Flexion Therapeutics, Inc.
Q2 2018 Earnings Call Transcript

Published: 8 Aug 2018

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Flexion Therapeutics Second Quarter Financial Results Conference Call. My name is Nicole and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session at the end of today’s call. [Operator Instructions] I will now turn the call over to the company.

[Scott Young:]

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 conference 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. On today’s teleconference 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 quarterly report on Form 10-Q for the quarter ended June 30, 2018, filed 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 Q2 earnings call. Today, we will provide an update on ZILRETTA’s launch, review our clinical development program activities, discuss Flexion’s financial performance in the second quarter, and then we will open up the call to Q&A. As we reported in our earnings press release, we continue to see strong progress with ZILRETTA’s launch in the second quarter, as reflected by net sales of approximately $3.8 million, which represents a 73% increase in sales over Q1. While it is still early days the launch is advancing on track. And we remain very pleased with the progress our commercial team has made building awareness of ZILRETTA with physicians. The work they have done in the first and second quarters provides a strong foundation for the second half of 2018. And we remain bullish about ZILRETTA’s potential based on the strong payer coverage we’ve seen to-date, the introduction of a ZILRETTA’s specific Q code and the positive clinical feedback we’re hearing. In that vein we continue to be contacted directly by physicians and patients who want to share stories about their positive clinical experiences with ZILRETTA. While anecdotal many of these are profoundly moving and this type of feedback obviously inspires us and further deepens our conviction in ZILRETTA’s potential to make a meaningful difference for the millions of patients who confront painful OA of the knee. With respect to reimbursement, we have described 2018 as a foundational year since physicians need to gain confidence that they will be reimbursed for ZILRETTA, which is predominantly a buy and bill product. On the commercial payer front, we continue to see strong coverage through our flex forward service. As for Medicare which represents approximately half of ZILRETTA’s market, we believe that the most critical reimbursement driver will be the introduction of a product specific J code. And as we have previously reported we anticipate ZILRETTA receiving such as J code next January. However, as we discussed on our last earnings call CMS made the decision to issue a product specific Q code for ZILRETTA, which became effective on July 1. This was a very welcome development, since ZILRETTA specific Q code makes reimbursement simpler, faster and more consistent. Furthermore, our own market research indicates that the vast majority of commercial payers are also expected to utilize the Q code. That said Q codes are relatively uncommon. So there is a level of fundamental education that’s required with prescribers and their office personnel. Additionally physicians and their office staff will want to see confirmation of payment utilizing the Q code. Similarly, we continue to work with the large orthopedic practices in institutions to get ZILRETTA included on their formularies. We are making good progress in this area and continue to navigate the intricacies of their internal processes. But many of these accounts require multiple interactions that can span months. So this remains an area of focus for our teams. As usual, Dan will discuss our launch activities in much more detail. So at this point, I’d like to provide an update on our clinical development activities. To start in our press release today, we provided a high level view of the results from our Phase 2 clinical trial evaluating the pharmacokinetics of concurrent administration of ZILRETTA in patients with bilateral knee OA compared to immediate release triamcinolone acetonide. Why did we do this study in the first place? This study was performed to generate data that would provide insight into the systemic exposure of triamcinolone from bilateral injections of ZILRETTA and demonstrate whether bilateral ZILRETTA injections would avoid substantial pharmacologic concentrations with triamcinolone systemically. Currently most patients with bilateral OA knee pain who would be appropriate for immediate release steroid injections in both knees receive one injection on an initial visit and then a second injection in the other knee on a subsequent visit based on concerns associated with excessive systemic steroid exposure. The trial completed in July and I am pleased to report that the finding for positive. In short the data demonstrated that peak plasma concentrations of triamcinolone acetonide were approximately ten-fold lower and the patients treated with ZILRETTA in both knees as compared to the patients treated with immediate release triamcinolone in both knees indicating reduced systemic exposure. Furthermore the study show that concurrent injections of ZILRETTA were generally safe and well tolerated with similar adverse event profiles for both the ZILRETTA and immediate release triamcinolone acetonide groups. We have submitted these results for presentation at a major medical conference later this year. And we look forward to presenting the full data as soon as possible. With respect to our ongoing Phase 3B open-label study evaluating the overall safety and general tolerability of repeat administration of ZILRETTA in OA of the knee. We previously presented interim results, which show that the average time to a second dose was more than 16 weeks after initial injection and that 74% of patients received their second dose between weeks 16 and 24. The study recently closed and following analysis of the full data set including radiographic data, which compares X-ray at baseline in one year. We expect to make the results available in the fourth quarter of this year. Regarding our Phase 2, open-label study evaluating the safety and PK of ZILRETTA in patients with OA of the shoulder or hip known as the SHIP study, it has progressed as planned and we have completed enrollment. Since this study has 24 weeks of follow-up, we anticipate results will be available in the fourth quarter of this year. The Phase 3b, open-label study assessing the effect of the administration of a single IA injection of ZILRETTA on synovitis in patients with OA of the knee is currently enrolling patients. We expect enrollment for this study will take time due to the various specific eligibility criteria and consequently, topline results are anticipated in late 2019. Finally, we continue to advance our preclinical studies of FX201, an intra-articular gene therapy product candidate, which is designed to produce human interleukin-1 receptor antagonist, whenever inflammation is present within the joint. If the planned GLP toxicology studies are successful, we anticipate filing an IND and initiating first-in-human clinical trials in 2019. In summary, we are pleased with the progress of our clinical trials and we are on-track to share updates on both the SHIP and repeat administration studies before year-end. I’ll now turn it over to Dan.

