Good afternoon, ladies and gentlemen and welcome to the Flexion Therapeutics Second 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 Vice President of Corporate Communications and Investor Relations.

Good afternoon. A short while ago, we issued a press release announcing our second quarter financial results. That press release and our latest Commercial Metrics Slides can be found under the Investors tab on the company's website. 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 Fred Driscoll, Flexion's Chief Financial Officer. On today's conference call, 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 website. I will now turn the call over to, Mike Clayman.

Thanks, Scott and thank you all for joining. In the press release we issued this afternoon, we provided a number of important updates on our commercial performance, R&D progress and a recent debt refinancing, all of which we will discuss in more detail on today's call. However, to begin, I would like to officially welcome, Will Andrews, our new Chief Medical Officer. Will joined us in early July and his presence and leadership is already being felt across the organization. And I look forward to his important contributions in the years ahead. Moving to our commercial performance, we recorded $28.2 million in ZILRETTA net sales during the second quarter, which represents solid growth of 15% over the first quarter. This result was in line with our expectations and we are reiterating our full year ZILRETTA sales guidance in the range of $120 million to $130 million, barring any unanticipated impact from COVID-19 in the second half. Stated simply, we believe ZILRETTA is a product that makes a real difference for patients confronting OA knee pain. Our charge is to ensure that we are bringing its benefits to as many of them as possible. And that's exactly what Melissa and her team are focused on. They've been making excellent progress executing against our three commercial priorities, and I will look to her to provide more color on those efforts and to share perspectives from the field on patient flows at healthcare practices. Before I move to recent clinical progress, I want to acknowledge the impact that Fred Driscoll has made since rejoining us as CFO in June. Under his leadership, we have introduced important cost containment initiatives across all functions within the company to ensure that we are scrutinizing every aspect of our spend and utilizing our resources judiciously. Consistent with…

Thank you, Mike. As Mike mentioned, the net sales in the second quarter were $28.2 million, which represents 15% growth over the first quarter. Overall, we were pleased with this performance and we feel very good about the opportunity for continued growth in the second half. Just last week, we conducted another round of surveys with a sample of 25 physicians to gauge the current impact of COVID on orthopedic practices. The respondents indicated that throughout the second quarter, patient flows to offices were back to about 90% of pre-COVID levels. Based on the recency of the survey, we were able to obtain a sense for if and how the proliferation of a variant could impact practices, and approximately 20% of practices surveyed indicated they have seen a recent reduction in both surgical and in-office patient flows. In the event that we see more states or more major metropolitan areas, reintroduce lockdowns, there could potentially be further disruptions to orthopedic offices. We are monitoring developments closely and our teams are prepared to work remotely should that be required in individual territories. Moving on to our three strategic priorities, amplification of the patient voice, pricing and physician reimbursement and positioning in market segmentation, we are making progress against each. With regard to our first priority, amplification of the patient voice, we have revised our messaging to even more effectively articulate and emphasize the unique product attributes of ZILRETTA that distinguish it from other intra-articular injections and we are rolling out several new tools and programs intended to enhance physician awareness of the unique patient experience that ZILRETTA delivers. Related to our second strategic priority, on August 2nd, we implemented a 5% price increase for ZILRETTA, which took the wholesale acquisition costs from $570 to $598.50. This is the first price increase…

Thanks, Melissa. As Mike mentioned, ZILRETTA net sales in the second quarter were $28.2 million, which reflect the gross to net reduction of 18.5%. This reduction includes rebates to healthcare providers that are variable and based on the volume of product purchased. Total provider rebates accounted for a gross to net reduction of approximately 9% in Q2, and the remaining gross to net reduction of approximately 9.5% is comprised of distributed in service fees, returns reserve and mandatory government discount rebates, including Medicaid, 340B institutions and Veterans Administrations and Department of Defense. At the end of the second quarter, the aggregate inventory held by specialty distributors were slightly above the one to three weeks we target. We reported a net loss of $22.2 million for the second quarter of 2021, compared to a net loss of $32.6 million for the same period of 2020. Our loss per share for the second quarter of 2021 was $0.44, compared to $0.76 for the same period of 2020. This improvement is due to a variety of factors, particularly the impacts of COVID on our operations last year. However, I can say that cost containment is a top of mind consideration for our management team. Cost of sales was $5 million and $5.5 million for the three months ended June 30, 2021 and 2020, respectively. Gross margin was $23.2 million or 82%, compared to $10 million was 65% of sales for the three months ended June 30, 2021 and 2020, respectively. The improvement year-over-year reflects the scale up in production in 2021 as compared to the shutdown and unabsorbed overhead cost in 2020 caused by COVID. Importantly, we saw a continued improvement in our gross margin rate in Q2 at the aforementioned 82% compared to 75% in Q1 as we move towards a more…

Thank you. [Operator Instructions] Thank you. And our first question is going to come from Elliot Wilbur from Raymond James. Your line is now open.

