Flexion Therapeutics Inc

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(MARK ONE)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015
or

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from

to

Commission file number 001-36287

Flexion Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
10 Mall Road, Suite 301
Burlington, Massachusetts
(Address of principal executive offices)

26-1388364
(I.R.S. Employer
Identification No.)

01803
(Zip Code)

(781) 305-7777
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Common Stock, par value $0.001 per share

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes ‘ No È.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act. Yes ‘ No È.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a

smaller reporting company.
Large accelerated filer ‘
Non-accelerated filer ‘ (Do not check if a smaller reporting company)

È
Accelerated filer
Smaller reporting company ‘

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange

Act). Yes ‘ No È

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant based on the last

reported sales price of the common stock on June 30, 2015 was approximately $392,188,000.

The number of outstanding shares of the registrant’s common stock as of March 2, 2016 was 21,570,395.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A in connection with the registrant’s 2016 Annual Meeting of Stockholders, which will be filed subsequent to
the date hereof, are incorporated by reference into Part III of this Form 10-K. Such proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days following the end of the registrant’s fiscal year ended
December 31, 2015.

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FLEXION THERAPEUTICS, INC.
FORM 10-K—ANNUAL REPORT
For the Fiscal Year Ended December 31, 2015

TABLE OF CONTENTS

PART I

Item 1.

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1A.

Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1B.

Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 2.

Item 3.

Item 4.

PART II

Item 5.

Item 6.

Item 7.

Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management’s Discussion and Analysis of Financial Condition and Results of Operations . . .

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 8.

Item 9.

Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . .

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Item 9A.

Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

113

Item 9B.

Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

114

PART III

Item 10.

Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Item 11.

Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

115

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

115

Item 13.

Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . .

115

Item 14.

Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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PART IV

Item 15.

Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Special Note Regarding Forward-Looking Statements

PART I

This Annual Report on Form 10-K, or this Annual Report, contains “forward-looking statements”— that is,
statements related to future, not past, events—as defined in Section 21E of the Securities Exchange Act of 1934,
as amended, or the Exchange Act, that reflect our current expectations regarding our future development
activities, results of operations, financial condition, cash flows, performance and business prospects, and
opportunities, as well as assumptions made by, and information currently available to, our management.
Forward-looking statements include any statement that does not directly relate to a current or historical fact. The
Company has tried to identify forward-looking statements by using words such as “believe,” “may,” “could,”
“will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should,” or “would.” Among the
factors that could cause actual results to differ materially from those indicated in the forward-looking statements
are risks and uncertainties inherent in our business including, without limitation: we have incurred significant
losses since our inception and we expect to incur substantial losses for the foreseeable future and may never
achieve or maintain profitability; we have not generated any revenue from, or received regulatory approval for,
any of our product candidates; we are a development stage company and will require additional capital prior to
commercializing ZilrettaTM (also known as FX006) or any of our other product candidates; we may be unable to
successfully complete the development of, obtain regulatory approval for, or commercialize Zilretta or any of our
other product candidates; we rely on third parties to manufacture and conduct the clinical trials of our product
candidates, which could delay or limit their future development or regulatory approval; we currently do not have
the infrastructure to commercialize any of our product candidates if such products receive regulatory approval;
we may be unable to adequately maintain and protect our proprietary intellectual property assets, which could
impair our commercial opportunities; and other risks detailed below in “Item 1A. Risk Factors.”

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we

cannot guarantee future results, events, levels of activity, performance or achievement. We undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise, unless required by law.

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Item 1. Business

Unless the content requires otherwise, references to “Flexion,” “Company,” “we,” “our,” and “us,” in this

Annual Report refer to Flexion Therapeutics, Inc. and our subsidiary, Flexion Securities Corporation, Inc.

Overview

We are a specialty pharmaceutical company focused on the development and commercialization of novel,

local therapies for the treatment of patients with musculoskeletal conditions, beginning with osteoarthritis, or
OA, a type of degenerative arthritis. Our portfolio of product candidates addresses the OA pain treatment
spectrum, from moderate to severe pain, and provides us with multiple opportunities to achieve our goal of
commercializing novel, targeted, locally administered therapies.

Our lead product candidate, Zilretta, is a late-stage, injectable, sustained-release, intra-articular, or IA,

meaning “in the joint,” steroid that we are developing as a treatment for patients with moderate to severe OA
pain. We specifically designed Zilretta to combine a commonly administered steroid, triamcinolone acetonide, or
TCA, with poly lactic-co-glycolic acid, referred to as PLGA, with the goal of providing sustained therapeutic
concentrations in the joint and persistent analgesic effect. Zilretta is intended to address the limitations of current
IA therapies by providing long-lasting, local analgesia while avoiding systemic side effects, which are effects
that occur throughout the body as a result of drug that is released from the site of injection into circulating blood.
To date, we have completed five clinical trials in which a total of approximately 600 patients with OA of the
knee were treated with Zilretta. The overall frequency of treatment-related adverse events in these trials has been
similar to those observed with placebo and no drug-related serious adverse events have been reported. Both the
magnitude and duration of pain relief provided by Zilretta in clinical trials have been shown to be clinically
meaningful with the magnitude of pain relief amongst the largest seen to date in OA clinical trials.