[Dan Deardorf:]

Thanks, Mike. We’re now just a little more than two full quarters into the launch and as we reported in our earnings release, we’re making strong progress on building the awareness and driving the adoption of ZILRETTA. However, before I dive into our quarterly metrics, I’d like to provide some context of where we are in the launch cycle as I did last quarter. As I previously discussed, coming out of the gate, our field sales reps or Musculoskeletal Business Managers or MBMs were prioritizing key accounts and high volume prescribers and our goal is to ensure that those accounts are supported to every step of the purchase and reimbursement process. At this point, our MBMs have made calls and essentially all of our pre-determined target physicians, laying the groundwork for ZILRETTA’s uptake by introducing them to the product, educating them about the important role can play in the treatment paradigm, training them on ZILRETTA product preparation and working their offices through benefits verification and reimbursement processes. We are now strategically broadening our reach and depth of engagement to a larger set of target prescribers. Based on factors such as practices and historical utilization of intra-articular injections. Concurrently, we continue to see progress and gaining access to key institutional formularies and the subsequent pull through of product usage. With respect to reimbursement, as Mike described, we expect the ZILRETTA specific Q code to be a tailwind for us. But at this point, it remains hard to quantify what the net impact will be. However, our MBMs and Field Access Managers, who are field based reimbursement experts are actively informing and educating prescribers and their staff about the advantages of utilizing the ZILRETTA specific reimbursement code. And we have already seen encouraging signs that the Q code is being well received. Looking at other key marketing activities in Q2, our direct-to-patient or DTP campaign is now activated. And the volume of physician peer to peer educational programs, as well as engagement at Regional Medical Society meetings continues to increase. Looking ahead, we expect to have a significant presence and physician education events at both the American College of Rheumatology Annual Meeting in October and the American Association of Hip and Knee Surgeons Meeting in November. Moving to our quarterly metrics, as I previously discussed our MBMs now have made calls on approximately 10,500 physician prescribers, which represents virtually all of our initial targets. With that goal achieved, we won’t continue to update on this metric moving forward. That said, our MBMs and Field Access Managers continue to conduct in-depth discussions around reimbursement or product preparation training. And they have done so at approximately 2,600 or 70% of our roughly 3,700 target accounts. Furthermore, roughly 2,240 target accounts have either purchased or received samples of ZILRETTA. And notably, of the accounts that have purchased ZILRETTA since launch more than half of place to reorder. With respect to reimbursement, Flexion’s Market Access team has engaged with 46 key commercial insurers that represent roughly 225 million covered lives. Commercial coverage for ZILRETTA remains strong with more than 95% of the benefits verifications processed through our FlexForward service indicating coverage of ZILRETTA. To wrap up, based on a recent performance and the trajectory of the launch, we continue be pleased with our overall commercial progress and remain excited about the near and long-term potential for ZILRETTA. I look forward to providing the next commercial update on the Q3 earnings call in November. And I’ll now turn it over to David.

