Flexion Therapeutics, Inc.
Q1 2020 Earnings Call Transcript

Published: 8 May 2020

[Scott Young:]

Good afternoon. This is Scott Young, Vice President for Corporate Communications and Investor Relations. Before we begin, I would call your attention to the metrics slide that we will discuss in today's presentation. Those slides can be viewed directly via the webcast, or under the Investors tab on flexiontherapeutics.com.In addition, the press release we issued this afternoon and an archive of this conference call, can also be found there. Today's conference call will be led by Flexion's Chief Executive Officer, Dr. Michael Clayman; and he is joined by David Arkowitz, Chief Financial Officer; and Melissa Layman, Flexion's Chief Commercial Officer.On today's call, 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 March 31, 2020, 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.

[Michael Clayman:]

Thank you, Scott, and thank you all for joining us today. It is clear that in the only eight weeks since our fourth quarter earnings call, the world has changed dramatically as a result of COVID-19. On today's call, we'll talk about what we've been seeing and doing both commercially and operationally during the unprecedented public health crisis, but we'll begin with a focus on our first quarter performance and provide color on why we remain in enthusiastically bullish about ZILRETTA’s future.Today, we recorded net ZILRETTA sales of $20.1 million for the first quarter of 2020. We had previously indicated that we believed our Q1 sales would be roughly flat versus Q4 sales of $23.7 million and we were on track to deliver sales in this range prior to the COVID-19 outbreak. We also said that at that point it was simply impossible to predict how the outbreak would evolve or what the effects of more aggressive social distancing or other containment efforts might have on patients or practices.Since then, the picture has become much clearer and we can speak now to the effects of the pandemic on ZILRETTA sales and later in the call on our development activities. Beginning in late Q1, we saw most practices substantially reduce patient visits or even suspend these all together. And as a result, utilization of ZILRETTA drops significantly. We believe it will take time to get to the new normal and the cadence of the recovery will vary practice by practice, region by region, and even person by person.Thus far, we have seen decreased demand for ZILRETTA in the second quarter and believe COVID-19 will adversely impact ZILRETTA revenue for the remainder of the year. That said, we do take note of a number of external circumstances that have the potential to increase demand for ZILRETTA over time. These all relate to the delay postponement or cancellation of total knee arthroplasties or TKAs. And the intense medical need to provide rapid substantial durable non-opioid analgesia for patients whose knee pain drove them to consider TKA in the first place.Three factors contribute to this dynamic and these were all brought our attention by orthopedic key opinion leaders. First, while elective surgeries are beginning to happen around the country, in most cases, there will be a gradual return to full capacity and many TKAs will be further delayed. Second [indiscernible] for those of Medicare age who are all considered in the vulnerable COVID-19 population. There may be reluctance to enter our hospital to have surgery until these patients have greater confidence they can avoid infectious risk.Finally for those who are younger than 65 and were previously employed, many may prioritize income generation over surgery and rehab. Recent survey data indicate that almost 50% of orthopedics surgeons expect that procedure volume will not be back to normal until sometime in 2021 and 63% expect anywhere between 25% and 75% of their patients will continue to delay their surgery for fear of COVID-19. Of course, Flexion is adapting to since instructing our employees to work from home in mid March.Our MBMs have adopted various technologies to engage in meaningful conversations with the prescribing physicians. Melissa can provide more color what you're seeing in the field, but since healthcare practitioners have more time on their hands, our MBMs have experienced greater access to prescribers who have historically been very difficult to see and their response to the ZILRETTA clinical data has been highly encouraging.And even with COVID-19, we continue to hear stories [indiscernible] who have received unprecedented OA knee pain relief from ZILRETTA The bottom line is that our confidence in ZILRETTA’s clinical performance and long-term