Based on the strength of our pivotal and other clinical trials, we believe that Zilretta has the potential to

address a significant unmet medical need for OA pain management by providing safe, more effective and
sustained pain relief. We believe the following attributes uniquely distinguish Zilretta:

• An injectable, IA, non-opioid, sustained-release investigational treatment for patients with moderate to

severe OA pain that has demonstrated in clinical trials to date the following:

•

•

•

•

statistically significant and clinically meaningful improvements in validated OA specific measures
compared to the current injectable standard of care,

statistically significant, durable and clinically meaningful pain relief compared to placebo,

persistent therapeutic concentrations of drug in the joint and durable efficacy, and

an attractive safety profile with limited systemic exposures and the potential for fewer serious side
effects compared to oral treatment options for OA pain.

• Amongst the largest analgesic effects seen in OA clinical trials.

•

Strong proprietary position through a combination of patents, trade secrets and proprietary know-how,
as well as eligibility for marketing exclusivity.

• Well-defined Section 505(b)(2) of the Federal Food Drug and Cosmetic Act, or FDCA, regulatory
pathway seeking approval for a novel formulation of the same dose and administration route of the
already approved immediate-release steroid used by orthopedists and rheumatologists.

•

•

•

Familiarity of orthopedists and rheumatologists with IA injections utilizing the same steroid at the
same dose.

Fast Track designation from the U.S. Food and Drug Administration, or FDA.

Potential for pharmacoeconomic benefits due to improved efficacy and durability that could delay
costly and invasive total joint replacement, also referred to as total joint arthroplasty, or TJA.

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Based upon the results of our pivotal clinical trials and pending a planned pre-new drug application, or

NDA, meeting with the FDA, we anticipate submitting our Zilretta NDA for single-dose administration to the
FDA during the second half of 2016.

Our other product candidates include FX007 for post-operative pain and FX005 for the treatment of end-

stage OA patients. FX007 is a locally administered TrkA receptor antagonist that is designed to provide
persistent relief of post-operative pain, including in patients who have undergone TJA. We are conducting
preclinical local pharmacology and toxicology experiments and in 2016 plan to use data from these studies to
decide whether to initiate a proof of concept, or PoC, clinical trial for FX007. FX005 is a sustained-release p38
MAP, or mitogen-activated protein, kinase inhibitor which has both analgesic and anti-inflammatory properties.
We are primarily focusing our resources towards the development of Zilretta and FX007. We do not plan to
continue the internal development of FX005 and plan to seek potential partners for out licensing opportunities.

We have worldwide commercialization rights to all of our product candidates. We also have an exclusive
worldwide license agreement with Southwest Research Institute, or SwRI®, with respect to the use of SwRI’s
proprietary microsphere manufacturing technologies for certain steroids formulated with PLGA, including
Zilretta. If Zilretta is approved, we intend to market our products in the United States through our own sales force
targeting specialty physicians, including orthopedists and rheumatologists. Outside of the United States, we are
exploring selective partnerships with third parties for the development and commercialization of our product
candidates. Each of our product candidates and our PLGA formulation technology is protected through a
combination of patents, trade secrets and proprietary know-how, and we intend to seek marketing exclusivity for
any approved products.

OA is a type of degenerative arthritis that is caused by the progressive breakdown and eventual loss of
cartilage in one or more joints. Arthritis is the most common cause of disability in the United States and OA is
the most common joint disease, affecting 27 million Americans, with numbers expected to grow as a result of
aging, obesity and sports injuries. Recent data suggest that OA accounts for over $185 billion of annual
healthcare expenditures in the United States, which does not include loss of productivity costs. We estimate that
by 2030, 45 million people will have OA. OA commonly affects large weight-bearing joints like the knees and
hips, but also occurs in the shoulders, hands, feet and spine. Patients with OA suffer from joint pain, tenderness,
stiffness and limited movement. As the disease progresses, it becomes increasingly painful and debilitating,
culminating, in many cases, in the need for TJA.

Current therapies for OA are suboptimal, and, because there is no cure for the disease, controlling pain and

delaying surgery are the primary goals for treatment regimens. Oral drugs, such as non-steroidal anti-
inflammatory drugs, or NSAIDs, including COX II inhibitors, and serotonin and norepinephrine reuptake
inhibitors, or SNRIs, as well as topical NSAIDs, are used to treat early-stage OA pain but have limited effect on
pain and, given the amount and frequency of use in OA patients, are associated with serious side effects. For
example, NSAIDs have shown increased risk of serious cardiovascular (CV) thrombotic events, myocardial
infarction, and stroke. Furthermore, this class of drugs can cause serious gastrointestinal (GI) adverse events
including bleeding, ulceration, and perforation of the stomach or intestines. These serious side effects are
particularly worrisome because OA patients often have co-existing medical conditions, including diabetes and
hypertension. For patients with moderate to severe OA pain, IA medicines, such as immediate-release steroids
and hyaluronic acid, or HA, injected into the joint, are generally considered well-tolerated, but leave the joint
rapidly and fail to produce or maintain clinically meaningful pain relief. For patients who progress to end-stage
OA, physicians prescribe opioids, which in addition to the risk of addiction and abuse, have numerous serious
side effects including respiratory depression, hypotension, constipation, cardiac events and, increasingly, deaths
from unintentional overdose. As a result of these suboptimal therapies, many OA patients experience persistent
and worsening pain, which often culminates in the decision for TJA, a painful and expensive procedure. Further,
because the initial joint replacement wears out over time, the younger the patient is at the time of the joint
replacement, the more likely it is that he or she will require repeat surgery in their lifetime.

