BURLINGTON May 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Flexion Therapeutics Inc earnings conference call or presentation Thursday, May 7, 2020 at 8:30:00pm GMT

* David A. Arkowitz

Flexion Therapeutics, Inc. - CFO

Flexion Therapeutics, Inc. - Chief Commercial Officer

* Michael D. Clayman

Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director

Flexion Therapeutics, Inc. - VP of Corporate Communications & IR

* Randall S. Stanicky

RBC Capital Markets, Research Division - MD of Global Equity Research & Lead Analyst

Scott Young, Flexion Therapeutics, Inc. - VP of Corporate Communications & IR [1]

Good afternoon. This is Scott Young, Vice President of Corporate Communications and Investor Relations.

Before we begin, I'd call your attention to the metrics slides that we will discuss in today's presentation. Those slides can be viewed directly via the webcast or under the Investors tab on flexiontherapeutics.com. In addition, the press release we issued this afternoon and an archive of this conference call can also be found there.

Today's conference call will be led by Flexion's Chief Executive Officer, Dr. Michael Clayman; and he is joined by David Arkowitz, Chief Financial Officer; and Melissa Layman, Chief Commercial Officer.

On today's call, we will be making forward-looking statements that include commercial, financial, clinical and regulatory projections. Statements relating to future financial or business performance, conditions or strategies and other business matters, including expectations regarding net sales, operating expenses, cash utilization, clinical, regulatory and commercial developments and anticipated milestones are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Flexion cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties which change over time. Additional information on the factors and risks that could affect Flexion's business, financial conditions and results of operations are contained in Flexion's Form 10-Q for the quarter ended March 31, 2020, filed with the SEC today and other filings which are available at http://www.sec.gov as well as Flexion's website. These forward-looking statements speak only as of the date of this call and Flexion assumes no duty to update such statements.

I will now turn the call over to Flexion's CEO, Mike Clayman.

Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [2]

Thank you, Scott, and thank you all for joining us today.

It is clear that in the only 8 weeks since our fourth quarter earnings call, the world has changed dramatically as a result of COVID-19. On today's call, we'll talk about what we've been seeing in doing both commercially and operationally during the unprecedented public health crisis, but we'll begin with a focus on our first quarter performance and provide color on why we remain enthusiastically bullish about ZILRETTA's future.

Today, we reported net ZILRETTA sales of $20.1 million for the first quarter of 2020. We had previously indicated that we believed our Q1 sales would be roughly flat versus Q4 sales of $23.7 million, and we were on track to deliver sales in this range prior to the COVID-19 outbreak. We also said that at that point, it was simply impossible to predict how the outbreak would evolve or what the effects of more aggressive social distancing or other containment efforts might have on patients or practices. Since then, the picture has become much clearer, and we can speak now to the effects of the pandemic on ZILRETTA sales and later in the call, on our development activities.

Beginning in late Q1, we saw most practices substantially reduce patient visits or even suspend these altogether. And as a result, utilization of ZILRETTA dropped significantly. We believe it will take time to get to the new normal and the cadence of the recovery will vary practice by practice, region by region and even person by person. Thus far, we have seen decreased demand for ZILRETTA in the second quarter and believe COVID-19 will adversely impact ZILRETTA revenue for the remainder of the year.

That said, we do take note of a number of external circumstances that have the potential to increase demand for ZILRETTA over time. These all relate to the delay, postponement or cancellation of total knee arthroplasties or TKAs, and the intense medical need to provide rapid, substantial, durable non-opioid analgesia for patients whose knee pain drove them to consider TKA in the first place. Three factors contribute to this dynamic and these were all brought to our attention by orthopedic key opinion leaders.

First, while elective surgeries are beginning to happen around the country, in most cases, there will be a gradual return to full capacity, and many TKAs will be further delayed. Second, particularly for those of Medicare age, who are all considered in the vulnerable COVID-19 population, there may be reluctance to enter a hospital to have surgery until these patients have greater confidence they can avoid infectious risk. Finally, for those who are younger than 65 and were previously employed, many may prioritize income generation over surgery and rehab.

Recent survey data indicate that almost 50% of orthopedic surgeons expect that procedure volume will not be back to normal until some time in 2021 and 63% expect anywhere between 25% and 75% of their patients will continue to delay their surgery for fear of COVID-19.

