Good afternoon, ladies and gentlemen, and welcome to the Flexion Therapeutics' First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. 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 Scott Young, Flexion's Vice President of Corporate Communications and Investor Relations.

Good afternoon. A short while ago, we issued a press release announcing our Q1 2021 financial results. In addition, today, we are introducing refreshed metrics to provide increased visibility and insights into the commercial performance of ZILRETTA. Our earnings press release and the commercial metrics slide can be found under the Investors tab on the company Web site, and a replay of this call will be accessible there shortly after its conclusion. Today's discussion will be led by Flexion's Chief Executive Officer, Dr. Michael Clayman; and he's joined by Melissa Layman, Flexion's Chief Commercial Officer; and David Arkowitz, Flexion's Chief Financial Officer. On today's teleconference, we will be making statements relating to future financial and business performance, market conditions, strategies and other business matters, including expectations regarding revenue, cash utilization, clinical, regulatory and commercial developments and anticipated milestones, which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to various assumptions, risks and uncertainties, which change over time. And such statements speak only as of the date of this call. Additional information on the factors and risks that could affect Flexion's business, financial conditions and results of operations are contained in Flexion's filings with the SEC as well as on Flexion's Web site. I will now turn the call over to Mike Clayman.

Thanks, Scott, and thank you all for joining. In April, we pre-announced preliminary net ZILRETTA sales of $24.6 million for the first quarter of 2021. And in this afternoon's press release, we confirmed those results and reiterated our full-year net sales guidance of $120 million the $130 million. On today's call, we will provide an update on our commercial progress, and walk through the refreshed commercial metrics that Scott mentioned. In addition, I'll share updates on our pipeline programs, and then we will recap our first quarter financial results. However, I would like to first discuss an important personnel update. As you all know, David Arkowitz has capably served as our Chief Financial Officer, since May of 2018. And I was truly disappointed when he recently informed me of his decision to leave the company to pursue new opportunities. David has been a key member of our senior management team, and I'm very grateful for all of his contributions throughout the past few years. I know I speak for our entire organization in wishing him continued success as he embarks on a new phase of his career. I'll look to him to share some additional color on his decision when he provides the financial update. While we will miss David's leadership, I'm tremendously pleased to announce that Fred Driscoll will be stepping in as David's successor. Fred was our Chief Financial Officer, beginning in 2013, led us through our IPO, in 2014, and was at the financial helm at the launch of ZILRETTA. With that as backdrop, Fred is uniquely qualified for this important role. He possesses an intimate knowledge of our organization and a deep understanding of ZILRETTA's value proposition, and we are fortunate to have him back. Fred and David will be working together in the coming weeks…

Thank you, Mike. Well, it has only been a few weeks since our last update. In that time, we held a virtual national sales meeting, where we focused on our strategic priorities, and rolled out a number of new supporting tools, all of which was met with great enthusiasm by the entirety of our sales organization. Access to these new tools, in conjunction with the return to pre-COVID field travel levels, has resulted in a level of focus and excitement that I have to say is unprecedented within my tenure here at Flexion. And we believe will serve as an impetus for potentially growing our business in 2021 and beyond, allowing for increasing numbers of patients to experience the impact that ZILRETTA can have in managing their knee OA pain. As we discussed on our last call, we have three strategic priorities. First, positioning in market segmentation; second, pricing and physician reimbursement; and third, amplification of the patient voice. And I can say that following our recent meeting, our entire commercial organization is hyper-focused on executing against each of them. Regarding our commercial metrics, we've been providing the same metrics for the past several years. Now that we have more than three years in market, we believe that this is the right time to introduce revised commercial metrics that can provide greater and more meaningful visibility into our commercial performance. Historically, we have presented a cumulative view providing utilization spanning back to the earliest days of launch. Since comparison to our early days on market are no longer as relevant as they once were. Our revised metrics, among other things provide views of the latest performance on a more current quarterly basis. At this point, I'll walk through the refresh metrics that we introduced today. Starting with slide two, we're…