potential is undiminished. We are not the only company to believe that ZILRETTA holds tremendous potential for millions of patients with OA knee pain. In April, in the midst of the pandemic, we announced that we entered into an exclusive license agreement with HK Tainuo and Jiangsu Tainuo, a subsidiary of CSBC, a leading Chinese biopharmaceutical company.Under the terms of the agreement, we are entitled to receive an upfront payment of $10 million and up to $32.5 million in development, regulatory and commercial sales milestone payments. Flexion will be solely responsible for the manufacturing and supply of ZILRETTA for all clinical and commercial activities. While our confidence in ZILRETTA is resolute, it is impossible for us to predict how long the pandemic will affect sales and as we announced in our press release this afternoon, we have taken meaningful actions to reduce our operating expenses in the near term.David will discuss these steps in more detail, but we are committed to ensuring that we come out of the pandemic in a strong financial position. Regarding clinical development recognizing that many clinical trial sites had shut down, wanting to ensure the safety of our research participants and in consideration of guidance issued by the FDA. In early April, we announced that we would temporarily suspend our Phase 2 clinical trial, evaluating the efficacy of ZILRETTA in patients with shoulder OA or adhesive capsulitis. And also our Phase 1 clinical trial evaluating the safety and tolerability of FX201, our intra-articular gene therapy candidate for OA.Subsequently, we made the strategic decision to discontinue our Phase 2 trial investigating ZILRETTA and shoulder OA and in adhesive capsulitis. Given the small number of patients enrolled in that trial, the uncertainty of when we would be able to restart it as well as the cost required to maintain the study in an inactive status, we believe terminating the trial is the most responsible action at this time.Moving forward, we will look to leverage our learnings from the study and potentially use these to refine the trial designed to advance ZILRETTA in these indications. We also aim to reinitiate the FX201 single ascending dose trial and recommencing enrollment when conditions and staffing at our trial site safely permit the return of patients.Turning to FX301, our NaV1.7 inhibitor formulated within a thermosensitive hydrogel for administration as a peripheral nerve block for control of postoperative pain. We continue to advance this product candidate. FX301 is a liquid at room temperature and jells following injection at body temperature to create a controlled release depot that can provide persistent therapeutic concentrations of drug locally at the selected nerve.We recently unveiled new preclinical data in a Virtual Poster Presentations now available on the American Society of Regional Anesthesia and Acute Pain Medicine’s website. These data show that compared to liposomal bupivacaine and placebo, FX301 provided sustained post-operative analgesic effect with no impairment in motor function.In addition, high local concentrations of funapide, the active ingredient in FX301, were measured at the site of administration for the duration of the study consistent with the creation of a depot providing controlled drug release.While it is still early days for the program, these findings support our leads that unlike typical local anesthetics, the selective pharmacology of FX301 has the potential to deliver substantial and persistent pain relief while preserving motor function, which could enable earlier rehabilitation following musculoskeletal surgery and potentially more rapid discharge from the hospital. We are completing GLP tox studies for FX301 and we remain on track to initiate clinical trials in 2021.Before I turn it over to Melissa, I would like to make just a few final comments. While there are many uncertainties about the shape and pace of the recovery, there are some key facts we know right now. We know that there are millions of patients for whom ZILRETTA can provide substantial and extended relief from OA knee pain. We know that at least many tens of thousands of elective knee replacements have been deferred due to COVID-19 and those patients will need effective pain relief while they wait for surgery. We know that our commercial organization is poised for the recovery at whatever pace or shape it takes. Finally, we know that everyone in Flexion stands ready to adapt to any circumstances we face and we remain confident in our future prospects.At this point, I would like to turn it over to Melissa to discuss our commercial operations.

