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Edited Transcript of FLXN earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q2 2019 Flexion Therapeutics Inc Earnings Call

Woburn Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Flexion Therapeutics Inc earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David A. Arkowitz

Flexion Therapeutics, Inc. - CFO

* Michael D. Clayman

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

* Scott Young

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

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Conference Call Participants

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* Daniel James Busby

RBC Capital Markets, LLC, Research Division - Senior Associate

* Elliot Henry Wilbur

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

* François Daniel Brisebois

Laidlaw & Company (UK) Ltd., Research Division - Healthcare Equity Analyst

* Gary Jay Nachman

BMO Capital Markets Equity Research - Analyst

* Patrick Ralph Trucchio

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Serge D. Belanger

Needham & Company, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Flexion Therapeutics Second Quarter 2019 Financial Results Conference Call. My name is Brian, and I will be your coordinator today. (Operator Instructions) I will now turn the call over to the company.

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Scott Young, Flexion Therapeutics, Inc. - VP of Corporate Communications & IR [2]

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Good afternoon. This is Scott Young, Vice President for Corporate Communications and Investor Relations. Before we begin, I would call your attention to the metric slides that we will discuss in today's presentation. Those slides can be viewed directly via the webcast, in the 8-K we issued afternoon, under the Investors tab on our website, flexiontherapeutics.com. In addition, our Q2 earnings press release and an archive of this conference call can also be found there. Today's call will be led by Flexion's Chief Executive Officer, Dr. Michael Clayman, and he is joined by David Arkowitz, Flexion's Chief Financial Officer.

On today's teleconference, we will be making forward-looking statements that include commercial, financial, clinical and regulatory projections. Statements related 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 June 30, 2019 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.

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

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Thanks, Scott, and thank you all for joining the call. It's my pleasure to provide an update on Flexion's second quarter business performance. Today I'll summarize Zilretta's progress in the market, discuss our recent regulatory and clinical activities, and then provide an update on FX201, our preclinical gene therapy program for osteoarthritis. After that, I'll turn it over to David who will review our latest commercial metrics and our second quarter financial results, and provide some color on the debt financing we announced in our press release and in our 10-Q. Following David's update, we will open the line and take questions.

To begin, we recorded Zilretta net sales of $17 million in the second quarter, which represents growth of 60% over the first quarter. We are very pleased by this performance and are reaffirming our revenue guidance of $65 million to $80 million for full year 2019. We believe that the second quarter marked an important step in the evolution of the commercialization of Zilretta and we attribute these results to three main drivers. Organizational changes we have implemented over the past translational modification several months, traction we are gaining from the permanent J Code, and the positively reinforcing clinical experiences patients and prescribers are having with the product. While I'm pleased to say that performance across each area of Flexion was strong, clearly our sales team and in fact our entire commercial organization, deserves special recognition for their work in Q2. As David will discuss in detail, the momentum in the field continues to build with respect to increasing utilization of Zilretta in existing accounts, and in the second quarter alone we saw nearly 500 new accounts order Zilretta. While we still have much work ahead of us, we believe these metrics bode well for both the near and long-term prospects for Zilretta and Flexion.

Regarding our search for a Chief Commercial Officer, I can report that there is substantial interest in the role, the search is progressing well, and we will hire the right person at the very earliest feasible time.

Moving to Zilretta's label, we continue to have productive conversations with the FDA regarding our supplemental NDA to remove the limitation of use statement. While we cannot make any assurances, based on the strength of the data from our repeat administration trial, we remain optimistic about a positive FDA decision by our PDUFA date of October 14.

Next, I'd like to discuss our clinical development activities. On our last call, we mentioned that we paused enrollment in the Phase 3 trial of Zilretta in hip OA pain due to a non-safety related issue which resulted in the inability to deliver a full dose in a small number of trial participants. Based on laboratory simulations, we've developed a working hypothesis about the root cause of the issue and we are now testing solutions informed by those insights in a small clinical study. Pending positive data from that study, we expect to resume registration trial enrollment in the fourth quarter.