Thanks, Melissa. As Mike mentioned, ZILRETTA net sales in the first quarter were $24.6 million, which reflects a gross to net reduction of 18%. This reduction includes rebates to healthcare providers that are very bold and based on the volume of product purchased. We reported net loss of 28.6 million for the first quarter of 2021 compared to a net loss of $36.8 million for the same period of 2020. Costs of sales were $6.1 million, and $2.3 million for the three months ended March 31, 2021 and 2020 respectively. Research and Development expenses were $14 million and $21.1 million for the three months ended March 31, 2021 and 2020 respectively. The decreases in R&D expenses of $7.1 million was primarily due to a decrease of $3.6 million in development expenses for ZILRETTA due to a reduction in lifecycle management activities, a decrease of $2.2 million related to FX 201 program costs largely due to the 2.5 million milestone payment for the first human patient in the phase one clinical trial, which occurred in the first quarter of 2020 as well as a decrease of $3.4 million in salary and other employee related costs. Decreases were partially offset by an increase of $2.4 million expenses to FX 301 due to the achievement of certain development milestones, specifically the clearing of the IND by the FDA and the initiation of the Phase 1b clinical trial, both of which occurred in the first quarter of 2021. Selling, general and administrative expenses were $27.6 million and $29.3 million for the three months ended March 31, 2021 and 2020 respectively. Selling expenses were $19.1 million and $20.5 million for the three months ended March 31, 2021 and 2020 respectably. The year-over-year decrease in selling expenses of $1.4 million was primarily because the majority of…

Thank you, David, and thank you for all of your hard work over the past few years. We have made tremendous progress during your tenure, and we deeply appreciate all that you have done, while David's tenure is coming to a close a new chapter in Fred Driscoll's career at Flexion is just beginning. And at this point, I would invite Fred to make a few remarks. Fred?

Thanks, Mike. It's a real pleasure to be on the call today, and I'm extremely excited to be rejoining the company. Since my retirement, I have been closely following Flexion's progress. So, red is ramp, and the addition of two potentially transformative pipeline drug candidates. In the last few years, the company has evolved into a significant player in the musculoskeletal space and the importance of its mission and the impact of ZILRETTA has only grown. I should David's view of Flexion's future. I firmly believe that with this product it's winning commercial strategy and the passionate people who make Flexion such a remarkable organization. The opportunity ahead of us is tremendous and I am thrilled to be back.

Thanks, Fred. And welcome back. Before I hand it over to the operator for Q&A, I would briefly summarize the first quarter as one of progress, building momentum and optimism about the improvements we are seeing across the nation. As Melissa mentioned, the energy in the field is at an all-time high. Our confidence in ZILRETTA's potential has never been greater. Our pipeline continues to advance and we have a tremendous management team in place. Those are all the ingredients needed for a very bright future. And I know that each and every individual inflection is committed to realizing it. Thank you. At this point, I would ask the operator to open up the line for Q&A.

Thank you [Operator Instructions] Our first question comes from the line of Elliot Wilbur of Raymond James. Your line is open.

Thank you, good afternoon. First question for Mike, just a point of clarification on the 201 study protocol, does any SAE trigger a stoppage of the trial and review by the DSMC or just certain events?

Elliot, the simple answer is yes. Any SAE is a first time this vector had been injected into the knee joint out of an abundance of caution, the FDA really strongly pushed in that direction because sometimes determinations of relatedness by investigators might get called into question after subsequent review. And in this case, we were asked to take what I'll call, built-in suspenders approach. So, any SAE would have triggered the cascade that was seen with this as a study pause -- investigator determination study pause DMC review FDA ultimately green light, and that's how it worked at this time. And it would be the case for anything that is an SAE.

Okay. And now that the initial data has been presented, can you just maybe describe for us some of the feedback, perspectives that you've received within the clinical community and maybe some of the important takeaways and subtleties that maybe just aren't so obvious in the post or abstract itself?