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Our projections indicate that by 2030 approximately 23.5 million of the 45 million OA patients will have
knee OA. According to IMS Health, each year over seven million OA patients in the United States receive IA
steroid injection treatments in the knee, hip, shoulder, hand and foot, with over 3.5 million of these being knee
injections. In 2014, the number of patients that received knee injections of IA steroids increased approximately
7%. We estimate that an additional 1.4 million patients received knee injections of IA HA, which the FDA has
approved for use only in the knee. Despite recent negative guidance related to HA as a treatment for knee OA
from specialty societies (e.g. the American Academy of Orthopedic Surgeons (AAOS) and the Osteoarthritis
Research Society International (OARSI)) and given that select payer groups have limited reimbursement for the
entire class of HA products, which collectively may begin to put downward pressure on HA sales, HA sales in
the United States were approximately $750 million in 2014, with a cost per treatment ranging from $500 to
$1000. We believe the vast majority of these sales were related to knee therapy. Our clinical trials to date have
treated patients with knee OA, which represents the most common joint treated with IA therapies.

Given the limitations of current therapies, we believe Zilretta, if approved, would provide an attractive
therapeutic alternative. Clinical trials to date for Zilretta have demonstrated statistically significant and clinically
meaningful improvements in validated OA specific measures compared to the current injectable standard of care,
persistent therapeutic concentrations of drug in the joint and durable efficacy, and an attractive safety profile with
limited systemic exposures and the potential for fewer serious side effects compared to oral OA treatment
options.

Our Strategy

Our goal is to cost-effectively develop and commercialize novel, local medicines that safely and effectively
address significant unmet medical needs. Currently, we are developing a portfolio of product candidates for the
management of OA pain and post-operative pain where we believe there are significant unmet needs. The
principal elements of our strategy to accomplish this goal are the following:

• Focus initially on novel product candidates that provide long-lasting analgesia locally while

avoiding systemic side effects. We intend to develop anti-inflammatory and analgesic therapies for the
treatment of patients with musculoskeletal conditions, beginning with OA and post-operative pain.
Many OA patients will eventually require IA injection therapies to control their pain as the disease
progresses. Currently available IA steroids, none of which are formulated for sustained-release, leave
the joint rapidly and typically fail to confer pain relief of sufficient magnitude or duration. Since, by
medical practice, steroids are not injected more frequently than every three months, patients can
experience months of pain during that time. While the benefits of HA injections generally last for a
longer period of time than steroid injections, they are only marginally more effective than placebo. As
a result, we believe there is a significant unmet medical need for persistent, effective and safe OA pain
relief that can be addressed by sustained-release injection therapies. We have therefore formulated our
IA product candidate, Zilretta, with the goal of achieving effective drug concentrations in the joint for
months, while avoiding significant plasma concentrations of drug that have been linked to systemic
side effects. FX007 is being developed to treat post-operative pain and is being formulated to remain in
the tissues for a sufficient period of time to provide adequate duration of pain relief.

• Mitigate development risk and expedite regulatory timeline to product approval. We seek to mitigate
development risk by selecting product candidates with validated mechanisms of action. Each of our
product candidates also utilizes a unique mechanism of action for achieving analgesia and/or anti-
inflammatory effects, which diversifies development risk across multiple targets. In addition, for
Zilretta, our sustained-release technology employs PLGA delivery systems, which are already used in
approved sustained-release drug products outside of OA and in approved surgical devices. Because
Zilretta incorporates an already approved steroid in PLGA, it qualifies for the Section 505(b)(2) NDA
pathway under the FDCA, which can be an expeditious, cost-effective means to seek product approval,
as well as to potentially expand indications for this product candidate. Section 505(b)(2) of the FDCA
enables the applicant to rely, in part, on published literature or the FDA’s findings of safety and
efficacy for an existing product in support of its application.

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• Target multiple points in the OA pain treatment spectrum. To maximize the likelihood of bringing

products to market successfully, our product candidates target different elements of the OA treatment
continuum. Zilretta is targeted for IA therapy in patients with moderate to severe OA pain with the
potential to replace currently available IA steroids and HA. FX007 is targeted for patients with post-
operative pain, including those undergoing TJAs.

• Retain commercial rights in the United States and selectively partner outside of the United States.

Because IA therapies in the United States are administered by a relatively small number of specialists,
particularly orthopedists and rheumatologists, we believe that, if approved, we can cost-effectively
commercialize Zilretta with our own specialty sales and marketing organization in the United States,
and thereby retain more of the commercial value of this product candidate. In prior years, Genzyme
Corporation, which was subsequently acquired by Sanofi, supported sales of Synvisc by utilizing a
sales force of approximately 110 representatives. We believe we can establish an effective U.S.
commercial organization with our own specialty sales force of approximately 60 to 100 representatives
that target orthopedists and rheumatologists. Outside of the United States, we are exploring selective
partnerships with third parties for the development and commercialization of Zilretta and our other
product candidates.

Osteoarthritis

Overview

OA, also referred to as degenerative joint disease, is the most common joint disease in the United States,

affecting 27 million Americans, with numbers expected to grow as a result of aging, obesity and sports injuries.

• With the U.S. population between the ages of 45 and 64 having grown 31.5% from 2000 through 2010

and accounting for 26.4% of the total population, we expect changing demographics will likely
contribute to a growing number of OA patients.

• Approximately 35.0% of U.S. adults are obese, which increases the risk of developing OA.

• Knee injury is common, particularly amongst young athletes, and increases the risk of developing OA

by more than fivefold.

As an example, one in two Americans is expected to develop symptomatic knee OA, the most common form

of OA, during their lifetime, according to the U.S. Centers for Disease Control and Prevention. Recent research
estimates that the average age of physician-diagnosed knee OA has fallen by 16 years, from age 72 in the 1990s
to age 56 in the 2010s. According to the same research, Americans between the ages of 35 and 84 in the early
2010s will account for approximately 6.5 million new cases of knee OA over the next decade.