Hi, guys. This is actually Michael Pagliari on for Elliot, thanks for taking my questions. So first one, I guess, the decision to pretreat FX201 with the steroids. Is that simultaneous with the administration of FX201, or is there a gap? And then also is there potential to maybe use like ZILRETTA versus the IR steroid? And then secondly, in terms of gross to net trends for ZILRETTA? I believe you guys were somewhere in the ballpark of like 18% last quarter, just wondering where that is? And where do you see it trending in the near-term? Any update on rebate strategies and successes you're seeing would also be helpful. Thanks.

Well I'll take the first two questions and I'll push this next two questions to Fred and Melissa. So in terms of timing in the steroid injection, it's done immediately prior to the FX201 injection. And what we're trying to accomplish here is to address a short-term phenomenon in terms of adverse events. So we don't think that requires ZILRETTA. And as a result, we're going with a steroid that has been used in the clinical trials that have demonstrated a short-term and an immediate release steroid that has demonstrated its ability that quell these reactions. Fred?

Yeah, I think the next question, could you just repeat that the next question, I'm sorry.

Gross to net where you guys were last quarter and then trending near-term with like let's say up until 2022.

Yeah, gross to net, I think as we said in the - in our script was 18.5% for the quarter. I think what, Melissa, I'll turn it to you to just to give some updates as to where you think where we go from here.

Well she might be on mute.

Sorry about that. Can you hear me?

Yeah.

I said - I don't think we're going to give forward-looking guidance on where we anticipate gross to net will go. I'm sorry, you should get back to me again probably too for the third question, right, which I believe is around rebate. And whether we've seen positive results coming from rebate. So as you know, we have been - we have deployed a broad-based rebate program going back to the third quarter of 2019. I would say that we have seen great success with that rebate program, which is why as I referenced in prepared remarks earlier today, that part of the new pricing strategy that we rolled out just earlier this week included a continuation of our rebate program.

Got it, thank you.

And thank you. And our next question comes from Madhu Kumar from Goldman Sachs. Your line is now open.

Hey guys, thanks for taking our questions. So first one kind of following-up on the earlier question about FX201. Kind of stepping back in bigger picture. What do you need to see in terms of a tolerability profile for the gene therapy to kind of give you confidence to move forward into a larger scale randomized trials? And then kind of paralleling that, what do you need to see in terms of efficacy? And I guess like, obviously, our frame of references ZILRETTA here like, what do you need to see in term of efficacy for FX201 to want to proceed moving forward with a 201 randomized control trial? And I have a follow-up after that.

Yeah. Fair questions, Madhu. And bottom line, what we need to see in terms of safety is a substantial mitigation of the adverse events. What that looks like exactly, we've not reduced to some formulaic set of observations, we have data now on all three dosing cohorts. And what we believe is that, this approach will make a meaningful difference in terms of reducing the prevalence of those. And even though they were modest, they were all mild to moderate. We expect that the severity, the mild to moderate characterization will be even less. So we're going to look at the data, I think we will know relatively quickly whether this intervention is making the kind of difference that we would hope and expected. But in terms of efficacy, we're going to need to see meaningful pain relief and functional improvement, clinically meaningful pain relief and functional improvement for at least 6 to 12 months, following a single injection.

Okay. And then a follow-up for chainsaw, Fred over there. As we think about kind of where you think cost savings could occur? How much of that could potentially be on the product pipeline from into clinical development front, as compared to kind of improve the efficiency of selling the ZILRETTA? How are you guys thinking about that right now?

Yeah, Madhu. I think we really need to see as Mike just said, we need to see over the course of the remainder of the year, where the clinical datasets come out on 201 and 301, as we guide towards and think about how research and development expenses move into next year. But what - as I said, we're really conducting an extensive review of all of our operating expense spending across every sector within the company. And once that's completed, we will have more to say about the impact about that in an upcoming call.