Of course, Flexion is adapting, too. Since instructing our employees to work from home in mid-March, our MBMs have adopted various technologies to engage in meaningful conversations with prescribing physicians. Melissa can provide more color on what we are seeing in the field, but since health care practitioners have more time on their hands, our MBMs have experienced greater access to prescribers who have historically been very difficult to see, and their response to the ZILRETTA clinical data has been highly encouraging. And even with COVID-19, we continue to hear stories of patients who have received unprecedented OA knee pain relief from ZILRETTA.

The bottom line is that our confidence in ZILRETTA's clinical performance and long-term potential is undiminished. We are not the only company to believe that ZILRETTA holds tremendous potential for millions of patients with OA knee pain. In April, in the midst of the pandemic, we announced that we entered into an exclusive license agreement with HK Tainuo and Jiangsu Tainuo, a subsidiary of CSPC, a leading Chinese biopharmaceutical company. Under the terms of the agreement, we are entitled to receive an upfront payment of $10 million and up to $32.5 million in development, regulatory and commercial sales milestone payments. And Flexion will be solely responsible for the manufacturing and supply of ZILRETTA for all clinical and commercial activities.

While our confidence in ZILRETTA is resolute, it is impossible for us to predict how long the pandemic will affect sales. And as we announced in our press release this afternoon, we have taken meaningful actions to reduce our operating expenses in the near term. David will discuss these steps in more detail, but we are committed to ensuring that we come out of the pandemic in a strong financial position.

Regarding clinical development, recognizing that many clinical trial sites had shut down, wanting to ensure the safety of our research participants and in consideration of guidance issued by the FDA, in early April we announced that we would temporarily suspend our Phase II clinical trial evaluating the efficacy of ZILRETTA in patients with shoulder OA or adhesive capsulitis and also our Phase I clinical trial evaluating the safety and tolerability of FX201, our intra-articular gene therapy candidate for OA.

Subsequently, we made the strategic decision to discontinue our Phase II trial investigating ZILRETTA in shoulder OA and in adhesive capsulitis. Given the small number of patients enrolled in that trial, the uncertainty of when we would be able to restart it, as well as the costs required to maintain the study in an inactive status, we believe terminating the trial is the most responsible action at this time. Moving forward, we will look to leverage our learnings from the study and potentially use these to refine the trial design to advance ZILRETTA in these indications.

We also aim to reinitiate the FX201 single ascending dose trial and recommence enrollment when conditions and staffing at our trial sites safely permit the return of patients.

Turning to FX301, our NaV1.7 inhibitor formulated within a thermosensitive hydrogel for administration as a peripheral nerve block for controlled postoperative pain, we continue to advance this product candidate. FX301 is a liquid at room temperature and gels following injection at body temperature to create a controlled release depot that can provide persistent therapeutic concentrations of drug locally at the selected nerve. We recently unveiled new preclinical data in a virtual poster presentation now available on the American Society of Regional Anesthesia and Acute Pain Medicine website. These data show that compared to liposomal bupivacaine and placebo, FX301 provided sustained postoperative analgesic effect with no impairment in motor function. In addition, high local concentrations of funapide, the active ingredient in FX301, were measured at the site of administration for the duration of the study, consistent with the creation of the depot providing controlled drug release.

While it is still early days for the program, these findings support our belief that unlike typical local anesthetics, the selective pharmacology of FX301 has the potential to deliver substantial and persistent pain relief while preserving motor function which could enable earlier rehabilitation following musculoskeletal surgery and potentially more rapid discharge from the hospital. We are completing GLP tox studies for FX301, and we remain on track to initiate clinical trials in 2021.

Before I turn it over to Melissa, I would like to make just a few final comments. While there are many uncertainties about the shape and pace of the recovery, there are some key facts we know right now. We know that there are millions of patients for whom ZILRETTA can provide substantial and extended relief from OA knee pain. We know that at least many tens of thousands of elective knee replacements have been deferred due to COVID-19 and those patients will need effective pain relief while they wait for surgery. We know that our commercial organization is poised for the recovery at whatever pace or shape it takes. Finally, we know that everyone at Flexion stands ready to adapt to any circumstances we face, and we remain confident in our future prospects.