In addition, we remain on track to initiate a Phase 2 trial before the end of the year which will investigate the safety and efficacy of Zilretta in shoulder OA and in adhesive capsulitis also known as frozen shoulder. In July, we presented new findings from a post hoc analysis of the repeat administration trial of Zilretta in patients with knee OA at the American Orthopedic Society of Sports Medicine. This evaluated the efficacy of initial and repeat administration of Zilretta in patients with symptomatic knee OA ranging in radiographic severity from Kellgren Lawrence or KL grades 2 to 4. KL grade 4 is the most advanced form of knee OA. It is often referred to as bone on bone, and had not been studied in Zilretta clinical trials previously. The analysis demonstrated that Zilretta consistently and substantially reduced OA knee pain for at least 12 weeks after each injection in patients with KL grade 4 disease and that this was comparable to that seen in patients with KL grades 2 and 3. This is particularly encouraging as one might intuitively expect patients with KL grade 4 OA to be less responsive due to the advanced state of their disease.

The incidence of treatment emergent adverse events was similar across all KL grades and the most commonly reported adverse events were consistent with those reported in previous clinical trials of Zilretta.

As for new scientific publications, in May the results from a pooled analysis of data from 3 Phase 2/3 randomized clinical trials on the use of rescue medications with Zilretta were published in the peer review journal Pain and Therapy. The analysis showed that the overall number of rescue medication tablets used per day through week 24 was significantly less for Zilretta compared to both saline placebo and immediate release triamcinolone acetonide crystal in suspension.

Regarding our pipeline, we are making excellent progress with FX201, a locally administered gene therapy product candidate for OA and remain on track for filing an IND and initiating a clinical study this year. During the second quarter we manufactured GMP clinical trial material and completed IND enabling nonclinical studies including GOP toxicology, biodistribution and pharmacology studies. Based on those results, we have established a potentially safe and efficacious starting dose for initial clinical testing.

Further, we have demonstrated efficacy in terms of both symptomatic and structural effects across multiple animal species. Additionally, in June the USPTO issued a new patent which covers the composition of matter and method of use of FX201 in the treatment of AO with a term through January of 2033. While we have great enthusiasm for FX201 and we will continue to look for other opportunities to expand our pipeline, it is important to emphasize that the vast majority of our resources and investments are and will continue to be focused on Zilretta.

I'll now turn it over to David, but before I do, I'd just like to note that we're pleased with the new debt financing that he'll discuss in more detail. This provides up to $60 million in nondilutive funds to support our business operations and R&D activities.

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

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Thank you, Mike. I'll start by walking through our commercial metrics which, as Scott mentioned, can be found on our website and in the 8-K we issued today. I'll then briefly cover the second quarter financials and provide further details on the new debt financing which Mike mentioned.

So let me direct you to Slide 2 which includes several key metrics that provide important context on the progress of Zilretta's launch. On the last call, I explained that we expect the number of accounts which we target to continue to increase over time as our sales reps broaden their reach, and as of the end of the second quarter, we've grown our target accounts to approximately 4,400. As of June 30, 2,733 accounts had purchased Zilretta which is up from 2,247 purchasing accounts as of the end of the first quarter. With respect to reorders, as of June 30, 2,004 accounts or 73% of purchasing accounts, had reordered Zilretta at least once which is up from 1,601 accounts that placed reorders by the end of the first quarter. This is highly encouraging as it demonstrates that nearly 3 out of every 4 purchasing accounts have had more than an initial experience with the product, especially when one considers that our customer base continues to grow significantly.

Moving to Slide 3, this graph provides our quarterly sales since launch and here you can see the impressive growth that we experienced in the second quarter. Our $17 million in net sales in the second quarter represents sequential growth of 60% over the prior quarter.

Switching to Slide 4, this slide and the remaining 2 slides reflect purchases of Zilretta by accounts which represent physician practices, clinics and hospitals of various sizes and purchasing potential. Here we provided the distribution of accounts that have purchased Zilretta since launch, with accounts broken out into one of 3 groups. Those that have purchased 1 to 10 units, purchased 11 to 50 units, or purchased more than 50 units. As you can see, the majority of the approximately 2,700 accounts that have purchased Zilretta have bought 1 to 10 units. This represents a strong and growing base as new accounts generally start in this group with small initial orders and then their purchasing increases in both frequency and size as they observe the clinical benefits of Zilretta and experience reliable and consistent reimbursement.