[Melissa Layman:]

Thank you, Mike. I've been with Flexion now for just under two months. My first day marked by our Q4 earnings call and my second day by the work from home directive resulting from the rise of the COVID-19 pandemic. Despite having yet to set foot in the field, I've met virtually with dozens of physicians and members of our sales organization. Each of these meetings has only confirmed what I believed about ZILRETTA before joining the team and bolstered my perception of the Flexion organization, particularly in light of our response to COVID-19 and the enhanced role I know ZILRETTA can play in effective durable pain management for patients all along the OA knee pain treatment continuum.Mike discussed some of what we have experienced in the field during recent weeks. I'll provide some additional color on how we've been engaging with prescribers during the crisis and how we plan to emerge from the crisis restores ZILRETTA prior sales trajectory and continue to grow from there.Before I talk about what we are seeing now, I'd like to start by walking through the commercial metrics for the first quarter. As Mike mentioned, we were pleased with the way the first quarter was progressing prior to the onset of COVID-19 and believed ZILRETTA was tracking to meet our expectations.You can see in Slide 2 that we recorded ZILRETTA net sales of $20.1 million reflecting the pandemic material impact on March sale. We expanded our list of targeted accounts in the fourth quarter to 5,000 and by March 31, 2020, our reach had extended to almost all of them. And by the end of the first quarter, 3,672 accounts had purchased ZILRETTA which was an increase of 184 purchasing accounts compared to the fourth quarter of 2019. As of the end of March, 2,832 or 77% of accounts had reordered ZILRETTA. Notably, this increase in purchasers occurred off the customer base that continued to grow even in light of the pandemic.On Slide 3, you can see how our sales have progressed since launch and as we've mentioned, we were pleased with the performance in the first part of Q1 prior to the onset of COVID-19 when we were on track to deliver sales in line with fourth quarter of last year consistent with our previous guidance. The next three slides reflect ZILRETTA purchasing patterns across our growing account base comprised of practices, clinics, and hospitals of various sizes and potential.Slide 4 describes the cumulative number of accounts that have purchased ZILRETTA since launch as well as the distribution of quarterly purchase volumes across our account base. In Q1, the trends continued with a growing number of accounts purchasing within and across the purchase break of one to 10 units, 11 to 50 units and 51 or more units with significant growth to 916 accounts in the 51 plus category.Slide 5 flips the perspective looking at the cumulative distribution of ZILRETTA purchases by account. For example, those 916 accounts in the 51 plus purchase group shown on the previous slide have been responsible for 177,664 of the total units purchased since launch and roughly 35,000 more units than were purchased from this purchase volume group in Q4 2019. This clearly illustrates that purchasing accounts continue to move through ZILRETTA utilization continuum described on previous calls. As we've also previously highlighted, even our largest accounts remain under penetrated and we continue to believe that there is tremendous opportunity to increase ZILRETTA utilization within and across each of these groups.It is also important to point out that while total ZILRETTA purchases in the first quarter were approximately 36,500 units which is slightly lower than the 37,500 units purchased in the fourth quarter. Through the middle of March, we were pleased with our progress and believe we were well on track to meet or exceed the fourth quarter purchase volume until the effects of COVID-19 began to impact our business and ZILRETTA purchases dropped precipitously.In our final Slide number 6, we break out ZILRETTA purchasing by new and existing accounts. In Q1, new accounts purchased 12,504 units, which further illustrates our strong start to 2020 prior to the onset of COVID-19 across the U.S.As Mike mentioned, COVID-19 has had significant impact on our customers. Throughout the COVID-19 impacted window, overall clinician access to ZILRETTA eligible patients has been limited, variable and practice dependent.Some practices have shut down in person, patient visits altogether while others are open to high priority critical or acute cases while implementing social distancing measures. Well, the circumstances vary. One common denominator has been the presence and tenacity of our salesforce, well, not a replacement for in-person exchanges, our reps have been successful in targeted remote detailing, in some cases, gaining access to prescribers that exceeds pre-COVID-19 levels. They have effectively employed various audio visual technologies to engage with both existing and new accounts to discuss the important roles ZILRETTA can play in the OA treatment paradigm, including for those patients who are awaiting or opt to decline surgery once COVID-19 restrictions are lifted.To better understand the current impact of COVID-19 on orthopedic practice and what the recovery might look like. We held a series of focus groups with specialists from across the nation. The insight from those exchanges support our assumptions that the return to new normalized practice patient flow will be gradual and driven by ongoing social distancing requirements and safety requirements as well as patient's comfort in returning to their doctor's offices. However, we also see the potential for increased use of ZILRETTA in a wider variety of patient types as both existing and new prescribers look to manage the growing backlog of surgical candidates including those previously scheduled for TKR who for various COVID-19 related reasons chose to defer treatment in favor of less invasive options like ZILRETTA.As Mike actually described, we cannot predict the timing or shape of the recovery, but as it occurs our commercial team will be there to support prescribers and ensure they understand the even more important role ZILRETTA can play in effectively managing their patients OA knee pain prior to or in avoidance of surgery.With that, I'll now turn it over to David for the financial updates.