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There is no cure for OA. As a result, current treatments are intended to address symptoms of OA, in
particular, relief of pain and improvement in functional status. The therapeutic regimen for OA becomes
increasingly invasive with progression of the disease, culminating, in many cases, in TJA. In addition, because
patients are being diagnosed with OA earlier in their lives, many patients will require repeat TJAs. Because the
decision to have TJA is based in large part on intractable pain and functional impairment, we believe that a new
therapy which meaningfully and durably relieves pain and improves function could delay TJA.

Osteoarthritis Pain and Treatment Spectrum

Severe

i

n
a
P
A
O

Steroid
Injections

Mild

Oral
Drugs &
Physical
Therapy

Total Joint
Arthroplasty
(TJA)

Opioids

Hyaluronic
Acid (HA)

Early-Stage

End-Stage

Post-Operative

Treatment Spectrum

Current Treatments for OA

Early-Stage OA Treatments. In early disease, treatment begins with non-pharmacologic therapy including

exercise, weight control and physical therapy. As the disease progresses, physicians prescribe pharmacologic
therapy, beginning with acetaminophen and progressing to oral NSAIDs, including COX II inhibitors, topical
NSAIDs or SNRIs. Available oral therapies have serious side effects. For example, Cymbalta, a SNRI, may have
a role in worsening depression and the emergence of suicidality in certain patients. In addition to their serious
side effects, oral drugs provide limited pain relief and eventually become insufficient to control OA pain for
many patients as the disease progresses.

IA Injection Treatments. When non-pharmacologic therapy and oral pain medications prove inadequate,

physicians typically transition patients to IA injections. Steroids are first line IA therapy and when this does not
provide sufficiently durable pain relief, patients may progress to IA HA, a significantly more expensive, but
currently reimbursable, therapy with only marginally greater effect than placebo. Triamcinolone acetonide, or
TCA, the corticosteroid used in Zilretta, is amongst the most commonly prescribed IA corticosteroid injections.

End-Stage Treatments. When patients progress to the point where IA injection therapies fail to adequately

control OA pain, physicians may prescribe opioids as a medicine of last resort.

TJA and Post-Operative Pain Treatments. Due to severe pain that can no longer be controlled
therapeutically, many patients opt to have TJA, which is costly and painful. One of the most prevalent TJA
procedures in the United States is total knee arthroplasty. Compared to existing drug therapy, total knee
arthroplasty is very expensive, with average costs ranging between $25,000 and $50,000, and as many as 30.0%
of patients are dissatisfied with the outcome of this procedure. The earlier a patient receives TJA, the more likely
the patient may need repeat replacement surgery in following years. In 2010, inpatient costs exceeded $13 billion

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per year in the United States for total knee arthroplasty alone and based on some estimates the number of total
knee arthroplasties is expected to increase sixfold to 3.5 million procedures per year between 2011 and 2030. Our
own market research has indicated that healthcare payors would be willing to reimburse additional OA therapies
that have the potential to delay the need for TJA.

Limitations of Current Treatments for OA

Current therapies for OA are suboptimal. Oral drugs, such as NSAIDs, while they may offer adequate
analgesia for early-stage OA pain, are associated with serious side effects such as gastrointestinal bleeding and
cardiovascular events, and, importantly, are eventually ineffective at managing OA pain as the disease
progresses.

IA therapies, including steroids and HA preparations, are generally well-tolerated but provide pain relief
that is insufficient or inadequate in duration. All IA steroid therapies approved for OA are immediate-release
suspensions or solutions that leave the joint within hours to days and are rapidly absorbed systemically, which
may result in undesirable side effects. For example, IA immediate-release steroid injections are associated with
elevation of blood glucose in diabetics, which can be of clinical concern. While IA steroids demonstrate large
initial analgesic effects relative to other therapies, as a result of leaving the joint quickly, IA steroids typically
fail to confer pain relief of sufficient magnitude or duration. In addition, current standards of care dictate that IA
steroid suspensions not be administered more frequently than once every three months. Based on internal
analysis, we believe approximately 44.0% of patients receiving IA immediate-release steroids are unsatisfied
with the duration of benefit.

Despite U.S. sales of over $750 million in 2014, IA HA therapies, which are approved only for treatment in
the knee, produce only marginally more effective pain relief than placebo and may have no discernible effect on
a patient’s ability to carry out their daily activities. In treatment guidelines for knee OA published in May 2013,
the AAOS concluded that current published studies do not show any clinically effective response for HA
injections. As a result, the guidelines do not recommend HA treatment for symptomatic knee OA for reasons of
“…lack of efficacy…” and, most recently, certain insurance carriers are no longer providing policy coverage of
HA and this may begin to put downward pressure on HA sales.

For patients with advanced disease, opioids are the medicine of last resort. Opioids, however, are associated

with significant side effects, particularly when administered chronically. These side effects include serious
dependency and abuse potential, respiratory depression, hypotension, constipation, cardiac events and,
increasingly, deaths from unintentional overdose.

For patients undergoing surgery, control of post-operative pain is an important priority. Numerous post-
operative pain treatments exist, including local injection of existing drugs at the time of surgical wound closure,
opioids, intravenous acetaminophen and NSAIDs and regional nerve blocks, but these all have limitations in
terms of inadequate magnitude and duration of pain relief, troublesome side-effects, such as increased risk of CV
and GI events, or functional impairment.

