Flexion Therapeutics, Inc.
Q3 2016 Earnings Call Transcript

Published: 8 Nov 2016

[Operator:]

Good afternoon, ladies and gentlemen and welcome to the Flexion Third Quarter 2016 Financial Results Conference Call. My name is Karen and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s call. [Operator Instructions] I’ll now turn the call over to the company. Please proceed. Fred Driscoll Thank you Karen, good afternoon everyone. This is Fred Driscoll, Chief Financial Officer, and I thank you for joining us on today’s conference call. Both the earnings release from this afternoon and an archive of this conference call can be found on the Company's website at flexiontherapeutics.com. Joining me on today’s call is Flexion's Senior Vice President of Commercial Operations, Dan Deardorf; and our President and CEO, Dr. Michael Clayman. Before we begin our prepared remarks, I need to remind you that we will be making forward-looking statements during this teleconference that include financial, clinical, regulatory and commercial projections. Statements relating to future financial or business performance, conditions or strategies and other financial and business matters, including expectations regarding operating expenses, cash usage, and clinical and regulatory 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 numerous assumptions, risks and uncertainties, which change over time. Further information on the factors and risks that could affect Flexion's business, financial conditions and results of operations are contained in Flexion's filings with the SEC, which are available at www.sec.gov. These forward-looking statements speak only as of the date of this call and Flexion assumes no duty to update such statements. With that, I’ll now turn the call over to Flexion's CEO, Mike Clayman. Mike Clayman Thanks, Fred. Good afternoon everyone. Thank you for joining us on our Q3 financial and operating results conference call. The agenda for today will be to discuss our most recent accomplishments, I'll then turn the call over to Dan who will provide some insight as to the progress we have made on commercial readiness and then Fred will summarize the Q3 financial results. After that we will take your questions. This past quarter highlighted some key milestones in the development of our lead drug candidate Zilretta, which I will review with you. As you know, Zilretta is an investigational non-opioid extended release intra-articular steroid for the treatment of osteoarthritis or OA. Last week we announced that the primary endpoint was met in a clinical trial evaluating Zilretta in type-two diabetic patients with knee osteoarthritis. The trial was a double-blind randomized parallel group single does clinical trial, whose objective was to examine if Zilretta had effects on blood glucose levels that differ from immediate-release triamcinolone acetonide or TCA. Investigators from seven study sites enrolled 33 patients, randomized one-to-one to receive a single intra-articular injection of 40 milligrams Zilretta or 40 milligrams immediate-release TCA. Blood glucose levels were evaluated for a total of three weeks. One week prior to injection and two weeks post injection using a continuous blood glucose monitoring device. Roughly 20% of OA patients have diabetes which means that of the 4.2 million OA patients who receive intra-articular steroid injections each year in the US approximately 800,000 have diabetes with the majority of those being type-2. If Zilretta is approved, the potential to enable treatment without glucose disruption would be an important clinical advance for patients with diabetes who are candidates for corticosteroid injections. To this end, we are enthusiastically looking forward to presenting the detailed results from the study at an upcoming scientific form which build on our previous announced efficacy data that suggests Zilretta has potential to confer rapid substantial and durable pain relief and functional improvement. In today's press release, we also announced that we have successfully completed the manufacturing technology transfer of Zilretta from Evonik, the CMO that manufactured our clinical trial materials to Patheon, our commercial supplier. The technology transfer and completion of the manufacture of the comparability lots for Zilretta includes three full-scale manufacturing batches using a comparability protocol which contained a pre-determined set of acceptance criteria to demonstrate the transfer of the process from Evonik to Patheon. Finalizing the transfer of the Zilretta manufacturing technology to Patheon marks a key milestone because it completes one of the final sections required for the NDA submission which I should add as an excellent condition and we plan to submit to the FDA in December. From a human resource perspective, we continue to expand the organization and ended Q3 with approximately 80 employees. A key component in that growth is our commercial organization and this quarter we announced several key personnel additions in sales, marketing, medical affairs and market access roles. Each of them comes to Flexion with deep expertise in their respective functions and track records of strong accomplishment at major pharmaceutical companies. So let me conclude by saying that we have organized a full-fledged commercial launch team which includes members from all functional departments in the company that are eagle-eye focused on preparing for the best possible product launch for Zilretta, which could happen in 2017. We also remain committed to building a fully integrated pharmaceutical company that has a rich pipeline of products and we are actively assessing both internal and external candidates and we'll have more to share with you in the future on this. With that I'll turn the call over to Dan to update you on commercial readiness.

