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. At this time, all participants are in a listen-only mode. [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. 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 this 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 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 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.

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 will 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 will 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 marks 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 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…

Thank you, Mike. I will 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 will 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 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 had placed reorders by the end of the first quarter. This is highly encouraging that it demonstrates that nearly three out of every four purchasing accounts that 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 two 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…

Thank you. This concludes our prepared remarks. We will now open the call for questions. [Operator Instructions] And our first question will come from the line of Randall Stanicky with RBC Capital Markets. Your line is now open.

Hey, guys. This is [indiscernible] on for Randall. I’ve a couple of questions on ZILRETTA to start and then a follow-up on FX201. But first on ZILRETTA, you’re clearly making progress bringing new accounts on board, but for those accounts that have yet to purchase ZILRETTA, can you discuss the primary factors preventing them from doing so? And second, it might still be a bit earlier, 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?

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're 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, so just that in fact progress is real. As it relates to the DTC, we're not going to speak about the data from those at this point. We may at some point in future, but not now. And then …

Patient advocacy.

… in terms of patient -- we believe patient advocacy is an important element in the ultimate success story of ZILRETTA and realizing our full potential. We are devoting substantial resources to patient advocacy and I would say stay tuned because there may be an opportunity to do even more there.

Okay. That’s helpful. And just a two-part follow-up on FX201. Part one, assuming it moves dependent of 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 two, I think when a lot of people heard 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 costs associated with the Phase 1 and subsequent trials over the next couple of years assuming that program is forward?

Well, just I will start and David can add as he would like. We're 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 potential -- potentially disease modification. As it relates to expense, yes, totally -- yes, 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 MLs 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 will have to show this, will be literally orders of magnitude below what would be required with systemic therapy. And as a result, the cons associated with producing relevant doses are going to be substantially less than from any other therapies and the driver to the expense of clinical trials in this space is predominantly COGS drivers. And as a result, we believe that we can cost-effectively develop FX201 to the point of proof-of-concept and beyond.

Great. That’s helpful. Thank you.

Yes.

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

Hi. Good evening. It's Rolfe on for Gary. What drove the strong gross margin in the quarter and how sustainable is that?

Sorry, say that again.

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

Yes. So 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%. We’ve been -- I think we’ve been very clear that there is inherent variability in our cost of sales as its still relatively early days from a manufacturing standpoint. Once we reach manufacturing steady-state, then we think we are going to have consistent gross margins in the 90% range. So, you will continue -- we will continue to experience some variability in the ensuing quarters until we achieve that steady-state.

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

Sorry, changes at the commercial team is implemented since the organizational changes. Well, so I would 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 in the sales leadership and particularly its done a nice job of ensuring we’ve the very best people in place to accomplish the strongest goals, and I think 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 sales people are NBMs 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.

Great. Thanks so much.

Yes.

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

Hey, it's Elliot Wilbur on for Elliot Wilbur. 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 your 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?

Yes. So, 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 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 and 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 small clinical study to convince ourselves that there is an injection approach that will allow routinely administer it -- 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 lend itself to more straightforward injection than the anatomy of the hip. So -- and so there is no plan to change the dose. We will inject or intend in the protocol dictates that we will inject a full 32 milligram dose of ZILRETTA in shoulder for both adhesive capsulitis and osteoarthritis.

Okay. Thanks. And just a couple of follow-up questions in ZILRETTA. Commercial activities with respect to the increase in targeted accounts I think 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 newer accounts, whether it is founded -- its been incrementally easier just based on market experience to date, but anything you could share there in terms of success at these particular accounts will be helpful.

Yes, I would say, Elliot, its 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 new accounts -- newly penetrated accounts came from the expansion of the base of total accounts.

And I would just add, I mean, 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 almost -- I mean, approximately a 50% increase. On top of that, the number of units on average at those accounts in that 50 units or more bucket had purchase increase from a 120 units to 136 units in the second quarter. So we're seeing both an increase in higher purchasing accounts in a number of those accounts and their utilization in the second quarter which is [technical difficulty] about that.