[David Arkowitz:]

Thank you, Melissa. Before I provide an overview of our financial performance in the first quarter, I'd like to share some details on our fiscal response to the economic and business disruption caused by COVID-19. As Mike mentioned and as we described in our first quarter earnings press release, we undertook a series of prudent and disciplined steps to reduce expenses across the organization in order to enhance our financial flexibility and liquidity.In total, we believe these steps will deliver between $43 million and $53 million in savings this year. As a result, our full year 2020 total operating expenses which include the cost of sales, research and development and selling, general and administrative expenses are expected to be in the range of $167 million to $177 million.We undertook cost savings initiatives across every area of the business, but the majority of the savings will be realized through the following, hiring and travel freezes, suspension and or termination of active clinical trials, elimination of live presence at medical and industry conferences, reductions in in-person physician speaker programs and reductions in market research and select marketing programs and materials as well as elimination of non-essential operating expenses.In addition, given the impact of COVID-19 and the uncertainty surrounding ZILRETTA sales for the remainder of this year, we are temporarily suspending manufacturing activities for ZILRETTA to avoid excessive inventory buildup and to reduce costs. We believe our current inventory of finished goods will be sufficient to meet demand for ZILRETTA through at least the remainder of this year and unlike typical contract manufacturing agreements, our condominium model at Patheon’s provides us with the ability to scale up production based on market dynamics and once we determined that additional supply will be needed, we can reinitiate manufacturing.With respect to our first quarter financial performance, we reported a net loss of $36.8 million for the first quarter of 2020 compared to a net loss of $41.5 million for the same period of 2019.Net sales of ZILRETTA were $20.1 million and $10.6 million for the three months ended March 31, 2020 and 2019, respectively. Cost of sales was $2.3 million and $1.8 million for the three months ended March 31, 2020 and 2019, respectively. First quarter, 2020 net sales reflect the gross to net reduction of 11%. A gross to net reduction is primarily comprised of distributor and service fees, returns reserve, health care provider rebates and mandatory government discounts and rebates, such as Medicaid, 340B institutions, and Veterans Administration, and Department of Defense.The rebates to healthcare providers are variable based on the volume of product purchased and contribute 2% of the first quarter total gross to net reductions of 11%. As Melissa mentioned, starting in the middle of March, purchases of ZILRETTA by account meaning physician practices, clinics and hospitals dropped materially due to COVID-19. As a result, the inventory levels held by our distributors at the end of the first quarter were higher than our target level of one to three weeks.While purchases of the ZILRETTA by account continue at a decreased rate, it will take time for our distributors to work through their current inventory. Since we recognize revenue upon sales to our distributors, a combination of reduced purchases in the second quarter by account and higher than normal distributor inventory levels have the potential to particularly impact our second quarter revenue negatively.Research and development expenses were $21.1 million and $15.4 million for the three months ended March 31, 2020 and 2019 respectively. The increase in research and development expenses of $5.7 million was primarily due to an increase of $2.2 million in salary and other employee-related costs for additional headcount and stock compensation expense, an increase in expenses related to FX201, including the $2.5 million to GeneQuine for dosing the first human patient in the Phase I clinical trial, and an increase in other portfolio expenses, primarily related to the $0.5 million milestone to Xenon Pharmaceuticals, offset by a decrease of $0.5 million in development expenses for ZILRETTA due to lower clinical trial expenses during the period.Selling, general and administrative expenses were $29.3 million and $32.2 million for the three months ended March 31, 2020 and 2019, respectively. Selling expenses were $20.5 million and $23.8 million for the three months ended March 31, 2020 and 2019, respectively. The year-over-year decrease in selling expenses of $3.3 million was primarily due to a reduction in physician and patient marketing activities. General and administrative expenses were $8.8 million and $8.4 million for the three months ended March 31, 2020 and 2019, respectively, which represents an increase of $0.4 million.Interest income was $0.4 million and $1 million for the three months ended March 31, 2020 and 2019, respectively. Interest expense was $4.7 million and $3.9 million for the three months ended March 31, 2020 and 2019, respectively.As of March 31, 2020, we had approximately $125.2 million in cash, cash equivalents and marketable securities compared with $136.7 million as of December 31, 2019.At this point in time, we cannot forecast with any precision, the duration of the pandemic or its full impact on purchasing patterns or utilization of ZILRETTA. Therefore, it would be imprudent for us to provide specific guidance with respect to our future sales of ZILRETTA or our cash runway. We will continue to review and reassess our assumptions and provide additional color when possible. As Mike mentioned, our confidence in ZILRETTA is as strong as ever and we will take the steps necessary to ensure we are well positioned from a financial perspective to maximize ZILRETTA’s value in a post-COVID-19 environment.At this point, I would ask the operator, please open the line for questions.