Yes, Elliot, I would say this. There's tremendous enthusiasm in many circles for the potential for FX201. The data that we presented at ASGCT was the low-dose cohort. It's still preliminary, it's not fully mature. And I think that people are looking to see not only what we have with the low-dose cohort, which has some promise in it as delineated, and we went through that in this script. But also to see what happens with the mid and high-dose cohort, especially over time. So, I think it's just early. I think there are a lot of people who are keenly interested in this gene therapy approach in this specific vector, and are hungry for additional data. And we're eager to share that, all those data at the right time.

Okay. And just the last question here, understand there's only a sample size of five, so obviously teasing out efficacy data is incredibly difficult. But just in terms of thinking about the clinical benefit of the product, I mean you had two patients that basically, I think, responded all the way out to 24 weeks, and then several where we saw 30% reduction and 50% reduction for longer periods of time.

Yes.

I guess how do you think about sort of what's clinically meaningful here in the context of a reduction from baseline versus the duration of effect? Because it seems like there were some patients where maybe the reduction wasn't as great but you had benefit out to, I think it was, I can't remember, 38 weeks maybe at the end.

Yes. Yes, well, we have to have both. We have to have magnitude of effect, and we have to have durability out to -- I mean our product profile says meaningful decreases in pain and improvements in function for at least six to 12 months. And certainly it would have to be at least 30%, and frankly ideally much closer to 50%.

Okay, I'll jump back in the queue. Thank you.

Thanks, Elliot.

Thank you. Our next question comes from the line of Madhu Kumar of Goldman Sachs. Your line is open.

Hey, guys, thanks for taking our questions. So, thinking about FX201 and the index-knee [AE you got,] [Ph] could you give us a little more granularity on kind of what happened in those index-knee AE, which patients they were in as much as you can kind of give us in terms of information? And then kind of stepping back from that, what do you think is an acceptable tolerability profile for a knee OA gene therapy drug given what you've seen so far, particularly in terms index-knee [OA] [Ph] from the trial?

Yes, well, these were adverse events in two out of five patients in the low-dose cohort that played out over the course of days or weeks. They're -- as you know, they were Grade 2, so they were not moderate-to-severe, and they resolved with conservative treatment. I think we're going to have to look at what the data tell us, Madhu, in terms of efficacy balanced by, in this case, modest and judged to be tolerable AE. So, I think it's really way premature for us to say chapter and verse on exactly what the equation will look like. Clearly, the more tolerable this product is the better. But everything is benefit-risk, and if there's extraordinary benefit that would balance out to some extent some degree of local adverse event if that should persist. But I don't want to be in the mode of speculating in the absence of the data.

Okay, well then to the end, the patients who had the index-knee AEs, were they patients who didn't achieve the 50% reduction? Like how should we sort out kind of which patients had these AE events compared to the patients who received benefit…

Yes, we've not -- yes, it's a great question, Madhu. We've not publicly disclosed that. And that's not something we're prepared to talk about. But we will absolutely be transparent with those data at the right time.

Okay, great. Thanks very much.

Thank you. Our next question comes from Serge Belanger of Needham & Company. Your line is open.

Hey, good afternoon. I guess my first question, to Mike or Melissa, have you completed other spot surveys with your group of orthopedists since we last spoke, just to give us an idea if we're seeing improvements in patient volumes in the early part of the second quarter? And then second question just a bookkeeping one for David. Since you've restarted manufacturing in the fourth quarter, are we now reaching steady state levels of COGS or should we still expect to see some variability in the second quarter? Thanks.

Melissa, do you want to take that first question?

Sure, yes, I can take the first one. So, the last time that we checked in on patient flows to practices was on near the end of February. And we have heard no change in some one-off conversations with practices as well as with our field leadership team that patient flows remain at around 80% of pre-COVID levels. And when we did that check-in, back in February, we also asked a panel of 30 or so orthopedists how long they expected that to remain. And they had said they thought it would carry through to at least the middle part of this year.

