U.S. Markets closed

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

Q1 2020 Flexion Therapeutics Inc Earnings Call

BURLINGTON Jun 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Flexion Therapeutics Inc earnings conference call or presentation Thursday, May 7, 2020 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David A. Arkowitz

Flexion Therapeutics, Inc. - CFO

* Melissa Layman

Flexion Therapeutics, Inc. - Chief Commercial Officer

* Michael D. Clayman

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

* Scott Young

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

================================================================================

Conference Call Participants

================================================================================

* Bruce David Jackson

The Benchmark Company, LLC, Research Division - Senior Equity Analyst

* Elliot Henry Wilbur

Raymond James & Associates, Inc., Research Division - Senior Research Analyst

* François Daniel Brisebois

Craig-Hallum Capital Group LLC, Research Division - Former Senior Research Analyst

* Gary Jay Nachman

BMO Capital Markets Equity Research - Analyst

* Randall S. Stanicky

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

* Tian Sun

Needham & Company, LLC, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

Before we begin, I would 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 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 and 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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 reductions 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.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Melissa, do you want to take that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question or comment comes from the line of Gary Nachman from BMO Capital Markets.

--------------------------------------------------------------------------------

Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [9]

--------------------------------------------------------------------------------

Just following on the previous question. In terms of the variability by physician practices and how they're handling COVID, have you been able to stratify these practices in any way and target them differently based on those that might be willing to treat patients sooner and then maybe go after those practices more aggressively in the near term?

--------------------------------------------------------------------------------

Melissa Layman, Flexion Therapeutics, Inc. - Chief Commercial Officer [10]

--------------------------------------------------------------------------------

In fact, we have. We've done exactly that. We've been able to stratify practices really into 3 different groups. And they're moving between and among those groups as the pandemic progresses. But we are seeing some practices that are completely shut down to patients altogether. Others that are seeing only what we would describe as trauma cases. And still others that are open to more than just trauma cases and are seeing patients that might be considered critical but not necessarily trauma. And so with the recognition that any given one of our customers might fall into any one of those 3 stratifications, we are guiding our sales force to engage in more urgent conversations around the use of ZILRETTA as that bridge to surgery for practices that are continuing to see patients above those that we would describe as trauma cases. For those that are not seeing ZILRETTA-eligible patients today, we are engaging them in conversations about preparing for the time at which they'll start to open their practices to more patients and the role that ZILRETTA can play in those patients as well as suggesting that they work now to pre-verify coverage for those patients for ZILRETTA. And then a similar discussion with those practices where they are closed down to all patients, but again considering ZILRETTA as a tool that they can begin to manage with now remotely in anticipation of the point at which they will begin to see patients again.

--------------------------------------------------------------------------------

Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [11]

--------------------------------------------------------------------------------

Okay. And as part of the cost cutting, you didn't specifically mention sales force. And I'm curious, in this new world that's evolving, do you think maybe it will make sense to be more efficient with the sales force if you could use telemedicine maybe more frequently going forward?

--------------------------------------------------------------------------------

Melissa Layman, Flexion Therapeutics, Inc. - Chief Commercial Officer [12]

--------------------------------------------------------------------------------

Certainly, the onset of telemedicine as a way for physicians to interact with patients has taken root and we believe it's here to stay. But as far as implications on our in-person detailing and our sales force, we're currently conducting a variety of commercial analyses to ensure that our ZILRETTA footprint is optimized as we emerge from COVID and reset the sales trajectory. It would be premature to comment on any of the potential outcomes from these analyses and any changes to our commercial footprint that they might suggest, but we are currently not planning to make any revisions to our sales footprint at this time.

--------------------------------------------------------------------------------

Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [13]

--------------------------------------------------------------------------------

Okay. And then just a couple for David. Oh, go ahead. Did you want to add, Mike? I'm sorry.

--------------------------------------------------------------------------------

Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [14]

--------------------------------------------------------------------------------

I was just going to say that, we think that we're learning a ton using virtual detailing, and it actually is pretty efficient. Having said that, it's also important to recognize that this is still a total office sale. That the personal connections are important. So I wouldn't want anyone to leave this call concluding that we're moving unduly in the direction of virtual detailing. It's not a question of if our sales reps go back in front of prescribing physicians and their office staff and their practitioners, it's a question of when and when it could be done safely and appropriately.