In addition, as of the end of the second quarter, there were 461 accounts that had purchased more than 50 units. This group is up by about 150 accounts or approximately 50% over the first quarter. And while we are very pleased with this progression, even for these accounts whom we characterize as early adopters, we believe there is substantial further opportunity to fully incorporate Zilretta into their practices.

Moving to Slide 5, you can clearly see the significance of these early adopting accounts on the total purchases of Zilretta to date. While the total number of accounts that have purchased more than 50 units is 461, which is about 17% of the total purchasing accounts, these accounts purchased approximately 63,000 units or roughly 70% of all purchases since launch. As we have mentioned previously, accounts generally move along this Zilretta utilization continuum from 1 to 10 units to 11 to 50 units and then to more than 50 units, which highlights the potential for significant sales from our current customer base of approximately 2,700 purchasing accounts.

We expect our customer base will continue to grow as we add new accounts, and on Slide 6, you can see how the Zilretta purchasing breaks out by new and existing accounts. We continue to grow our base in a meaningful way with 400 to 500 new accounts coming onboard every quarter. While we expect this will eventually slow down, it indicates the success we have had in continuing to grow our customer base and further bolsters our confidence that Zilretta can become the leading branded intra articular therapy for OA knee pain.

So now let me briefly walk through the second quarter financial results, which we included in the press release issued this afternoon and in our 10-Q. We reported net sales of Zilretta for the second quarter of 2019 of $17 million compared to net sales of $3.8 million for the second quarter of 2018. The cost of sales was $1.4 million and $0.9 million for the second quarter of 2019 and 2018 respectively. The net loss was $36.5 million for the second quarter of 2019 compared to a net loss of $43.9 million for the same period of 2018.

The second quarter 2019 net sales reflect a gross to net reduction of 8%. The gross to net reduction is primarily comprised of distributor fees, returns reserve, and mandatory government discounts and rebates such as Medicaid 340B institutions and Veterans Administration and Department of Defense.

Research and development expenses were $16.1 million and $13.1 million for the 3 months ended June 30, 2019 and 2018 respectively. The increase in research and development expenses of $3 million was primarily due to an increase of $1.2 million in salary and other employee-related costs for additional headcount and stock compensation expense as well as a $1.5 million increase in preclinical expenses related to our portfolio expansion activities and other program costs and an increase of $0.4 million in development expenses for Zilretta.

Selling, general and administrative expenses were $33.1 million and $31 million for the 3 months ended June 30, 2019 and 2018 respectively. Selling expenses were $24.8 million and $22.7 million for the 3 months ended June 30, 2019 and 2018 respectively. The year-over-year increase in selling expenses of $2.1 million was primarily due to salary and other employee-related costs and external costs related to marketing and reimbursement support activities.

General and administrative expenses were $8.3 million for both the 3 months ended June 30, 2019 and 2018. Interest income was $0.8 million and $1.3 million for the 3 months ended June 30, 2019 and 2018 respectively. Interest expense was $3.9 million for both the 3 months ended June 30, 2019 and 2018. We expect that our operating expenses will continue to increase primarily driven by commercial activities in support of Zilretta, line extension clinical trials for Zilretta, continued development of FX201, and development activities associated with future additions to the pipeline.

As of June 30, 2019, we had approximately $176.6 million in cash, cash equivalents and marketable securities compared with $217.8 million as of March 31, 2019. We believe that our current cash balance and the expected proceeds from our new debt financing with the expected future sales of Zilretta and the ongoing prudent management of our expenses will bring us to profitability. With that said, it is important to add that, as always, we will be opportunistic as it relates to potential funding decisions and we will do what we believe is in the best long-term interest of Flexion and our shareholders.