[Operator:]

[Operator Instructions] Our first question or comment comes from the line of Randall Stanicky from RBC Capital Markets. Your line is open.

[Randall Stanicky:]

Great, thanks guys. Do you have from a) regions were large profit were re-opened as to what their ordering patterns was like, because presumable that will give a sense for at least physician or practitioner thinking around any pent up demand and where they really intend to focus on from a procedure prospective kind of channel inventory aside. And I have a follow-up.

[Michael Clayman:]

Can you take that?

[Melissa Layman:]

Yes I can. We have been for empowering the basis for which practices have been re-opening and is not geographically persistent. We believe that the return to normal, the patient volume is going to vary by region, by practice and even by patients. And the impacts to existing office patient flow that we've seen don't necessarily correlate to the areas where COVID-19 has been more prevalent.

[Michael Clayman:]

Well, just building on Melissa’s, I mean Randall I just think it's too early for us to declare that we're seeing patterns. We're seeing some accounts order substantial quantities, other accounts, ordering less or minus, but it's far from us having an updated MSA [ph]. We acquired ordering pattern.

[Randall Stanicky:]

Let me ask a follow-up I mean during this shutdown period, which in some regions, regions like New York is probably going to continue. Have you guys been able to alter your outreach, via DTC? I mean you have captive patients who are home bound who are probably in pain. Maybe thinking about the timing of elective surgeries, have you figured out a way to access those patients to get ZILRETTA as an option in front of them?

[Melissa Layman:]

So with regard to asking patients specifically, our efforts haven't been focused there during this period. They have been focused specifically with our healthcare providers. Our salesforce has been working from home since the middle of March and they have been fully audio visual equipped to continue to engage physicians remotely. And in fact many of their conversations with our users and some of our nonusers have focused around that very point, which is that with surgeries having been rescheduled, postponed, canceled altogether, the wait times to get to those surgeries are mounting.And ZILRETTA offers an alternative to managing the intractable pain that these patients are continuing to suffer with and therefore is being more widely considered by our customers as that bridging tool that they can use until those patients are able to be put back onto the surgical schedule.

[Randall Stanicky:]

Okay, great. Thanks guys.

[Michael Clayman:]

Thanks Randall.

[Operator:]

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

[Gary Nachman:]

Hi guys. Good afternoon. Just following on the previous question in terms of the variability by physician practices in how they're handling COVID, have you been able to stratify these practices in any way and target them differently based on those that might be willing to treat patients sooner and then maybe go after those practices more aggressively in the near term?

[Melissa Layman:]

In fact, we have, we've done exactly that. We've been able to stratify practices really into different groups. And they are moving between and among those groups as the pandemic progresses. But we are seeing some practices that are completely shut down to patients altogether. Others that are seeing only what we would describe as trauma cases and still others that are open to more than just trauma cases and are seeing patients that might be considered critical, but not necessarily trauma. And so with the recognition that any given one of our customers might fall into any one of those three stratifications, we are guiding our sales force to engage in more urgent conversations around the use of ZILRETTA as that bridge to surgery or practices that are continuing to see patients above those that we would describe as trauma cases.For those that are not seeing ZILRETTA eligible patients today, we are engaging them in conversations about preparing for the time at which they will start to open their practices and more patients and the role that the ZILRETTA can play in those patients as well as suggesting that they work now to pre verify coverage for those patients for ZILRETTA. And then a similar discussion with those practices where they are closed down to all patients, but again, considering ZILRETTA as a tool that they can begin to manage with now remotely in anticipation of the point at which they will begin to see patients again.

[Gary Nachman:]

Okay. And it's part of the cost cutting, you did specifically mentioned salesforce, and I'm curious in this new world that's evolving, do you think that it maybe it'll make sense to be more efficient with the salesforce if you could use telemedicine maybe more frequently going forward?

