Flexion Therapeutics, Inc.
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Flexion Therapeutics Q1 2018 Financial Results Conference Call. My name is Kevin and I will be your coordinator today. [Operator Instructions] I will now turn the call over to the company.

[Scott Young:]

Thank you, Kevin. Good afternoon. This is Scott Young, Vice President for Corporate Communications and Investor Relations. Both the earnings release we issued this afternoon and an archive of this call can be found on the company's website at flexiontherapeutics.com. Today's call will be led by Flexion's Chief Executive Officer, Dr. Michael Clayman, and he is joined by Dan Deardorf, Senior Vice President of Commercial Operations; and David Arkowitz, Flexion's Chief Financial Officer. Before we begin, I need to remind you that we will be making forward-looking statements during this teleconference that include commercial, financial, clinical and regulatory projections. Statements related 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 quarterly report on Form 10-Q for the quarter ended March 31, 2018, and other filings with the SEC today, and other filings with the SEC, 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:]

Thanks, Scott, and thank you all for joining us this afternoon for our Q1 earnings call. Today, we will provide updates on our business performance including the progress of ZILRETTA's launch, recent developments with our clinical trials and pipeline programs and our financial performance in the first quarter. With respect to the financials, before we get too far into the call I'd like to say what a genuine pleasure it is to have David Arkowitz joining us today. Yesterday, we announced David' appointment as CFO, and that press release summarizes his extensive industry experience and deep financial prowess. David will be an invaluable asset to us as Flexion continues to grow, and we are thrilled to have him onboard. In typical Flexion fashion, he has wasted no time immersing himself in our operations, and I am pleased he will cover our financial performance later on this call. As for Q1, it represented the first full quarter of ZILRETTA availability in the market, and we recorded $2.2 million in net sales. I'll leave it to Dan to provide a detailed review of our commercial activities in Q1, but I can say that based on these encouraging initial sales, the high clinical interest in ZILRETTA and the compelling anecdotal feedback we are hearing from physicians and patients, our confidence in ZILRETTA long-term potential to disrupt the OA market continues to grow. I emphasized on our last earnings call, 2018 is all about establishing a solid foundation for ZILRETTA, and one of the key dynamics that will cover its uptake and adoption is building prescribers' comfort and confidence in their ability to get reimbursed. As a reminder, ZILRETTA is a buy-and-bill product, meaning prescribers purchase it, take inventory and submit for reimbursement only after it has been administered to a patient. It is currently reimbursed under a miscellaneous J code, which means that both Medicare and commercial insurance claims must be processed manually, and the timeframe for payment can range from 1 to 3 months and that assumes the paperwork is done correctly. Thus, the recent developments with Medicare reimbursement are particularly significant for us. To provide some color on this, in April we received the welcome news that the Centers for Medicare and Medicaid Services, or CMS, made the decision to issue a Q code for ZILRETTA. This was a clear statement that they see ZILRETTA as a truly unique product and served as foreshadowing for last week's decision to recommend ZILRETTA for a dedicated J code. To summarize the importance of these developments, the dedicated Q code for ZILRETTA takes effect on July 1, at which point the Medicare reimbursement process will become automated as opposed to the manual review required under the current miscellaneous J code. Once the Q code is effective, ZILRETTA claims will be processed much more quickly and payments can flow to prescribers in a fraction of the time it takes with a miscellaneous J code. In essence, we expect the Q code will serve as a de facto J code for Medicare claims in the second half of 2018. Additionally, we have conducted recent market research, which indicates a majority of commercial payers are also likely to adopt the Q code in the second half. While the Q code is certainly a key development for the second half, we believe a particularly strong catalyst for ZILRETTA will come next year when our dedicated J code is in place. As we announced last week, CMS recommended ZILRETTA for a dedicated J code, which is proposed to take effect on January 1st, 2019. And J codes a universally utilized by Medicare and commercial payers. At this point, I'll move on to highlight some of our