following our 5x30. As mentioned, we are pleased by the positive early signs of NOPAIN. But just can't reiterate more that it will take time for the customers to integrate the new reimbursement. And stay tuned for what we expect to be more meaningful uptake to begin in the second half of the year.

Gregory Renza (Analyst)

Great. That's really helpful. Maybe just as a follow-up, as you've mentioned, the double-digit CAGR on product revenues with 5x30. And certainly, Frank, you're mentioning a value in certainty. Just help us understand maybe what some of the implications are and some of the competitive landscape that you're thinking about when you cite those numbers through into 2030. Does it imply competitive entry with Exparel, some degree of timeline and competitive dynamic there? Thank you.

Frank Lee (CEO)

Sure. Great. That's a great question, and I have to tell you, we're very thoughtful as we put the 5x30 path to growth together, and specifically around compound annual growth rates that are in the double digits, so we've talked a little bit about this before, but we do not believe there will be an at-risk launch of a generic this year or in the foreseeable future, so on top of that, we continue to build on our IP estate. We continue to innovate, and that gave us confidence to put forth this 5x30 strategy.

And as Shawn mentioned, picking up that growth rate as we exit the year with all the different catalysts that we have behind us.

Gregory Renza (Analyst)

Fantastic. Thanks, guys. Congrats again.

Frank Lee (CEO)

Thanks, Greg.

Operator (participant)

Thank you. Our next question coming from the line of Gary Nachman with Raymond James. Your line is now open.

Gary Nachman (Analyst)

Hi guys. Good afternoon. So back to the revenue guidance range. What are you assuming in terms of volume growth versus how much offsetting pressure you'll have on gross margins from the GPO contracts just when we think about the NOPAIN dynamic? And then for DTC, the pilot effort, just how much could Exparel utilization be consumer-driven versus targeting physicians and hospitals like you have done traditionally? And then I have a follow-up.

Frank Lee (CEO)

Sure. Let me address the targeted DTC question first, and then I'll hand it over to Shawn to talk a little bit more about the numbers. Typically, what we see in the industry is once you educate the healthcare providers and when you lower the access barriers, that is reimbursement, payers, coding, etc., then it's the right time to consider a very targeted approach to activating the patient, and I want to underscore targeted because, as you might imagine, the level of education and level of access, level of billing savvy varies by customer across the various geographies, so we're going to be very, very targeted, and we're going to be ROI-driven, so these days, you can be very, very targeted with these kinds of approaches, and as Shawn mentioned, we'll pilot some of those approaches in the first half of the year.

Depending on what we see, we'll adjust our investment accordingly. That's how we're thinking about it. The great news here is that we've had a long history of educating healthcare providers about Exparel. With the J code now and NOPAIN Act, it's given us an opportunity to lower those access barriers. Now is the right time to start to pilot and understand how best we can activate patients in certain settings and certain geographies. That's our thinking there. Let me hand it over to Shawn to talk a little bit about the numbers.

Shawn Cross (CFO)

Yeah. We'll just keep this very. It's a pretty simple answer with regard to the forward guidance on the revenue side that it's effectively all volume growth. That's the way to think about it.

Gary Nachman (Analyst)

Okay. Great. But in terms of magnitude of just the gross-to-nets, you're going to have a little bit of pressure this year when you have the additional GPO? That obviously would be offset, but is that a little bit of a headwind at all?

Shawn Cross (CFO)

Yeah. You got it spot on. So we take price increase and have a little bit of headwind there, and they'll offset each other. So just think about it as volume growth.

Gary Nachman (Analyst)

Okay. And then, Frank, just I mean, it is a notable step up in terms of your R&D spend this year. And you have a few programs ongoing that sound pretty interesting. How comfortable are you with what you have in-house? And maybe you just want to comment quickly on the GQ Bio and just adding that, the types of preclinical programs that you have. Do you think you need to still go outside the company maybe to expand the pipeline further? Or do you have enough now internally to generate the kind of innovation that you're looking for? Thanks.

Frank Lee (CEO)

Yeah. That's a good question, Gary. So I want to step back and say we're in the process of transitioning from, more especially, pharma and innovative pharma. I don't think that transition's complete. We'll be taking steps deliberately in that direction. That's number one. Number two, as a result of that now, we'll start to invest a little more in R&D consistent with that kind of a company that we're talking about that's a little bit more innovative pharma than specialty pharma. What's great here is we've got not only lifecycle programs for our existing products, but now we're adding some truly innovative programs like PCRX-201 that we're very excited about.