--------------------------------------------------------------------------------

Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [15]

--------------------------------------------------------------------------------

Okay. And just a couple of last ones for David. So is your gross margin going to be impacted at all by stopping manufacturing of ZILRETTA for a period of time? And then I think you mentioned, I'm just jumping on a couple of calls, how much could sales be down in the second quarter now that you have a couple of months in the bag? I think you mentioned inventories would be an issue.

--------------------------------------------------------------------------------

David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [16]

--------------------------------------------------------------------------------

Yes, Gary. So to answer the second question first. Look, it's still early days. COVID hit us in the middle of March, and that resulted in a material decline at that point in time. We're not going to give specifics on how things are playing out because as you can appreciate, it's very fluid at this juncture.

Your first question was about manufacturing and gross margins. And yes, during the time that we have manufacturing suspended, our gross margin will be adversely impacted. That's because we do have certain fixed production costs. As you recall, this is a condominium model with Patheon. And those fixed production costs with production would have been charged to inventory. Now they're going to need to be recognized as part of cost of sales. So this will occur during the time that we have suspended manufacturing.

--------------------------------------------------------------------------------

Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [17]

--------------------------------------------------------------------------------

Okay. I mean, you actually had good gross margin in the first quarter, I think trending in the high 80s. So I don't know. Can you give us a sense of where that might go? Does it get cut in half or how dramatic it might be?

--------------------------------------------------------------------------------

David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [18]

--------------------------------------------------------------------------------

It's pretty fluid at this point in time. And to your point, the quarter, we had a gross margin of 89%. So we were clearly heading in the right direction, but we're going to take a little bit of a pause. But again, it's too early and too fluid at this point to give specific guidance on what the gross margins are going to look like during this time of production suspension.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Our next question or comment comes from the line of Elliot Wilbur from Raymond James & Associates.

--------------------------------------------------------------------------------

Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [20]

--------------------------------------------------------------------------------

I didn't realize I was able to make comments on the call. I probably shouldn't. I'll stick with questions. And I'll start with a couple of questions for David. I never thought I'd be asking Flexion a question about WIP. But nevertheless, I'm going to proceed in that direction. Just looking through the Q, you've got work in process inventory of around $10 million on the balance sheet, finished goods of around $7 million. And I think somebody is going to look at the finished goods of $7 million, divide by your margin in the quarter and conclude that, that means you've got inventory on hand to satisfy about $60 million in sales for the balance of the year. So just wanted to kind of bounce that idea off you if I'm thinking about that correctly. I'm not sure about the process of converting WIP into finished goods at this point in time and whether that $7 million may actually underrepresent what you think you have in terms of finished goods inventory to satisfy any additional demand in 2020. That's first question.

--------------------------------------------------------------------------------

David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [21]

--------------------------------------------------------------------------------

Got it. Okay. So thank you, Elliot. Appreciate the inventory question. Yes, I think just looking at finished goods is an incomplete picture. That WIP will be converted and may be already converted given that we're a little bit of time outside of the end of the first quarter. So just looking at finished goods alone is only part of the story. And I think I would just revert back to what we said on our prepared remarks that we do have adequate commercial supply of ZILRETTA to meet demand for at least the remainder of 2020. And again, as we talked about, we have the ability to restart up at Patheon 3 months of notice. So we'll obviously keep a close eye on what our inventory levels are, but we feel very good about at this juncture.

--------------------------------------------------------------------------------

Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [22]

--------------------------------------------------------------------------------

Okay. And for yourself as well, David, I want to ask a question around the debt, the term loan and the revolver and then also the Patheon expenses, which I think jump up in 2021 as well. Just how are you thinking about those obligations, not really an issue this year, but potentially a little bit more so next if, in fact, things don't bounce back along the time lines that we're all hoping and expecting, possibility of renegotiating interest rates, maybe defer an amortization of the debt or anything you can do with respect to the Patheon expenses to push those out? Just trying to think about what kind of flexibility you have in terms of some of these fixed obligations that are more concentrated in 2021 than 2020.

--------------------------------------------------------------------------------

David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [23]

--------------------------------------------------------------------------------

Right. Right. So as it relates to the revolver, our term loan, look, we're currently in discussions, engaged in productive and constructive discussions with our lenders to potentially modify select terms that we believe will favorably impact our liquidity. Our lenders very much understand unprecedented situation that we are in as a result of COVID-19 and are working with us to come up with a mutually agreeable solution. We're not there yet. But once we have agreement on this, then we'll provide an update in the appropriate form. So we're optimistic, a little premature as it relates to details.