recent progress on the clinical side. If you've been watching our recent news flow, you've seen some exciting activity over the past few months, and one of the most anticipated developments was the publication of the pivotal Phase 3 study in the Journal of Bone and Joint Surgery, commonly referred to as JBJS. As you all know, we wanted the data from this study to appear in a top-tier peer-reviewed orthopedic journal, and JBJS certainly fits the bill. For those of you who are unfamiliar with JBJS, it has one of the highest impact factors in the space, and it is, by far, one of the most widely read and highly regarded orthopedic journals with a circulation of approximately 33,000 subscribers. The publication of the Phase 3 results in a peer-reviewed journal provides an opportunity, where appropriate, to have a more complete dialogue with physician and payers about the data. As for our ongoing study investigating the safety and general tolerability of repeat administration of ZILRETTA in patients with symptomatic OA of the knee, on our last call we reported exciting initial data, which showed that 95% of patients, or 195 or 205 patients, experienced clinical benefit by Week 12 following the initial injection of ZILRETTA, and approximately 92% of eligible patients received a second dose of ZILRETTA between Weeks 12 and 24. Last month, at the Osteoarthritis Research Society International, or OARSI, Annual Meeting, we presented additional interim data showing that the average time to second dose was more than 16 weeks, and 74% of patients received a second administration of ZILRETTA between Weeks 16 and 24. Another important aspect of the repeat administration study is that the participants represent a broad, real-world patient population, which included a significant percentage of patients who were previously treated with interarticular corticosteroids, 51.9%; and/or interarticular hyaluronic acid therapy, 17.3%; and individuals classified as Kellgren-Lawrence Grade 4, 30.3%, which is the most radiographically severe form of OA. As a reminder, following the initial injection of ZILRETTA, patients are evaluated at 12, 16, 20 and 24 weeks to determine their eligibility for a second injection. Patients who receive a repeat administration of ZILRETTA are followed for a total of 52 weeks after the initial injection regardless of when the second injection is administered, so the minimum follow-up after the second injection is 6 months. Top-line study results are expected in the third quarter of 2018. With respect to new clinical trials, just this month we initiated an open-label study to assess the effect of a single administration of ZILRETTA on synovitis in patients with OA of the knee. While this is not a label-expansion study per se, we believe it can provide us with potentially valuable information on ZILRETTA's ability to quell synovial inflammation, which increasingly is recognized as a key driver of both symptoms and disease progression in OA. The study is expected to take roughly 6 months to enroll, and the top-line results are anticipated next year. Finally, regarding our pipeline programs, in March we discontinued the development of FX101, our extended-release formulation of fluticasone. The decision was not taken lightly, but based on the results from our pre-clinical studies, it was clear that the program was not meeting the requirements of our target product profile. While we would have preferred to see the program advance, the data simply did not support this, and the decision to discontinue FX101 is in keeping with our commitment to make critical go/no-go decisions as early in the development process as possible. The FX101 decision allows us to preserve precious resources and enables our research teams to focus their efforts on the development of FX201, our pre-clinical gene therapy program, which aims to provide at least a year of OA pain relief and potentially modified disease progression. With respect to FX201, there was exciting new pre-clinical data presented at OARSI. These data showed that the administration of equine equivalent of FX201 in an equine OA model resulted in successful pain relief, improvement of function and slowing of disease progression compared to placebo. Additionally, a single administration of the FX201 murine and equine equivalents was well-tolerated in their respective pre-clinical models, and there was no significant bio-distribution observed outside the target joint tissues, which gives us confidence that the risk of systemic side effects in humans is likely to be low. These data were shared with the FDA as part of a pre-IND meeting, and assuming our GLP toxicology studies are successful, we anticipate filing an IND and initiating first-in-human clinical trials in 2019. With that, I'll turn the call over to Dan to provide his update on our launch activities and commercial progress.