We're starting the phase II study. In fact, the study is open now for enrollment. And as you know, that'll read out sometime late next year in terms of part A of that study. So we're very excited about that. And we're going to carefully look at what else is in the non-clinical pipeline from GQ Bio. And of course, there's some very interesting things there. And this supports the idea in our 5x30 that we'd have five novel development programs by 2030. So how many of them will come from GQ Bio, I can't comment on now, but we do think there's some very interesting projects there. First of all, the platform, the HCAD platform, is something that comes with GQ Bio now. PCRX-201, we had that asset, but now we also have the platform that could also be a way to generate additional programs and molecules.

So we're excited about it. And so how much of it will come from GQ Bio and Exparel, I can't really speak to right now, but we're very, very excited about the acquisition of GQ Bio. And again, it brings with it this idea that now we have a platform, the preclinical assets. It gives us some really talented, I think, talented researchers in this space. People make the difference here in capability. And historically, we haven't had a lot of that in terms of the research and early development. And finally, from a financial standpoint, I really think it's a no-brainer. We're taking care of the future milestones, some of which we would have had to pay this year. So all in all, it's a great acquisition. And we look forward to welcoming the GQ Bio team next week as we make a trip to Germany.

Great. Thanks for that additional color.

Operator (participant)

Thank you.

Frank Lee (CEO)

Thanks, Gary.

Operator (participant)

Our next question coming from the line of Serge Belanger with Needham & Company. Your line is now open.

Hi. This is John on for Serge today. Thanks for taking our questions. First, on iovera, with the implementation of iovera into NOPAIN, do you kind of see it taking on a similar trajectory kind of adjacent to Exparel regarding any potential increased uptake throughout 2025? And then second, on the generic front, although it looks like it's unlikely that we'll see a generic launch in the near term, just wanted to gauge your guys' appetite on a potential settlement agreement at this time. Thanks.

Frank Lee (CEO)

Yeah. Let me speak to the generic first, and then we can chat a little bit about iovera. From a generic standpoint, as I mentioned earlier, we value certainty as much or more than any other investor out there. I think in terms of settlement, we really can't comment on those kinds of discussions. And so I think whatever we do is going to be in the long-term best interest of our shareholders and patients. So I'll just leave it at that.

And again, want to reiterate that we feel very good about our IP estate, and we continue to innovate. And what you should expect are more patents to come later on this year. With regard to iovera, what I'd tell you here is it's one where we're very excited about this additional reimbursement. I have to be very transparent and tell you that we didn't know we were going to get it or not. We were fairly certain about Exparel, for sure. But for iovera, this one was a bit of a jump ball. So we're very excited about iovera being included as part of the 11 products. So Exparel and iovera, two out of the 11, and provide some additional reimbursement. And maybe, I mean, Brendan, you can speak to the additional reimbursement and situation about iovera.

Brendan Teehan (Chief Commercial Officer)

Sure. Thanks for the question. Thanks, Frank. We do see this as a key growth driver kicking in this year with separate CMS reimbursement for iovera with a product-specific C code, C9809. That's important as physicians are going to receive up to $256 for iovera when it's administered in an ambulatory surgical center or an HOPD setting via the new code. And the payment is, importantly, in addition to procedural fees that they would get that they would currently be receiving. So I think we see that as an untapped opportunity.

As we're looking ahead, we're looking at selectively investing in iovera for accelerated growth. It's in a different stage of its life cycle than Exparel. And we'll look at that and try to capitalize on the improved reimbursement landscape. And then finally, as you probably know, we have an additional opportunity with the new Smart Tip that is launching later this year for low back pain. And we'll continue our phase III registration study and spasticity.

Frank Lee (CEO)

Thanks for the question, John.

Operator (participant)

Thank you. Our next question coming from the line of Les Sulewski with Truist Securities. Your line is now open.

Jeevan Larson (Analyst)

Hey, good evening. This is Jeevan on for Les. Thank you for taking my questions. Quick one for me. So with Zilretta's phase III data for shoulder OA expected in 2026, just wondering how you view its potential contribution to revenue growth. Are there plans to maybe accelerate development timelines or expand indications?

Frank Lee (CEO)

Yeah. Thanks for the question. I have to tell you, I'm excited about Zilretta. Zilretta, as I've always said, is maybe the other three products that maybe hasn't gotten the attention it really deserves. It's a fantastic product. It does a lot to help patients with pain. And now we're excited about this opportunity with Zilretta in the shoulder. And this opportunity in shoulder, we think this will be we'll see top-line data sometime probably mid to late next year. And this will be the first long-acting corticosteroid for shoulder. And it's roughly about 1 million intra-articular injections a year. So it's quite substantial. So we're optimistic. We obviously have to conduct the studies and have good data. But those studies are now enrolling, and we feel very good about delivering that data late next year or mid to late next year.

Operator (participant)

Thank you. And as a reminder, to ask a question, please press star one one. Our next question coming from the line of Hardeep Tuli with JPMorgan. Your line is now open.

