Flexion Therapeutics Inc (FLXN) Q1 2021 Earnings Call Transcript

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Flexion Therapeutics Inc (FLXN)
Q1 2021 Earnings Call
Apr 13, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Flexion Therapeutics Business Update Call. [Operator Instructions]

I will now turn the call over to Scott Young, Flexion's Vice President of Corporate Communications and Investor Relations.

Scott Young -- Vice President, Corporate Communications and Investor Relations

Good afternoon. A short while ago, we issued a press release announcing our preliminary ZILRETTA net sales for Q1 2021, and which includes revenue and operating expense guidance for the full year. That press release and our latest commercial metrics slides can be found under the Investors tab on the Company's website and a replay of this call will be accessible there shortly after its conclusion.

Today's discussion will be led by Flexion's Chief Executive Officer, Dr. Michael Clayman and he's joined by Melissa Layman, Flexion's Chief Commercial Officer; and David Arkowitz, Flexion's Chief Financial Officer.

On today's conference call, we will be making statements relating to future financial and business performance, market conditions, strategies and other business matters, including expectations regarding revenues, cash utilization, clinical, regulatory and commercial developments and anticipated milestones, which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to various assumptions, risks and uncertainties, which change over time, and such statements speak only as of the date of this call. Additional 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 as well as on Flexion's website.

I will now turn the call over to Mike Clayman.

Mike Clayman -- Chief Executive Officer and Co-Founder

Thanks, Scott, and thank you all for joining the call. In the press release we issued this afternoon, we announced preliminary ZILRETTA net sales of $24.6 million for the first quarter of 2021. And overall, we're very pleased with this performance. Net sales were broadly in line with our expectations, and in fact, demand for ZILRETTA from healthcare providers grew by 6% in Q1 versus Q4 of last year. This increase in volume is particularly encouraging for a couple of reasons. First, Q1 typically is a flat to down quarter for intra-articular knee injections; and secondly, we encountered some unexpected headwinds during the quarter.

Let me provide some additional context. Historically, sales of intra-articular treatments for knee OA dropped nearly 10% in Q1 versus Q4, particularly driven by insurance deductibles resetting and winter weather. While, ZILRETTA is still ramping, it is also influenced by these same quarterly dynamics. In addition, Q1 was further challenged by atypical and severe weather events which caused extended power outages across Texas, Oklahoma and other regions that resulted in the postponement of office procedures.

Furthermore, we saw ZILRETTA sales affected by the roll-out of the COVID vaccines, which impacted IA steroid injections in the first quarter. As you know, ZILRETTA's market largely consists of Medicare age patients and seniors were prioritized for COVID vaccinations throughout the first quarter. Despite the absence of CDC recommendations, out of an abundance of caution, some physicians opted to defer IA steroid injections for a period of two weeks prior to COVID vaccination through two weeks post completion of the vaccination regimen. Melissa will provide more color on the data we have, but we believe the most significant impacts associated with these deferrals have been largely worked through in barring a major resurgence outbreaks of more virulent strains of the virus or other unexpected events. We anticipate 2021 ZILRETTA product revenue in the range of $120 million to $130 million. This guidance reflects the fact that patient flows are expected to remain at approximately 80% of their pre-COVID levels through at least the middle of this year.

To be clear, our confidence in ZILRETTA's long-term growth potential remains as strong as ever. Virtually every day, we receive testimonials from patients who want to share their stories about how ZILRETTA has helped them manage their pain and live life on their own terms. These anecdotes inspire everyone at Flexion, motivate our sales team and can have a powerful impact on prescribers. In fact, emphasizing the patient experience with ZILRETTA is a central part of our commercial strategy.

As Melissa discussed on our most recent call, we have three commercial priorities that we believe will drive increasing ZILRETTA sales. First, positioning and market segmentation; secondly, pricing and physician reimbursement; and third, amplification of the patient voice. Melissa, will provide more details on each of these in her update. With respect to expanding the ZILRETTA label to new indications, we are advancing our plans to start a registration trial investigating ZILRETTA in shoulder OA. While, shoulder OA is a smaller indication than knee OA, the unmet medical need is particularly pronounced, given the dearth of approved pharmacologic treatments for this indication. As Melissa can attest, HCPs have conveyed to us how eager they are to have a new treatment option for this condition, and we look forward to initiating the shoulder trial this year.