[David Arkowitz:]

Thanks, Dan. It is my pleasure to walk through the company’s financial performance for the second quarter of 2018. The company reported a net loss of $43.9 million for the second quarter compared to a net loss of $28.9 million for the second quarter of 2017. As Mike mentioned in his comments, net sales of ZILRETTA for the second quarter of 2018 totaled $3.8 million and the cost of sales for the second quarter was $0.9 million. The net sales for the quarter and six months reflect the gross to net reduction of 10%. The gross to net reduction is primarily comprised of distributor fees, returns reserve and mandatory government discounts and rebates such as Medicaid, 340b institutions and VA, DoD. As we don’t provide – and we have no plans to provide end customer rebates or discounts, we expect our gross to net percentage reduction to be in the low teens over the ensuing quarters Research and development expenses were $13.1 million for the second quarter of 2018, compared to $11.8 million for the same period in 2017. The increase in R&D expenses was primarily due to an increase of $0.8 million in salary and other employee related costs associated with additional headcount and increased stock-based compensation expense, as well as $0.5 million increase in pre-clinical expenses related to our portfolio expansion and other program costs. Selling, general and administrative expenses were $31 million and $15.1 million for the second quarters of 2018 and 2017 respectively. Selling expenses were $22.7 million and $8 million for the second quarters of 2018 and 2017. The year-over-year increase in selling expenses of $14.7 million was primarily due to salary and other employee-related costs associated with additional headcount and costs to establish commercial marketing and sales capabilities. General and administrative expenses increased by $1.2 million in the second quarter of 2018 compared to the second quarter of 2017, primarily due to salary and other employee-related costs associated with additional headcount and increased stock-based compensation expense. Interest expense was $3.9 million and $2.9 million for the second quarters of 2018 and 2017, respectively. The increase in interest expense was due to interest incurred on our 2024 convertible notes. As of June 30, 2018, the Company had $340.4 million in cash, cash equivalents and marketable securities compared with $423.9 million as of December 31, 2017. We expect expenses to increase over the next several years due to commercial activities and support at ZILRETTA, line extension clinical trials for ZILRETTA in OA of the hip and shoulder, continue development of FX201 and development activities associated with future additions to the pipeline. With that, operator, please open the line for questions.

[Operator:]

Thank you. That concludes our prepared remarks. We’ll now open the call for your questions. [Operator Instructions] Our first question comes from the line of David Maris of Wells Fargo. Your line is now open. David Maris, your line is now open.

[David Maris:]

Hi, sorry about that. Couple questions on the code for the at the start of the New Year, you mentioned that you expect it will be a tailwind. When you’ve looked at previous launches with J codes like this, I mean what sort of pickup do you see? Is there any reason to think that they – this would be different or that it would be the same? And then separately where feedback that you’re getting from the sales people for high users and then maybe non-users or lower users, what’s been the main pushback for not using ZILRETTA, what’s been the – for the high users what’s resonated the most? Thank you.

[Michael Clayman:]

Yes, sure. So let me make sure I’ve got your questions. Are you asking about the Q code or modeling for the J code come January.

[David Maris:]

The J code, sorry.

[Michael Clayman:]

Okay.

[David Maris:]

The J code in January.