Thanks. I want to ask you one follow-up question around that, David, as well I know this is probably a difficult data point 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?

Yes, 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's tremendous opportunity even with those and there's 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.

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

Hi. Good afternoon. This is actually [indiscernible] 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’ve received? And then I have a couple follow-up questions. Thanks.

Yes, so we’re not getting into detail about the work, hypothesis. I just simply state that the laboratory simulations allowed us to understand the relationship of injection in the hip have 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 issues associated with this inability to deliver a full dose and a handful of patients. There was no need for FDA in traction.

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 top line data and submission of supplement NDA? And then finally, can you explain to us the PO dynamics with the OA hip label expansion as in would you need a separate J code for OA hip or with the existing J code [indiscernible] indication as well? Thank you.

Yes, so as we mentioned earlier in the Q&A, we are going to take the hip study genetics stepwise. Let's first be sure we have confidence that we can inject a full dose at that point and we are not giving you a timeline for that. But at that point, we will reinitiate the 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.

Okay. Thank you.

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

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?

Yes, we're not -- Serge, we are very pleased with the progress throughout the quarter. We're not going to continually talk about quarter-over-quarter sales. We are 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 and in fact we were headed in 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.

Seasonality?

Seasonality, sorry.

I can take that.

Yes, please.

Yes. So, Serge, as you can appreciate ZILRETTA sales are increasing. We anticipate quarter-over-quarter growth throughout the year, and -- 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.

Okay. Thanks. And then on -- 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?

Yes, I would 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 will let David answer the question on contract.

Yes, so with respect to contracting that relates to agreements such as purchase arrangements with GPLs for example, as you’re going to 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. So we put in place and appreciate that we are 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.

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

Yes. So, yes, we appreciate that we shared that information in the slides. Last quarter we didn't this time because it's -- 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 are going to make the sale and we’re going to use samples to facilitate adoption or utilization.

Great. All right. Thank you.

Thank you.

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

Hey, guys. Thanks for taking the questions. Congrats on the quarter. Just a couple here. You talked about a lot of the metrics just around the sampling, with Serge and Elliot, but I was wondering from your perspective what if you guys wanted 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, may be switching the 1 to 10, or 11 to 50 or should they be pretty consistent for the quarters to come.

Yes. I think this is a good base set of metrics in this -- at this juncture. As you indicated and as we indicated, we drop 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 breakpoints going forward. And in our fairness we will reevaluate the metrics on a regular basis. So, if we feel like there's limited utility and including particular metrics down the road because there's nothing meaningful coming out of it, we will modify accordingly. But we feel good about the metrics that we have right now.

Okay, great. And I was just wondering if -- through a couple of years of launch share. 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’s the drug actually works. Are you guys seeing any change in that or you expecting this 1.5 to actually increase.

Yes, it's difficult to say, Frank, but I think that it's -- it is fair to say that once the limitation of use is removed we will 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 media release steroid population, realized at 60% of those patients are one and done. So the 1.5 injections are concentrated in the 40% of patients who have a satisfactory response in terms of magnitude and duration. It would not be logical to expect that was on the radar providing better and longer pain relief that the incentives 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 limitation of uses removed.

Understood. Okay. It makes sense. And then lastly, just in your search for the -- a new Chief Commercial Officer, are you looking as one of the checkbox to look for someone with x U.S experience. So should we more expect kind of a partnership or I guess how long to do this launch go for us to start thinking about the potential outside the U.S.

Well, I would say this Frank, what’s top of mind for us is an outstanding commercial leader who is done it, who is being successful and leads with U.S experience. This is a U.S launch for the time being at least. We believe 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 way preclude the potential for going outside of the U.S. at the right time top of mind for us, so it's the U.S.

All right. Thank you, guys. That’s it for me.

Thank you.

Thank you. There are no additional questions.

Well, thanks vey muck everybody for your time and attention. I appreciate the good questions and we look forward to reporting back to you our hard third quarter results in -- sometime in November? Take care.

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.