Good afternoon, ladies and gentlemen and welcome to the Flexion Therapeutics First Quarter 2019 Financial Results Conference Call. My name is Kevin and I will be your coordinator today. At this time, all participants are in a listen-only mode. Before we begin I would like to call your attention to the slides that Company will present today. The slides can be view directly via the webcast on Flexion's website under the Investor's tab or on the 8-K the Company issued this afternoon. We will be facilitating a question-and-answer session at the end of today's call. [Operator Instructions] I'll now turn the call over to the Company.

Good afternoon. This is Scott Young, Vice President for Corporate Communications and Investor Relations. The earnings release and slides we issued this afternoon and an archive of this conference call can be found on the Company's website at flexiontherapeutics.com. 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 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 year ended March 31, 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 the Flexion's CEO, Mike Clayman.

Thanks, Scott, and thank you all for joining the call, As usual during today's teleconference, I'll provide an update on Flexion's business performance, including our progress with ZILRETTA's launch, recent regulatory and clinical developments, lifecycle management activities, and FX201, our preclinical gene therapy program. Following that, David will cover our first quarter financial results and importantly, he will also walkthrough new commercial metrics, which we believe will provide our investors with much better visibility and key elements of the launch and ZILRETTA uptake in the market. Finally, we will open the line and take questions. To begin, as we announced in our earnings release this afternoon, we reported ZILRETTA net sales of $10.6 million in the first quarter. We see this as solid progress, and it gives us confidence reaffirming our full year revenue guidance of $65 million to $80 million. Additionally, as we announced in our press release, preliminary net sales of ZILRETTA in the month of April were $5.1 million. As a matter of practice, we do not provide real time sales updates, and we have no plans to do so on future calls. In this circumstance, we thought it important to provide our investors with this recent data point, which is directionally encouraging and correlates with changes we have implemented in our commercial organization. In January, we appointed Steve Meyers as our new Vice President of Sales. Steve joined the Flexion sales organization as a Regional Sales Director well before the launch of ZILRETTA and has rapidly risen through the ranks based on outstanding performance and leadership. He has deep knowledge of the buy and bill space, knows what good looks like, and is a dynamic and effective sales leader who has an innate ability to get the best from his team. In conjunction with his appointment,…

Thank you, Mike. With that, I'll first walk through the new metrics, and then I'll briefly cover the first quarter financials. To start, we appreciate that the lack of meaningful monthly prescription data from the usual third party sources may contribute to a sense of opacity when it comes to ZILRETTA sales and I want to reiterate Mike's earlier comment that we develop these metrics to provide better visibility and insights for our shareholders and analysts. Additionally, we did not develop these in isolation, and they reflect input that we've received from our investors and other stakeholders. That said, we expect that we will revise and refine these over time based on their utility. And we will continue to solicit and incorporate your feedback to the extent possible. So let me direct you to Slide 2, with some new key metrics that provide important context on the progress of the launch. As Mike mentioned, we had a solid first quarter with ZILRETTA net sales of $10.6 million in preliminary net sales of $5.1 million for the month of April. I'll provide further perspective on that in the following slide. We've historically reported the number of target accounts we have called on. This number has and will continue to grow incrementally as our sales reps broaden their reach. As of the end of the first quarter 2,247 of our 4100 target accounts or 55% had purchased ZILRETTA. We appreciate that this is a new metric so for comparison this is up from 1,837 accounts that had purchased as of December 31, 2018. Importantly, as of March 31, just over 1,600 accounts, or 71% of accounts that previously purchased ZILRETTA had placed at least one reorder. This is up from 1,276 accounts that had reordered ZILRETTA as of yearend 2018. We believe…

Thank you. That concludes our prepared remarks. We will now open the call for questions. [Operator Instructions] Our first question comes from David Maris with Wells Fargo Securities.

Hi. I jumped out a little bit late. So I don't know if you covered this. But on the new, on sales and when you were talking about the repeat users versus expansion of these, can you just describe of the sales increase that you'd expect for this year? Do you think it will come more from repeat uses of those that have already ordered or is this expansion of the user base? And also I don't know if you covered any - you mentioned about non-dilutive financing or alternative financing if need be? Did you mention anything about like non-dilutive financing vis-à-vis the partnership? Thank you.

So David, I'll take a shot at the first. And we expect, we're going to make our target this year through growth in both components, new and repeat users. We expect both expand and obviously we expect new users to become repeat users. So we think there's a large installed base of new users that will grow. And there will be additional new users that will get added to that. But there also are repeat users who have had the greatest experience with the product. And I would say like the most - as a result, the most reinforcing clinical experience with the product we fully expect will continue to grow additionally.

