Flexion Therapeutics, Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Flexion Therapeutics Q2 2015 Financial Results Conference Call. My name is Candice, 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 would now turn the call over to Fred Driscoll from the company. Fred, please proceed with your call.

[Fred Driscoll:]

Thank you, Candice, and good afternoon. This is Fred Driscoll, Chief Financial Officer, and I thank you for joining us on today's second quarter 2015 financial results conference call. Both the earnings release from this afternoon and an archive of this earnings call can be found on the company's website at flexiontherapeutics.com. On today's call here with me is Flexion's President and Chief Executive Officer, 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, and regulatory projections, statements relating to future financial or business performance, conditions or strategies and other financial and business matters, including expectations regarding operating plans, cash usage and clinical 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 overtime. Further information on the factors and risks that could affect Flexion's business, financial conditions and results of operations, including those mentioned in the forward-looking statements 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 will now turn the call over to Flexion's CEO, Mike Clayman.

[Mike Clayman:]

Thanks, Fred. Good afternoon, everyone, and thanks for joining us. Our agenda for today's call is to review Flexion's recent accomplishments and after that I will turn the call over to Fred to summarize the second quarter financial results. Following Fred's comments, we'll take your questions. Over the past several months we've made substantial progress on numerous fronts in the development of our lead drug, FX006. As you know, FX006 is a sustained-release intra-articular or IA steroid, the specific steroid being triamcinolone acetonide, also referred to as TCA for the treatment of osteoarthritis or OA of the knee. I will cover four of the more significant advancements in the FX006 program. First, in June, a manuscript describing the final study results from the completed Phase 2b clinical trial, which compared FX006 to immediate release TCA was published in the Journal of Bone and Joint Surgery or JBJS. JBJS is among the most highly regarded peer-reviewed publications with orthopedics and sports medicine physicians who are key decision-makers in the management of OA patients. These specialists perform approximately 70% of all intra-articular knee injections in this present operation. The clinical trial described in JBJS was conducted in the United States, Canada, and Australia, and researchers enrolled 228 patients with moderate to severe OA of the knee. The 40 milligram dose of FX006 produced pain relief that was improved at weeks 2 through 12 and was statistically and clinically significantly superior to immediate release TCA at weeks 5 to 10. The extended residency of drug in the joint with 40 milligrams of FX006 not only prolonged, but also amplified analgesic effect relative to the standard of care. The second key accomplishment in the quarter was the completion of enrollment in the Phase 3 clinical trial for FX006 approximately three months earlier than anticipated. To remind you, that trial was a double-blind randomized study of 486 patients who are treated with a single injection of either 40 milligrams of FX006 or 40 milligrams of immediate release TCA or saline placebo. The primary outcome measure is the weekly mean of the average daily pain intensity score as assessed using an 11-point numeric rating scale with the primary endpoint at 12 weeks versus placebo and with patience follow-up for 24 weeks. The secondary objectives of the study are to assess the effect of FX006 on the magnitude and duration of pain relief relative to immediate release TCA and the effect of FX006 on function, responder status, global impressions of change, stiffness, and consumption of analgesic medications relative to both controls. We plan on reporting top line data from this Phase 3 trial in the first quarter of 2016 and this will complement the topline data from our pivotal Phase 2b trial that will be reported next month. Taking together the data from these two studies will complete the requisite clinical package for the NDA submission of FX006. Assuming positive data, our plan is to file the NDA in the second half of 2016. The third key accomplishment was the award of a grant worth approximately $2 million to conduct a Phase 2 clinical trial investigating FX006’s treatment for OA pain in active military and medically retired veterans with post-traumatic OA of the knee. The fourth key accomplishment occurred just a few days ago when we announced that we entered into a strategic manufacturing and as a supply agreement with Patheon, a leading global provider of high-quality drug development and delivery solutions. We believe this agreement will complement our existing manufacturing relationship with Evonik Corporation and create redundant supply for FX006. A key benefit of partnering with Patheon is that they will establish a dedicated manufacturing suite for us at their specialty sterile manufacturing facility in Swindon, England to allow for greater control of unit production and provide added scale to meet long-term product demand. We believe having two leading manufacturers as our partners will help ensure that we have appropriate supply capacity and redundancy in manufacturing capabilities for the future commercialization of FX006. We also disclosed shortly after the Patheon announcement that we had secured a $30 million non-dilutive debt facility with Silicon Valley Bank and Midcap Financial. With the addition of Patheon as a second contract manufacturer, we intend to use this debt facility over the next several years primarily to finance the capital expenditures and manufacturing scale up associated with FX006. Fred will talk more about this in a moment. So in summary, we continue to execute against our FX006 development plan ahead of schedule and we look forward to announcing key milestone events over the next several months. With that, I will now turn the call over to Fred to keep recap our financial results for the first quarter.