[Dan Deardorf:]

Thanks, Mike. It's been about 5 months since the launch of ZILRETTA, and in the relatively short period of time, we've made meaningful progress as reflected in our Q1 sales and our quarterly launch metrics. And while it's still early days, our musculoskeletal business managers, or MDMs, are gaining access to our target accounts as prescribers are showing high levels of interest. Before I discuss the launch metrics in fuller detail, let me provide some context on where we are in our launch cycle. As I previously discussed our initial approach is to ensure that our MDMs focus on depth versus breadth, but I often get asked exactly what that means. Simply put, coming out of the gate, our reps were prioritizing key accounts and high-volume prescribers. We wanted to ensure that those accounts are supported through every step of the selling process. As we had emphasized, the clinical sale is just the beginning of the process with a buy-and-bill product like ZILRETTA. If you're familiar with the expression, &quote it takes a village & quot [ph] well, it takes an entire office to order and administer buy-and-bill products. It starts with the prescribers' clinical buy-in and the quickly moves to office managers, reimbursement staff, schedulers and even finance directors. For large practices and hospitals, it can include navigating pharmacy and therapeutics committees to get ZILRETTA added to institutional formularies. These large accounts require time and effort, and ensuring they have a positive experience with ZILRETTA throughout the entire process is key to securing repeat orders and long-term customer satisfaction. And that's exactly why we hired a field force that has deep experience navigating the intricacies of a buy-and-bill process, and I'm pleased to report that they've been out there doing a great job executing our playbook as designed. In Q1, our MDMs began expanding the breadth of their outreach to the next wave of target accounts. And as we build broader market awareness, we've begun to activate our direct-to-patient, or DTP, campaign. Without providing too much competitive information, I can say that our DTP campaign will place a heavy emphasis on web-based advertising that is utilizing advanced digital targeting. However, there are also multiple dimensions and components to the campaign, which will also span print and the in-office channels. Some of these activities have already begun with the remainder expected to start later in Q2. With respect to reimbursement, as Mike described, clearly the J code will be an important catalyst in 2019. However, we believe the issuance of the Q code will create additional comfort with reimbursement in the second half of this year. In addition to providing prescribers with comfort and confidence in Medicare reimbursement, as Mike mentioned, our research suggests that a majority of commercial insurers will, in fact, utilize the Q code. In the meantime, our MDMs and field access managers are working with prescribers to help them navigate and manage reimbursement under the current miscellaneous J code. At this point, I'll walk through our quarterly launch metrics. As a reminder, the intention of the first 4 metrics when considered collectively is to provide insights on the uptake and adoption of ZILRETTA. In addition, we have 2 metrics that focus on payers and reimbursement. Since launch, our MDMs have called on approximately 8,500 of the approximately 10,500 target prescribers who practice in approximately 3,700 target accounts. The number of prescribers increased from 9,500 to 10,500 and the number of target accounts increased from 3,500 to 3,700 during the first quarter as our MDMs identified additional prescribers and accounts in their territories. Our MDMs and field access managers have held in-depth discussions on reimbursement or conducted product preparation training at roughly 1,600 accounts since the launch on November 20th. Furthermore, approximately 1,480 accounts have gained experience with ZILRETTA through either purchases or product samples since launch. And of the accounts that have purchased ZILRETTA, approximately 48% have placed a reorder. With respect to commercial payers, we have engaged about 40 key commercial insurers that represent roughly 207 million covered lives, and we continue to see more than 95% of the benefits verification requests processed through our FLEXFORWARD service have confirmed coverage of ZILRETTA. In summary, we're very pleased with our commercial progress, the clinical interest in ZILRETTA and the feedback we're hearing from the field, and we're excited about what's to come. So with that, I'll turn it over to David.