Regarding our pipeline, I'm pleased to report that both FX301 and FX201 continue to make excellent progress. We remain on track to share initial data from both programs by the end of the year and we look forward to providing a very early look at initial data from the FX201 single ascending dose study at the American Society of Gene & Cell Therapy Meeting in May.

In summary, despite facing some new and unexpected challenges in the first quarter, we are pleased with our performance and with the progress we are making toward our goal of making ZILRETTA, a leading intra-articular therapy for OA knee pain. In fact, my confidence in this important product, our team's ability to execute in Flexion's future has never been greater.

Melissa?

Melissa Layman -- Chief Commercial Officer

Thank you, Mike. I would start by echoing Mike's confidence and enthusiasm. The energy in the field among prescribers and our MBMs and their passion for ZILRETTA continues to grow despite having faced some unexpected headwinds in Q1. While inclement weather is a natural part of the first quarter every year, the winter storms that hit Texas and other regions this February resulted in transient but real impact on sales. These storms were particularly devastating and caused extended power outages that closed physician offices for a week or more in some places.

With respect to COVID, while the roll-out of the vaccines is a tremendously positive development and an extraordinary achievement, it did, as Mike mentioned, create headwinds for ZILRETTA utilization in Q1. To provide some perspective on the scope of the impact, we conducted a spot survey at the end of February, and roughly 30% of respondents indicated their steroid administrations were down anywhere between 20% and 50% of their precedent COVID impacted volumes.

As mentioned, our target patient population is predominantly of Medicare age and as of February 1, more than half of all states had expanded eligibility for COVID-19 vaccines to include people 65 and older. As of April 5, the CDC reported that nearly 60% of all people aged 65 and older had been fully vaccinated, and we believe that remaining headwinds from vaccinations and steroid injections will become less meaningful in the second quarter. In spite of these challenges, we saw healthcare providers demand for ZILRETTA in Q1 grow by 6% over the fourth quarter of last year and that is a testament to the value ZILRETTA provides and the tenacity of our MBMs and unlocking that value with healthcare providers.

We continue to make strong progress across all three of the strategic priorities that Mike referenced earlier. First, the positioning and market segmentation; second, pricing and physician reimbursements; and third, amplification of the patient voice. All of these elements are designed to accelerate ZILRETTA sales growth. As part of our positioning and market segmentation effort, we are characterizing customers by their behaviors related to the management of patients with knee OA, and their likelihood to further adapt ZILRETTA. We will then use this information to inform how we should differentially apply our promotional voice. Regarding our pricing and reimbursement work, we structured our Q1 rebate offerings to incentivize greater purchasing volumes and those efforts proved effective and going forward, we will build on that success.

And with respect to amplification of the patient voice, Mike mentioned the dynamic that exists today in orthopedic practice related to the fragility of the patient feedback loop to their treating physician. We believe ZILRETTA's future growth depends on more deeply penetrating existing user accounts and to this end, we have developed a strategy and a number of supporting tactics intended to close that feedback loop more quickly and consistently to incent physician consideration of ZILRETTA across the broader population of their OAK patient.

On our last conference call, we mentioned that we intend to introduce revised commercial metrics this year. We plan to share those on our Q1 full financial results call in May. And today, we posted our usual metrics. I won't go through them in detail, as they tell a consistent story, but they illustrate, a number of key points about our progress to-date and the opportunity ahead of us. We have a concentrated and loyal customer base, which is accounted for the vast majority of ZILRETTA sales since launch and yet even these accounts have not yet fully adopted ZILRETTA. I would close by reiterating what I said at the beginning. I share Mike's enthusiasm and confidence in our strategy and initiatives and their ability to take root in 2021 and in their potential to deliver accelerated growth of ZILRETTA in the quarters and years ahead.

And with that, I'll turn it over to David.