[Fred Driscoll:]

Thanks, Mike. The company reported a net loss of $12.4 million for the three months ended June 30, 2015 compared to a net loss of $5.9 million for the same period in 2014. The primary cause for the increased net loss was due to an increase in research and development expenses to $9.6 million for the second quarter of 2015 as compared to $3.6 million for the same period in 2014. The key drivers behind the increase in R&D expenses were the Phase 2b and Phase 3 clinical trial programs and manufacturing development scale up costs. General and administrative expenses were $2.9 million in the second quarter of 2015 as compared to $2.2 million for the same period in 2014 due primarily to increases in salary and related costs associated with increased headcount including stock-based compensation expense. As of June 30, 2015, the company had $127.4 million in cash, cash equivalents, and marketable securities. From a liquidity and cash resource perspective, cash used in operations for the second quarter was in line with our expectations. As Mike mentioned earlier, we are pleased to have concluded a debt facility under which we can draw up to $30 million and we anticipate using these funds under this facility to help fund the expenditures associated with the Patheon manufacturing expansion. Some of the key features of the debt facility are that it is non-dilutive, it has no warrants attached. There is a term that runs through February 2020 at an attractive annual interest rate of 6.25%. Payments are interest-only for the first 18 months and it has no financial covenants tied to it. In addition, we have the right to repay all borrowed funds and terminate the facility at anytime subject to prepayment fees. That concludes our prepared remarks. And operator, we'll now open the call for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from David Maris of BMO Capital Markets. Your line is now open.

[David Maris:]

Good afternoon. I won’t ask about the partnerships and how that's going, which will be the first time I haven’t asked about that. But I wanted to talk a little bit – ask a little bit about how the enrollment – you mentioned the enrollment has been coming along better than expected. Mike, what do you think is driving that, is that the centers being excited about getting patients in, is it just the wide number, a large number of patients, what do you think is really driving that?

[Mike Clayman:]

I do think that there is genuine enthusiasm for the potential for this therapy and we've seen a lot of, in a sense, acceleration, in other words, ramp up at individual sites as the studies gotten underway. I think – and the ability to enroll as aggressive as we have while maintaining what I’ll call the highest and most rigorous inclusion and exclusion criteria I think is testimony to the enthusiasm of the investigators and frankly this obviously will sound self-serving, but it’s true, that the outstanding job that was performed by people at Flexion in terms of providing support oversight and effort applied to the study overall. And look, obviously, David, it doesn't hurt that there are 30 million patients with symptomatic OA in the U.S. and about half of them with symptomatic knee OA. But to get a trial to get to enroll as well as this did, I think it does reflect the other things I just mentioned.

[David Maris:]

But do you think that because of that – and it's only by a couple of months, so to us it doesn't really matter, but maybe the optics to some it does. Do you think that the filing could be pushed up to the first half of 2016 or no it's really impossible for that to happen?

[Mike Clayman:]

I think it's premature for us to speculate on that, I think we will deliver the second and what should be the final dataset in the first quarter. Those data are going to be analyzed integrated summaries of safety and efficacy are going to have to be written off of those data. I just think it’s most reasonable to maintain a second half of 2016 guidance. And should that change, obviously, David, you will be amongst the very first to know.

[David Maris:]

Great. Thank you very much.

[Operator:]

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

[Randall Stanicky:]

Great. Thanks, guys. Mike, I know some of the challenges around HA from a headline perspective are continuing and we've seen that with some of the formulary updates. I know you guys are targeting the IR [ph] market, but HA is definitely a big pool of opportunity for you. How do you guys see that opportunity? And then I guess more specifically is the continued pressure here, is that helpful or does that push patients away from injection and maybe towards – upwards opioid or some other ways of dealing with pain?