Yes, hey, Serge, it's David, on your question about COGS. So, as I had said previously, we were expecting to get back to kind of normalized pre-COVID gross margin percentage levels this year. First quarter gross margin percentage was 75%, a bit lower than what we'd anticipated. We expect that to improve during this year, but to continue to have a certain level of inherent operational and cost variability as we are ramping up. Beyond this year, I think that's when we start thinking about steady state, and getting to a target gross margin percentage of around 90%.

Thanks. Best of luck, David.

Thanks, Serge.

Thank you. Our next question comes from Gary Nachman of BMO Capital Markets. Your line is open.

Hi. This is Evan Hua on in for Gary. Thanks for taking my question. First, based on the initial cut of low-dose data, is there any modifications you're able to implement, so different other cohorts for the remainder of the trial? And secondly, for ZILRETTA, where are the sales reps now in terms of face-to-face interactions with physicians? Is there any modifications you plan on doing either to the sales force or the target positions? Thanks.

So, I'll answer the first question. Melissa, obviously, will take the second. But just if you would clarify for me, what kinds of modifications are you asking about?

I guess, in terms of the safety and any ways to -- and as far as dosing frequency or just -- anyways…

Yes, I would say this. Based on the very mild nature of these As in the low-dose cohort, there would not be a compelling reason to modify the protocol. Obviously, what we will do is look at the entire dataset, low, mid, and high-dose and ensure that we're doing what's right for patients and for the product. So, there's certainly nothing I can tell you with confidence that there's nothing in this dataset that would have pushed us to consider a modification protocol.

And with regard to the second question around the degree to which our sales force is back to face-to-face interactions with our customers, I would say sort of what I've said previously, which is that across all of our hundred or so MBM territories, our reps are able to see some percentage of their customers. In some cases all of their customers and in some cases, 60%, 70%, 80% of their customers in terms of face-to-face office visits. And that's just based on what individual practice policies are in the moment with regard to allowing industry visits to come back. And with regard to the second part of your question around any foreseeable changes to the sales force, we're still in the process of synthesizing our findings relative to our optimized footprint. I would simply say at this time, we don't anticipate any material changes to the size of our sales organization; more to come on that.

Thank you.

Thank you. Our next question comes from Patrick Trucchio of H.C. Wainwright. Please go ahead.

Hi, good afternoon, and congrats on all the progress read on the pipeline. I'm wondering should we think of the regulatory bar for approval of a gene therapy treatment such as FX201, has been consistent with the updated guidance FDA has provided on disease modifying OA drugs, and if it is, can you discuss your level of confidence that 201 could demonstrate a benefit on both the pain scores as well as disease modification? And then related to the disease modification, how would you be measuring or evaluating disease modification in the current trial underway or in a larger Phase 1 trial? I have a follow-up.

Pat, thanks very much for those questions, they're good questions. I think it's fair to say that there is far from clear understanding of what the agency will accept for disease modification. The guidance is pretty high-level. And we are capturing X-ray and MRI data, but the key thing is to have a validated endpoint from the imaging studies that one can hang their hat on, that will be endorsed by the FDA. And I'd say that's very much in front of us. We are particularly interested in durability and magnitude of pain relief and functional improvement. And that if we get at least six to 12 months of that, of meaningful improvements in those domains, that will be enormous. Icing on the cake would be evidence of disease modification. And I know you know this, Pat, but I'll just kind of point out that patients make the decision to get their knee replaced, patients with advanced OA, which are patients with advanced pain and functional compromise make the decision to get their knee replaced, not because of an imaging study. They get the decision to get their knee replaced based on the fact that they can't leave the lives they want to live, and have pain that's refractory available therapeutics. So from our perspective, being able to hit on both of those cylinders, pain and function, would provide tremendous benefit to patients, and have the great potential, the potential to not have those patients, need to make a decision about knee replacement as soon as they might otherwise. Again, this is all in front of us. We have to generate the data, but the logic that hangs together here is around symptom improvement as a prelude to delaying the need to make a decision for total knee replacement.

Yes. That's helpful. Thank you very much.

Thanks, Pat.