[Dan Deardorf:]

Thanks Mike and good afternoon everyone. Certainly an exciting time at Flexion, as we continue to make significant progress on all fronts toward the anticipated launch of Zilretta. As Mike indicated, we are well on our way to creating a world-class commercial team, a team which now stands sixteen strong. We have hired our heads of sales, marketing, market access and commercial operations and with the exception of field-based personnel, we fully staffed by year’s end. All of our hires come with deep domain expertise in their areas of focus and do not require any on the job training. We continue to have every intention of controlling our own destiny by hiring our own sales force. And we're in the process of sales force sizing now. While we await the result of that analysis, we continue to believe that our sales force will be in the 80 to 100 representative range and remain committed to fully staffing our field sales teams. We're all focused on maximizing the opportunity for Zilretta in a market that continues to experience significant growth. According to recent market data, the number of patients receiving steroid injections for osteoarthritis of the knee grew by 12% from approximately 3.7 million to 4.2 million from 2014 to 2015. And according to the same data, approximately another million OA patients received injections for hyaluronic acid products. Based on those numbers, the attractiveness of this market with the clinical profile that Zilretta offers continues to grow. In addition to the hiring of the commercial team, we've also developed a comprehensive and detailed launch plan. That plan accounts for all activities, milestones and contingencies across the 13 functions in the company that will touch the launch of Zilretta. That plan has been vetted by external launch experts and will serve as the foundation for our daily effort. On the commercial front, there are too many areas of focus to fully list here today, but some areas that are greatest focus include brand development, market conditioning and patient activation, market access strategy, tactical planning and development, our sales force structure, and the commercial operations infrastructure needed to direct and measure our efforts. I’ll conclude by saying that for me, my team and I'm sure the rest of the company perhaps the most compelling reason to join Flexion is the opportunity to take our collective expertise and to build this brand and this company right and that will continue to be our focus until we are successful. With that I'll turn the call over to Fred to review our Q3 2016 financial results.

[Fred Driscoll:]

Thank you, Dan. For the third quarter of 2016 we reported a net loss of 17.8 million as compared to net loss of 11.1 million for the same period in 2015. Research and development expenses increased to $9 million in the third of 2016 compared to 7.8 million for the same period in 2015 due to an increase in personnel and other employee-related costs for additional headcount and stock-based compensation. General and administrative expenses increased to 8.4 million in third quarter of 2016 as compared to 3.2 million for the same period in 2015 due primarily to additional costs associated with building a commercial infrastructure to effectively support the potential commercialization of Zilretta. The net loss per share in Q3 2016 was $0.65 as compared to $0.52 for the same period in 2015, due primarily to the increase of the net loss offset in part by the year over year increase in the weighted average number of common shares outstanding. At September 30, 2016, cash, cash equivalents, marketable securities and long-term investments totaling a 161 million compared to 119 million at December 31, 2015. The increase in cash reflects the equity financing in June were we raised 83 million followed by the drawdown of an additional 15 million of senior debt. We believe that our cash position provides a runway post of potential loss - a potential launch of Zilretta into 2018. As a matter of corporate practice, we do not generally provide financial guidance due to being a pre-revenue stage company. However, we do expect expenses to increase over the next several quarters due to the potential pre and post launch activities for Zilretta. That concludes our prepared remark and operator we’ll now open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Ken Trbovich from Janney.

[Unidentified Analyst:]

Hi guys, this is actually Brendan on for Ken. Thanks for taking my question. My first question is about the NDA, I know you guys just finished the transition from Evonik to Patheon, are there any other gating factors before the submission you’re anticipating in December.