[Mike Clayman:]

Those are really excellent questions, Rand. As it relates to HA, we do know that that segment is under pressure, I will just say that. We do know that very large parties like Express Scripts and CVS Caremark are jettisoning branded high organic [ph] assets, a number of them anyway to go to the a single branded HA of what we assume is lowest cost. That’s one. We do know that the blues and several states have withdrawn reimbursement on the heels of the American Academy of Orthopedic Surgeon recommendations of 2013. So we do think that it is a less – in our humble opinion, this is a less robust market than it once was and so to the extent that those therapies are somewhat less available under pressure, we think that just intensifies the unmet medical need for patients who are otherwise progressing to total knee replacement. I think that it’s generally considered that HAs are tried as a stopgap between other therapies and total knee into the extent that they are less available for the sake of discussion that should make a product like FX006 more aggressively embraced. And you do touch on opioids, we think it's – we are quite cognizant of the challenges associated with opioid therapy, the expense of the medicine and the fact the side effects associated with chronic opioid therapy are 3x be cost of the medicine, not even mentioning the side effects and the unintentional overdose deaths that are associated with opioids. It’s been estimated that between 30% and 40% of the Medicare population with OA are on opioids. And we’ve said many times, it’s, again, in our humble opinion, not a very good choice at all for an elderly population with a chronic condition. So again we think, being a non-opioid and confirming magnitude and duration of – certainly magnitude of pain relief that is substantially greater than whatsoever been seen historically with the HAs, we think we – this – it’s reasonable to say FX006 having a superb opportunity at the present time.

[Randall Stanicky:]

And, Mike, you touched on both opioids and you also touched on price, it kind of leads me into another question. You’ve talked about a $500 per injection type of pricing paradigm and if we look at opioid pricing, they are in a monthly or a three month basis, I mean you could argue that opioids are more expensive. So have you thought about how you are going to present on that pharmacoeconomic support or data to payors to support your pricing level and how are you just thinking about the whole pricing dynamic right now?

[Mike Clayman:]

Yeah, well, again, we are continuing to do additional pricing research all that continues to support a pricing in the $500 range and it should come as no surprise that we are building healthy con models that we will populate with appropriate data to allow us to model the kinds of savings that can be associated with some [ph] 006 based on the data that we will be generating. I continue to be comfortable saying that a price in the range of $500 is credible and has been supported by our payor research, I don’t think that should come as any surprise that we’ve had investors and analysts say to us that if something like HA can command a price of between $500 and $800 and can confer a benefit that barely separates from placebo, there is a certain logic to suggest that the value of FX006 should be proportionately higher, but that’s in front of us.

[Randall Stanicky:]

Got it. Great. Thanks, guys.

[Mike Clayman:]

Thanks, Rand.

[Operator:]

Thank you. And our next question comes from the line of Jim Molloy of Laidlaw. Your line is now open.

[Jim Molloy:]

Hi, guys. Thanks for taking my questions. Looking at the run rate currently and I know that you are ramping up with the trials that it should be [indiscernible], is this good run rate for going forward, the $12.5 million operating expense and can you talk a little bit about some of the rationale in the $30 million as well, I mean – it’s a plenty of cash, more is always better than less, I couldn’t agree with you more on that, but if you could walk us through that a little bit that would be great.

[Fred Driscoll:]

Yeah, Jim, this is Fred. I will take that one. The idea on that run rate, as I think I’ve said before, as a corporate policy, we don’t get into try not provide you much the way a guidance, but I think it’s reasonable to say that the run rate that you saw – that you’ve seen in the first half is something that we think will continue certainly into the second half. And then we have manufacturing scale up next year and the beginnings of the hiring of a commercial organization. So I’m not going to go into next year that much, but I think the run rates that we saw in the first half are what we expected and I think that we will continue to see. The question on why did we do the debt facility, we didn’t want to do – is to have to draw funds from our existing treasury, which as you know are targeted specifically for clinical and commercial development. We just think that that has a return on investment then investing in bricks and mortars. So we – and we also – what we also did not want to do is change our guidance on how well our cash runway would take us, which takes us into 2017 and clearly, this would not be the cash if we had to fund the Patheon arrangement from existing treasury. Couple that with the low interest rates that are out there today, we thought it was prime time to institute a debt vehicle such as this for all of those reasons.

[Jim Molloy:]

Excellent. Thank you. A couple of quick follow-up if I could, I know that back on the Phase 2b, we had that – there was an issue that the health of the trial turned out not to be what it was thought to be and the trial as I guess shouldn’t [indiscernible] at all. Is there anything like that to come up in the trial again where like Jesus we’ve seen this before, it’s not from the [indiscernible] you usually going to look for? And then I know that there is some other compounds out there, there’s FGF-18s, the BMPs, the MRI imaging endpoints for OA. Any thoughts on endpoints in a way beyond the straight pain that obviously you guys are targeting and it is the gold standard for getting approval, did these have any lags in MR imaging and these other components something that you keeping a close eye on?

