What happened

After the company reported it had priced its common share offering at $9.75 per share, shares in Flexion Therapeutics (NASDAQ:FLXN) are trading 10% lower at 11:30 a.m. EST on Thursday.

So what

Demand for the pharmaceutical company's osteoarthritis treatment, Zilretta, has been significantly lowered by COVID-19 closures to doctors' offices, prompting management to bolster its balance sheet via a dilutive equity offering. On Thursday the company announced it will sell approximately 9.2 million common shares at $9.75 per share, plus up to an additional 1.4 million shares to meet over-allotments if necessary. 

A senior man rubs his knee while sitting on a park bench.

Image source: Getty Images.

Flexion has set a closing date of May 26 for the offering. Assuming everything goes off without a hitch, management will pocket about $90 million before underwriting costs and fees. 

The additional financial wiggle room is important given that the company's experiencing a sharp drop-off in demand for Zilretta because of social distancing efforts to curb the spread of COVID-19. Since Zilretta is administered in a doctor's office quarterly to treat osteorthritis pain in the knee, the closing of doctors' offices has significantly eroded its use.

In Q1 2020, net sales dipped to $20.1 from $23.7 million in Q4 because of canceled office visits. During Flexion's first-quarter conference call, management said it was halting Zilretta manufacturing and instituting a cost restructuring because of declining sales volumes. Cost-cutting is expected to reduce expenses by at least $43 million this year, resulting in full-year operating expenses of between $167 million and $177 million.

Now what

Share offerings can be a better option for bolstering balance sheets than taking on debt, and while the company is cutting costs, operating expenses should still exceed revenue this year even if volume bounces back due to the reopening of doctors' offices. 

However, investors might not want to be too pessimistic about Flexion's future. Last year, about 8 million steroid or hyaluronic acid injections were administered to address knee pain, suggesting there's a significant market share opportunity for Zilretta. Since Zilretta may provide longer-lasting relief than those options, reducing the use of opioids, its use may rebound quickly.

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