Thank you. Our next question comes from François Brisebois of Oppenheimer. Your line is open. François Brisebois: Hi, thanks for taking the questions and best of luck David on the next job. I was just wondering Melissa, in terms of the new metrics here, is there a particular reason for the order that they're presented in, and on slide five, I guess the purchase accounts to go 100 up to 300 and more, is there kind of a maximum threshold where you think accounts can only purchase a certain amount of units per quarter?

No intention behind the order of the slides. Just kind of thought that the summary slide up front followed by revenue performance and demand performance, and then sort of a breakdown of where our demand performance came from seemed logical. And with regards to do we think there's sort of a ceiling on penetration at the account level, we don't and certainly there's not one insight today. I think that even among our highest using customers, we continue to believe that we've only scratched the surface with the opportunity within a given HCP patient population, but also across practices, patient types. François Brisebois: Okay, great. And then Mike, in terms of the WOMAC-A score, can you just remind us, I think, back a few years ago, you had shown some serious improvement in both in all three WOMAC-A, B and C. So I was just wondering why on the show WOMAC-A, is there a reason here?

Well, we were particularly focused on pain and function and KOOS has an instrument actually encompasses WOMAC-C the function domain for WOMAC, and asks questions beyond that. It's a very, it's a instrument that's very familiar to orthopaedic community. And we made the decision to use that this time around as maybe even a more robust characterization of functional improvement. François Brisebois: Okay, great. And then just lastly on gene therapy, is there sometimes people think about astronomical costs here, can you just remind us why it might be a lot less expensive here sort of OA, if any?

Yes, I mean, because we're injecting locally and we're asking the vector to produce sufficient protein to achieve a therapeutic concentration in five MLs, I mean basically, a teaspoon full worth or about that anyway, a very small volume. It is if you compare that to the volume of the intravascular space, the blood volume that's about 6,000 ML. So this is three orders of magnitude less. So you can dose down proportionately to achieve the therapeutic concentration in the drawing. And by dosing down, your COGS are less challenging and that creates pricing latitude that will allow you to charge a price that will be consistent with deriving value for the product, but will not be astronomical. François Brisebois: Okay, great. And would someone, if six months their ability was shown, why would someone choose ZILRETTA over this? Is there any reason to or are they?

Yes, we get asked this a lot Frank, and it's a fair question. What you get with ZILRETTA is you get highly reliable, pain relief for three months, four months and 93% by our own data, 93% of patients respond to ZILRETTA. That's pretty remarkable. And so for a person who is entering ski season, or is going on a trip somewhere, and wants to have that reliable pain relief, and knows that it's going to kick in, within a matter of days, ZILRETTA will be in my humble opinion, I expect ZILRETTA will be, continue to be the tried and true therapeutic that will address that need for someone who has different circumstances and wants to have a longer pain relief. So, what we have in front of us is how, what the magnitude will be and how durable it will be and how expensive it will be. And all those factors have to be put together in an equation that patient and physician decide on. But I can't, given the unmet medical need here, Frank, let's pull way up 8 million knee injections a year. And many, many patients over a million patients going to total knee replacement a year, the unmet medical need is vast and the field needs multiple effective therapies. François Brisebois: Okay, great. Thank you very much.

Thank you.

Thank you. Our next question comes from Carl Byrnes of Northland Capital Management. Your line is open.

Great, thank you. Congratulations on the progress. Looking at the demand being up 6% sequentially in the fourth quarter despite the challenges of COVID and power outages, extended power outage that is in Texas and the deductible GAAP which you also get in the first quarter, do you have any sort of visibility or read into what the pent-up demand of these anomalies might be? Thanks.

It's a great question. I don't know that I would characterize it necessarily as pent-up demand, I think it's probably a combination of the reflection of us being back out there in fuller force, practices, catching up with their own patient populations that maybe, they've been seen to a lesser degree in the quarters proceeding Q1, and just continued improvement with regard to our sales effort, our blocking and tackling at the account level.

Great, thank you.