[David Arkowitz:]

Thank you, Dan, and I'd like to thank Mike for his kind introduction earlier. Before I get into the financials, I'd like to say what a privilege it is to be here today. I've been watching Flexion for some time and it is tremendously exciting to now be part of this team. It is my pleasure to walk through our recent financial performance. The company reported a net loss of $41.6 million for the first quarter of 2018 compared to a net loss of $23.9 million for the same period of 2017. Net sales of ZILRETTA for the first quarter of 2018 totaled $2.2 million. Cost of sales for the first quarter of 2018 were $2.7 million and was due to manufacturing costs. Research and development expenses were $11.6 million and $10.8 million for the 3 months ended March 31, 2018 and 2017 respectively. The increase in research and development expenses of $0.8 million was primarily due to an increase of $1 million in personnel and other employee-related costs for additional headcount and stock compensation expense as well as a $0.5 million increase in pre-clinical expenses related to our portfolio expansion and other program costs offset by $0.7 million decrease in development expenses for ZILRETTA. Selling, general and administrative expenses were $26.9 million and $13 million for the 3 months ended March 31, 2018 and 2017 respectively. Selling expenses were $17.6 million and $5.2 million for the 3 months ended March 31, 2018 and 2017 respectively. The increase in selling expenses of $12.4 million was primarily due to salary and related costs associated with additional headcount and other costs to establish commercial marketing and sales capabilities. Our general and administrative expenses increased by $1.5 million in the 3 months ended March 31, 2018 as compared to the same period in 2017 primarily due to salary and related costs associated with additional headcount and increased stock compensation expense. Interest expense increased by $3.3 million in the 3 months ended March 31, 2018 as compared to the same period in 2017 primarily due to the May 2017 issuance of an aggregate of approximately $201 million in 2024 convertible notes. As of March 31, 2018, the company had approximately $377 million in cash, cash equivalents and marketable securities compared with approximately $424 million as of December 31, 2017. As a matter of corporate practice, we do not provide financial guidance. However, we expect expenses to increase over the next several years due to the ramp in costs associated with commercial activities for ZILRETTA. Line extension clinical trials for ZILRETTA in OA of the hip and shoulder, expenses associated with the development of FX201 and development activities associated with future additions to the pipeline. With that, operator, please open the line for questions.

[Operator:]

[Operator Instructions] This concludes our prepared remarks. We will now open the call for your questions. [Operator Instructions] Our first question comes from David Maris with Wells Fargo.

[Unidentified Analyst:]

Hi, this is Katie Curfit on for David Maris. First I was wondering; do you feel that things are going as expected or better than expected with the ZILRETTA launch? And if it's better, what part is better than expected? Is it the doctors prescribing? Is it net realized price? And also any kind of more detail you could give around the trend to net realized price compared to what you had expected would be helpful.

[Dan Deardorf:]

Sure, Katie. It's Dan. Yes, we're very pleased with what we're seeing in the marketplace and across all of the metrics that we highlighted earlier. As we've continued to say, the clinical interest in this product continues to be extremely high, the feedback we're hearing from clinicians and patients alike on how well the product is responding and the broad payer coverage that we've got. So we're pleased across all of these metrics and progress that we've made from Q4 of '17 to Q1 of '18. So continue, again, just be pleased with what we're seeing in the marketplace. Of the metrics we look at, the ones that I think are probably most telling will ultimately be product experience that either ordered or sampled, or account reorders will obviously be something we'll be watching closely as we move forward. Btu as I say, we're pleased with what we're seeing the marketplace. Was there a second part to the question I did not answer?

[Unidentified Analyst:]

Just any, if you care to, give any color around the net realized price. And I'd also, as a follow-up, just like to ask if you have a proxy or if you've looked at proxies for other treatments that have received a Q code or a J code and how the potential sales trajectory changes once those go into effect. If you can share anything that you've seen given your history in the field, that would be helpful.