[Melissa Layman:]

Certainly, the onset of telemedicine as a way for physicians to interact with patients has taken root and we believe it’s here to stay. But as far as implications on in-person detailing and our salesforce we're currently conducting a variety of commercial analysis to ensure that our Zilretta footprint is optimized as we emerge from COVID and reset the sales trajectory. It would be premature to comment on any of the potential outcomes from these analyses and any changes to our commercial footprint that they might suggest. But we are currently not planning to make any revisions to our sales footprint at this time.

[Gary Nachman:]

Okay. And then just a couple for David. Go ahead. Did you want to add Mike? I'm sorry.

[Mike Clayman:]

No I was just going to say that we think we are learning these details and we are actually is pretty efficient. Having said that, it's also important to recognize that this is still a total office, that the personal connections are important, so I wouldn't want anyone to leave this call, including that we're moving unduly in the direction of virtual retailing, not a collection of if our sales reps back in front of prescribing physicians and their office staff and nurse practitioners it’s a collection of when and when it can be done safely and appropriately.

[Gary Nachman:]

Okay. And just a couple last ones for David, so is your gross margin going to be impacted at all by stopping the manufacturing of Zilretta for a period of time? And then I think you mentioned I'm just jumping on a couple of calls. How much could sales be down in the second quarter, now that you have a couple of months in the bag, I think you mentioned inventories would be an issue.

[Mike Clayman:]

Yes, Gary, so answer the second question first. Look, it's still early days. COVID hit us the middle of March. And that resulted in the material decline at that point. We're not going to give tickets on how things are playing out because it's – as you can appreciate it's very fluid at this juncture. Your first question was about manufacturing and gross margins. And yes, during the time that we have manufacturing suspended, our gross margin will be adversely impacted. That's because we do have certain fixed production costs. As you recall, this is a condominium model with Patheon. And those fixed production costs with production would have been charged to inventory. Now they are going to need to be recognized as parts of cost of sales. So this will occur during the time that we have suspended manufacturing.

[Gary Nachman:]

Okay it’s so nice. I mean, you actually have a good gross margin in the first quarter, I think, trending in the high 80s. So, I don't know, but can you give us a sense of where that might go? Does it get cut in half, or how dramatic it might be?

[David Arkowitz:]

It's pretty fluid at this point in time to your point. This quarter we add a gross margin by 89%. So we were clearly heading in the right direction. But we're going to take a little bit of a pause. But again, it's just too early in too fluid at this point to give specific guidance on what the gross margins are going to look like during this time of production suspension.

[Gary Nachman:]

Okay, understood. Alright thank you guys.

[Michael Clayman:]

Thank you, Garry.

[Operator:]

Thank you. Our next question or comment comes from the line of Elliot Wilbur from Raymond James and Associates. Your line is open.

[Elliot Wilbur:]

Thanks. Good afternoon. I didn't realize I was able to make comments on the call. I probably shouldn't, I'll just stick with questions. And so a couple of questions for David, I never thought I'd be asking a Flexion question about whip. But nevertheless I'm going to proceed in that direction. Just looking through the queue, you've got work in process inventory of around $10 million on the balance sheet, finished goods of around $7 million. And I think somebody is going to look at the finished goods is $7 million divided by your margin in the quarter and conclude that that means you've got inventory on hand to satisfy that $60 million sales for the balance of the year. So just wanted to kind of bounce that idea off you.If I'm thinking about that correctly, I'm not sure about the process of converting whip into finished goods at this point in time and whether that $7 million may actually under represent what you think you have in terms of finished goods inventory to satisfy any additional demand and in 2020. That’s my first question.

[David Arkowitz:]

Got it. Okay. So thank you Elliott. I appreciate the inventory question. Yes, I think just looking at finished goods is an incomplete picture that whip will be converted. And may be already converted even that were a little bit of time outside of the end of the first quarter. So just looking at finished goods alone is only part of the story. And, I think I would just revert back to what we said on our prepared remarks that we do have adequate partial supply of ZILRETTA to meet demand for at least the remainder of 2020. And again, as we talked about we have the ability to restart up at Patheon three months of notice. So, we'll obviously keep a close eye on and what our inventory levels are, but we feel good about this juncture.