[Michael Clayman:]

Yes. We’ve obviously done some analysis on that to look at lift your product. It’s hard to find analogous products in a similar space with the competitive dynamics that might exist in the disease area, et cetera, that we found to be good analogs if you will. So it’s tough for us to quantify that at this point in time. We have identified that’s one of the elements that makes this a foundational year is working through the miscellaneous J code. Now the Q code and ultimately the J code, so we expect – certainly expect some significant lift from the J code next year is that something that’s comfortable, convenient and known to our customer audience, but have not been able to quantify that with respect to any analogs that we call comfortable with. With respect to the offices that have not pick up the product at this point in time, I would say they’re predominantly due to reimbursement. And we anticipate for some number of them the Q code will help in the back half of the year and the J code will certainly help in the first part of next year. But that’s what we hear very few if any pushbacks on the clinical data and the value that this product could bring it’s really around reimbursement. And for the physicians who are now have a track record of utilizing more product or reordering on a regular basis, it’s frankly the fact that they’ve tried to product and the product performance that they’re seeing in the response, they’re seeing in their patients is going that growth.

[David Maris:]

And then if I can is just a follow-up for physicians – what use are you getting about diabetic use one physician call that we did during the quarter, the physician says he doesn’t use the product at all, except in his diabetic patients. And then we asked him well, what percentage is that and he said about 20%. If you have physician that are limiting it to just diabetic patients or what’s been the feedback so far in the diabetes patient population?

[David Arkowitz:]

I think what we hear more often David is that’s the first place that a physician might go with their first couple patients there’s obviously an additional clinical reason to started in that patient population. But I would say it’s a minority of that have limited their usage to that patient population. It’s just – but yes, they acknowledged an important patients up subset utilize the products. So based on what we’ve heard and as a buy and bill physician administer product we don’t have hard data on patient type specifics, but I would say we’re facing what we know it’s a minority that are limiting it to that patient population, at least beyond their initial use.

[David Maris:]

Great. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Randall Stanicky of RBC Capital Markets. Your line is now open.

[Dan Busby:]

Hey guys, this is Dan Busby on for Randall. Start off with a high level question. Now they are more than halfway through the year, this has anything changed at this point with respect to your overall expectations for ZILRETTA. And then I’m sure you’re probably tired of getting this question, but are you still comfortable with the 2018 and 2019 Street consensus estimates from earlier this year.

[Michael Clayman:]

Yes. Thanks, Dan. Regarding our overall expectations for the product, they remain very strong. And as we said in the script we remain bullish. We’re very pleased with the performance of the product in the first two quarters we’re on track. And I would say as it relates to consensus nothing is change we were proceeding with confidence.

[Dan Busby:]

All right, great. And then a quick follow-up. I know you’ve been hesitant to breakout sampling in the past. But could you comment just on the percentage of accounts that have started off with samples and then have gone on to purchase the product?

[Michael Clayman:]

Yes. We’re not breaking out those statistics separately, other than that is clearly the intention of a sample to lead the product usage after they’ve had that experience, which as we’ve said is, has been very positive. We’re seeing great results from the product. But we’re not breaking those out specifically.

[Dan Busby:]

Okay, I’ll leave it there. Thank you.

[Michael Clayman:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of Gary Nachman of Bank of Montréal. Your line is now open.

[Ann-Hunter Van Kirk:]

Hi, this is Ann-Hunter Van Kirk on for Gary. Can you tell us how the payers have been handling repeat injections in ZILRETTA, now that we have some patients coming back? And how important you think the full repeat dosing data will be including the X-ray for both physicians and payers. And how soon you might be able to have a discussion with FDA about changing the label?

[David Arkowitz:]

Yes. I think so with respect to what we’re seeing on the payer front, we’re still seeing very, very few payer policies actually written. And at this point in time while we’re not able to track since it’s a position buy and bill product, when repeat usage is happening, we are certainly hearing in the marketplace that that product. The product is being reused or repeated and getting reimbursed. That’s the information that we’ve got to go on at this point in time. The – with respect to the repeat treatment data, we believe – into turn that over to Mike.

[Michael Clayman:]

Yes. It’s – so we’re – as I think we’ve presented on the 12-week follow-up data from the first and second injections we find those quite encouraging. We will be processing the data that comes from the completion of the study in a fashion that allows it to be a topic of discussion with the agency as soon as it’s feasible and as we’ve guided to in the script the data should be available for some form of discussion certainly topline by the end of the year. Where I simply say this is about those data to-date, we’re encouraged by what they reveal, we believe they can from the basis for a productive dialogue with the agency. And you can be confident to proceed to ensure we have that discussion without delay.