In sum, current therapies, for OA pain are inadequate and do not address the desire among physicians and

healthcare payors to manage pain for longer periods of time, which can delay TJA. In addition, existing pain
therapies provide suboptimal post-operative pain relief. As such, we believe there is a significant commercial
opportunity for (i) an IA therapy that is well-tolerated and can deliver significant and durable analgesia to
patients with moderate to severe OA pain, and (ii) a novel therapy that safely provides persistent post-operative
pain relief.

The Flexion Portfolio

Our product candidates are designed to deliver established anti-inflammatory and analgesic effects directly

to the site of disease, optimizing sustained local drug concentration to achieve a durable and clinically
meaningful response. These product candidates are also designed to limit systemic exposure to the drugs and

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minimize systemic toxicities, a major concern in the many OA patients with comorbidities, which are co-existing
medical conditions. We believe that our portfolio of product candidates has the potential to offer safe, durable
pain relief and functional improvement for patients across the OA pain treatment spectrum.

Our sustained-release technology allows us to incorporate pharmaceuticals in PLGA microspheres for
administration of Zilretta and potentially other product candidates. PLGA is a proven sustained-release delivery
vehicle that is metabolized to carbon dioxide and water as it releases drug in the IA space and is used in approved
drug products and surgical devices. The technology is designed to enable novel formulations of pharmaceuticals
by providing controlled, sustained-release of drugs over time and the physical properties of the polymer-drug
matrix can be varied to achieve specified drug loads and release rates. Key to the success of our IA therapies is
the ability to maintain persistent therapeutic concentrations of drug in the joint, while minimizing systemic
exposure. We believe we are the first company to administer PLGA microspheres into a human joint, and
preclinical and clinical data suggest that Zilretta may provide local therapeutic concentrations that could last for
at least three months and result in very low systemic concentrations of drug. The pharmacokinetic, or PK, clinical
trials of Zilretta provide direct evidence that following a single injection, therapeutic concentrations of TCA are
maintained locally (in the joint) for at least 12 weeks, while very low concentrations of TCA enter systemic
circulation. Furthermore, clinical data from our pivotal efficacy trials of Zilretta suggest that following a single
injection, Zilretta can provide durable local pain relief and functional improvement, while producing very low
systemic concentrations and attractive systemic safety profiles. Together these data suggest that the persistent
local delivery of Zilretta’s active pharmaceutical ingredient from PLGA microspheres has the potential to
provide prolonged, local therapeutic effects while reducing the potential for systemic side effects.

We are currently developing two product candidates that span the OA pain spectrum:

Severe

n
i
a
P
A
O

Zilretta TM
(Sustained Release Anti-Inflammatory)
Moderate to severe OA pain

Opioids

Hyaluronic
Acid (HA)

FX007
(TrkA
Antagonist)
Post-Op pain

Total Joint
Replacement
(TJR)

Steroid
Injections

Mild

Oral
Drugs &
Physical
Therapy

Early-stage

End-stage

Post-operative

Treatment Spectrum

• Zilretta is our lead, late-stage, intra-articular, sustained-release investigational steroid treatment that
combines TCA with PLGA. Zilretta was specifically designed to provide sustained therapeutic
concentrations in the joint and persistent analgesic effect, and is intended to address the limitations of
current IA therapies by providing local and long lasting analgesia over a period of months while
minimizing systemic exposure and avoiding serious side effects common to oral therapies prescribed
for OA pain. In our recently completed Phase 3 clinical trial, Zilretta demonstrated statistically
significant and clinically meaningful pain relief compared to placebo through week 16. Zilretta also
showed statistically significant and clinically meaningful improvements in validated OA specific
secondary outcome measures at each measured time point through 12 weeks in that trial compared to
the current injectable standard of care, immediate-release TCA. While Zilretta was numerically
superior to immediate-release TCA at weeks 2 through 12 on the average daily pain rating scale, it did

8

 
not achieve statistical significance in that measure during the duration of the trial. The frequency of
treatment-related side effects was comparable across all treatment arms in the trial.

•

•

FX007 is our preclinical, small-molecule TrkA receptor antagonist designed to address post-operative
pain. We are conducting preclinical local pharmacology and toxicology experiments and in 2016 will
use data from these studies to decide on the initiation of a PoC clinical trial for FX007.

FX005 is our sustained-release p38 MAP, or mitogen-activated protein, kinase inhibitor, which has
both analgesic and anti-inflammatory properties. We do not plan to continue the internal development
of FX005 and intend to seek potential partners for out licensing opportunities.

We believe our product candidates and technology will be protected primarily through a combination of

patents, trade secrets and proprietary know-how, and we intend to seek marketing exclusivity for any approved
products. A composition of matter patent has been issued by the United States Patent and Trademark Office, or
U.S. PTO, for Zilretta, with a patent term into 2031. Method of manufacturing and method of use claims have
been filed in Divisional applications. Considerable expertise and effort was required to carry out the large body
of original work underlying the formulation of Zilretta, including experimenting with, and observing the effects
of over 50 steroid and PLGA formulations. We believe our extensive know-how and trade secrets relating to the
manufacturing process for Zilretta, including those that relate to precise pharmaceutical release profiles,
represent a competitive advantage.

Zilretta—Late-Stage Candidate for IA Therapy for Patients with Moderate to Severe OA Pain

Development Program

To date, we have completed five clinical trials in which we have evaluated Zilretta against either immediate-

release TCA injection or placebo (saline) or both. A total of almost 1,100 patients were treated in these five
clinical trials, of which approximately 600 patients received Zilretta, 230 patients received immediate-release
TCA and 260 patients received placebo.