At this point, I would like to turn it over to Melissa to discuss our commercial operations.

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Melissa Layman, Flexion Therapeutics, Inc. - Chief Commercial Officer [3]

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Thank you, Mike.

I've been with Flexion now for just under 2 months, my first day marked by our Q4 earnings call and my second day by the work-from-home directive resulting from the rise of the COVID-19 pandemic. Despite having yet to set foot in the field, I've met virtually with dozens of physicians and members of our sales organization. Each of these meetings has only confirmed what I believed about ZILRETTA before joining the team and bolstered my perceptions of the Flexion organization, particularly in light of our response to COVID-19 and the enhanced role I know ZILRETTA can play in effective, durable pain management for patients all along the OA knee pain treatment continuum.

Mike discussed some of what we have experienced in the field during recent weeks. I'll provide some additional color on how we've been engaging with prescribers during the crisis and how we plan to emerge from the crisis, restore ZILRETTA's prior sales trajectory and continue to grow from there. Before I talk about what we are seeing now, I'd like to start by walking through the commercial metrics for the first quarter.

As Mike mentioned, we were pleased with the way the first quarter was progressing prior to the onset of COVID-19 and believe ZILRETTA was tracking to meet our expectations. You can see in Slide 2 that we recorded ZILRETTA net sales of $20.1 million, reflecting the pandemic's material impact on March sales. We expanded our list of target accounts in the fourth quarter to 5,000 and by March 31, 2020, our reach had extended to almost all of them. And by the end of the first quarter, 3,672 accounts had purchased ZILRETTA, which was an increase of 184 purchasing accounts compared to the fourth quarter of 2019. As of the end of March, 2,832 or 77% of accounts had reordered ZILRETTA. Notably, this increase in purchasers occurred off a customer base that continued to grow even in light of the pandemic.

On Slide 3, you can see how our sales have progressed since launch. And as we've mentioned, we were pleased with the performance in the first part of Q1 prior to the onset of COVID-19, when we were on track to deliver sales in line with fourth quarter of last year, consistent with our previous guidance.

The next 3 slides reflect ZILRETTA purchasing patterns across our growing account base comprised of practices, clinics and hospitals of various sizes and potential.

Slide 4 describes the cumulative number of accounts that have purchased ZILRETTA since launch as well as the distribution of quarterly purchase volumes across our account base. In Q1, the trend continued with a growing number of accounts purchasing within and across the purchase break of 1 to 10 units, 11 to 50 units and 51 or more units with significant growth to 916 accounts in the 51-plus category.

Slide 5 flips the perspective, looking at the cumulative distribution of ZILRETTA purchases by accounts. For example, those 916 accounts in the 51-plus purchase group shown on the previous slide have been responsible for 177,664 of the total units purchased since launch and roughly 35,000 more units than were purchased from this purchase volume group in Q4 2019. This clearly illustrates that purchasing accounts continue to move through the ZILRETTA utilization continuum described on previous calls.

As we've also previously highlighted, even our largest accounts remain underpenetrated, and we continue to believe that there is tremendous opportunity to increase ZILRETTA utilization within and across each of these groups.

It is also important to point out that while total ZILRETTA purchases in the first quarter were approximately 36,500 units, which is slightly lower than the 37,500 units purchased in the fourth quarter, through the middle of March, we were pleased with our progress and believe we were well on track to meet or exceed the fourth quarter purchase volume until the effects of COVID-19 began to impact our business and ZILRETTA purchases dropped precipitously.

In our final slide, #6, we break out ZILRETTA purchasing by new and existing accounts. In Q1, new accounts purchased 12,504 units, which further illustrates our strong start to 2020 prior to the onset of COVID-19 across the U.S.

As Mike mentioned, COVID-19 has had significant impact on our customers. Throughout the COVID-19 impacted window, overall clinician access to ZILRETTA-eligible patients has been limited, variable and practice dependent. Some practices have shut down in-person patient visits altogether, while others are open to high priority critical or acute cases while implementing social distancing measures. While the circumstances vary, one common denominator has been the presence and tenacity of our sales force. While not a replacement for in-person exchanges, our reps have been successful in targeted remote detailing, in some cases gaining access to prescribers that exceeds pre-COVID-19 levels. They have effectively employed various audiovisual technologies to engage with both existing and new accounts to discuss the important role ZILRETTA can play in the OA treatment paradigm, including for those patients who are awaiting or opt to decline surgery once COVID-19 restrictions are lifted.