[Ann-Hunter Van Kirk:]

Thank you so much. And if I could ask one more, can you tell us how clinically relevant the bilateral knee data is and how intact would be and it’s particularly what do you expecting to see from the hip and shoulder PK data.

[David Arkowitz:]

Yes. So I think that the way to think about the bilateral data is, its consistent with what we’ve already demonstrated with unilateral injections, meaning that with unilateral injections we’re between one tenth and one twentieth the peak plasma concentrations seen with the immediate release steroid and that theme reprises itself with the bilateral data. We will certainly submit these data to the agency for potential and inclusion in the label. So that they could inform physicians as they contemplate the optimal treatment of their patients. As it relates to the SHIP study, we believe the data have the potential to provide confidence that based on the plasma PK, one would infer similar residence time of drug [indiscernible] following injection. But it’s an indirect measure, it’s not perfect, it gets us in the ballpark of understanding. But there will likely be work beyond that to more fully explore the use of ZILRETTA in both hip and shoulder as a prelude to label expansion.

[Ann-Hunter Van Kirk:]

Okay, great. Thank you so much.

[Operator:]

Thank you. Our next question comes from the line of Elliot Wilbur of Raymond James. Your line is now open.

[Elliot Wilbur:]

Hey thanks, good afternoon. Just a question for you Mike, kind of high level competitive landscape question. I guess when the Pfizer, Lilly tanezumab data first came out. I’ve got a lot of questions about its potential relation to ZILRETTA. I’m just wondering there’s still a lot – obvious lot of uncertainty about that class of compounds given some of the prior AE issues here. But you really think that intersecting ZILRETTA’s world at all or is this most likely just could be an expensive monoclonal antibody and not really have much overlap or impact to ZILRETTA?

[Michael Clayman:]

Yes. I appreciate the question Elliot. My preference is not – strongly not weighing on how competitors might or might not fit into the treatment paradigm. As you acknowledged the Phase 3 studies for tanezumab of over 7,000 patients, now we have 698 patients worth of data reported out. So I’ll simply say that we will follow with great interest. There’s still a lot of data to come out. And exactly where this product might be placed in the treatment paradigm, I think is in front of us.

[Elliot Wilbur:]

Okay. And then now that you’ve got three quarters ZILRETTA launch experience under your belt or 2 point probably one quarters I guess. Maybe just talk a little bit about BD initiatives going forward whether or not might talk a little more resources towards those endeavors and it potentially accelerate in licensing opportunities.

[Michael Clayman:]

Well. Elly maybe just start by saying that our one, two, three and four priorities are ensuring ZILRETTA success. We are heads down on that and every day essentially everyone in the company is top of mind issue in our plans are committed, our resources are committed to that. Having said that we have carved out a modest amount of resources to create the ability to build a pipeline, we’ve done that with FX201 the gene therapy, I think in a very responsible way. And I think that that sense of responsibility will subtend our future efforts in terms of building the pipeline. You are right, we are not done building the pipeline, but we are going to be prudent and deliberate in that process. And ensure that whatever we do does not takeaway in any meaningful fashion from ensuring ZILRETTA success.

[Elliot Wilbur:]

Okay. And then just last question I may have, this in your earlier commentary, but specifically with respect to the just released bilateral data and then it repeat those data. Which of those do you believe would potentially open discussions with respect to label expansion opportunities?

[Michael Clayman:]

Well, it’s difficult to speculate, I wish I could give you a very clear answer on this. We’re very excited about both datasets. And you can be sure that we will pursue the possibility of their inclusion in the label as appropriate that will be a discussion with the agency and as soon as we know something worth I’m sharing we will shared.

[Elliot Wilbur:]

All right, thank you.

[Michael Clayman:]

Thanks, Elliot.

[Operator:]

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

[Serge Belanger:]

Hi, guys, good afternoon. A couple of questions for Dan first, you’ve had an active Q code for four or five weeks now and the direct-to-patient campaign is also underway. Again noticed any impact, I guess, since the start of July on volumes in sales.