Our next question comes from Daniel Busb of RBC Capital Markets. Your line is open.

Hi, everyone. I have a couple questions on the commercial metrics that you disclosed today. First, if we look at the old commercial metrics, I think around 4,400 total accounts had purchased ZILRETTA since launch. But if I look at the slides today, only about 2,000 accounts purchased it during the first quarter. Can you help reconcile those two numbers for us? How much of the difference is accounted for by variability and the timing of orders versus accounts that have tried ZILRETTA but are no longer using it? Second, it looks like roughly 12.5% of all ZILRETTA demand in the first quarter came from your Top 15 accounts. Is there anything unique or different about those accounts that explains the large order sizes? Just trying to tease out whether that's an achievable target for what may be a more typical account? Thank you.

Both great questions. So I think the difference between what you saw in terms of cumulative accounts purchasing to-date versus the 2044 that purchased in Q1 is 100% what you've suggested, which is just a difference in the timing, within a quarter when an account might make their purchases, and they may be purchasing based on when they might have, wanting to sort of shore up their access to rebating. It may have more to do with just the way that their patients are flowing. But I don't think that there is anything else that connects or disconnects the total number of cumulative accounts purchasing with those that purchased in Q1. With regard to your second question about the percentage of our accounts that purchased in Q1, in the top tiers, no, we actually, we looked at this data, a bunch of different ways. And got to the conclusion, as I stated in my prepared remarks that among those 99 accounts that comprise the top two tiers of purchasers in the first quarter, our penetration rate could be as high as 60 plus percent. I think we look at that as a potential model for where we can go with some more significant proportion of our accounts in the event that we're able to apply the same level of voice and intensity around a broader base of accounts, the way that we have with those 99 accounts that today sits in the top two tiers for first quarter purchasing.

Okay, and if I could ask a quick follow-up, are those top 99 accounts, they tend to be larger than your average account?

It's really across the board in terms of the number of docs, the number of patients that they see the size of the opportunity. There's no sort of unique or set of unique characteristics that tie those 99 accounts together.

Got it. Appreciate the color.

Thank you. Our next question comes from Bruce Jackson of The Benchmark Company. Your line is open.

Good afternoon, and thanks for taking my questions. So for Melissa, a couple of quarters ago, you were talking about the increase in the backlog for total knee replacement surgeries. Have you seen any change in that backlog in the market and with your physician survey, they said things might back to normal, middle of this year. How long do you think that the backlog in surgeries might persist?

So when we did our last check-in with our panel of orthopedics back in February, we asked about both the resumption of patient fluid practices versus pre-COVID levels, as well as sort of where things stood from the OR standpoint. And they cited in both cases, if they were still living around 80%, I would translate that that we've probably worked through the majority of the backlog of TKA procedures. But certainly as we get above 100%, get above 80% in both settings of care, we might expect to see some dribbling in upside as we get back to normative levels of TKA procedures as well as more normative levels of patient flow to practices.

Okay. And then one follow-up if I could, the other thing that was discussed a few quarters ago is the ability to access some of the high prescribing accounts, who had finally had some time to evaluate ZILRETTA, what's the experience been like in those accounts? Are they reordering? And are you getting more of the physicians within those practices to start using ZILRETTA?

Yes, I think what you're referring to is the fact that, during the height of the pandemic, where physicians were out of their offices and relegated to their home offices and not seeing patients, it gave us the opportunity through remote means to be able to access some HTPs that we maybe previously had had a harder time accessing. And I think that our experience has been that, not insignificant percentage of those HTPs that we were able to access remotely during that sort of heightened period of the pandemic have resulted in some new customers coming on.

Okay, thank you very much.

Thank you. At this time, I'd like to turn the call back over to Mike Clayman for closing remarks. Sir?

Yes, I'd like to just thank everybody for their time and attention, I appreciate your support. We're excited about where we're and what the future holds for us. And we're looking forward to updating you on our progress over time. Be well, everybody.

This concludes today's conference call. Thank you for participating. You may now disconnect.