[Michael Clayman:]

Simply the collection of all the required documents, the completion of summary documents. So that's all very much in process and as we mentioned we are absolutely confident in our filing the NDA in December.

[Ken Trbovich:]

And then on the commercial side, I know you guys have recruited a lot of senior members from the Synvisc franchise in each injection space, is that the sort of expansion you’re looking for as well in your sales force as you build that out or plan to build that out?

[Michael Clayman:]

I think the - probably the first note on there is, I’ve actually intentionally gone out of my way to balance people who come from that Synvisc experience and from that world if you will that marketplace with folks that haven't to infuse some fresh thinking and different thinking into what we're doing. So I think we've got a very good balance of people with previous experience and those that bring some fresh perspective to the table. With respect to the sales force, I suspect as we get to that - to hiring a sales force that there will be a natural number of representatives that have operated in the hyaluronic acid base that will likely raise their hands to come join us. It's a market that from our understanding continues to be under some payer pressure and I think it will be a natural place for many of those reps to come here and we will go out of our way to hire the best and brightest of those. Again, augmenting where it makes sense with people who also bring fresh perspective from different marketplaces.

[Ken Trbovich:]

One last question, and that kind of tails into the pricing pressure comment. I know you guys have mentioned before expecting pricing around $500. Can you comment I guess a little bit on any sort of - is that going to be retail pricing or what sort of gross to net sort of you expect and I guess any differences with commercial pay and noncommercial pay?

[Fred Driscoll:]

That range that we're looking at are price around $500, I kind of view that as an average sales price and the pricing strategy that we employ to get us there will be - is certainly work that’s in front of us with the various different channels, which product goes through but in essence view that as a net price if you will base on your question.

[Operator:]

Thank you. And our next question comes from the line of Gary Nachman from BMO Capital Markets.

[Gary Nachman:]

When you think of the launch curve for Zilretta, what are some good analogs we should consider considering you probably won't have a J code right away and how should we think about the expense run rate into next year, sort of the magnitude of increase leading into the launch?

[Dan Deardorf:]

Yeah. As you can guess, if you look at analogs in the biopharma space in general, it's hard to find something that lines up across all the factors that you would want. We've actually done an extensive analysis to look at 54 products launched over the last decade by companies that were commercializing their first product. And it was really - it's really difficult to find an analog that really lines up. So we’ve had some difficulty identifying what the right analog is. I think looking at the HA products from the early days, there might be some insight there, although the market was much different place than as well, so that needs to be factored in. So to answer your question, we've had a tough time finding an analog. Sometimes, people throw out ex-pro as a potential analog, I don't view that as a good analog, because it's in the hospital setting under a DRG and there's just a lot more dynamics there from a formulary perspective than we would be subjected to.

[Fred Driscoll:]

Hi, Gary. This is Fred. And the question around ramp, let’s say we don't provide detailed guidance, but what I would say to you is as Dan mentioned, we've hired now 16 people in the commercial function. We still have plans of adding to the population here in census at Flexion. So clearly, as we ramp into next year, the burn rate is going to increase I would say significantly and certainly when we bring on the sales force. From an R&D perspective, I would say that our view is that R&D will - should be - should continue along at the same levels we're at today. So that’s about as much as I can give you.

[Gary Nachman:]

Okay. And then Mike, how close are you, any more color on lining up another pipeline opportunity and with respect to the manufacturing, how much products can a suite of Patheon handle. What's the capacity there? Thanks.