[Dan Deardorf:]

Yes. Too early to tell with respect to any quantification of that. We have seen early signs the Q codes being well received. And but again, just too early to quantify. I would say similarly with our DTP efforts just up and running here recently, obviously we’ve got some early stats around things like website visits in the like that we’re very pleased with, but we’re still early days on that program as well.

[Serge Belanger:]

And then I think in the prepared comments, you mentioned that reimbursement was still kind of a push back issue for your discussions with target accounts. Can that be address with the Q code or do you think it will eventually just take the J code in January.

[Michael Clayman:]

Yes. I think from a majority of accounts, the Q code is going to is move them. It will take varying accounts, varying amounts of time to get themselves comfortable with that. But – a product specific code with a dedicated reimbursement rate that they can look up and see concretely on the CMS website is going to go a long ways to create the comfort that they’ll be looking for.

[Serge Belanger:]

Okay. And then how many of your, I guess, commercial scripts go through flex forward.

[Michael Clayman:]

We have not been specific about that, we’ve got – we’ve quite a number of them do. So when we report that 95% plus of the benefits verifications that we’re doing are showing coverage for ZILRETTA, that gives us great confidence, because we do have very significant volume going through flex forward.

[Serge Belanger:]

Got it. Right. Thanks for the update.

[Operator:]

Thank you. Our next question comes from the line of Carl Byrnes of Northland Securities. Your line is now open.

[Carl Byrnes:]

Great. First, congratulations on the quarter and the bilateral knee data. Considering that the J codes around the quarter, do you anticipate any increase in the MBMs or Field Access Managers staffing, and if so what might that look like first where it is today. Thanks.

[Michael Clayman:]

Thanks, Carl. No, we don’t. We as with everything we did around the launch, we set out to do everything right the first time in all of our efforts to size our sales force, the FAM team, the resources, the programs behind them and we set out to do this right. So we’re still confident at this point time and we’ve got the right number of reps, the right number of FAMs out there and don’t see that changing at any time in the near future, we’ve got the right people to handle what we need to.

[Carl Byrnes:]

Great. Thank you so much.

[Operator:]

Thank you. Our next question comes from the line of Patrick Trucchio of Berenberg. Your line is now open.

[Patrick Trucchio:]

Thanks, good afternoon. I just have a couple of follow-ups on the product specific codes. First, can you tell us when you will know specifically, when products specific J code has been issued for ZILRETTA. And then, can you talk in terms of the magnitude of the impact we should expect from the Q code and the J code. How much to these codes typically accelerate growth for new products in the marketplace, first with Q code and then with the J code in general and then sort of the magnitude we should be expecting in the case of ZILRETTA.

[Michael Clayman:]

Yes. So the – thanks, Patrick. So the first question timing, it’s usually in the October timeframe, October sometimes November, CMS will issued the final list of codes for 2019. So that’s the timing when we will know or have confirmation that we’re going to have a dedicated J code. With respect to quantifying the acceleration particularly for Q codes, there are so few of them I think there’s two to three issued a year across any different disease date and area. So it’s really difficult to quantify what the uptake of that could be with all the market specifics there. And likewise, with respect to the J code, there’s so many market specific elements in there to try in fact, in exactly the quantification of that. But as we’ve said we clearly see the J code as one of the key elements to accelerate and take us out of our 2018 foundational year into the 2019, we’re really, really start to see the growth of the product.

[Patrick Trucchio:]

So on the second question here is just on the – sort of on the external consensus estimates. So you’ve spoken about how you’re comfortable, what sort of the revenue numbers in 2018 and 2019 and earlier in the call you mentioned that you expect the expenses to sort of increase over the next few years of you know R&D ramps and et cetera. So I’m wondering on the expense side, are you comfortable with where the external consensus estimates are in terms of the operating expenses both in 2018, 2019 and beyond.

[David Arkowitz:]

Yes, this is David. What we can say is that similar to what we said in the prepared remarks is that, our expectation is that SG&A and R&D expenses will continue to increase over the next several years and support ZILRETTA portfolio expansion and the infrastructure to support those activities. But as it relates to specific street numbers, we are not providing any direction as it relates to that.