In February 2016, we announced top-line results from our second pivotal Zilretta study, a Phase 3 clinical

trial that enrolled 486 patients with moderate to severe OA knee pain. This Phase 3 trial met its primary endpoint
at week 12, demonstrating highly statistically significant (p<0.0001), durable and clinically meaningful pain
relief against placebo (saline). In clinical trials, the “p-value” is the probability that the result was obtained by
chance. For example, a “p-value” of 0.10 would indicate that there is a 10% likelihood that the observed results
could have happened at random. By convention, a “p-value” that is less than 0.05 is considered statistically
significant. In addition, Zilretta achieved statistically significant analgesia against placebo in this trial at each of
weeks 1 through 16 and patients treated with Zilretta experienced, on average, a 50 percent reduction from
baseline pain over weeks 1 through 12. In pre-specified analyses, Zilretta achieved statistical significance against
placebo in validated OA specific and quality of life secondary measures at each measured time point through
week 12. In pre-specified secondary measures, compared to commercially available immediate-release TCA,
Zilretta also achieved statistical significance at each measured time point through 12 weeks on the Western
Ontario and McMaster Universities Osteoarthritis Index, commonly referred to as WOMAC®, subscales for
WOMAC A (pain), WOMAC B (stiffness) and WOMAC C (function) and the validated Knee injury and
Osteoarthritis Outcome Score, commonly referred to as KOOS, quality of life, or QOL, subscale and was
numerically superior at weeks 2 through 12 on the daily pain rating scale, although it did not achieve statistical
significance in that measure during the duration of the trial. WOMAC is a validated, widely used questionnaire
used by healthcare professionals to specifically evaluate the condition of patients with OA of the knee and hip,
including pain, stiffness, and physical function of the joints and the KOOS QOL subscale is a validated
questionnaire used by healthcare professionals to evaluate the extent to which knee symptoms compromise a
patient’s quality of life. The frequency of treatment-related side effects in this study was comparable across all
treatment arms in the trial. No drug-related serious adverse events were observed and no patients treated with
Zilretta were discontinued from the study due to a treatment-related side effect. We intend to present detailed
results from the trial at a future scientific conference and to submit the results for publication in a journal.

9

In September 2015, we reported top-line results from our first pivotal Zilretta study, a Phase 2b clinical trial

that enrolled 310 patients with moderate to severe OA knee pain. In this trial, 40 mg of Zilretta, compared to
placebo (saline), demonstrated statistical significance in average pain relief over weeks 1 through 12 (p = 0.0012;
2-sided) and over weeks 1 through 24 (p = 0.0209; 2-sided) (see Figure 1). At weekly time points, 40 mg of
Zilretta also demonstrated superiority to placebo in pain relief beginning at week 1, continuing to week 11 and
also at week 13 (p < 0.05 at each time point; 2-sided) (see Figure 2). The primary endpoint of the trial, pain relief
against placebo at week 12, did not reach statistical significance (p = 0.0821; 2-sided) (see Figure 2). However, a
pre-specified, commonly applied sensitivity analysis, Baseline Observation Carried Forward/Last Observation
Carried Forward (BOCF/LOCF), that addresses missing data due to patient dropouts demonstrated statistical
significance for the primary endpoint at week 12 (p = 0.042), while also demonstrating significance at all time
points between weeks 1 and 11 and at week 13 (p<0.05 at each time point; 2-sided) (see Figure 3). Overall, the
40 mg dose of Zilretta performed better than the 20 mg Zilretta dose (see Figure 2). In particular, the 40 mg dose
conferred more durable pain relief (see Figure 2). The frequency of treatment-related adverse events across the
three groups (Zilretta 40 mg, Zilretta 20 mg and placebo) was comparable, and no drug-related serious adverse
events were observed in the trial.

e
l
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-0.5

-1.0

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-2.5

-3.0

-3.5

-4.0

Figure 1: Primary Endpoint Bracketed by Significance

1 - 12 weeks (p=0.0012)

Placebo

Zilretta 40mg

1 - 24 weeks (p=0.0209)

*

>1 unit 
(Wks 2 – 6)

*

*

*

*

*

*

*

*

*

*

*

Wk
0

Wk
1

Wk
2

Wk
3

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4

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5

Wk
6

Wk
7

Wk
8

Wk
9

Wk
11

Wk
 Wk
Wk
10
14
12
Weeks Post Treatment

Wk
13

*Statistically significant (p < 0.05)

Wk
15

Wk
16

Wk
17

Wk
18

Wk
19

Wk
20

Wk
21

Wk
22

Wk
23

Wk
24

10

 
 
 
 
 
 
 
Figure 2: Weekly Mean of Average Daily Pain Intensity Scores

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*Statistically significant (p < 0.05)

Wk
0

Wk
1

Wk
2

Wk
3

Wk
4

Wk
5

Wk
6

Wk
7

Wk
8

Wk
9

Wk
11

Wk
Wk
Wk
10
12
14
Weeks Post Treatment

Wk
13

Placebo (-006)

FX006 40 mg (-006)

FX006 20 mg (-006)

Wk
15

Wk
16

Wk
17

Wk
18

Wk
19

Wk
20

Wk
21

Wk
22

Wk
23

Wk
24

Figure 3: Average Change from Baseline in the Weekly Mean of Average Daily Pain

Intensity (MMRM vs. BOCF/LOCF)

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-2.0

-2.5

-3.0

-3.5

-4.0

Placebo (MMRM)

Zilretta 40mg (MMRM)

Placebo (BLOCF/LOCF)

Zilretta 40mg (BOCF/LOCF)

BOCF / LOCF achieved statistical significance from Weeks 1 - 13

Wk
0

Wk
1

Wk
2

Wk
3

Wk
4

Wk
5

Wk
6

Wk
7

Wk
8

Wk
9

Wk
11

Wk
 Wk
Wk
10
14
12
Weeks Post Treatment

Wk
13

Wk
15

Wk
16

Wk
17

Wk
18

Wk
19

Wk
20

Wk
21

Wk
22

Wk
23

Wk
24

• Last-observation carried forward (LOCF): patients discontinuing due to lack of efficacy.
• Baseline-observation carried forward (BOCF): patients discontinuing due to AE or other reasons.