To better understand the current impact of COVID-19 on orthopedic practice and what the recovery might look like, we held a series of focus groups with specialists from across the nation. The insight from those exchanges support our assumptions that the return to new normalized practice patient flow will be gradual and driven by ongoing social distancing requirements and safety requirements as well as patients' comfort in returning to their doctors' offices. However, we also see the potential for increased use of ZILRETTA in a wider variety of patient types as both existing and new prescribers look to manage the growing backlog of surgical candidates, including those previously scheduled for TKR who, for various COVID-19-related reasons, choose to defer treatment in favor of less invasive options like ZILRETTA.

As Mike aptly described, we cannot predict the timing or shape of the recovery. But as it occurs, our commercial team will be there to support prescribers and ensure they understand the even more important role ZILRETTA can play in effectively managing their patients' OA knee pain prior to or in avoidance of surgery.

With that, I'll now turn it over to David for the financial update.

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David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [4]

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Thank you, Melissa.

Before I provide an overview of our financial performance in the first quarter, I'd like to share some details on our fiscal response to the economic and business disruption caused by COVID-19.

As Mike mentioned and as we described in our first quarter earnings press release, we undertook a series of prudent and disciplined steps to reduce expenses across the organization in order to enhance our financial flexibility and liquidity. In total, we believe these steps will deliver between $43 million and $53 million in savings this year. As a result, our full year 2020 total operating expenses, which include the cost of sales, research and development, and selling, general and administrative expenses, are expected to be in the range of $167 million to $177 million.

We undertook cost savings initiatives across every area of the business, but the majority of the savings will be realized through the following: hiring and travel freezes, suspension and/or termination of active clinical trials, elimination of live presence at medical and industry conferences, reductions in in-person physician speaker programs and reductions in market research and select marketing programs and materials as well as elimination of nonessential operating expenses.

In addition, given the impact of COVID-19 and the uncertainty surrounding ZILRETTA sales for the remainder of this year, we are temporarily suspending manufacturing activities for ZILRETTA to avoid excessive inventory buildup and to reduce costs. We believe our current inventory of finished goods will be sufficient to meet demand for ZILRETTA through at least the remainder of this year. And unlike typical contract manufacturing agreements, our condominium model at Patheon provides us with the ability to scale up production based on market dynamics. And once we determine that additional supply will be needed, we can reinitiate manufacturing.

With respect to our first quarter financial performance, we reported a net loss of $36.8 million for the first quarter of 2020 compared to a net loss of $41.5 million for the same period of 2019.

Net sales of ZILRETTA were $20.1 million and $10.6 million for the 3 months ended March 31, 2020 and 2019, respectively. Cost of sales were $2.3 million and $1.8 million for the 3 months ended March 31, 2020 and 2019, respectively. The first quarter 2020 net sales reflect a gross to net reduction of 11%. The gross to net reduction is primarily comprised of distributor and service fees, returns reserve, health care provider rebates and mandatory government discounts and rebates, such as Medicaid, 340B institutions, Veterans Administration and Department of Defense. The rebates to health care providers are variable based on the volume of product purchased and contribute 2% of the first quarter total gross to net reduction of 11%.

As Melissa mentioned, starting in the middle of March, purchases of ZILRETTA by accounts, meaning physician practices, clinics and hospitals, dropped materially due to COVID-19. As a result, the inventory levels held by our distributors at the end of the first quarter were higher than our target level of 1 to 3 weeks. While purchases of ZILRETTA by accounts continue at a decreased rate, it will take time for our distributors to work through their current inventory. Since we recognize revenue upon sales to our distributors, a combination of reduced purchases in the second quarter by account and higher-than-normal distributor inventory levels have the potential to particularly impact our second quarter revenue negatively.