Yes. And I would just add to that, I mean, if you look at the metrics, David, there's approximately 2,000 purchasing accounts that - almost 2,000 that have purchased less than 50 units of ZILRETTA today. So there's a tremendous opportunity to really expand utilization at those accounts. And we're obviously very focused on that. Second question was on partnerships. Is that right?

Yeah.

So David, I think it's a topic of regular discussion. We are continuing to look at the possibility partnership outside the U.S. and we'll let you and the rest of the world know when they have has progressed the point of being signed.

Thank you.

Thank you.

Our next question comes from Randall Stanicky with RBC Capital Markets.

Great, thanks. Mike, the April $5.1 million sale, so I'm just going to get a lot of focus tomorrow, and it's a helpful metric. Can you just help us calibrate that? Is there anything that we should be thinking about either being pushed out of Q1 into April or can we think of that monthly number and the monthly numbers in general it's more linear in nature? And then I have a follow-up.

Yeah. We have seen steady growth from the first quarter into April and we think this is a quite natural extension of some of the changes that we've made and some of the new leadership Steve Meyers and his team and a heightened level and an even greater level of focus and accountability in the sales organization with appropriate support from other functions. So obviously I can't sit here and predict the future but I'll simply say it would be surprising if we saw anything other than continued growth in the quarter.

If I was to rephrase that generally the months are not lumpy. We generally see month over month growth, is at fair?

That's a fair characterization I know.

And Randal this is David. Let me also chime in here. As it relates to inventory at the distributors as we have talked about before, we target one to three weeks of inventory at the distributors. Those are the customers that we sell directly to within that one to three week range at the end of the year, at the end of the first quarter of this year and at the end of April as well. So we obviously monitor that, we manage that. And our contracts with those distributors stipulate that they need to be within those ranges.

Great. That's actually really helpful. And then Mike the follow-up for you we have talked about this in the past, but at some point when you look at the SG&A spend you're run rating it over $120 million now, all that's not selling expense obviously, but does it make sense to start thinking about in licensing additional products that could be brought in with little disruption to the sales force but add some sales leverage on top of that current commercial infrastructure? Thanks.

Yeah, Randall. It's a fair question and the bottom line is we are open to considering anything that makes sense to expand our commercial success. We want to balance that by ensuring that we do not in any way get distracted from the focus on ZILRETTA, we have a lot of work to do with ZILRETTA. We're encouraged about where we're headed, but we would be entirely open to the possibility that a commercial asset could make sense, but it would have to be a compelling opportunity I will just that. It would have to make sense holistically in terms of what it would cost in license weather it would cause a distraction and what the upside potential would be for the asset. So - yeah, please.

No presumably, this would be in the something that you would sell into the ortho channel is that right?

That would certainly make the most amount of sense because if you are not selling it in the ortho channel then it becomes even more of a distraction for the sales force or you have to create a different sales force which clearly would make to us less sense. At this point time anyway.

Thank you. Our next question comes from Elliot Wilbur with Raymond James.

Thanks, good afternoon. First question for Mike specifically with respect to your comments on the ongoing enrollment in the hip OA study. So in terms the inability to deliver in a certain subset of patients are those - I guess question's basically you know whose patients are so you're able to correct that issue fairly quickly or was this something in certain product lot that you just basically have to go out and discover exactly which patients receive these particular lots?

Yeah. I will just say this Elliot, we're highly confident that this is not a lot issue and the reason for that is we produce many, many lots we have not seen this commercial lots, obviously there is a clinical trial lot but there's still manufacturing site and manufacturing process is the same. We've not seen this in any of our knee studies or our commercial knee injections. So we're comfortable - we're going to look for every possibility but the likelihood that this is a manufacturing issue is extraordinarily low. Realize what happened was patient would - the injection would start into the hip, the injection would experience back pressure after ml or two, or three of injection and this is a 5 ml injections and got the back pressure became sufficient that it was impossible to complete the injection. This was - this happened without any adverse event or any symptoms. But obviously we need to get to the root cause in order to ensure that we're able to routinely administer ZILRETTA in the hip without difficulty that we can complete the study file and ultimately have commercial products. So there's a SWAT [ph] team in place, that is looking under every possibility, visiting the site, understanding the prep technique, understanding the administration technique realizes a danedar flouroscopy. So we're a full investigations underway and the study is paused until we have a root cause that can reassure us that going from we solve the problem.

Okay. And then follow-up questions for you Mike as well with respect to the recently disclosed unilateral data from the pivotal Phase 3, particularly thinking about the confirmation of a static benefit versus TCA. I think it was weeks four through 21, if I remember…

Right.