In June 2013, we announced top-line results from our Phase 2b dose-ranging clinical trial of Zilretta, which

enrolled 229 patients with moderate to severe knee OA pain. In this trial, Zilretta demonstrated clinically
meaningful and statistically significant improvements in pain relief and functional status relative to commercially
available immediate-release TCA. Data from this 12-week dose-ranging clinical trial showed that Zilretta had a
safety profile that was comparable to the standard of care immediate-release steroid. Patients were injected with
40 mg of immediate-release TCA or 10, 40 or 60 mg of Zilretta. At the 8-week endpoint, the 40 mg dose of
Zilretta demonstrated a statistically (p= 0.01) and clinically significant improvement relative to immediate-
release TCA, and analyses of pre-specified secondary measures including pain, stiffness and function, patient

11

 
 
 
 
 
 
 
 
 
 
 
 
 
 
global impression of change and clinician global impression of change also demonstrated statistical superiority.
Additionally, the 40 mg dose of Zilretta produced pain relief that was improved at weeks 2-12 and statistically
superior to immediate-release TCA at weeks 5-10 (p < 0.05 at each time point), and the time-weighted average of
pain relief was statistically superior to immediate-release TCA over weeks 1-12 (p=0.04). In summary, the
extended residency of drug in the joint with 40 mg of Zilretta not only prolonged but also amplified analgesic
effect relative to the standard of care. In June 2015, the final study results from this trial were published in the
Journal of Bone and Joint Surgery (JBJS), a prominent orthopedic publication.

We previously completed two PK clinical studies of Zilretta that compared the duration of TCA residency in

the joint, systemic TCA exposure, and effects on the hypothalamic-pituitary-adrenal, or HPA, axis, which
determines the body’s ability to make its own naturally occurring steroids, following a 3 mL injection of Zilretta
or an injection of the marketed formulation of immediate-release TCA in patients with OA. The data from these
clinical trials showed that at 6, 12 and 16 weeks, the Zilretta 40 mg dose groups had measurable concentrations
of drug in synovial fluid. In contrast, the 40 mg immediate-release TCA dose group at 6 and 12 weeks had
concentrations of drug that were below the lower limit of quantitation, which means below the measurement
capability of the assay. Data from one of these studies also demonstrated that Zilretta reduced systemic TCA
exposure and avoided the marked suppression of the HPA axis seen with commercially available steroid
suspensions. In sum, these data suggest that IA administration of Zilretta prolongs exposure to TCA in the joint
and reduces systemic exposure relative to immediate-release TCA in patients with OA.

In December 2015, we initiated another PK study to provide additional characterization of the local
concentrations of TCA, the active pharmaceutical ingredient in Zilretta, in the knee over 20 weeks following a
single 5 mL IA injection of Zilretta. In our earlier PK clinical studies we utilized an injection volume of 3 mL,
while in our pivotal Phase 2b and Phase 3 clinical trials we used a 5 mL injection volume. The rationale for the
increase in injection volume size was to provide adequate dispersion of the microspheres and avoid premature
release of drug.

In April 2015, we announced that the U.S. Department of Defense awarded us a grant worth approximately

$2 million to conduct a Phase 2 clinical trial investigating Zilretta for the management of OA pain in active
military and medically retired veterans with post-traumatic OA of the knee. This ongoing trial is a double-blind,
randomized, parallel group, PoC study, in which, we, as the sponsor of the clinical trial, plan to enroll a total of
124 male and female patients between the ages of 20 and 50 and with moderately symptomatic post-traumatic
OA of the knee. The primary objective of this study is to assess the analgesic effect of a single IA injection of 40
mg of Zilretta relative to commercially available immediate-release TCA in this population. The primary
endpoint is the average change from baseline in the weekly mean of the average daily (24-hour) pain intensity
scores over weeks 5 to 10. The study is also designed to assess the effect of Zilretta on function, responder status,
global impressions of change, stiffness and consumption of analgesic medications and to assess the safety and
tolerability of a single IA injection of 40 mg Zilretta relative to commercially available immediate-release TCA.

We expect to initiate a double-blind, randomized, parallel group, single dose design Phase 2 clinical trial of

Zilretta in patients with OA of the knee who also have type 2 (adult) diabetes during 2016. A total of
approximately 36 patients will be randomized, and blood glucose levels will be monitored for a total of three
weeks (one week prior to injection and two weeks post injection) using a continuous glucose monitoring device.
Approximately 20% of patients with knee OA have diabetes and clinical trial data demonstrate that these
patients, when treated with IA injections of immediate-release TCA (as well as other corticosteroids) can
experience substantial elevations in blood glucose levels in the days post injection. These increases in blood
sugar coincide with peak plasma concentrations of the injected steroid and are thought to reflect the anti-insulin
effects of such drugs. Since Zilretta has demonstrated minimized systemic exposures in clinical trials and much
lower plasma concentrations than those seen with immediate-release TCA, we believe that administration of
Zilretta may avoid elevated blood glucose levels. The primary endpoint of this trial is the average blood glucose
levels over time from baseline through 72 hours post injection for patients receiving Zilretta compared to patients
receiving immediate-release TCA.