Research and development expenses were $21.1 million and $15.4 million for the 3 months ended March 31, 2020 and 2019, respectively. The increase in research and development expenses of $5.7 million was primarily due to an increase of $2.2 million in salary and other employee-related costs for additional headcount and stock compensation expense; an increase in expenses related to FX201, including the $2.5 million milestone to GeneQuine for dosing the first human patient in the Phase I clinical trial; and an increase in other portfolio expenses primarily related to a $0.5 million milestone to Xenon Pharmaceuticals, offset by a decrease of $0.5 million in development expenses for ZILRETTA due to lower clinical trial expenses during the period.

Selling, general and administrative expenses were $29.3 million and $32.2 million for the 3 months ended March 31, 2020 and 2019, respectively. Selling expenses were $20.5 million and $23.8 million for the 3 months ended March 31, 2020 and 2019, respectively. The year-over-year decrease in selling expenses of $3.3 million was primarily due to a reduction in physician and patient marketing activities. General and administrative expenses were $8.8 million and $8.4 million for the 3 months ended March 31, 2020 and 2019, respectively, which represents an increase of $0.4 million.

Interest expense was $0.4 million and $1 million for the 3 months ended March 31, 2020 and 2019, respectively. Interest expense was $4.7 million and $3.9 million for the 3 months ended March 31, 2020 and 2019, respectively.

As of March 31, 2020, we had approximately $125.2 million in cash, cash equivalents and marketable securities compared with $136.7 million as of December 31, 2019.

At this point in time, we cannot forecast with any precision the duration of the pandemic or its full impact on purchasing patterns or utilization of ZILRETTA. Therefore, it would be imprudent for us to provide specific guidance with respect to our future sales of ZILRETTA or our cash runway. We will continue to review and reassess our assumptions and provide additional color when possible. As Mike mentioned, our confidence in ZILRETTA is as strong as ever, and we will take the steps necessary to ensure we are well positioned from a financial perspective to maximize ZILRETTA's value in a post-COVID-19 environment.

At this point, I would ask the operator to please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question or comment comes from the line of Randall Stanicky from RBC Capital Markets.

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Randall S. Stanicky, RBC Capital Markets, Research Division - MD of Global Equity Research & Lead Analyst [2]

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Great. Do you have a sense from any of the regions or the large practices that have reopened as to what their ordering patterns look like? Because presumably, that would give you a sense for at least physician or practice thinking around any pent-up demand and then where they intend to focus on from a procedure perspective kind of channel inventory aside. And then I have a follow-up.

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [3]

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Melissa, do you want to take that?

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Melissa Layman, Flexion Therapeutics, Inc. - Chief Commercial Officer [4]

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Yes. I think that's me. We have been sort of following the basis for which practices have been reopening and it is not geographically specific. We believe that the return to normal patient volume is going to vary by region, by practice and even by patient. And the impact to existing office-based patient flow that we've seen don't necessarily correlate to the areas where COVID-19 has been more prevalent.

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [5]

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And just building on Melissa. I mean, Randall, I just think it's too early for us to declare that we're seeing patterns. We're seeing some accounts order substantial quantities, other accounts ordering lesser amounts, but it's far from us having an update and then say, we have clarity on ordering pattern.

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Randall S. Stanicky, RBC Capital Markets, Research Division - MD of Global Equity Research & Lead Analyst [6]

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Let me ask a follow-up. I mean, during this shutdown period, which in some regions, regions like New York is probably going to continue, have you guys been able to alter your outreach via DTC? I mean, you have captive patients who are homebound, who are probably in pain, maybe thinking about the timing of elective surgeries. Have you figured out a way to access those patients to get ZILRETTA as an option in front of them?

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Melissa Layman, Flexion Therapeutics, Inc. - Chief Commercial Officer [7]

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So with regard to accessing patients specifically, our efforts haven't been focused there during this period. They have been focused specifically with our health care providers. Our sales force has been working from home since the middle of March, and they have been fully audiovisual equipped to continue to engage physicians remotely. And in fact, many of their conversations with our users and some of our nonusers have focused around that very point, which is that with surgeries having been rescheduled, postponed, canceled altogether, the wait times to get to those surgeries are mounting and that ZILRETTA offers an alternative to managing the intractable pain that these patients are continuing to suffer with and therefore is being more widely considered by our customers as that bridging tool that they can use until those patients are able to be put back on to the surgical schedule.

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Operator [8]

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Edited Transcript of FLXN earnings conference call or presentation 7-May-20 8:30pm GMT - Yahoo Finance