Flexion Therapeutics, Inc.
Q3 2019 Earnings Call Transcript

Published: 10 Nov 2019

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Flexion Therapeutics Third Quarter 2019 Financial Results Conference Call. My name is Dilem, and I'll be your coordinator today. [Operator Instructions] I'll now turn the call over to the company.

[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 metric slide that we will discuss in today's presentation. Those slides can be viewed directly via the webcast, in the 8-K we issued this afternoon under the Investors tab on flexiontherapeutics.com. In addition, our Q3 earnings press release and an archive of this conference call can be found there.Today's call will be led by Flexion's Chief Executive Officer, Dr. Michael Clayman. And he's joined by David Arkowitz, Flexion's Chief Financial 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 or 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 September 30, 2019 filed with the SEC today; and other filings, which are available at www.sec.gov as well as Flexion's website. These forward-looking statements speak only as of the date of this call, and Flexion assumes no duty to update such statements.I will now turn the call over to Flexion's CEO, Mike Clayman.

[Mike Clayman:]

Thanks, Scott, and thank you all for joining the call. It's my pleasure to provide an update on Flexion's third quarter business performance. Today, I'll discuss ZILRETTA's progress in the market, recap our recent regulatory, clinical and business development achievements, and then turn it over to David for a deeper review of our commercial metrics and a summary of our financial performance. After that, we will open the line and take questions.To begin, as we announced in the press release this afternoon, we recorded ZILRETTA net sales of $21.8 million in the third quarter, which represents growth of 29% over the second quarter. Throughout the course of 2019, we have seen increased traction with existing accounts as well as strong penetration into new accounts. As we have discussed previously, we believe this momentum can be attributed to several key factors, including

[David Arkowitz:]

Thank you, Mike. I'll start by walking through our commercial metrics, which, as Scott mentioned, can be found on our website in the 8-K we issued today.I'll begin with Slide 2, which includes several key metrics that provide important context on the progress of ZILRETTA's launch.As Mike mentioned, we recorded net sales of $21.8 million in the third quarter, representing growth of 29% over the second quarter, and we called nearly all of our 4,600 target accounts. Our continued strong quarter-over-quarter sales growth, we believe, is attributable to a number of key factors, including

[Operator:]

[Operator Instructions] I show our first question comes from Randall Stanicky from RBC Capital Markets.

[Daniel Busby:]

This is Dan Busby on for Randall. A few questions from me. First, if we take the midpoint of your updated ZILRETTA guidance and implies a deceleration in growth in 4Q relative to 3Q, is that the right way to think about the upcoming quarter? Or could there be some conservatism built into the guide?

[Mike Clayman:]

Yes. Dan, it's a great question. And as we've consistently said about our guidance, we're providing numbers to be in a range that we believe are credible and achievable. And we believe 70 to 75 is both of those, and we'd be very pleased with that.

[Daniel Busby:]

Okay. And second, with respect to your repeat administration sNDA, has FDA provided a reason for the delay as part of your ongoing dialogue?

[Mike Clayman:]

You have to realize that the agency tends to be reasonably opaque about these kinds of things. So we do not have any clear insight into exactly what is transpiring there. And as I expected, others will have questions about the status of the sNDA. I'll simply say that at this point, in essence, what we have put in the press release and in the script is the extent of our knowledge.

[Daniel Busby:]

Got it, understood. And last question from me. Where do you expect gross to net to settle out once your volume-based rebate program is fully implemented and in place?

[David Arkowitz:]

Sure. So this is David. So at this point, we're not going to be providing a projection of our gross-to-net reductions, as we -- as we're focused on continuing to address economic considerations related to ZILRETTA utilization, such as the introduction of the rebate program in the third quarter. There will be clearly greater variability on the future gross-to-net reductions. We're going to continue to -- in a thoughtful and judicious way, look at approaches and means in which we can enhance the value proposition as it relates to ZILRETTA for health care providers and intermediaries such as GPOs.

[Operator:]

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

[Gary Nachman:]

Congrats on the quarter and great progress. So how is the direct ordering with physician practices in this value-based rebate program been helping uptake? I know it's early, but is that driving a lot of the shift to the 50-plus bucket that you highlighted?