[Patrick Trucchio:]

Okay, thanks very much guys.

[Michael Clayman:]

Thanks, Patrick.

[Operator:]

Thank you. Our next question comes from the line of Francois Brisebois of Laidlaw. Your line is now open.

[Francois Brisebois:]

Hey, guys. Thanks for taking the questions. Just a couple here, in terms of topline are you guys expecting any seasonality effect as summer months or end of year kind of roll around.

[Michael Clayman:]

Yes, there is – thanks Frank. There’s certainly some seasonality aspects to this. Things are generally a little lighter in the early part of the year, probably driven by deductibles in the things like that. And then the summer months can be a little lighter. So there’s certainly some seasonality, which we factor into all of our forecasting and thinking and resource allocation.

[Francois Brisebois:]

Okay, great. And then in terms of sales reps and their performance, and so – what are – how do – are there metrics that you quantified by and how does that work if – as you expand into more rural areas and territories that are maybe less familiar with in terms of awareness. How is it? And then how are the sales reps evaluated?

[Michael Clayman:]

Yes. So we take all those things in our account, we said the quota for any individual territory and all of our territories. And there was a myriad of details and analysis that they goes into that. At the end of the day, how they’re measured is how they perform versus their quota. And that’s pretty much the start and the stop of how the sales rep is measured. With respect to rural areas, which you mention and how we might account for that, we have – we actually have an inside sales force, which we have the coverage what we call white space, which is a lot of those rural areas, you can imagine Square States and the like. So we’ve got an inside sales group that covers those and has ability to go out as appropriate, when there’s opportunity to open up opportunity in those spaces. But those are spaces where we can’t justify a full time, full time rep. So that’s how we handle those more rural areas.

[Francois Brisebois:]

Understood. And then just lastly, is there any reason for you guys to think that maybe depending on the size of the joint whether hip, shoulder, knee that the drug would react differently or it would be harder to feel the pain depending on the [indiscernible]

[Michael Clayman:]

I think conceptually, Frank, the actual volume of these joints is not dramatically different from knee to hip to shoulder. So I don’t think there’s any inherent reason to expect that for example, anyone of these joints would not be able to readily accommodate these injections. And given the fact that immediate release steroids are used in all three spaces and in general as a standard of care, they provide pain relief. We believe that there’s every reason to expect that ZILRETTA would similarly provide pain relief in locations outside of knee and we intend to generate the data is demonstrated.

[Francois Brisebois:]

Excellent. All right, thank you very much.

[Michael Clayman:]

Thanks, Frank.

[Operator:]

Thank you. And our next question comes from the line of Bruce Jackson of Benchmark. Your line is now open.

[Bruce Jackson:]

Hi. Thank you for taking my question. Most of my questions have been answered, but I’m curious about the physicians, who are using ZILRETTA in their diabetic population. And is this an indication that they like the drug and they’ll expand their usage once the J code is in place. Do they – how they kind of just continue to limited to the diabetic population?

[Michael Clayman:]

Yes. I think try to indicate earlier, I think the first question. The physicians from what we understand that are limiting their use ZILRETTA to diabetic patients at this point time is a minority. It is a small number. Many times for those that are treating their diabetic patients, it might be again the first patient that they want to try. I want to try this, there’s even more reason clinically to use this product in diabetic patients, I’m going to try it there first. They’re going to quickly see how this product responds and how it does in those patients and we quickly see them expanding their patient population. Beyond that and that’s something a job of our sales reps to identify all of the different patient types, which are broad for ZILRETTA that they've been at the products appropriate. So again minority of physicians that are just sticking with diabetic patients for their use of ZILRETTA.

[Bruce Jackson:]

Okay, that’s helpful. Thank you very much.

[Operator:]

Thank you. And there are no further questions at this time.

[Michael Clayman:]

Thanks very much everybody. We appreciate your time and attention and we’re already looking forward to updating you following the next quarter’s results.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program, you may all disconnect. Everyone have a great day.