[Michael Clayman:]

So Gary, in terms of pipeline, we have an internal candidate that we are progressing. It's not ready for, how shall I say, external discussion yet. It has a few more hoops to go through, but it's - the preliminary data is pretty exciting as soon as we have the rest of the data that we need to be confident that it's bonafide entry and will share that and there are a number of in-licensing discussions that are ongoing and as is our want, we'll make external stakeholders aware of those at the time that we sign deals. But I do want to reemphasize, I appreciate the question that we are absolutely committed to creating a pipeline of high quality shots on goal. And the second question capacity at Patheon, I'm not going to get into exact numbers, Gary. But I can tell you that even in the most optimistic forecasts that one could possibly generate in the first few years, we will have excess capacity and we are already contemplating the possibility of expanding beyond the suite that we have and when we have more color on that, we’ll certainly share it. But one of the beauties of the suite model is you have the opportunity to kind of basically recreate almost exactly what you have and do that quite efficiently. So we are very attuned to ensuring that we have the capacity to meet need and we're highly confident that in fact we have that with Patheon.

[Operator:]

Thank you. And our next question comes from the line of Chiara Russo from Cantor.

[Chiara Russo:]

Yeah. Hey, guys. Thank you for taking my question. I’ll be pretty quick here. Just two quick ones. The first one is sort of given the recent changes within the competitive landscape, I assume you guys are probably going to be asking for a priority review when you submit the NDA. And secondly what do you think the impact of getting the J code will have on your potential marketing ramp? Thank you.

[Michael Clayman:]

Sure. As it relates to the priority review, that is well within the purview of the agency to provide that. It's logical that they might, given that this is a fast track designated product, but I have to say that at one level, we're not counting on it, Chiara. On the other, we are preparing for that possibility, so that we’ll be in a position to launch should they grant that. And then as it relates to J code, I'll turn that over to Dan.

[Dan Deardorf:]

Yeah. So we’ll certainly have a miscellaneous J code for a while and we’ll provide a comprehensive and kind of world class support of customers who are trying to gain access of the product to their patients. That said, there could well be some physicians who are a little reticent in the early days due to the miscellaneous J code, but based on my history with Synvisc 1 when we did this, it didn't take a whole lot of time before physicians who perhaps were reticent to start to see some of their colleagues seeing reimbursement come through before they would start utilizing the product. So I think we'll start to see that growth prior to getting the dedicated code. And then of course once we’ve got the dedicated code, then there should not be any issues, but any issues in the early days can certainly, it will be mitigated by the patient access, hotline and support that we’ll provide for our customers.

[Operator:]

Thank you. And our next question comes from the line of Jim Molloy from Laidlaw.

[Unidentified Analyst:]

Hi, guys. This is actually Frank on for Jim. Thanks for taking the questions. Couple quick ones here too. So in terms of M&A, are you guys more interested in drugs that act locally as opposed to systemically a little bit like Zilretta and are you still more interested in 505(b)(2) pathways?

[Michael Clayman:]

Yeah. I think you’re asking really good questions and our strategy for filling the pipeline does revolve around our great interest in local therapies that avoids any meaningful systemic exposures as a recipe for given the drug, there is best chance to work at the site of the disease, while avoiding systemic side effects. 505(b)(2)s are of interest. What are also of interest are NCEs in the pain in musculoskeletal space. And beyond those if you will, if you think about the big circle being local therapies, then the three intersecting circles within that being musculoskeletal, pain and 505(b)(2), there's a substantial space between those three circles in the larger local therapy circle and we call that opportunistic space and we will maintain an open mind about the possibility of compelling opportunities arising in that space. So it's a reasonable large spaces that turns out and I'd also point out that in addition to in-licensing, we're actively developing internally generated ideas too.

[Unidentified Analyst:]

Great. Okay. And in terms of ramping up the commercial infrastructure, how should we expect the hiring of field sales reps to happen, will it be more of a progressive hiring or is it kind of ready to go, everyone’s hired before launch starts?

[Dan Deardorf:]

Yes. So perhaps to back up a little bit, we've hired John Magee, our VP of sales who comes with - he's just a seasoned veteran coming from Shire most recently, a long tenure at Bayer, et cetera. So he’s got a great blend of strategic thinking with the additional ability to just motivate the troops in the field. He's in the process of recruiting his next line manager, so a couple of area sales directors to really kind of help him with sizing and alignment, incentive compensation, all the work that we’ll do there. We will wait until we know the fate of priority review to determine when we'll bring on the first line field sales managers, our regional sales directors, intending to bring them on a few months prior to launch, so that they can start prior to launch, so that they can start recruiting reps and we can be ready with all the folks that we want to hire as of the PDUFA date, approximate to the PDUFA date.