…correctly. I guess those of us who've followed you for a long time and known the Company for a long time. I mean, that seems like a very significant data point, I guess, in terms of some of the early development strategy and then some of market based reactions, some of the data that's been was disclosed kind of early on. Just curious how that data point has resonated with any payers and obviously clinicians that you've talked with about that?

So, Elliot, just to kind of frame this for those who may be less familiar come with the story than you and you've been with us for a long time. The full data set from the Phase 3 trial showed statistically significant and clinically significant separation, not only from placebo, but from the immediate release steroid and osteoarthritis specific measures of pain, stiffness function and quality of life. It did not - while we separate very nicely from placebo on the average daily pain measure a single question related to pain. We were numerically superior, but not statistically significantly superior from the immediate release steroid competitor. What - as we thought more about this and reflected on it. We can't appreciate that with a single question. The literature would suggest single question like ADP, the literature would suggest that it's an inherently less sensitive measure, one. And it's made even further less sensitive, why, by looking at patients who had bilateral knee pain, but by the design of the study only got injected in one knee, because when you're asking about knee pain, and you might have very good relief in one knee, but your - the knee pain in the other knee is not affected. That, not surprisingly, can confound your answer. So very logical way to interrogate that question is to look at patients who presented in the trial with only unilateral pain. And we think of the unilateral analysis is as unmasking as cleanly as possible the true benefit of ZILRETTA. And we see it is powerful, when you show physicians these data, they are invariably impressed. And we're in the process of sharing these data with payers also.

Okay, thanks. Just one last question for the team as a whole, I guess anything you could share with us in terms of significant or major changes to the overall marketing game plan that has occurred in light of some of the recent changes or have there been any…?

Yes, Elliot, I think that's going to be a stay tuned answer. We - I can tell you that we are aggressively reexamining all the assumptions that have gone into the marketing and sale of ZILRETTA. And we're encouraged by some potential new directions and at the right time, we'll be in a position to talk about them.

Alright. Thank you.

Thanks, Elliot.

Our next question comes from Gary Nachman with BMO Capital Markets.

Hi, guys. The new metrics are very helpful. So thanks for providing that. Regarding the number of accounts purchasing different numbers of units. Do you have a target that you're trying to reach, based on industry standards of what percentage of docs could end up being high volume users? Just any analogues to compare that to?

Gary, it is David, thanks for the question. The simple answer is that we don't. So we have 2200 accounts, roughly speaking 2200 accounts out of our target 4100 accounts that are purchasing. We are focused on really three things. That top section, those early adopters of approximately 300 accounts that are purchasing 50 units or more of increasing their utilization because we're confident that we're just scratching the surface with them. The accounts that are purchasing less than 50 units and there's almost 1700 of those our focus is there, because they're really just initial users is to continue to drive adoption at those accounts and really incorporate ZILRETTA into their practices. And then the third piece is adding new accounts. So 2200 accounts with a target of 4100. We've added 400 to 500 new purchasing accounts per quarter each last four quarters. We want to continue to add new accounts. So I realized it's a little bit of a roundabout answer. But we're pretty happy with where we are, I think we've shown good progression and we're really excited about building upon that.

Okay. And then the sampling that was at 10% about of unit volume, would you consider being even more aggressive than that to accelerate uptake, it looks like you got a positive return on that in the first quarter?

So as you can see how that progressed through 2018 clearly in the early part of 2018, it was much higher than 10%. And it ramped down over the year. Consistent with what we talked about as our philosophy around sampling which is - when we can make a sale we will. If we think that sampling can help drive initial use and familiarity and accelerate utilization of ZILRETTA, we will use samples to do that. We had an uptick in the first quarter of this year, really driven by the J code and the ability to access accounts we previously didn't have the ability to get to. So, we're just going to continue to appropriately manage the samples consistent with our philosophy of if we can make a sale, we will; if samples help, we will deploy them appropriately.

Okay. And last question for Mike. Of the remaining accounts that haven't yet purchased at all, how much of those are part of the consolidated practices that you've been talking about? And maybe just give us some commentary on if you've been able to get any more traction with those practices and if not how you plan on doing that over the course of the year? Thanks.

Yeah, it's a good question, Gary. I would say that there are parallels with large accounts in terms of the smaller accounts. What do I mean by that? It's a process. We have large - some very large accounts that are ordering and ordering aggressively. And we have a number of accounts that are in earlier stages. And that's true for the smaller accounts. So I think the way we think about this is that this is a continuum. And many of the considerations in getting lift in smaller accounts attend larger accounts, with the wrinkle, the wrinkle that there is more administrative, in general more administrative challenge, but we're pleased with the progress we're making. We're particularly pleased with the plans we have in place. And we fully expect that we're going to see continued progress in the larger accounts. And to say if we are scratching the surface overall we're even more superficially scratching the surface with those large accounts because the potential there is just enormous.