[David Arkowitz:]

Gary, this is David. So we're not going to break out sales by these specific initiatives and activities. What we can say is these things are all contributing to the performance that we had in the third quarter, and we will continue to use these initiatives, these activities and add to them in subsequent quarters to drive continued growth in utilization and adoption.

[Gary Nachman:]

Okay. And I mean within that bucket of 51 plus, is there a group that's really high? So curious where the ceiling might be for some of your best accounts and at a certain price. Since they are contributing to so much of the volume, I'm curious just within that group, how concentrated it might be?

[David Arkowitz:]

Sure. So I think what I can do is share a couple of additional pieces of information. The first is, if you look at the 50 -- the more-than-50 bucket and look at the average units purchased over the last couple of quarters or at over the last 3 quarters, it's gone from -- the average gone from 120, on average to -- in the first quarter to 136 in the second quarter to 163 in the third quarter. So we're getting greater utilization out of those, what we call the early adopters. That's point one. Point two is; we do have a number of accounts, more than 25 accounts, that have purchased more than 50 units -- excuse me, more than 500 units of ZILRETTA launched today.

[Gary Nachman:]

Okay, that's very helpful. And then, Mike, I know it's hard -- there's not much that you could share in the communications with FDA. But since it's taking them a bit more time, do you think it's more likely we'll see a modification of the language versus a complete removal of the LOU from the label?

[Mike Clayman:]

Yes. Gary, I'd simply say that to avoid speculation, I'll simply say that, we continue to proceed with confidence in the data that supports an improvement in the label. To go beyond that is to stray into the realm of speculation. And I think as you can appreciate, Gary, to speculate on what's going to transpire with the FDA is to do so at your substantial risk.

[Gary Nachman:]

Okay, that's fair. And then assuming that it does turn out favorably and there is some change, how quickly could you implement that to your promotional materials? And how long before you think we might see a benefit? And then just -- I know you've talked about in the past, but just characterize how much of a benefit do you think it might be.

[Mike Clayman:]

Yes. So in terms of translating the new label language, assuming we get new label language, translating that into marketing materials, I can tell you that there's been a -- this should come as no surprise to you that there's been a broad and deep cross-functional team focused on exactly that. And they've done an outstanding job preparing for a variety of different outcomes. And I'm confident that we will see new marketing materials within hours today is after we get the finalized language from the agency. We expect that this will provide progressive positive influence on sales. Just like with the J code, it's not going to be the flip of a light switch. It will create the opportunity for dialogue and a lowering in the threshold for repeat dosing. It'll have ramifications for prescribing physicians and those handful of payers that have had any resistance to the idea of repeat injection. That will be a process that we'll roll out over months and quarters. But I can tell you, we have done internally everything humanly possible to prepare for rapid implementation of updated materials in the field.

[Operator:]

Our next question comes from Elliot Wilbur from Raymond James.

[Elliot Wilbur:]

First question actually for David. With respect to gross margin trends going forward, been somewhat volatile over the last couple of quarters. But how do we think about this period sort of being a baseline going forward, especially as you implement some of these new volume-based and rebate-based programs?

[David Arkowitz:]

Yes, Elliott. So gross margin in this quarter, the third quarter, was about 87%. And that is a reduction from 92% in the second quarter. We've always said that expect some inherent variability in our gross margins as we continue to ramp from a manufacturing standpoint. Once we hit steady state, and we're not at steady state at this juncture, we think gross margins are going to be around 90%. So we're getting there, but we're not there yet.

[Elliot Wilbur:]

Okay. So you're -- you would not anticipate some of these new initiatives to have a material impact on gross margins basically, is there?

[David Arkowitz:]

I think we're still going to see some variability over the near to intermediate timeframe.

[Elliot Wilbur:]

Okay. And then a couple of questions for Mike. Based on now what I imagine is rather significant interaction with the agency around the limitation of use language and the multi-dose study that you guys have put together, how might that inform your thinking about the study design in shoulder and adhesive capsulitis? I would assume that you'd sort of look to address some issues that have risen, any indication in -- with data in those studies that most likely sort of simultaneously with the submission.

[Mike Clayman:]

Well, it -- Elliot, it's a very good question. Under active -- I'd simply say under active consideration. What we'd like to do is do this sequentially. Let's see how we come out with this current round of discussions with the agency, and that will inform our decision-making in shoulder.