As it relates to Patheon, appreciate that from an accounting standpoint, that shows up partially as a lease, but it's really about a manufacturing, a long-term manufacturing contract. We've talked about the fact that we've paused production for the time being and have the opportunity to start up with 3 months' notice. We have a good relationship with Patheon. And as things progress through 2020, we will be working closely with them to figure out what makes sense beyond this year.

--------------------------------------------------------------------------------

Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [24]

--------------------------------------------------------------------------------

Okay. Then I want to ask a question directed at Mike with respect to the CSPC agreement and specifically the milestones associated with that $32.5 million, if I remember correctly. I would assume the bulk of that is tied to final approval. But just trying to get a sense of how much of those could, in fact, be generated if everything goes according to plan in advance of the final approval?

--------------------------------------------------------------------------------

Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [25]

--------------------------------------------------------------------------------

Yes. And Elliot, I should know exactly what that is, the $32 million. And Scott Young might have a better line of sight on this. My recollection is that the $32.5 million in milestones, regulatory and commercial sales milestones are heavily weighted in the direction of approval and downstream sales.

--------------------------------------------------------------------------------

Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [26]

--------------------------------------------------------------------------------

Okay. And then just one last question for Melissa with respect to account conversion and the opportunity that still seems to be on the table. Just looking at the latest metrics, you still have like 45% of accounts that generate or excuse me, that purchase roughly 3% to 4% of total units. So kind of wondering just how much sales force time, effort, energy, attention and costs are sort of targeted at that 45% that generate relatively small volume? And so what's the best strategy to really try and convert those accounts right now versus maybe just focusing efforts more on the high-prescribing accounts which still may be underutilized in terms of their potential total volume?

--------------------------------------------------------------------------------

Melissa Layman, Flexion Therapeutics, Inc. - Chief Commercial Officer [27]

--------------------------------------------------------------------------------

Sure. As we said before, we think that there is room for all of our accounts, regardless of whether we consider this to be high or low volume purchasers, to be more penetrated. David has talked on previous calls about the ZILRETTA utilization continuum. And you can see from a number of the commercial metrics slides that we are continuing to move customers into the small volume purchases, move customers from the small volume purchases to the midsized volume purchases and from midsized volume purchases to the larger volume purchases. And that really, we believe, is a function of customers getting comfortable with initial trials, being able to, in the context of their own practice, get evidence of the clinical impact that ZILRETTA can have on a small number of patients, experience successful coding, billing and reimbursement and then expanding that use to other patients within that physician's purview and to other physicians within that practice. And so the degree of effort that is placed against those small volume purchases is proportional to the opportunity that exists within those practices as we understand it.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Our next question or comment comes from the line of Serge Belanger from Needham & Company.

--------------------------------------------------------------------------------

Tian Sun, Needham & Company, LLC, Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

This is Tian on for Serge. I just had a few questions. So given the positive impact that you've seen on your virtual outreach program so far, sorry. I guess, just broadly speaking, how do you plan to, I guess, incorporate these virtual technologies and tech tools going forward in a post-COVID environment? I guess, is this something that you think is worthwhile in pursuing long term?

--------------------------------------------------------------------------------

Melissa Layman, Flexion Therapeutics, Inc. - Chief Commercial Officer [30]

--------------------------------------------------------------------------------

Absolutely. We know for sure that ZILRETTA is a highly promotionally sensitive product. And regardless of whether that promotion is in-person, which is clearly most effective, or remote, it all counts towards the ability to drive utilization. We've been benefited by the fact that physicians have time on their hands now and we can access them to a greater degree through our own remote detailing. And they, likewise, are accessing their patients through the telemedicine services that they're now getting more and more equipped every day to use. That creates an opportunity for us to leverage the remote physician-to-patient dynamic with ZILRETTA advertising. And that is absolutely something we're looking into.

In terms of direct-to-physician promotion through remote detailing in addition to our sales, people are spending the majority of their time today doing that. We are also beginning to turn on peer-to-peer education from a remote position, including a number of national speaker programs with panels of experienced physicians in terms of their use of ZILRETTA and being able to engage a much broader number of physicians across the country remotely in those types of interactions.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question or comment comes from the line of François Brisebois from Craig-Hallum Capital Group.