[Mike Clayman:]

Well, just to answer the second question, first, Jim, we definitely are keeping a close on the competition because that's just good [indiscernible] to do so. The endpoint, the MRI imaging endpoint is one that’s still has to be vetted with regulators and it's not – we’ve not seen any guidance or any other information in the public domain that suggests that MRI per se in some of it – in hand sensitivity that you get with MRI in terms of cartilage volume and other measures will be a basis for an approval particularly for potentially disease modifying drugs. The agency has consistently relied on joint space narrowing, which is a very insensitive and typically slowly progressing measure. So as it relates to any possibility that MRI will be the endpoint for some of these therapies, I guess that the most prudent thing to say is this, stay tuned. As it relates to adverse events in our trials, at this point, we’ve had over 600 patients exposed FX006 and we have not had a single drug-related serious adverse event.

[Jim Molloy:]

Great. Thank you for taking the questions.

[Mike Clayman:]

Yeah, thank you.

[Fred Driscoll:]

Thank you, Jim.

[Operator:]

Thank you. And our next question comes from Chiara Russo of Janney. Your line is now open.

[Chiara Russo:]

Hi, guys. Thanks for taking my question. Just some quick questions. First of all, the R&D number for this quarter was higher than what I had expected. I'm assuming that was because the rate of involvement was so was so fast and I know you said on Jim's question that your run rate would be approximately the same going forward. So should I anticipate those types of numbers third quarter, fourth quarter?

[Fred Driscoll:]

I don't want to get too granular on the projections. I think it's just fair to say the overall – when I think about it I think more of the overall operating loss will continue in the same pattern that we’ve seen. What I would say to you on the R&D line, Chiara, is that in the first quarter, our R&D number was actually lower than what we had expected and now with the expanded – I mean accelerated enrollment, you are correct, we did see a ramp up there in the second quarter. So I think it's more of a timing issue as I say that was sort of moved from the first quarter to second quarter.

[Chiara Russo:]

Okay, that makes more sense. All right, awesome. So that in touching on the sort of wrapping enrollment in the Phase 3, obviously, from my seat here, from an analyst side, we tend to be a little bit dubious about quickly enrolling trials because speed tends to come at the price of quality, and I was wondering if you could just sort of touch on that and maybe alleviate some of our interpretation that you are enrolling the quality type patient for the Phase 3?

[Mike Clayman:]

Yeah, sure, that’s a good question. And we are certainly familiar with exactly what you're talking about. But I can tell you, Chiara, that the entry criteria – the inclusion and exclusion criteria on a per patient basis are essentially identically to those that we employed in the very first study that compared to triamcinolone acetonide immediate release essentially identical to the study that we will be reading out next month. So, it’s – every bit is rigorous and tight as either of the other trials that we’ve performed. We are actually – we have one or two of our investigators have been involved in OA trials where the entry criteria beyond breathing is that, there’s someone said at one point in time that you might have OA. So for us – that’s an example of what you are talking about. And our view quite strongly is we need to have these patients well characterized in terms of entry criteria and they need to be consistent across studies. And I'm absolutely confident that that the case in this Phase 3 trial.

[Chiara Russo:]

Okay. Okay. That sounds good. I take your word for it. So was there a sort of inflection point in terms of the enthusiasm for the trial, was it that some of the other competitor trials that are wrapped up, obviously there has kind of been some not-so-good information out of some of the other trials and that you guys are sort of the last man standing with good results type of thing anything like that?

[Mike Clayman:]

I think that what we did in the clinical operations group made conservative estimates on per site enrollments per month. So you always model how many patients per site per month do we expect to have enrolled. And I think it’s prudent to be conservative in those estimates. That’s one thing. The other is that there was – when you start a clinical trial, sites start typically start slowly because there is a lot of infrastructure staff and a lot of organizational things and there is outreach to patients. But as sites begin to hit their stride, they begin to enroll more aggressively. This is not uncommon at all. And in this study, in particular, we saw the rate of enrollment substantially increase over time. You will know that this study was originally modeled as 450 patients, we enrolled 486, we could have in the following month or two enrolled several hundred more because each of the sites was hitting their stride knowing all the things they needed to know, screening more effectively, reaching out more effectively and more efficiently enrolling their patients. So what I really think this is is good clinical trial implementation. And I certainly have seen this kind of thing before where tremendous amount of effort gets translated into increasing enrollments over time. It’s a moment thing and that’s what happened here.