[Elliot Wilbur:]

Okay. And one last question for you, Mike, as well. With respect to FX201, obviously, new OA is the big target here. But once you get through the Phase I study, how might your thinking evolve in terms of potentially running different joint programs simultaneously? I'm assuming that, obviously, 201 would have applicability in joint similar to what the standard TCA or steroids would. But just you're wondering if you might be considering more rapid development in other joints and in more of a simultaneous development program rather than sequenced.

[Mike Clayman:]

Elliot, it's a very good question. And clearly, that gene therapy does lend itself to a variety of different joints. I think it's fair to say that we will take this stepwise. We will define the value proposition in knee and devote our effort and attention to energy and knee since that is such an important part of the unmet medical need out there. And we will judicially consider other joints and other conditions that might benefit from this approach. Having said that, I do think knee is top of mind for us because getting it right in knee and getting that across the finish line represents such an enormous opportunity.

[Operator:]

Our next question comes from Serge Belanger from Needham & Company.

[Serge Belanger:]

A couple of questions on ongoing commercialization efforts. First, on DTC. Can you give us an update there? Are you at a point where you can -- where you'll decide to expand the DTC advertising? And then where are you at on the CCO search?

[David Arkowitz:]

The what?

[Mike Clayman:]

CCO. Oh, okay. So as it relates to DTC surge, there are a variety of different ways you can approach DTC. And there are web-based approaches and print material approaches that we are embracing increasingly. And I would say stay tuned on that. But we think that there's a big opportunity to reach even more patients going forward than we have to date. On the CCO search, I'd say that we are -- we continue to look for an individual who has great leadership skills, an excellent track record of success leading a commercial organization and someone who will add to the culture and be consistent with the values of this organization. We're proceeding with confidence that we will find an outstanding individual.And a follow-on question that you might have or someone else might have is, well, is there a time line to this? And the answer is yes. There is a time line, and that is as soon as possible.

[Serge Belanger:]

Okay. And then, just on the pipeline. I know the FX301 acquisition is pretty recent, but can you just give us a kind of a broad time line for how this product will move towards the clinics?

[Mike Clayman:]

Yes. I think we've guided to the fact that we expect to be in the clinic in 2021, assuming supportive toxicology -- GLP toxicology. And that's -- I think that's a very reasonable and credible time line.

[Operator:]

[Operator Instructions] I show our next question comes from Patrick Trucchio from Berenberg.

[Unidentified Analyst:]

This is Long [ph] on for Patrick. So I just have a few questions. The first related to LOU. Do you believe that the external expectation for 2020 are reasonable, whether or not the LOU can be removed from the label? And then on the hip related to the discontinuation of the hip trial, should we think of ZILRETTA, in a way, as such being impossible? Or maybe is there, perhaps, a different formulation or a lower dose that could work in this indication?

[Mike Clayman:]

Yes. Let me -- so just to be clear, I think we missed the -- your first question. Can you -- do you mind repeating that?

[Unidentified Analyst:]

Yes, sure. So related to the LOU, I'm just wondering if you think that the external expectations for 2020 are reasonable, whether the LOU can be removed or not.

[Mike Clayman:]

We have not spoken...

[David Arkowitz:]

Guided.

[Mike Clayman:]

About 2020. We anticipate we will ultimately put out guidance for 2020. So I'd simply say stay tuned in that regard. As it relates to hip. We don't use the word impossible around here very much. It's a question of where do you put your resources to achieve the best return on what are precious investor dollars. And at this point, we believe that those dollars are best spent on other very high-potential opportunities. I can't preclude the possibility that at the right time, we might revisit hip. But given everything we know, we're turning our attention to other higher priority potential projects.

[Operator:]

Thank you. I show no further questions in the queue. At this time, I'd like to turn the call over to Mike Clayman, CEO, for closing remarks.

[Mike Clayman:]

I'd simply like to thank everybody for your time and attention. I have to tell you that we are very enthusiastic about where we've ended up in the third quarter through the dint of efforts of a tremendous field organization who are working hard every day to get what we believe is a medicine that matters to patients in need. And we look forward to updating you on the fourth quarter results shortly after the beginning of next year. Thanks a lot.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.