Okay, great. Thanks, everyone.

Thank you.

Thank you. And our next question comes from Daniel Busby from RBC Capital Markets. Your line is now open.

Hi, good afternoon. I've got a couple on ZILRETTA. So first, can you talk a little bit more about your current assumptions for patient flows in the second half of 2021 relative to the 90% level you referenced for the second quarter? And second, can you provide any qualitative color on the expected cadence of ZILRETTA sales in the third and fourth quarters? Is it reasonable to assume a fairly linear trend? Or are there other dynamics that play that could influence that?

Sure, Daniel. I'm going to take those in reverse order. So you know, I think, you know, with regard to the second half, historically, we do see our strongest sales in Q3 and Q4, we're continuing to guide to full year net sales in the range of $120 million to $130 million. We're not providing quarterly guidance at this point. But you can go back and look at our historical quarterly cadence to get a sense of how the quarters typically fall out. And with regard to your question around patient flows to practices in the back half of the year, you know, I think I kind of said it in the prepared remarks that, we saw an increase of patient flows to practices in this last fielded survey versus the one prior going from 85% to 90%. But we also at the same time, ask those respondents about whether they anticipated they would see or if they were seeing or if anticipated, they would see any coming declines in flows again as a result of the proliferation of COVID. And what they told us was, you know, a third of the respondents that we spoke to said that they were seeing a decrease, a real-time decrease in patient flows of between 40% and 50%. That was only a third of the survey respondents that we spoke to which in total was 25.

Okay. So fair to say you've factored some of that into your second half assumptions.

I think as we'd said in prior calls, right, we had always kind of assumed that, you know, patient flows to practices would remain around 80% through the mid part of the year, with some modest improvement in that in the back half of the year. Declined to 90% now in certain parts of the country, they may be back down to something less than that. So I think, yeah, it's fair to assume that adequately baked into our plan for the rest of the year.

Got it and thank you.

Thank you. And our next question comes from Gary Nachman from BMO Capital Markets. Your line is now open.

Hi. Thanks for taking my question. This is Evan Hua filling in for Gary. So for ZILRETTA, are there a lot more new accounts you're able to tap into? And what will be the focus going forward once they are tapped? Thanks.

So I think I would say that there's not a lot more new accounts for us to tap into, you know, we're four years in the market, we do continue to bring on new accounts to the tune of, I'll say, you know, 100 to 120 quarter-over-quarter, but that number is declining over time, because there are fewer new accounts to come on as we start to penetrate more and more accounts. I would say that our primary focus going forward is to deepen or increase our penetration among our existing user accounts. And part of the work that I've talked about in the past related to our footprint optimization aims to get exactly at that idea helping us to identify and understand which accounts out there that are already existing users have the propensity to move further and faster. And there's ZILRETTA adoption. And, you know, increasing our focus around those types of accounts, we believe is the right way to accelerate growth in the near-term.

And thank you. And our next question comes from Serge Belanger from Needham & Company. Your line is now open.

Hi, good afternoon. First question for Melissa. Do you believe there is still kind of pent up demand in the market either from patients who have had their knee replacement surgeries postponed or patients who have stayed away from seeing their physicians over the last year and can that pent up demand add to the ZILRETTA volumes in the second half?

Hey, Serge, it's a good question. I think it's a little bit of a complicated answer. If we had stopped at the response from our survey that said that patient flows to practices were back to 90%, I think my answer that would have been, there may still be a little bit of pent up demand out there that has yet to be realized by us, I think we realized the majority of the pent up demand as we were sort of in the mid and latter part of last year. But when you add to that statistics, the 90% patient flow statistics from their recent survey, when you add to that, that there was a not insignificant number of respondents who actually said that they were seeing real-time decreases in their patient flows because of COVID proliferation to the tune of 40% to 50%. I would suggest that whatever pent up demand may still be out there that we would have otherwise been able to realize in the back half may be muted by what's happening in parts that across the country relative to you know, practices slowing down and elective procedures being delayed.

Okay. And my second question, again for Melissa or maybe it's for Fred, related to the recent 5% price increase. It doesn't sound like you'll be able to realize it in 2021. But when you do, what amount of the price increase you think will impact the net price?