David Arkowitz -- Chief Financial Officer

Thanks, Melissa. As we reported in our press release, in the first quarter of 2021, we had $24.6 million in preliminary net sales of ZILRETTA. Our net sales reflect a gross net reduction of 18%. This reduction includes rebates to healthcare providers that are variable and based on the volume of product purchased. As Melissa mentioned, the Q1 healthcare provider rebate offerings were structured to incentivize greater purchasing volumes, particularly among accounts with the capacity of purchase, larger volumes of ZILRETTA, and the total provider rebates accounted for a gross to net reduction of approximately 9% in Q1. The remaining gross to net reduction of 9% is comprised of distributor and service fees, returns reserve and mandatory government discounts and rebates, including Medicaid, 340B institutions and Veterans Administration and Department of Defense.

As of the end of the first quarter, the aggregate inventory held by specialty distributors was well within the one weeks to three weeks we target. As Mike mentioned, barring any unforeseen impacts from the COVID-19 pandemic, we anticipate 2021 ZILRETTA product revenue in the range of $120 million to $130 million. In addition, we expect our full-year 2021 total operating expenses, including cost of sales, research and development expenses and selling, general and administrative expenses will be in the range of $195 million to $205 million. As of March 31, 2021, the Company had approximately $154 million in cash, cash equivalents and marketable securities. Based on our current operating plan, we believe that our current cash balance is sufficient to fund our operations into at least mid-2022.

At this point, I would ask the operator to open up the line for Q&A. Thank you.

Questions and Answers:

Operator

Thank you very much. That concludes our prepared remarks. We'll now open the call for questions. [Operator Instructions] Thank you.

The first question comes from Martin Auster with Credit Suisse.

Mark -- Credit Suisse -- Analyst

Hi, everyone. This is Mark on for Marty. Thanks for taking my questions. I'm curious if you could walk through just in more detail what sales were each month just to better understand that trajectory? And then you had mentioned that the gross to net this quarter was 18%. Is that something that we should think of as being a run rate going forward? Thanks for taking my questions.

Mike Clayman -- Chief Executive Officer and Co-Founder

Thanks, Mark. This is Mike. Just, we certainly want to be accommodating, but we're not going to break-out sales on a monthly basis. And probably David is the best to speak to the gross to net.

David Arkowitz -- Chief Financial Officer

Yeah, Mark. So, as we've talked about before, we're not going to be providing projections as it relates to our gross to net reductions. We're going to continue to use discounts and rebates as really a way to address economic considerations related to ZILRETTA utilization, and we've been doing that since the third quarter of 2019. There will be -- we expect there will be just continued greater variability on future gross-to-net reductions but, appreciate that we're going to be thoughtful, judicious and prudent in how we apply those, and what we offer to our customers.

Mark -- Credit Suisse -- Analyst

Okay. Thanks for taking my questions.

Operator

Our next question comes from Graig Suvannavejh with Goldman Sachs.

Graig Suvannavejh -- Goldman Sachs -- Analyst

Hey, guys. Thanks for taking my questions and thanks for the update on ZILRETTA. I've got a few, if you don't mind. One, I'm just curious as to how you're thinking about capital allocation right now? I mean you've got an opex for 2021, where you're providing a range. You've also given us a sense of what do you think revenue could be and given the fact that you've got existing cash about a $154 million. I mean it would seem to suggest that you're going to have to raise funds at some point this year. And so, given progress you're making with the pipeline, there's a lot going on, and given your current cash you have, how are you thinking about kind of what that next financing potential situation could look like on a go-forward basis? Thanks.

David Arkowitz -- Chief Financial Officer

Yeah, this is David. So, as we disclosed today, we ended Q1 with approximately $154 million in cash, marketable securities and what we've also shared is that based on that cash balance and our current operating plan, we believe we're funded sufficiently into at least the middle of next year. As it relates to augmenting our cash balance, all I can say at this juncture is, in the past, we've been opportunistic as it relates to funding and fundraising activities and we plan on continuing to be that way going forward. So opportunistic as it relates to fundraising.