Okay. Actually, I want to also ask you quickly, has there been any turnover with the sales force since you announced some of the commercial changes?

No, we - and we made it - we went out of our way to say this in the press release, I actually believe that throughout the commercial organization, there's a renewed sense of future and energy and passion and sense of urgency. So, there's always going to be turnover in the sales force. There certainly was no blip up in sales force and turnover. And frankly, what turnover we've had in the sales force has been almost entirely a matter of accountability and lack of performance fit. So this is us more aggressively managing and ensuring that we have the very best most effective sales force out there.

Okay. Thanks.

Thank you.

Our next question comes from Patrick Trucchio with Berenberg Capital Markets.

Thanks, good evening. I have few follow-ups on the Phase 3 OA hip pain study. Just first, did anything change from the patient enrollment or baseline characteristics from the Phase 2 SHIP study to the Phase 3 study that could have contributed to the non-safety issue in the Phase 3 study? And then secondly, where there any issues with those thing in the SHIP study? And then I have a follow up on 201.

Yeah. Those are really excellent questions, Patrick, the simple answer to your first question is no, there were no changes in criteria entry, inclusion and exclusion criteria going from SHIP to the registration hip trial. And the answer to your second question is, we saw at one site two patients who had - in whom they was difficulty administering. As you might imagine, we went to extraordinary length to understand that. We thought we understood it adequately to initiate the hip trial, but now we see it - again it's in a handful of patients but it's across handful of sites and that has given us pause. So what we thought we understood is a root cause coming out of SHIP study it was only two patients out of the entire study turned out not to be the root cause and that's what's pushing us to take a step back and sure we understand this completely.

Got it. And then just regarding FX201, first, can you discuss the mechanism of IL-1Ra and its role in the pathogenesis of OA knee? And then secondly, assuming we have a successful completion of the top studies IND filing is on schedule. When one in the second half could we expect the Phase 1 trial to initiate and how many patients will this trial enroll, how soon would you anticipate topline data from the study?

Well, okay. All good questions. Let me just start Scott is furiously writing to make sure we don't miss any of them. First on IL-1Ra, so this gene therapy makes IL-1Ra under the control of the information sensitive promoter. So you reject the viral particles into the knee taken up by the cells lining of the knee, the DNA strands that are contained within the viral particles are ultimately end up in the nucleus and they take the cell machinery and convert it to the production of IL-1Ra. IL-1Ra is interleukin one receptor antagonist. It's a small, relatively small 19,000 molecular weight endogenous protein that we all have in our bodies. And as opposed to the monoclonal antibodies that might block the receptor or block one of IL-1 alpha or IL-1 beta. IL-1Ra blocks both receptors, so blocks at receptor levels, so both IL-1 alpha and IL-1 beta are blocked. The data on IL-1Ra having efficacy beyond preclinical because the preclinical data are striking. IL-1Ra is a marketed product Anakinra or Kineret. And when that product, that protein has been injected into the knees of patients who have osteoarthritis, what you see is a very nice pain relief signal, but its transient, as a protein is free to leave the knee, which it does very rapidly. So we're solving for persistence of therapeutic protein levels in this case with an approach that is in essence on-demand anti-inflammatory effect. So when the viruses take up residence and there's information present the DNA is turned on and makes IL-1Ra suppresses the information, turns off production of a proteins. We have very strong preclinical data on persistence of production after single injection, very strong efficacy data preclinically. We're very pleased with the clinical data that provides validation and in a large animal model, preclinically, we see which is the most validated model for disease progression, we see substantial modulation of disease progression. So we are very enthusiastic about the potential for this product make a difference at all about the data. When will we enroll? How many patients? And how soon could we have the data? Well, we - I'm just going to continue to guide to what we said, Pat, we're going to assuming supportive preclinical day talks data. We will submit this application with IND in the second half of this year. And we will enroll starting 30 days after that. We're not guiding to a more specific timeline. I would say stay tuned there because it won't be long before we have a better understanding about the preclinical data telling us and we'll be able to provide a more granular timeline.

That's helpful. Thank you.

Thank you.

Our next question comes from Serge Belanger of Needham.

Hey, guys. Thanks for squeezing me in. And I apologize if these questions have been asked. So in terms of retreatments and reimbursements. Do you guys have a good read of how many patients are getting retreated? And do you see reimbursement as an issue? And has it been increasing with the publication of the repeat dose studies?