Finally, as Mike mentioned, we are pleased to announce that we have secured $60 million in debt financing. The lenders are Silicon Valley Bank, Midcap Financial Trust, and Flex Point MCLS Holdings. The debt financing is comprised of a $40 million term loan which was fully drawn down at closing and a revolving credit facility secured by our accounts receivable of up to $20 million. The interest rate on the term loan is the greater of the prime rate plus 1.5% and 6.5%. And the interest rate on the revolver is the greater of the prime rate and 5.5%. In addition, both facilities mature January of 2024. Today's financing replaces our $30 debt facility with Silicon Valley Bank and Midcap and approximately $8 million of the proceeds from today's financing will pay off the remaining amount owed.

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 will come from the line of Randall Stanicky with RBC Capital Markets. Your line is now open.

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Daniel James Busby, RBC Capital Markets, LLC, Research Division - Senior Associate [2]

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Hey, guys, this is Dan Busby on for Randall. I have a couple of questions on Zilretta to start and then a follow-up on FX201. First on Zilretta, you're clearly making progress bringing new accounts onboard. But for those accounts that have yet to purchase Zilretta, can you describe the primary factors preventing them from doing so? And second, it might still be a bit early, but do you have any qualitative or quantitative feedback that you can share from your DTC efforts to date? And more broadly speaking, how important is patient advocacy in the knee OA market?

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

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All good questions, and related to accounts that have yet to order Zilretta, I think it's a question of continued exposure of physicians in those practices to the data. Gaining experience through samples or commercial product to have that first experience. And I think what you see from the metrics is that once there's a requisite experience with this product, the experience drives further adoption. And so we are continuing to find ways to get product to ordering accounts and increase their familiarity, work with leading physicians at those accounts, and we're continuing to be bullish about our prospects going forward. The fact that we added 500 accounts this quarter suggests that in fact that progress is real. As it relates to DTC, we're not going to speak about the data from those at this point. We may at some point in the future, but not now. And then in terms of patient advocacy, we believe patient advocacy is an important element in the ultimate success story of Zilretta and realizing our full potential. We're devoting substantial resources to patient advocacy and I would say stay tuned because there may be an opportunity to do even more there.

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Daniel James Busby, RBC Capital Markets, LLC, Research Division - Senior Associate [4]

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Okay, that's helpful. Then just a 2-part follow-up on FX201. Part one, assuming it moves into the clinic later this year, can you give us a sense of the patient profile that you're likely to target for that? And then part 2, I think when a lot of people hear gene therapy, they think expensive. So from an R&D perspective, this is probably a good one for David, but how should we think about the cost associated with the Phase 1 and subsequent trials over the next couple of years assuming that program moves forward?

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

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I'll start and David can add as he would like. We are targeting patients with moderate to severe knee OA to begin with and we have every intention of considering the potential refinement to that population. But to begin with, we want to define signal in that patient population in terms of pain relief and potentially disease modification. As it relates to expense, yeah, we totally get what you're saying. People hear the phrase gene therapy and assume very, very large price tags for those products. One of the beauties of FX201 is that it's injected locally into the knee and in a volume of 5 mL which is roughly, roughly the knee volume, it does not take much protein to achieve the therapeutic concentration. And as a result, the viral particle dose that's required to do that, we expect, and we'll have to show this, will be literally orders of magnitude below what would be required with systemic therapy. And as a result, the COGS associated with producing relevant doses are going to be substantially less than for many other therapies and the driver to the expense of clinical trials in this space is predominantly COGS drivers. As a result, we believe that we can cost effectively develop FX201 to the point of proof of concept and beyond.

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Operator [6]

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Thank you. And our next question will come from the line of Gary Nachman with BMO Capital Markets. Your line is now open.

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [7]

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Good evening, it's Rafi on for Gary. What drove the strong gross margin in the quarter and how sustainable is that?

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [8]

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Sorry, say that again?

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

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What drove the strong gross margin in the quarter and how sustainable is that?

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David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [10]

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This is David. So yes, as you noted, we had a gross margin of 92% in this quarter. That compares to the prior quarter when it was 83%. I think we've been very clear that there is inherent variability in our cost of sales and it is still relatively early days from a manufacturing standpoint. Once we reach manufacturing steady state, then we think we're going to have consistent gross margins in the 90% range. So we will continue to experience some variability in the ensuing quarters until we achieve that steady state.