Graig Suvannavejh -- Goldman Sachs -- Analyst

Okay, thanks. And maybe if I could ask just a second question, can you just remind me, do you have in terms of your term loan payment, you've got $20 million that's due this year, is that the accurate number there?

David Arkowitz -- Chief Financial Officer

So, the term loan, so we've got total between our revolver, which is $5 million and our term loan is $55 million. We're at the point of amortizing principal at this juncture for the term loan, a math that [Phonetic] equates to about $5 million a quarter in principal payments.

Graig Suvannavejh -- Goldman Sachs -- Analyst

Okay, thanks so much. I'll get back in the queue.

Operator

Our next question comes from Elliot Wilbur with Raymond James.

Elliot Wilbur -- Raymond James -- Analyst

Thanks, good afternoon. With respect to some of the changes in rebating strategies, can you just maybe provide an indication of whether or not those were universally applied to existing user base versus new accounts? And the reason I asked the question, I guess, just looks like, purchases by new accounts were a little bit stronger perhaps than they have been in the past couple of quarters. And then, follow-up question for Melissa. Given the fact that the full -- the salesforce hasn't really been able to be fully engaged I guess in a traditional sense, since the pandemic began, what should we be thinking about in terms of changes to the overall marketing plan, messaging, strategy, beginning second-half of this year when we're all sort of assuming something resembling closer to pre-pandemic conditions? Thanks.

David Arkowitz -- Chief Financial Officer

Elliot, this is David...

Melissa Layman -- Chief Commercial Officer

Thanks, Elliot -- well, go ahead...

David Arkowitz -- Chief Financial Officer

I'll take the first question and pass it on to Melissa. So, as it relates to the Q1 healthcare provider rebate offerings, as most had mentioned in our prepared remarks, those are really structured for this quarter to better incentivize greater purchasing volumes, particularly with those accounts that have the capacity to purchase larger volumes of ZILRETTA. So we -- as I think you can appreciate, we evolve and we tweak our rebate offerings every quarter based on our prior quarter's experience and that's exactly what we did in Q1. And quite frankly, we're very pleased with the results from that and we'll build upon that going forward.

Melissa Layman -- Chief Commercial Officer

Thanks, and Elliot, in response to your second question around sort of how promotion may change in the back part of the year. We continue to make strong progress across all of the strategic priorities that Mike mentioned, and then I referenced in the prepared remarks that's inclusive of positioning and market segmentation, pricing and physician reimbursements and amplification of the patient voice. All of these elements taken together are designed to accelerate ZILRETTA sales growth. And as part of our positioning and market segmentation effort, we are in the process of characterizing customers by their behaviors related to the management of patients with knee OA, and their likelihood to further adopt ZILRETTA. We'll use the findings from that segmentation research to inform how we may differentially apply our promotional voice in the back-half of the year.

Operator

Our next question comes from Dan Busby with RBC Capital Markets.

Daniel Busby -- RBC Capital Markets -- Analyst

Hey, thanks for the questions. First, I may have missed this, but could you provide any color on your guidance assumptions with respect to patient flows during the second-half of this year? It sounds like you're assuming roughly 80% of pre-COVID levels through mid-year. So, curious what you're building in after that? And second, with respect to the shoulder study, what are the gating items there and how should we think about trial initiation timing? Is that a potential near-term event or is that more likely to kick-off toward the end of this year?

Melissa Layman -- Chief Commercial Officer

I can take the first part of that and then hand the second part off to Mike. We expect that patient flows to office will remain around 80% through the middle of the year and then we anticipate incremental improvement as the year progresses.

Mike Clayman -- Chief Executive Officer and Co-Founder

Yeah, and Dan, can you just repeat your question please?

Daniel Busby -- RBC Capital Markets -- Analyst

Right. Yeah. The second part of the question was around the shoulder study. What are the gating items there? Do you still need to hear back from FDA on study protocol? And then when should we expect that study to kick-off over the -- would it be closer to now or closer to the end of the year?