Yes. So we don't have hard numbers on retreated patients Serge. We - and again all we have are anecdotes because very difficult to track at the patient level. But we have heard many stories of patients being rejected not just one, second time but a third and a fourth time. So - and reimbursement, to be clear is straightforward from Medicare and consistent. And the vast majority of commercial lines are also covered without restricted policy for a second injection. So having said that, we remain committed to the removal of the LOU, because the LOU creates confusion, and there's no need for it, particularly in the phase of the reassuring repeat dose data that we have.

Got you. And the Phase 2 shoulder trials, how's the preparation on those coming along? And are they going to be running separately or concurrently with the frozen shoulder trial?

Yes. So the way we're thinking about is that we expect to initiate both shoulder OA and frozen shoulder in the second half of this year. And we expect that it will be running concurrently.

Okay. Thank you.

Thank you.

Our next question comes from Francois Brisebois with Laidlaw.

Hi, thanks for squeezing me in too. Just quickly here. I was just wondering where - from all the metrics that you're giving, obviously so far, we have to track these. But does it change your strategy of going after the high prescribers or just going after all the accounts? And why is that 50 units per account, how was that number chosen, the 50?

Yes, so this is David. Frank, how are you? Let me address the second part of your question first. So just really given where we are in the launch, we determined that 50 unit break point made sense. Clearly, overtime, we will consider revising that and bumping that up as appropriate, but we felt it was a - it provide a good way of additional visibility insights at this point.

Okay, great. And then, I guess, just quickly, I think obviously that unilateral look is very interesting to get a real feel for the drug. But can you break down what you think the population is? The proportion of people that have unilateral pain versus bilateral?

Yes, we can do that Frank. But I just want to start out by saying. I don't want anyone on this call to think that the unilateral data suggests that this product should only be used in the unilateral patients, because the whole point of the analysis was that by removing patients with bilateral knee pain, who were only injected unilaterally, you remove a contaminating - a confounding factor for understanding the effect of the drug. So we believe this approach was a way of more clearly understanding ZILRETTA effect without the complicating factor of a patient potentially reporting on pain in the uninjected knee, because it had bilateral knee pain. So just to be clear this - we certainly see this as an approach to better understanding what the data are telling us. It turns out that - but to answer your specific question, 40% of an all commerce population have unilateral disease and about 60% will have bilateral disease. But what I'm trying to go to great lengths to say is we don't think that's terribly relevant because what the unilateral data tell us is the impact of the drug without confounders.

Okay, great. And just quickly here. It turns - congrats, this April $5 million is great, can you remind us of your thoughts on seasonality here as we enter the second half [ph]?

Yeah. There is seasonality. And David is our seasonality maid. So I will turn it over to him.

Thanks, Mike. Thanks, Franc. So I think one way to look at that is to look at HA or hyaluronic acid products and how they track throughout the year just to give some flavor. So historically with those products, you see declines of about 10% in Q1 units versus Q4. And that's due to seasonality, it's due to stocking and it's due to contracting. I think the point though, however, is ZILRETTA is in a different place. We're still ramping and we believe that the 11% growth in sales Q1 over Q4 was solid so we're pleased with that.

Okay. Great. That's it for me. Thank you.

Thanks Franc.

Our next question comes from Bruce Jackson with Benchmark Company.

Hi. Thanks for taking the question. With regard to that the J-code implementation, there was some question about how quickly the physician practices could be set up on the new J-codes and I was curious to know if it's taking longer, shorter or if the time you spent as expected and has the availability of the new J-code help you in new accounts.

I think the way to think about this Bruce, just I will try to answer your question, you can let me know whether I am. Once you have a permanent J-code completing the reimbursement, the insurance forms becomes much more straightforward and more importantly the reimbursement itself becomes more reliable and much faster because it's - when you are just putting J3304 in the form as opposed to filling a box with verbiage that's a straightforward path. And these - once you're in J-code their claims can be electronically adjudicated which underlies the speed and consistency of reimbursement. The way we have portrayed the impact of the J-code on, improve sales performances for a number of practices having a permanent J-code was an absolute requirement for us to begin the sales cycle. And that is certainly well underway, sales cycle their given institutions at varying lengths. And while we believe to see some effect of that permanent J code, there is going to be process that will play out quite naturally over many months.

Okay. That's it for me. Thank you.

Thank you.

And there are no additional questions at this time. I would like to turn the call back over to Mike for closing comments.

Yeah. I will just say thanks everybody for your time and attention. We continue to be very bullish about where we are and where we're headed. We have a lot of work to do and we're committed to doing. And we look forward to updating you on our next earnings call. Thanks.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.