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

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Thanks. Can you talk about what the salesforce and commercial organization may be doing differently if anything following some of the changes in the commercial leadership?

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [12]

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Changes that the commercial team has implemented since the organizational changes. I'd say that there are a number of different things that we're doing as it relates to the commercial organization. We've talked about a number of them and I think we've actually cited them in the script. First of all, it starts with people. And I think we've done a very nice job and the sales leadership in particular has done a nice job of ensuring we have the very best people in place to accomplish the strongest goals. And I think that that's reflected in our sales numbers. I think some of the things that David just has talked about in the script, including the ability for our salespeople, our MBMs to take orders directly, helps facilitate things. And the use of contracting with group purchasing organizations we think have the potential to generate valuable data that can advantage us in the further growth of Zilretta.

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Operator [13]

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Thank you. (Operator Instructions) Our next question will come from the line of Elliot Wilbur with Raymond James. Your line is now open.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [14]

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Hey, it's Elliot Wilbur on for Elliot Wilbur. A couple of questions here. Mike, just any updates on the moving forward of the shoulder adhesive capsulitis OA studies just in terms of timing? And then just thinking about those studies in terms of the dosing profile of the product, based on what occurred with hip OA and what you may have learned from those studies, any thoughts around changing either the relative strength or concentration or viscosity of the product based on some of the data that has emerged from the earlier studies in those indications?

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [15]

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Yeah. First of all, Elliot, we are on track to start the shoulder studies in OA and adhesive capsulitis before the end of the year. And I would say that the experience in the SHIP study, the shoulder and hip injection study that was really a PK study, suggested in a small number of patients that one could inject the shoulder without difficulty. And in the hip, we did see a couple of examples of what we saw in the registration trial. We ascribed those situations to inadequate dose preparation at the site level. And have subsequently learned that it's more than that for the hip, and that's why we had to go to the lab simulations and ultimately do a small clinical study to convince ourselves that there's an injection approach that will allow routine administration of the full dose. We saw no problems in the shoulder in the SHIP study, and we believe that fundamentally the anatomy of the shoulder lends itself to more straightforward injection than the anatomy of the hip. So there is no plan to change the dose. We will inject our intent and the protocol dictates that we will inject a full 32 mg dose of Zilretta in shoulder for both adhesive capsulitis and osteoarthritis.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [16]

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Thanks, just a couple of follow-up questions around commercial activities, with respect to the increase in targeted accounts, I think it was roughly 300 this period. Any anecdotal feedback you can provide in terms of just sort of the relative success or win percentage at these new accounts? Whether it's been incrementally easier just based on market experience to date, but anything you could share there in terms of success at these particular accounts would be helpful.

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [17]

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Yeah, I'd say, Elliot, it's a good question. I think the reasonable expectation is our ability to penetrate accounts generally is the same as our ability to penetrate new accounts. And at least some of those 500 newly penetrated accounts came from the expansion of the base of total accounts.

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

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And I would just add, I think also it's important to look at the increase in the number of accounts that have purchased more than 50 units from Q1 to Q2, it's been approximately a 50% increase. On top of that, the number of units on average at those accounts in that 50 units or more bucket have purchased increased from 120 units to 136 units in the second quarter. So we're seeing both an increase in higher purchasing accounts and the number of those accounts and their utilization in the second quarter which is about that.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [19]

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Thanks. I wanted to ask you one follow-up question around that, David, as well. I know this is probably a difficult datapoint to actually get your hands on, but with respect to these high prescribing accounts or practices, any sense of what Zilretta's penetration is in terms of their total overall TCA utilization in OA?

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David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [20]

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Yeah, I mean without getting into a lot of granularity, we feel that for the vast majority of those 461 accounts that have purchased 50 units or more, we are still just scratching the surface. We still have opportunities for greater adoption among additional physicians in the accounts and then across a broader set of patient types. So we do think there is tremendous opportunity even with those. And there is a handful of them that have utilized more than 500 units to date, so there's just a lot of room to run even with that existing 461 accounts.