[Elliot Wilbur:]

Okay. And for yourself as well David, I want to ask a question around the debt, the term loan and the revolver and then also the Pantheon expenses, which I think jump up in 2021 as well. Just how are you thinking about those obligations, not really an issue this year, but potentially a little bit more? So next, if in fact things don't bounce back along the timeline that we're all hoping and expecting possibility of renegotiating interest rates maybe different amortization of the debt or anything you can do with respect to the Patheon expenses to push those out. Just trying to think about what you can – what kind of flexibility you have in terms of some of these fixed obligations that are more concentrated in 2021 and 2020.

[David Arkowitz:]

Right, so as it relates to the revolver, our term loan, look we're currently in discussions engaged in productive and constructive discussions with our lenders to potentially modify select terms that we believe will favorably impact our liquidity. Our lenders very much understand un-precedent relation that we are in as result of COVID-19, and they're working us to come up with a mutually agreeable solution. We're not there yet. But once we have agreement on this, then we'll provide an update in the in the appropriate forum. So, we're optimistic a little premature as it relates to details.As it relates to Patheon I appreciate that from an accounting standpoint that shows up partially as a lease. But it's really about a manufacturing, a long-term manufacturing contract. We've talked about the fact that we've paused production for the time being and have the opportunity to startup with three months notice. We have a good relationship with Patheon and as things progress through 2020, we will be working closely with what makes sense beyond this year.

[Elliot Wilbur:]

Okay. Then I want to ask a question directed to Mike with respect to the CSPC agreement and specifically the milestones associated with that $32.5 million if I remember correctly. I would assume the bulk of that is tied to final approval, but just trying to get a sense of how much of those could in fact be generated if everything goes according to plan in advance of a final approval.

[Michael Clayman:]

Yes, I don’t know exactly what that is, the $32. 5 million and Scott Young might have a better line of sight on this. My recollection is that the $32.5 million in milestones regular drawing can work with sales milestones are heavily weighted in the direction of sales volumes and downstream sales.

[Elliot Wilbur:]

Okay. And then just one last question for Melissa, with respect to conversion and the opportunity that still seems to be on the table, I guess looking at the latest metrics, you still have like 45% of accounts that generate, or excuse me, that purchase, roughly 3% to 4% of total units. So kind of wondering, just how much salesforce time, effort, energy, attention and costs are sort of targeted at that 45% that generate relatively small volume. So what's the best strategy to really try and convert those accounts right now versus maybe just focusing efforts more on the high prescribing accounts, which still may be under utilized in terms of their potential, total volume? Thanks.

[Melissa Layman:]

As we said before, we think that there is room for all of our accounts regardless of whether we consider it to be higher or low volume purchasers to be more penetrated. David has talked on previous calls about the ZILRETTA utilization continuum. And you can see from a number of the commercial message slides that we are continuing to move customers into the small volume purchases, move customers from the small volume purchases to the midsized volume purchases and from midsized volume purchases to the larger volume purchases. And that really we believe is a function of customers getting comfortable with initial trial, being able to in the context of their own practice, get evidence of the clinical impacts that ZILRETTA can have on a small number of patients, experience successful coding, billing and reimbursement and then expanding that use to other patients within that physician purview and to other physicians within that practice.And so the degree of effort that is placed against those small volume purchases is proportional to the opportunity that exists within those practices as we understand it.

[Operator:]

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

[Unidentified Analyst:]

Hey this is Dan [ph] on for Serge. I just had a few questions. So given the positive impact that you've seen on your virtual outreach program so far, sorry I guess just broadly speaking, how do you plan to, I guess, incorporate this virtual technologies and tech tools going forward in a post COVID environment? I guess is just something that you think is worthwhile in pursuing long term?

[Melissa Layman:]

Absolutely, I think, we know for sure that ZILRETTA is a highly, promotionally sensitive product. And regardless of whether that promotion is in person, which is clearly most effective or remote it all counts towards the ability to drive utilization. We've been benefited by the fact that physicians have time on their hands now and we can access them to a greater degree through our own, remote detailing. And they likewise are accessing their patients through the telemedicine services that they are now getting more and more equipped everyday to use. That creates an opportunity for us to leverage the remote physician to patient dynamic with ZILRETTA advertising. And that is absolutely something we're looking into.In terms of direct-to-physician promotion through remote detailing in addition to our sales people spending the majority of their time today doing that. We are also beginning to turn on peer-to-peer education from a remote position including a number of, national speaker programs with panels of experienced physicians in terms of their use of ZILRETTA and being able to engage a much broader number of physicians across the country remotely in those types of interactions.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Francois Brisebois from Craig-Hallum Capital Group. Your line is open.