Hardeep Tuli (Analyst)

Hey, Frank and team. Thanks for the call. Just had a few questions for you. First is a follow-up to the R&D and OpEx question that was asked earlier. So this was definitely a bit higher than the guide and I think what I had expected. And I was wondering, do you guys see this kind of level of year-over-year increase kind of being more the standard? Or is this mostly one time because of the PCRX-201 enrollment and the DTC? So that's just the first question, and I'll follow up with that.

Frank Lee (CEO)

Yeah. Hardeep, it's a good question. I don't want to guide for too many years. What I'll do is I'll tell you about this year. This year, we've got some really important catalysts like we just talked about. And we believe that these investments are going to return against we'll have a good return on investment against these investments. So that's number one as it relates to what we're doing on the commercial medical market access side. As it relates to the development programs, as I said, it's very exciting around these development programs. And in terms of how quickly we shift towards more of innovative versus specialty pharma, we'll have to be opportunistic about that. We'll see how these non-clinical assets and GQ Bio pan out. And there's some other things we're looking at as well. And so we'll be very, very careful there in managing our growth.

And so the key thing to take away is let's focus on this year. And this year, we believe because of the catalysts and the investment opportunities in front of us, this is going to return in terms of the ROI that we expect. Yeah.

Hardeep Tuli (Analyst)

Okay. Great. And then you mentioned that you had some commercial payers that had adopted a NOPAIN-like reimbursement model. I was just wondering if you could give us some more insight into which payers made that switch and how close their models are to the NOPAIN model.

Frank Lee (CEO)

Yeah. So it's a good question. Now, it's a tricky thing sometimes to mention specific payers in these kinds of things because you have to get permission from those folks. But what I'll tell you, it is a national payer for sure. We were also able to get a couple of other payers that are very important as well. I want to come back to the fact that we're probably sitting at about double where we were before in terms of commercial covered lives. We've gone from about 20 million to about 40 million.

This is early out of the gate. It's early out of the gate, which is a good sign. This is very consistent with how CMS is reimbursing. In some cases, it's north of that. It's outside of the bundle and at least what CMS is reimbursing. I did fail to mention that we also got TRICARE as well. As you know, they service the military and their families. That was a great win right out of the gate. We're encouraged by what we're seeing. We're encouraged. But it's still early days. So I don't want to get ahead of ourselves. But as I mentioned in prior calls, we expected the commercial payers to lag significantly as they normally do. But having these kinds of wins early on is encouraging.

Hardeep Tuli (Analyst)

Thank you.

Operator (participant)

Thank you. And we have a follow-up question from Oren Livnat of H.C. Wainwright. Your line is now open.

Oren Livnat (Analyst)

Thanks. And just let me try to think about how conservative or not this guidance is. I did notice on the gross margins, the adjusted gross margin guidance, they're flat to down from where we were in the entire second half of this year. And I would think with the growth, even conservative assumptions on growth above your fixed cost structure and the 200-liter suite in San Diego now online, I would have thought that would be even higher in 2025. Can you just talk at all about the gross margin trends, maybe cadence through the year? And is there anything new or something we might be missing on that front that is factoring into that guidance?

Frank Lee (CEO)

Yeah. Gross margins can be a little lumpy as they were last year. But certainly, Shawn can speak to how kind of lumpy they were last year and where we wound up. And overall, what I'd say is that we expect these margins to improve over time because of volume, right? So I mean, Shawn, you can comment a little bit about kind of where we were with margins last year, where we ended up.

Shawn Cross (CFO)

Sure. And thanks for the question. I completely agree that over time, we'll improve margins by driving volume growth. But we were pleased to see strong fourth-quarter margins that exceeded our guided range of 74%-76%. But as Frank did mention, we need to emphasize this. There can be quarter-over-quarter variability in our gross margins. And full-year margins are a much better sort of frame of reference. And that informed our guided range for 2025 for 76%-78%.

Frank Lee (CEO)

And I think as we start to see volume pick up more going into the second half, and particularly quarter four, as we talked about, really running at that double digit, then going into next year, it'll start to improve quite a bit more. And 200-liter will become more and more of a part of our mix. And so all these things give us a good tailwind, but it's going to take us a little bit of time to get there.

Oren Livnat (Analyst)

All right. I appreciate it.

Frank Lee (CEO)

Thanks, Oren.

Operator (participant)

Thank you ladies and gentlemen for your questions. I will now turn the call back over to Susan Mesco for any closing remarks.

Susan Mesco (Head of Investor Relations)

Thank you, Livia, and thanks to all on the call for your questions and time today. We are excited about the opportunities that lie ahead for us. Throughout the remainder of the year, we will continue to ensure we are well-positioned for long-term success by executing our 5x30 plan to advance our mission. Thank you and be well.

Operator (participant)

This concludes today's conference call. Thank you all for participating, and you may now disconnect.