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Operator [21]

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Thank you. Our next question will come from the line of Patrick Trucchio with Berenberg Capital Markets. Your line is now open.

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Patrick Ralph Trucchio, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [22]

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Hi, good afternoon. This is actually Iris Lon on for Patrick Trucchio. Can you tell us what the working hypothesis is regarding the issue in the Phase 3 hip OA pain study? And then secondly, have you discussed this hypothesis with the FDA? And if so, can you share with us any of the feedback you have received? And then I have a couple of follow-up questions. Thanks.

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [23]

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Yeah, we're not getting into detail about the working hypothesis. I'd just simply state that the laboratory simulations allowed us to understand the relationship to injection in the hip, the anatomy of the hip and the material that's being injected in a way that allowed us to fashion a very slightly revised injection procedure that we think has the potential to solve the problem. Because there was no safety issue associated with this inability to deliver a full dose in a handful of patients, there was no need for FDA interaction.

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Patrick Ralph Trucchio, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [24]

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Okay. Also, regarding the OA hip trial, how soon would you expect enrollment to complete assuming that it resumes on schedule in Q4? And secondly, when should we anticipate topline data and submission of supplement NDA? And then finally, can you explain to us the payor dynamics with the OA hip label expansion? As in, would you need a separate J Code for OA hip or would the existing J Code cover this indication as well? Thank you.

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

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Yeah, so as we mentioned earlier in the Q&A, we are going to take the hip study, KINETICS, stepwise. Let's first be sure we have confidence that we can inject the full dose. At that point, and we're not giving a timeline for that, but at that point we will reinitiate a registration trial and it depends on when we reinitiate the registration trial, which we expect we could be doing in the fourth quarter, we'd be in a better position to guide to when it's reasonable to expect data. As it relates to permanent J Code, we fully expect that the permanent J Code for knee OA will apply for hip OA.

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Operator [26]

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Thank you. Our next question will come from the line of Serge Belanger with Needham & Company. Your line is now open.

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Serge D. Belanger, Needham & Company, LLC, Research Division - Senior Analyst [27]

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Hi, guys, this is Serge. First question, on this quarter's sales, obviously a big jump from the first quarter. Can you just talk about the monthly progression through the second quarter? And I don't know if you want to talk about July sales, but maybe just give us some color on whether we should expect some seasonality over the summer months?

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [28]

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Yeah, we're not, Serge, we are very pleased with the progress throughout the quarter. We're not going to continually talk about month over month sales (corrected by company after the call). We're not going to talk about July sales because we talked about April sales by exception at a time when it was important to reveal what was a very healthy month as we followed that first quarter of sales to give our investors full confidence that in fact we were headed in a good direction. We don't feel the need to do that and we don't think frankly it's good corporate hygiene to be guiding to month by month sales. And I'll stop there.

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Serge D. Belanger, Needham & Company, LLC, Research Division - Senior Analyst [29]

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Seasonality?

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [30]

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Ah, seasonality, sorry.

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David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [31]

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I can take that. So Serge, as you can appreciate, Zilretta sales are increasing. We anticipate quarter-over-quarter growth throughout the year. But it's not unreasonable to look at other intra articular products in terms of how they track through the course of the year. So if you look at the historical hyaluronic acid data, you see that their weakest sales quarters are the first quarter and the third quarter. Again, we're in a different place, but that's just some additional context.

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Serge D. Belanger, Needham & Company, LLC, Research Division - Senior Analyst [32]

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Okay, thanks. Then in terms of formulary coverage, has there been any significant changes over the last couple of quarters? I think you had previously discussed contracting. Has there been any progress there?

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [33]

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I'd simply say as it relates to coverage, the coverage continues to be excellent. Medicare 100%. Private commercial insurance is between 95% and 100%, so we're very pleased with that. I'll let David answer the question on contracting.

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David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [34]

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Yeah, so with respect to contracting, that relates to agreements such as purchase arrangements with GPOs for example. As you can appreciate, we're not going to get into specifics on that. It is something that we did initiate, embarked upon once we had the J Code earlier this year, so it's still relatively early days with respect to contracts that we put in place. And appreciate that we're not going to break out sales in any detail related to contracts. But it will be an important component tactic on a go forward basis.