Mike Clayman -- Chief Executive Officer and Co-Founder

Well, what we say consistently, and we'll continue to say. It's between now and the end of the year, but I think it's fair to say it's not completely imminent. We still do have a couple of things to nail down with the agency, which we will and we're confident, will be done efficiently and allow us to get started, certainly, by the -- sometime in the second-half of this year.

Daniel Busby -- RBC Capital Markets -- Analyst

Okay, thanks.

Operator

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

Gary Nachman -- BMO Capital Markets -- Analyst

Hi, good afternoon, guys. First, how much is your guidance factoring a potential resurgence in COVID cases which it seems we may be starting to see with the variant? So, did you built in any cushion for that possibility in the $120 million to $130 million? I'm curious why you're comfortable in giving that guidance now, given that there is still so many moving parts with the pandemic. And then secondly, just thinking of the entire 1Q dynamics, have you been able to quantify how much demand could have been up in 1Q if not for the headwinds that you faced, that you talked about, specifically the weather factor. So, how much more than the 6% increase, even if you give us a range, do you think it could have been? Thanks.

Mike Clayman -- Chief Executive Officer and Co-Founder

I'll jump in here, Gary. Thanks for the questions. Yeah, it is. We are far from an absolutely, completely stable set of circumstances, but we believe with the roll-out of, particularly the continuing roll-out of the vaccine, Moderna and Pfizer, that we will see the vast majority of Americans who want to be vaccinated, vaccinated in the coming weeks, and month or two. And as a result, that gives us some confidence that we will see a new horizon that is more stable, of course, if a variant emerges that is even more virulent and more contagious and not controlled adequately by either of the mRNA vaccines, then we'll be in a different circumstance. But the discussion we had is how long would we wait until we had certainty about what the future look like, because there's not going to be a bright line. And on any day, things might look a little bit better or little less good and we just thought it was valuable to clear the air and provide what we believe is a credible and achievable range. And I think you can appreciate this, Gary, as it relates to your second question, we're not going to speculate on what sales could have been in different circumstances in the first quarter.

Gary Nachman -- BMO Capital Markets -- Analyst

Okay. Maybe just a quick follow-up, given your answer for the first question [Speech Overlap]

Mike Clayman -- Chief Executive Officer and Co-Founder

Wait a second, Gary, I think you used your two questions. I'm sorry. No, I'm only -- I'm giving you hard time. Please go ahead. Please go ahead. Go ahead.

Gary Nachman -- BMO Capital Markets -- Analyst

And, just the cadence of the quarter. I think that's what a lot of us are trying to get our arms around. So is it really very back-end loaded, given what you're seeing in front of you today or will it be more linear in terms of the increases throughout the year? I think that would be helpful.

Mike Clayman -- Chief Executive Officer and Co-Founder

Well, again, we're not going to break things down into a monthly cadence and I appreciate the desire to understand that. I'd just simply say that we are confident that we will see continued momentum in the sales, because obviously that's what the range would expect. And we all report on a quarterly basis, not on a monthly basis, and then, certainly, I'm happy to turn it over to Melissa or David, if they want to add additional color.

Melissa Layman -- Chief Commercial Officer

I think you covered it, Mike.

Gary Nachman -- BMO Capital Markets -- Analyst

Okay, thanks.

Operator

Our next question comes from Dana Flanders with Guggenheim.

Dana Flanders -- Guggenheim -- Analyst

Great, thank you very much for the questions. I just had one on revenue guidance and kind of following -- thinking of some other questions on the call, just trying to understand some of your assumptions into the back-half, which presumably you'll see a step-up in revenue growth just based on kind of the cadence, how much of that improvement, do you expect it to be driven by just the general operating environment improving as it relates to COVID versus more company-specific increases in kind of the rate of ZILRETTA penetration and adoption? I mean, it sounds like you're assuming some improvement in the COVID operating environment, but just wondering if you could help kind of benchmark the two. Thank you.

Melissa Layman -- Chief Commercial Officer

Yeah, I don't think we're going to tease out specifically what part of our ramp in the back-part of the year would be attributed to improving COVID conditions versus improvements in our selling effort. I'll just go back to say that we have considered in part of our guidance that we expect patient flows to offices to remain at 80% at least through the middle of the year with some incremental improvement as we move through the back half.