[Dan Deardorf:]

Sure, sure. I would say we're in line with what we've expected from a gross to net perspective on that front. And an important backdrop with respect to Q codes; there are very few Q codes that are actually issued. So it's difficult to find a proxy particularly a proxy that looked like our product to see what that increase might ultimately look like. We're ultimately pleased that we've got a Q code and we think it will give us some level of tailwind, but it is something that will be new to many of our customers so there will be an educational process around that. And customers will ultimately want to see reimbursement under that Q code. So again, we're pleased that we've got the Q code, and it's just too early for us to tell to what extent we'll have a tailwind moving forward through the back half of the year.

[Operator:]

Our next question comes from Randall Stanicky with RBC Capital Markets.

[Dan Busby:]

Hi. This is Dan Busby on for Randall. Two questions. The first one; regarding bilateral knee pain, you said in the past that it's fairly typical to receive sequenced injections. So I know it's early, but have you seen or heard any evidence of either sequenced or concurrent use with ZILRETTA? And then more broadly, on that point, assuming the bilateral knee data is positive, are there other hurdles that would prevent widespread concurrent use in both knees? And then second question, could you speak a bit more to the impetus for increasing the number of target prescribers and target accounts? Was this always the intention as you reached this stage of the launch? Or were there other factors that influenced the timing?

[Michael Clayman:]

Yes. So let me, Dan, let me take the first question about bilateral, and we'll ask Dan Deardorf to answer your question about targets. So we know from our clinical trials that between 60% and 70% of patients, at least of those patients enrolled in those trials, have bilateral knee pain. We know that it is typical if you are a patient who is going to receive bilateral steroid injections that those are typically sequenced. Frankly, even if you don't have diabetes - there's a compelling reason to do so if you have diabetes - but many times they're sequenced even if you don't have diabetes because the pharmacologic levels that are created with a bilateral immediate-release steroid injection are so substantial. It is way early days for us to be commenting on patients receiving bilateral knee injections with ZILRETTA at one setting. I'll simply say that we have anecdotal evidence that that is happening and is being well tolerated. You have - I have often said that the plural of anecdotes is not data, but that's what we have to go on right now. And I was in the field not too long ago and was made aware of a patient, who had diabetes, got bilateral ZILRETTA injections and did not bump her glucose at all and got pain relief that far exceeded what she had gotten with her immediate-release steroid injections. And her immediate-release steroid injections even in one knee were sufficient to bump her glucose. So it's at the level of that story. And we're hopeful that with the bilateral knee data that will provide a basis for physicians to consider this. Ultimately, it's going to be physician and patient decision.

[Dan Deardorf:]

Yes, and with respect to the addition of target physicians and target accounts, you may recall that we did some very extensive modeling to identify these targets, probably to the extent that it was a proprietary piece of work that we did. That said, as the reps get out in the real world, they'll identify predominantly additional physicians within existing accounts, but we've also identified a few additional accounts. So at the end of the day, given how difficult it is to identify these targets in any launch, I'm, frankly, quite pleased that we got it 90%, 90-plus% right with respect to identifying these physicians and accounts. And our reps, with their first-hand knowledge, have augmented that.

[Operator:]

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

[Unidentified Analyst:]

Hi. This is Nicole on for Gary. For the study in the hip and shoulder, currently we have the timing around second half of '18. Can you provide a more specific timing around that data readout? And are you going to also be announcing when the last patient enrolled is going to be?

[Michael Clayman:]

No. We're going to stay with the second half of 2018. We're confident in that timeframe. As we move on in the year, we will provide greater clarity on when you can expect the data. And we've typically not announced last patient in. Rather, we announce once we have data, which is typically a matter of weeks or a month or so from last patient in. So I would simply say stay tuned.

[Operator:]

Our next question comes from Elliot Wilbur with Raymond James.

[Elliot Wilbur:]

First question. With respect to the revenue recognized in the quarter, some folks want to know how much of that was actually based on in-market demand versus potential trade stocking.

