The opioid epidemic is a huge and tragic problem, and the market is starved for solutions. Flexion Therapeutics (NASDAQ:FLXN) is one company that's working on filling that gap and is close to potentially releasing its treatment to the market.

In this Industry Focus: Healthcare segment, Motley Fool analyst Kristine Harjes and contributor Todd Campbell explain why so many people are prescribed opioids for pain today, what indication Flexion is targeting with Zilretta, how Flexion's treatment works and when it will be approved or rejected by the Food and Drug Administration, how Zilretta differs from existing treatments in some really exciting ways, and more.

A full transcript follows the video.

This video was recorded on July 26, 2017.

Kristine Harjes: Our second stock to talk about today that is under $30 per share is called Flexion Therapeutics. They are a $780 million market cap company, and their ticker is FLXN. Listeners might recall that we talked about them on our April 12 show, which was about drugmakers looking to create non-opioid pain medications. In this episode, we discussed how opioids are an extremely common prescription. There are over 650,000 opioid prescriptions dispensed every day. Meanwhile, there's been a quadrupling of deaths due to opioid abuse since 1999. So, there's a huge market for new ways to control pain, and Flexion is right up in the middle of that market.

Todd Campbell: Yeah. There are 650,000 prescriptions that are written for opioids every day, according to the Department of Health and Human Services. A lot of those prescriptions are for the use of opioids as rescue medication for people who are suffering from chronic pain, including chronic pain associated with osteoarthritis of the knee. That's really the sweet spot that Flexion Therapeutics is targeting, developing a new way to control pain that isn't an opioid, that can control pain more consistently, and potentially, as a result, reduce the need to rely on these rescue medications which, as we talked about previously in that prior show, it can increase the likelihood of getting addicted and contributing to the opioid epidemic.

Harjes: Right. The way that knee pain treatment generally works is, you start off on an ibuprofen or aspirin, and over time it doesn't work as well. Then you move on to corticosteroid injections. Again, over time, it starts to not work as well. That's when you end up being moved to an opioid, because with all of these things, eventually your body built up a little bit of a tolerance, and the pain is not effectively being managed by the milder drugs. Zilretta is a sustained-release steroid injection, and it's supposed to supplement the natural fluids in the knee. It's been very effective so far. They are looking to get this drug approved by the FDA. Currently, they have an application submitted. The PDUFA date, which is the day that is, in theory, the deadline that the FDA is supposed to say yes or no by, that date is October 6.

Campbell: Yeah. If you suffer from knee pain, and you're one of the five million people who get corticosteroid shots every quarter, you probably know why it is that Flexion is intriguing. Frankly, the effects, the benefits of the corticosteroid shots, can start wearing off after the course of a few weeks. And by the time you get to the three-month mark, you don't have any relief from it. One of the things you were talking about, the progression of treatment, the next step after you've exhausted corticosteroid shots and some of these other medical interventions, is actual knee replacement. And obviously, it's invasive, it's expensive, it's not something that people want to subject themselves to. And oftentimes, knee replacement doesn't necessarily give you the relief that you were hoping for. 20% of the patients aren't satisfied after they've had that done. So, if you can find a way, like Zilretta, where you can extend the life of the corticosteroid, and have that pain relief last that entire three-month period, not only do you improve the quality of life of the patient, but you may actually delay them advancing to that eventual total knee replacement. 

There's no guarantee, obviously, that the FDA will approve this drug when they make their decision in October. But I think it's intriguing. I think they might have a good shot at it when you consider the fact that this is just a reformulation of a drug that's already available. They've redone this corticosteroid so that it will last longer. So, I think they have a good shot at it. Anything can happen. If they do get approved, you're talking about a drug that could bring in hundreds of millions of dollars in sales based upon what you've seen out there for competing drugs in this indication. And, there are studies that are ongoing for Zilretta that could expand its use to other disease indications and other areas of chronic pain.

Harjes: The numbers that I've seen peg this drug at $500-$600 million in peak sales just for this one indication, so I could easily see it being a blockbuster, meaning a billion or more annually if it gets that expansion to other joints. One other thing that I thought would be interesting to talk about with this company is that they've also examined the cost effectiveness of this drug. They assumed a hypothetical cost of $500 per treatment, and they used the actual cost of some comparable treatments, some of the more traditional ones and also the hyaluronic acid injections. So, they had three different things they were comparing it to. In each of them, they found that Zilretta improved quality of life at a lower cost per QALY. QALY is a way of adjusting a life-year for the quality of that life. The acronym is QALY, quality-adjusted life year. So, it improves QALY, quality of your life, and it also does it at a lower cost for that improvement. And since this is a chronic treatment, that's pretty huge, because not only would you find insurers more willing to accept this, but they're going to accept it year in and year out, and that's that constantly generating revenue flow, which, especially as the population ages, that's only going to grow.

Campbell: Right. And the diagnosis and the treatment and intervention is starting younger now, younger and younger. So maybe, when before you weren't doing this until you were in your 50s or 60s, now because of injuries people have suffered to their knee when they were in their teens or 20s, they're being diagnosed and beginning treatments in their 40s. Well, people are living longer and the population is bigger. So, you have some pretty attractive demographic tailwinds that could support demand for this drug.

They also have management that has some experience. Sanofi makes one of those hyaluronan injections, Synvisc-One, that drug has $400 million annual in sales. And some ex-Sanofi executives have joined Flexion in the C-suite. So, they seem to have a team that's pretty good, they have an intriguing drug, and they have that catalyst coming in October, i.e., the decision date. Obviously, if it gets rejected, the stock will tank. But if it gets approved, then theoretically, you could argue the stock will go higher.

Harjes: Yeah, and that's the case with a lot of these smaller companies that we talk about. The drugs are not on the market yet, so an FDA decision is really make or break.

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