Well, I think there's - that's a bit of a complex answer as well, because as you heard in the prepared remarks, not only do we roll out a price increase, but we also roll out off-invoice discounting. And in the near-term, i.e., sort of 2021, we anticipate that the material impact from the combination of those two things will be, you know, it'll be a wash. As we go further out. And, you know, contemplate what we'll be doing from a price increase and discounting strategy in 2022, we'll certainly share those insights with you. But we're not prepared at this point to talk further than what we're - what we've planned and what we've executed for 2021.

Okay. Thank you.

And thank you. [Operator Instructions] And our next question comes from Patrick Trucchio from H.C. Wainwright. Your line is now open.

Hi, thanks and good afternoon. Just a follow-up regarding FX301. I'm wondering if you can remind us the advantages in terms of the formulation of FX301 versus prior attempts of this pathway? And secondly, should we expect to have a better understanding of those advantages after part one or part two of the Phase 1 trial? Or would we need additional data from a Phase 2 trial? And then what would you need to see from this - from the Phase 1 trial overall to give confidence to move forward in the - to a Phase 2 program?

Okay, Pat. Thanks for those questions. Let me just start out by saying, the FX301 is unique in two dimensions. First, it is formulated in a thermosensitive gel that is liquid at room temperature and gels at body temperature so that when the formulation with the active is injected around the nerve of interest, it gels within a minute and creates a depot for prolonged payout. Thereby supporting our intended vision for the product of providing at least three to five days' worth of meaningful pain relief, that would already set it apart. And secondly, the active is a selective sodium channel blocker that blocks channels on sensory fibers, spares motor fibers and translates into the potential for pain relief without compromising motor function that would also be unprecedented in the field. So between the two, we're super excited about the potential for this product to generate the kind of profile that could make a real difference for many, many patients and their millions, literally millions of peripheral nerve blocks that are done each year. The data we are getting from the first phase of this trial will allow us to make a decision about expanding the trial by another 36 patients. We believe that by assuming the data support expansion, and we'll know that in the relatively near-term, the data will - is on - this is on clinicaltrials.gov, 12 patients per cohort 4 different dosing cohorts, we will look at the data in their totality, make a decision whether there's a sufficient signal in terms of efficacy and support for tolerability to then expand to 36 patients. If there is, we'll go ahead and do that and by the end of the year, we should have a dataset that will tell us whether in bunionectomy, which is a very painful surgery, this product performs the way we might hope it would. Of course, if the data when we look at it from the 4 cohorts does not support continued development, then we'll make the hard decision and consider the cessation of development. But we'll guided by the data and their totality. I think my view, our view is, there should be a substantial step up in terms of overall probability of technical success, assuming a positive bunionectomy trial.

And just to follow-up, so when we have some of the data from part two by the end of this year, or would that be more next year?

No, no we will have the - we fully expect bunionectomy trials in general, enroll rapidly. And we have guided and continue to guide to their expectation that we will have the full dataset by the end of the year.

Got it. That's really helpful. Thank you.

Thank you, Ben.

And thank you. And our next question comes from Franc Brisebois from Oppenheimer. Your line is now open.

Hi, guys. This is Daniel on behalf of Franc Brisebois. Thank you for taking the questions. Two questions. One is, any developments on hyaluronic acid products getting reimbursement pressure? And the second question, can you remind us once again of the convertible note when it's due and the terms there? Thank you.

So I can take the first one and hand the second one to Fred. As you may be aware, maybe the impetus for the question that the proposed rule - CMS proposed rules came out in July, and there was a piece of that proposal that called for all medic - all products, all drugs reimbursable under Medicare Part B to begin reporting their ASPs and HA is the interpretation of that proposed rule is that, HAs would be included in that - in the event that they were included in that and all of HAs needed to start reporting their ASP it would, I think, definitely it will result in a change in reimbursement for the HAs and perhaps a subsequent change in their pricing structure and strategy.

Thanks.

Yeah, that's right. Convertible note is just over $200 million, and it's due on May 1st, 2024.

Thank you. Thanks for taking the questions.

And thank you. And I am showing no further questions. I would now like to turn the call back to Michael Clayman for closing remark.

Thanks very much and thanks for all of your time and attention this afternoon. Exciting inflection point for the company in terms of our ability to extend runway to 2023 in a non-dilutive way, continued progress in the commercialization of ZILRETTA and knocking on the door of defining data for our two very exciting pipeline assets. So, simply say, stay tuned. We'll look forward to communicating with you in the future as more information becomes available. Take care.

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