[Michael Clayman:]

So all we report, Elliot, is end user. And that's…

[David Arkowitz:]

It was ex-factory.

[Michael Clayman:]

I'm sorry. I misspoke. Ex-factory. And that is what it is. I mean I think it's fair to say the vast majority of ex-factory is demand. We're not going to get into details beyond that. But we have guard rails in place to ensure that there is not undue stocking at specialty distributors because, for us, it's important that what we report ex-factory is a direct reflection of demand, and we believe it is.

[Elliot Wilbur:]

Okay. Then the follow-up question, probably for Dan and yourself as well, Mike. I mean it looks like to date that you've had sort of kind of high-touch experience with about 1,600 of the total target of around 3,700 accounts, and there's been extremely high conversion with those accounts that you've actually had sort of direct hands-on experience with in terms of reimbursement or product training. How many of the total target of 3,700 accounts do you actually expect to have sort of those high-touch experiences with?

[Dan Deardorf:]

Yes. So I think the first comment to make is I think you're first points speaks to our depth versus breadth strategy. We identified our first set of accounts and we're living with them, making sure that they're going to have a positive experience clinically as well as from a reimbursement perspective. So it speaks to the depth versus breadth. We're not sure with anything with respect to what we're expecting on those conversions. We, as I indicated in the pre-prepared remarks, we are now branching out into the next wave of targets across the board. And so we'll be digging in deep as we did on the first wave of customers to, again, ensure that positive experience and the conversion as we've seen with these metrics.

[Elliot Wilbur:]

Okay. And then I wanted to ask, well, maybe just a quick follow-up to that. So you've expanded the number of target prescribers. Can you just remind us - so with that expansion at 10,500, what percentage of existing IR PCA RXs does this expanded base cover? Do you have that metric?

[Dan Deardorf:]

I don't have it exactly, but in general we're following an 80-20 rule with respect to the business.

[Elliot Wilbur:]

Okay. Then the last question is for Mike. I guess with respect to the recent report of data from the repeat dose study and I guess the patient constitution in terms of sort of real-world experience. I thought it was particularly noteworthy that such a higher percentage had KL4 scores. I think it was around a little over 30% of KL Grade 4. I'm just kind of wondering sort of based on sort of end-market experience, how that particular data point is resonating with practicing prescribers. I mean it seems like obviously that would have been a tough population to treat. We don't have the specific metrics there. But just sort of wondering what kind of feedback you're getting from the field on that metric.

[Michael Clayman:]

Yes. Yes, I'd say it's early days in terms of getting the feedback, but realize when most physicians are treating most patients, they're not looking at a KL grade. They're looking at patient with moderate to severe pain. And fair to say that many patients with moderate to severe pain will be KL4s. We studied KL2 and 3 in our pivotal registration trial so we could have the most controlled population. There is apocryphal data that would suggest that the KL4s are more difficult to treat, and we wanted a pure, if you will, population in our registration trials. But it's fair to say that in the real world KL4s will be treated. And this is a real-world study. We felt something tantamount to an ethical responsibility to understand how this product would perform in KL4s, and we couldn't be more pleased with that performance.

[Operator:]

Our next question comes from Serge Belanger with Needham and Company.

[Serge Belanger:]

Mike, in the past you've been asked about your level of comfortableness vis a vis the Street consensus estimates for ZILRETTA for 2018. Just wanted to revisit that comfortableness now that we're a quarter in and the Q code has been granted.

[Michael Clayman:]

Yes. I would say at this point nothing has changed, Serge, and would leave it at that.

[Serge Belanger:]

Okay, good. A couple of questions for Dan. Can you describe the current sampling efforts as well? As I think you mentioned you met with - you've now met with 40-some commercial payers. Have any of them started issuing their formal policy? And how are they looking at step edits?