[Chiara Russo:]

Okay, got you. And with the manufacturing, are they good – or short of what type of additional steps do they have to go through in order to start producing FX006, what type of capacity are you going to have once everybody is online?

[Mike Clayman:]

Yeah, so just – I will just provide general comments – these are good questions, Chiara. I can tell you we are meeting with the FDA, we will be meeting with the FDA to get – to explore exactly their expectations for the kind of data that we will need to have on Patheon to get them approved as a second site. I mean, it’s quite clear what you need to do to have a new process and a new product in terms of manufacturing site approved. There is – it’s worthy of discussion with the agency when you are getting a second site approved because there maybe opportunity to be even more efficient. So I will just say stay tuned. [Indiscernible] on the second question?

[Fred Driscoll:]

Capacity.

[Mike Clayman:]

What I will say to you on the capacity, Chiara, is that with the addition of Patheon, we are absolutely confident that even under our most optimistic scenarios that we will be able to supply the market with comfort.

[Chiara Russo:]

Okay. All right, great. Thank you guys so much.

[Mike Clayman:]

Thank you.

[Fred Driscoll:]

Thanks, Chiara, thank you.

[Operator:]

Thank you. And our next question comes from Serge Belanger of Needham and Company. Your line is now open.

[Serge Belanger:]

Hi, good afternoon. I guess first a follow-up question on the Patheon manufacturing agreement which was born out of just a prudent strategy to have a back up or there was real concerns that have an equivalent supply and adequate capacity for the launch of the product?

[Mike Clayman:]

I think this reflects an abundance of planning and preparation. It made us given how bullish we are on the product and its potential, it made us uncomfortable to concentrate manufacturing at a single sight in a single location. I don’t want to sound unduly paranoid, but weird weather things can happen and we would hate to find ourselves in a position where our single manufacturing site was down for any period of time. So, we get the assurance that that won’t be the case on the one hand and we get expanded capacity on the other.

[Serge Belanger:]

And I guess, on the DoD trial for FX006, I know last time around – I guess, it was too early to provide any timelines. Just wanted to know if you could provide enough data?

[Mike Clayman:]

Yeah, I’m not – I’m really not prepared to provide a timeline at this point. We will – I will just ask your indulgence give us some more time to get the enrolments, to get a better feel for how the enrolments are going, and we will – believe me we will provide an update when we have some additional data.

[Serge Belanger:]

All right. That’s all for me. Thank you.

[Mike Clayman:]

Thanks, Serge.

[Fred Driscoll:]

Thanks, Serge.

[Operator:]

Thank you. And our next question comes from Mark Landy of Northland Capital Markets. Your line is now open.

[Mark Landy:]

Good evening, folks. Thanks for taking my question. Forgive me if some of these have been asked, I’m trying to covert at the moment. Mike, just firstly on the repeat-dose study, should we be thinking of that being brought forward giving a current experience or just occurring as previously expected?

[Mike Clayman:]

Well, I would say that, Mark, we would continue to guide to as currently expected and then if that changes, we would certainly announce the change.

[Mark Landy:]

And then, on the Department of Defense contract, the Phase 2 study, can u provide any updates or any updates yet to provide?

[Mike Clayman:]

There really aren’t. Serge just asked that. We want to get some – a little bit more time under our belt in terms of enrolment that we able to project and get back to you on that.

[Mark Landy:]

And then lastly from me, just shifting focus a little bit, I know you’ve been talking a lot about FX006, any updates on FX005 and FX007 that you can share with us?

[Mike Clayman:]

I don’t think there is anything new on either one, Mark. FX005, as we said before, we would advance as resources allowed, that’s still the case. And FX007, we are plowing through the appropriate preclinical work to allow us to enter the clinic.

[Mark Landy:]

Excellent guys. Thank you so much.

[Mike Clayman:]

Thank you.

[Fred Driscoll:]

Thank you, Mark.

[Mike Clayman:]

If there are no further questions, I would like to thank everyone for their participation in today’s call and we look forward to providing further updates to you in the future as we make progress with the product pipeline. Have a nice day everybody.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day, everyone.