--------------------------------------------------------------------------------

François Daniel Brisebois, Craig-Hallum Capital Group LLC, Research Division - Former Senior Research Analyst [32]

--------------------------------------------------------------------------------

Just quickly here, I was wondering if the cost-cutting, now that you've given a little more guidance on the impact there, $43 million to $53 million, is that in any way related to kind of your revenue expectations here or you're just waiting on that to get more clarity before giving guidance there?

--------------------------------------------------------------------------------

David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [33]

--------------------------------------------------------------------------------

Frank, this is David. So as you'd appreciate and as I said in my prepared remarks, this was really a deep dive throughout the organization to reduce expenses in order to ensure that we have financial flexibility and liquidity given what we're experiencing, COVID-19. We eliminated, we reduced, we deferred the things that we thought made the most sense. And we've talked about this in the past, planning for the worst and being prepared for the recovery.

As it relates to revenues, as you'd appreciate, we're still relatively early days in this pandemic and things are changing every day. So we didn't sit there and match up our expense reductions to revenue, to what we think our revenue is going to be because there's a wide dispersion of outcomes there. We chose and focused on our expense reductions based on what we think made sense for the business, both short term and long term, with the objective of enhancing financial flexibility and liquidity.

--------------------------------------------------------------------------------

François Daniel Brisebois, Craig-Hallum Capital Group LLC, Research Division - Former Senior Research Analyst [34]

--------------------------------------------------------------------------------

Now that makes a lot of sense. And then did the cost-cutting start? It seems like the sales were starting to really get hit in mid-March with COVID. Did cost-cutting start at that point or is this really going forward in the quarters to come here?

--------------------------------------------------------------------------------

David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [35]

--------------------------------------------------------------------------------

We really embarked on that late -- we'll say late in the first quarter, but the impact on our expenses in the first quarter related to those activities is really de minimis because things were already well in progress. So it's really about our expenses Q2, 3 and 4 going forward. And the other way to think about this is, just by doing the math, we are expecting aggregate operating expenses Q2 through Q4 to be in the $115 million to $124 million range given what we incurred in the first quarter.

--------------------------------------------------------------------------------

François Daniel Brisebois, Craig-Hallum Capital Group LLC, Research Division - Former Senior Research Analyst [36]

--------------------------------------------------------------------------------

Understood. And then just lastly here in terms of Patheon and production. Is this something that you would let the Street or let the public know when you would re-engage production with Patheon because it seems like it would be related with what's going on in the medical practice?

--------------------------------------------------------------------------------

David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [37]

--------------------------------------------------------------------------------

That's a good question. I think we would figure out what makes sense from a disclosure standpoint when we reinitiate production. I think it'd be kind of premature at this point to say, we will let everybody know at that point in time or not. Again, as we disclosed, we would give -- let Patheon know when there's a 3-month notice period.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

Our next question or comment comes from the line of Bruce Jackson from Benchmark.

--------------------------------------------------------------------------------

Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [39]

--------------------------------------------------------------------------------

Just quickly on the shoulder trial, are you going to be able to kind of salvage any data out of that?

--------------------------------------------------------------------------------

Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [40]

--------------------------------------------------------------------------------

Yes. Bruce, this is Mike. Thanks for the question. Yes, of course, we will. We're stopping the study, we will unblind the study. We will analyze the data that has been accumulated and determine its utility to the potential requirement of the subsequent protocol that we will write and implement. I would caution though, Bruce, there are limited numbers of patients enrolled in this study. Certainly wouldn't want your expectations to be too high, but I think we owe it to the patients who enrolled themselves or got enrolled in that trial and to the larger community to extract whatever information we can and reveal that.

--------------------------------------------------------------------------------

Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [41]

--------------------------------------------------------------------------------

Okay. Good. And then with FX201, do you think you're going to be able to start that back up pretty quickly when you get the opportunity?

--------------------------------------------------------------------------------

Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [42]

--------------------------------------------------------------------------------

I think the operational phrase approves it as soon as feasible, as soon as sites are ready and we're confident that we are not going to be exposing patients and the MDs if we restart.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

Thank you. I'm showing no additional comments in the queue. At this time, I'd like to turn the conference back over to Mr. Michael Clayman for any closing remarks.

--------------------------------------------------------------------------------

Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [44]

--------------------------------------------------------------------------------

Yes. Just simply say, thank you for all those who participated and thanks to those who asked questions. I just want to leave people with the idea that we feel good about the future. We can't predict day by day, but we are confident that the need for ZILRETTA will translate into demand that will be substantial in all of the elements that we outlined in our call today. Thanks very much.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Stay safe.