[Dan Deardorf:]

Yes, so commercial payers - so sampling. Yes, so let me first just ground everybody in our sampling program where we use samples. And where we utilize samples is in order to get a physician clinical experience with the product when there is a non-clinical reason for them being resistant to use the product; generally, a reimbursement situation and we want to get them that clinical experience. So we are continuing to utilize that program judiciously and in those cases and we will continue to do so. As mentioned earlier, we're kind of going to next wave of physicians that we're going to be targeting, and there will be certainly a subset of those that we'll need to utilize samples in order to get them that clinical experience. So continue to use the program judiciously and under those circumstances, as I just mentioned. With respect to commercial payers, we have seen very, very few written policies at this point in time. We continue to monitor and work with and educate payers so that we can impact those policies, but at this point in time, we have seen very, very few policies. You asked specifically about step edits. When we do start seeing policies, I would not be surprised if we saw some step edits. But recall that step edits are something that's normal in the injectable OA category, and it's something that our customers deal with on a daily basis in order to go through those step edits in order to get their patients approved for treatment.

[Serge Belanger:]

Okay. One last one. You presented interim data from the repeat dose study last month at one of the meetings. Any feedback you've gotten from physicians? And I guess in parallel to that, now that you've been on the market for 5 months, some patients are coming up for re-treatment. How are physicians handling that?

[Michael Clayman:]

Yes. So I think it's a bit early. We just presented at OARSI literally a week-or-so ago. So it's in front of us. And in particular we're eager to get these data in print before long, and I think that's going to be a good pathway for dissemination of information. And as it relates to repeat dose data in the real world or experience in the real world, we see that as a decision that will be rendered by the physician taking in the full complement of details related to the patient. And we would expect that this would be particularly dependent on the quality of the response of the patient to the first injection and their desire to have a second injection. So I would say stay tuned. That's also pretty much in front of us.

[Dan Deardorf:]

Yes. We've seen very little at this point in time, Serge.

[Operator:]

Our next question comes from Carl Byrnes with Northland Securities.

[Carl Byrnes:]

Great. Congratulations particularly on the Q code and the C code and recommendation for permanent J code. So regarding the Q code effective July 1st, are accounts now saying they'll use ZILRETTA once the Q code becomes effective whereas perhaps maybe before they were saying, &quot. We'll use ZILRETTA once the permanent J code is in place & quot? Is that what's going on? Or is there anything that you can add incrementally to your prior comments?

[Dan Deardorf:]

Yes. I think the dissemination of that information and the awareness of our accounts at this point in time is probably pretty low around the Q code so we haven't heard much feedback from them. As I mentioned earlier, there's not a lot of Q codes out there, and we'll be fully prepared to educate our customers around how to best implement that moving forward. But we have not heard much back from the marketplace on their intentions given the Q code effective July 1.

[Carl Byrnes:]

So it's that plus the body of publications and peer-reviewed materials that you can use to market do you think is going to be the catalyst for that? That's what I'm hearing.

[Dan Deardorf:]

Yes. I definitely think that a dedicated code with a defined reimbursement rate for the product will be seen as a positive thing. But again, there will be some education as to how to best fill out the forms to make sure those claims are adjudicated appropriately and ultimately receive reimbursement for that usage.

[Operator:]

Our next question comes from Bruce Jackson with Lake Street Capital.

[Bruce Jackson:]

If I could just get a couple of questions in on the labeling for diabetics. First, to what extent do you think it's differentiating ZILRETTA out in the marketplace? And then, secondly, does it factor into the physician decision-making and their enthusiasm for the drug?

[Dan Deardorf:]

Yes. Certainly, diabetes data is front and center in the data that we present to physicians and it certainly gains traction with them. We often hear, &quot. It's one less thing for me to think about & quot; Some physicians say that they don't always have a complete work-up on a patient when they see them, when the specialists see them. So they don't know if the patient is diabetic or pre-diabetic so it's one less thing to think about. And if they do know the patient is diabetic, it's again, one less thing for them to worry about and for the patient to worry about. So again, front and center in our messaging to the marketplace and it is getting traction.