[Francois Brisebois:]

Thanks. Thanks for taking the question. Just quickly here, I was wondering if cost cutting, now that you've given a little more guidance on the impact, there $43 million to $53 million, is that in any way related to kind of your revenue expectations here or you're just waiting on that to get more clarity before giving guidance there?

[David Arkowitz:]

Hi Frank, this is David. So this, as you can appreciate and as I said in my prepared remarks, this was really a deep dive throughout the organization to reduce expenses in order to in order to ensure that we have actual flexibility and liquidity, given what we're experiencing COVID19. We have eliminated, we reduced, we deferred the things that we thought made the most sense. And we've talked about this in the past, planning for the worst and being prepared for the recovery. As it relates to revenues, as you appreciate, we're still relatively early days as pandemic and things are changing every day.So we didn't sit there and match up our expense reductions to revenue – to what we think our revenue is going to be because it's – there is a wide dispersion of outcomes there. We had those and focused on our expense reductions based on what we think makes sense for the business, both short term and long-term with the objective of facing, financial flexibility and liquidity.

[Francois Brisebois:]

No, that makes a lot of sense. Thanks for that. And then did the cost cutting start, it seems like the sales were starting to really get hit in mid-March with COVID. Did cost cutting start at that point, or is this really going forward in the quarters to come here?

[Michael Clayman:]

We really embarked on that late, we'll say late in the late, in the first quarter, but the impact on our expenses the first quarter related to those activities is really de minimis, because things were already well in progress.So it’s really about our expense Q2, Q3 and Q4 going forward. And the other way to think about this is by just doing the math we are expecting aggregate operating expenses Q2 through Q4 to be in $100 million to $124 million range, given what we incurred in the first quarter.

[Francois Brisebois:]

Understood. And then just lastly here in terms of Patheon and production is this something that you would let the Street or let the public know when you would reengage production with Patheon because it seems like it would be related with what's going on in the medical practice?

[Michael Clayman:]

That's a good question. I think we would figure out what makes, from a disclosure standpoint, when we initiate production. I think it'd be kind of premature at this point to say we will let everybody know at that point in time or not. Again as we disclosed we would give – let Pantheon know when there's a three-month notice period.

[Francois Brisebois:]

Excellent, that's it for me. Thank you.

[Operator:]

Thank you. Next question or comment comes from Bruce Jackson from Benchmark. Your line is open.

[Bruce Jackson:]

Hi, thanks for taking my question. Just quickly on the shoulder trial, are you going to be able to salvage any data out of that?

[Michael Clayman:]

Yes, Bruce, this is Mike. Thanks for the question. We of course, we will restart the study, we will un-blind the study, we will analyze the data that has accumulated and determine its utility to potential requirements of the subsequent protocol that we will write and implement. I would caution though there are limited numbers of patients enrolled in there. But certainly we don’t want your expectations to be too high, but we owe the patients who enrolled themselves or jotting [ph] roles in that trial and to the larger community that [indiscernible].

[Bruce Jackson:]

Okay, good. And then with FX201, do you think you’re going to be able to search back up pretty quickly when you get the opportunity?

[Michael Clayman:]

Only the operational [indiscernible] as soon as feasible, as soon as [indiscernible] are ready and we're confident that we are not going to be exposing patients [indiscernible] restarted.

[Bruce Jackson:]

Okay, great. Thank you very much.

[Michael Clayman:]

Thank you Bruce.

[Operator:]

Thank you. I'm showing no additional comments in the queue at this time. I'd like to turn the conference back over to Mr. Michael Clayman for any closing remarks.

[Michael Clayman:]

Yes I’d just say thank you for all those who could come and to those who asked questions. I just want to leave people with the idea that we feel good about the future. And we can't predict day by day, but we understand that's there’s a need for Zilretta and we'll try to meet the demand that will be substantial in all of the elements that we outlined in our call today. Thanks very much

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Stay safe.