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Serge D. Belanger, Needham & Company, LLC, Research Division - Senior Analyst [35]

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Okay, then sorry, one last follow-up on sampling. I think in the past you've talked about 10% or sampling represented about 10% of the purchased units. Where does that number kind of reside now?

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David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [36]

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Yeah, we appreciate that we shared that information in the slides last quarter. We didn't this time because we expect it to be pretty consistent quarter-over-quarter. And in fact, sampling for Q2 was in the 5% to 10% range of purchases and we expect it to be in that range on a go forward basis. Also, I'd just add that our philosophy around sampling is the same. Where we can make a sale, we're going to make the sale and we're going to use samples to facilitate adoption or utilization.

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Operator [37]

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Thank you. Our next question will come from the line of Franc Brisebois with Laidlaw. Your line is now open.

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François Daniel Brisebois, Laidlaw & Company (UK) Ltd., Research Division - Healthcare Equity Analyst [38]

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Hey, guys, thanks for taking the questions. Congrats on the quarter. Just a couple here. You talked about a lot of the metrics, just now on the sampling with Serge and with Elliot. But I was wondering from your perspective, what have you guys learned the most about these metrics so far? And should we expect you guys to add or I guess you took out sampling, but are you guys looking at different metrics? Maybe switching to 1 to 10, 11 to 50, or should this be pretty consistent for the quarters to come?

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David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [39]

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Yeah, I think this is a good base set of metrics at this juncture. As you indicated and as we indicated, we dropped sampling because we didn't feel like it added a whole lot of value at this juncture. We will undoubtedly think about the different groupings of purchases, so expect that we will change the break points going forward. In all fairness, we'll reevaluate the metrics on a regular basis. So if we feel like there is limited utility in including particular metrics down the road because there's nothing meaningful coming out of it, we'll modify accordingly. But we feel good about the metrics that we have right now.

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François Daniel Brisebois, Laidlaw & Company (UK) Ltd., Research Division - Healthcare Equity Analyst [40]

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Okay great. I was just wondering if after a couple of years of launch here, I remember the average injections for patients with OA problems was about 1.5 injections a year which is interesting for the amount of time that the drug actually works. Are you guys seeing any change in that? Or are you expecting this 1.5 to actually increase?

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [41]

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It's difficult to say Franc, but I think it is fair to say that once the limitation of use is removed, we'll be able to understand reinjection in a clearer way than we can now. Just to provide a frame, that 1.5 injections per year in the immediate release steroid population, realize that 60% of those patients are "one and done". So the 1.5 injections are concentrated in the 40% of patients who have satisfactory response in terms of magnitude and duration. It would not be illogical to expect that with Zilretta providing better and longer pain relief, that the incentive to be injected a second time would be higher. And I think that it just remains to be seen exactly how that plays out. But we won't have a fair appraisal of that until the limitation of use is removed.

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François Daniel Brisebois, Laidlaw & Company (UK) Ltd., Research Division - Healthcare Equity Analyst [42]

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Understood. Okay, makes sense. Then lastly, just in your search for a new Chief Commercial Officer, are you looking, is one of the checkboxes to look for someone with ex-US experience? Or should we more expect kind of a partnership? I guess how long does this launch go for us to start thinking about the potential outside the U.S.?

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [43]

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I would say this, Franc. What's top of mind for us is an outstanding commercial leader who has done it, who has been successful and leads with U.S. experience. This is a U.S. launch for the time being at least. We believe that the potential for this product is enormous in the U.S. and so what's top of mind for us is finding the best leader who has been successful with U.S. launches. We would not in any preclude the potential for going outside the U.S. at the right time. Top of mind for us though is the U.S.

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Operator [44]

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Thank you. There are no additional questions.

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [45]

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Thanks very much everybody, for your time and attention. Appreciate the good questions and we look forward to reporting back to you our third quarter results sometime in November. Take care.

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Operator [46]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and you may all disconnect. Everybody, have a wonderful day.