[Operator:]

Our next question comes from Patrick Trucchio with Berenberg Capital Markets.

[Patrick Trucchio:]

With regard to the OARSI guidelines, I believe the last time the research society released these guidelines for treatment of OA knee was 2014, and there was a potential for an update in 2018. So I'm wondering if you know the status of this, when the next update is going to be issued, whether ZILRETTA may be included in the update. And then also what impact this may have on either awareness, reimbursement and/or uptake of ZILRETTA.

[Michael Clayman:]

Yes, Patrick. We do not have crystal-clear clarity on exactly when updated guidelines will be issued by any of the societies; AAOS, American Academy of Orthopedic Surgeons; OARSI, et cetera. I can tell you that we have, I think, very good relations with senior leaders in each of the societies, and to the extent that it is feasible that, based on the available data, ZILRETTA could be included in those guidelines, that is certainly something we are actively exploring. Premature to guide to whether that will be the case or not.

[Patrick Trucchio:]

Okay. And then just one follow-up for Dan. I mean I realize it's early days. I'm just wondering if you've had any sense in the discussions you've had with payers, any sense whether or not ZILRETTA will be placed ahead of HAM formularies or whether clinicians are perhaps switching patients to ZILRETTA from HA.

[Dan Deardorf:]

Yes. Again, early days with some of those conversations and they're happening real-time and on an ongoing basis. I don't think that we've heard any indication of policies that would have us either before or after an HA. It's hard to believe that it would possibly be after. But we haven't heard a lot of discussion with respect to us versus HA within an algorithm or a decision-making policy for a payer.

[Operator:]

Our next question comes from Ken Trbovich from Janney.

[Ken Trbovich:]

Just a couple of quick ones. Dan, I was wondering if you could give us an update on sort of the refrigerator status and whether or not that's an obstacle still ongoing or one that you guys have already overcome.

[Dan Deardorf:]

Yes. Despite all of the work that we did to prepare for that, which leave no stone unturned was always our policy, the fact that we have 6 weeks of room temperature stability on the label has rendered that a moot issue.

[Ken Trbovich:]

Got it. So it's not a concern at all in terms of being able to push forward with the buy-and-bill? These guys are confident that they can obviously inject in that period of time. They wouldn't stock more in that sense.

[Dan Deardorf:]

Yes. And not at all. The pre-work that we did actually a few years ago informed us that most accounts reorder their steroids and/or HA products, many of them every week, if not every 2 weeks, and on the outside every month. So to have 6 weeks of room temperature stability certainly puts us in there.

[Ken Trbovich:]

No, that's great. And then just with regard to (inaudible) and better understanding the cost of manufacturing there, should we be thinking of this as like an on-off situation with when the suite is on you're getting billed for fix overhead and when it's off you're not. Or is it a consistent quarterly charge that we should be expecting there?

[David Arkowitz:]

It's a consistent quarterly charge that gets expensed in the absence of releasing commercial product and goes to inventory in the setting of releasing commercial product. So you will see this expense vary from quarter to quarter.

[Ken Trbovich:]

Okay. And then last question just on the AAOS and the guidelines there. I just had a recent visit and certainly was informed of the fact that many of the plans just flat out aren't covering HA. To what extent is that something that you guys are seeing a noticeable sort of reception or benefit as it relates to your call points?

[Dan Deardorf:]

Yes. We are continuing to hear that trend happen here and there with various payers. We learned of another just today or at least I first learned of another today. So it appears to be a trend that is continuing to happen in that category.

[Operator:]

And I'm not showing any further questions at this time. I'd like to turn the call back over to our host.

[Michael Clayman:]

Thanks very much, everybody. Appreciate your time and attention as always. And we'll look forward to updating you with new information as it arises. Take care.

[Operator:]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.