[Unidentified Analyst:]

Okay. Thank you. And then just another one in terms of M&A, in terms of size, can you guys give any guidance and are you more focused on finding other indications for Zilretta or is it really acquiring other products, but mostly just in terms of cash, is there kind of a range that you guys are - sweet spot that you guys are looking for?

[Michael Clayman:]

Well I mean just to be clear on this, we will aggressively continue the development of Zilretta to realize the potential of that product. So that, you can rest on that assumption and in parallel, we will look for interesting in-licensing opportunities in addition to internally generated assets and I think it's premature for us to guide to a dollar amount as it relates to what the sweet spot would be. Suffice it to say that we've built into our budget monies for that eventuality.

[Operator:]

Thank you. And our next question comes from the line of Serge Belanger from Needham and Company.

[Serge Belanger:]

Hi. Good afternoon. Just two quick questions for me also. I want to follow up on the prior commercial question, when you think about the increase in overall headcount related to the commercial infrastructure, I think in the past, you've talked about having 80 to 100 reps, but I guess the total headcount increase including reps, managers and the support staff, what should we think of in terms of the number?

[Fred Driscoll:]

So if you just want to use rough math and again this work is all in front of us to flush out from a detail perspective. But if we assume the sales force of 100 reps, I probably need about 10 district managers, you'll need the two area sales directors and the head of sales and then probably one or two headcount internally from a coordination perspective to keep them supported.

[Serge Belanger:]

Okay. And then I don't know if you covered this last week, but the repeat those studies, is that still on track to begin this quarter?

[Michael Clayman:]

We're projecting that will begin in the early part of next year, sometime in the first quarter next year. That is a change for our surge, but given the intense focus and effort associated with pulling together the final documents for the NDA and given the absolute paramount importance of that filing, we elected to move the initiation of the repeat dose study, which - and I can say that the protocol is finalized. We have a line of sight on sites we want to use. We have material that will be available for us to conduct that study. So we're all set to go, but there are a number of people who are playing key roles in the NDA submission and we certainly did not want them distracted from that key task at hand. So we remain committed to doing that study and we anticipate that it will start likely in the first quarter of next year.

[Serge Belanger:]

Okay. That makes sense. Can you remind me again how many patients and how many repeat doses that go through?

[Michael Clayman:]

Yeah. We’ve not publicized that yet and that should be going up on the clinicaltrials.gov site eventually and I think at that point, we’d be pleased to go into more detail and describe that in more detail.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Bruce Jackson from Lake Street Capital.

[Bruce Jackson:]

Hi. Good afternoon and thank you for taking my question. So given the positive data from the diabetes trial, is that something that can make it into the application against the label the first time around. Or is it something where you might come back to it at a later date? And if so when would that date be?

[Michael Clayman:]

Yeah. We are including the diabetes data in the filing and whether that gets included in the label or not will be part of the discussion with the agency. Certainly, we believe it makes sense to include such label has from our perspective safety implications for diabetic patients and so our view that logic would dictate that that information would be included there, but that as I say will depend on the dialog with the agency in terms of what the final label looks like.

[Bruce Jackson:]

Okay. Great. And then with regard to the reimbursement codes, where do you stand in the process of getting a dedicated code?

[Dan Deardorf:]

Yeah. We’ll need to - you need to have with one exception, you need to have an approved product before you can submit for that code. So assuming that we get approved at some point in 2017, we will apply before the end of ‘17. We will be in the 2018 review cycle and would get a dedicated J code, January 1 of ‘19.

[Operator:]

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Flexion for any closing comments.

[Fred Driscoll:]

I just want to say thank you all for your time and attention and we'll look forward to updating you at some point in the not-too-distant future on the progress of the company.

[Operator:]

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great evening.