Dana Flanders -- Guggenheim -- Analyst

Okay. That was it from me. Thanks.

Operator

[Operator Instructions] Our next question comes from Francois Brisebois with Oppenheimer.

Francois Brisebois -- Oppenheimer -- Analyst

Hi, thanks for taking the question. I think this is a little bit on Gary's previous question, but I guess my question is more on the, why now? Not necessarily on the end of the year. Well, I guess that was already answered. So -- but more on the why now disclosed first quarter. I don't think this is something that you've done in the past that much. So, did something specific happened here or is it just trying to add some clarity to the street?

Mike Clayman -- Chief Executive Officer and Co-Founder

Well, with all due respect, Frank, we have pre-released quarters before and with the rationale being that things are so uncertain out there, so relatively opaque that providing that information sooner rather than later, we feel is in everyone's best interest or has been anyway until we reach a new steady state. And in this case, providing guidance for the year is to just create clarity for management's perspective on what we believe is a credible and achievable range. And to set the stage for analysts, locking and loading on a range -- we presume we'll lock and load on a range that we're committing to, so...

Francois Brisebois -- Oppenheimer -- Analyst

Okay. No, yeah.

Mike Clayman -- Chief Executive Officer and Co-Founder

Yeah.

Francois Brisebois -- Oppenheimer -- Analyst

I was mentioning more of a -- I think I've seen it on the fourth quarter. Maybe I just -- I didn't remember that much on the first quarter, but that's -- I might have missed it.

Mike Clayman -- Chief Executive Officer and Co-Founder

It's really -- I would say what triggered this for us in particular, we've done it before. But in particular, the uncertainty of the COVID environment has a lot of people wondering the lack of reliability of the IQVIA or Symphony databases in terms of understanding what performance looks like. We just think that we owed it to you and our investors to provide clarity on these things.

Francois Brisebois -- Oppenheimer -- Analyst

Understood, great. And then you mentioned, Melissa, the metrics that you've -- that you guys are working on and to discuss that more in a couple of weeks here in May. What can you share? I guess, maybe they're not ready yet or there's still work to be done, but how much can you share on color for what those metrics will touch on here?

Melissa Layman -- Chief Commercial Officer

We'll share them in our -- on our call in May. I think it would be premature to discuss any specifics at this point, but it's our goal to provide metrics that will provide you guys with useful insights into our commercial progress at this stage in ZILRETTA's ramp.

Francois Brisebois -- Oppenheimer -- Analyst

Okay, understood. And if I can cheat here and get my third in, if that's OK, can you -- you talked about the revolver on one of the questions. Can you just remind us on the convert and where that stands?

David Arkowitz -- Chief Financial Officer

So, Franc and this is David. No. No changes in the convert. It is due May, 2024. So, nothing to update there.

Francois Brisebois -- Oppenheimer -- Analyst

All right, thank you.

Operator

There are no additional questions.

Mike Clayman -- Chief Executive Officer and Co-Founder

Superb. I just wanted to thank everybody for their time and attention. We've said this many times, absolutely true. This is the most exciting time in the evolution of Flexion as a company. We're superb bullish on ZILRETTA and its prospects and we couldn't be more excited about the fact that our two pipeline assets are in the clinic and moving toward a better understanding of their value proposition. So, stay tuned on that and we look forward to updating you on these things as time evolves. Take care.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Scott Young -- Vice President, Corporate Communications and Investor Relations

Mike Clayman -- Chief Executive Officer and Co-Founder

Melissa Layman -- Chief Commercial Officer

David Arkowitz -- Chief Financial Officer

Mark -- Credit Suisse -- Analyst

Graig Suvannavejh -- Goldman Sachs -- Analyst

Elliot Wilbur -- Raymond James -- Analyst

Daniel Busby -- RBC Capital Markets -- Analyst

Gary Nachman -- BMO Capital Markets -- Analyst

Dana Flanders -- Guggenheim -- Analyst

Francois Brisebois -- Oppenheimer -- Analyst

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