12

We expect to generate repeat-dose safety data for Zilretta in the future and, if Zilretta is approved, submit

this data in a supplemental NDA, following commercial launch of Zilretta for single-dose administration.

Regulatory Strategy

In September 2015, we announced that the FDA had granted Fast Track Designation for Zilretta. The FDA’s

Fast Track program was designed to facilitate the development and expedite the review of new drugs that are
intended to treat serious or life-threatening conditions and that demonstrate the potential to address unmet
medical needs. Additionally, Fast Track Designation allows a company to submit completed sections of a related
NDA on a rolling basis. Drugs with the Fast Track designation generally qualify for priority review if supported
by clinical data at the time of NDA filing, thereby expediting the FDA review process.

Pending the outcome of a planned pre-NDA meeting with the FDA, we anticipate submitting our Zilretta

NDA for single-dose administration to the FDA during the second half of 2016 and expect to develop and
subsequently submit repeat-dose safety data in a supplemental NDA in the event Zilretta is approved and
successfully launched.

FX007—Early Stage Candidate for Post-Operative Pain

Overview

FX007 is a small molecule TrkA receptor antagonist that is in development for the persistent relief of post-

operative pain. TrkA is the receptor for nerve growth factor, commonly known as NGF, a small peptide that is
released following tissue injury. NGF binds to TrkA on the surface of pain sensing neurons and renders these cells
more responsive to external stimuli. In recent clinical trials of Pfizer’s monoclonal antibody, tanezumab, systemic
blockade of NGF demonstrated marked analgesia in a variety of painful conditions. Additionally, human genetic
studies demonstrated that patients with a mutation in the TrkA gene have congenital insensitivity to pain. These data
indicate that interruption of the NGF-TrkA pathway produces a profound analgesic effect, and in preclinical
pharmacology experiments, FX007 has demonstrated both high affinity for the TrkA receptor and analgesic effects
in OA and post-operative pain. Because systemic and persistent blockade of NGF with monoclonal antibodies has
been associated with rapidly progressive OA requiring TJA, FX007 is being developed for acute, local
administration, which has the potential to avoid side effects associated with chronic systemic use.

Post-operative pain is usually most severe in the first few days following the completion of a surgical
procedure and is a response to tissue damage during surgery which stimulates peripheral nerves that signal the
brain to produce a sensory and physiological response. Numerous studies reveal that the incidence and severity of
post-operative pain is primarily determined by the type of surgery, duration of surgery and the pain treatment
choice following surgery.

Unrelieved acute pain causes patient suffering and can lead to other complications, which delays recovery

from surgery and may result in higher healthcare costs. This is particularly true with respect to post-operative
TJA pain, which can compromise rehabilitation and result in poor outcomes. According to the Agency for
Healthcare Research and Quality, aggressive prevention of the onset of pain is better than treatment of pain
because, once established, pain is more difficult to suppress. Current multimodal therapy for post-operative pain
includes administration of local anesthetics to the wound combined with the systemic administration of opioid
and NSAID analgesics. Opioids are associated with a variety of unwanted and potentially severe side effects,
such as respiratory depression, hypotension and constipation, and many physicians seek alternatives to opioids
for their patients. These side effects may require additional medications or treatments and prolong a patient’s stay
in the post-anesthesia care unit and the hospital or ambulatory surgery center, thereby increasing costs
significantly. The use of injectable NSAIDs, such as ketorolac and ibuprofen, is severely limited in the post-
operative period because they increase the risk of bleeding and gastrointestinal and renal complications.

There are approximately 51 million surgeries performed in the United States each year, and the global post-

operative pain market was estimated to be $5.9 billion in 2010. Despite the size of this market, however,
post-operative pain management remains a challenge for healthcare providers, with studies reporting that up to

13

80% of patients experience inadequate pain relief after surgery. Given the limitations of current post-operative
therapies, we are developing FX007 as a superior alternative to manage post-operative pain. The blockade of the
NGF-TrkA pathway has been shown to provide highly effective analgesia. Additionally, acute local
administration has the potential to avoid the side-effects associated with systemic and persistent blockade of
NGF.

Development Program

FX007 is being developed to treat post-operative pain with target analgesia of at least 36 to 72 hours and is

being formulated to remain in the tissues for a sufficient period of time to provide this duration of pain relief. We
are conducting preclinical local pharmacology and toxicology experiments and in 2016 will use data from these
studies to determine whether to initiate a PoC clinical trial for FX007.

Manufacturing

We believe that the multifaceted nature of PLGA drug product manufacturing and the limited number of

capable contract manufacturing companies that offer PLGA drug product manufacturing provides a competitive
advantage. The technology is designed to enable novel formulations of pharmaceuticals by providing controlled,
sustained-release of drugs over time and the physical properties of the polymer-drug matrix can be varied to
achieve specified drug loads and release rates.

Zilretta

We currently do not have manufacturing facilities and thus utilize contract manufacturers to produce our

drug substances and drug products used for preclinical and clinical supplies and plan to use contract
manufacturers for commercial supplies of Zilretta. Manufacture of PLGA microspheres is a complex process and
there are a limited number of contract manufacturing sites with PLGA experience. Our injectable IA sustained-
release technology allows us to incorporate pharmaceuticals in PLGA microspheres for administration of Zilretta
and potentially other product candidates. Following extensive development programs, we have generated
formulations of Zilretta designed to sustain local concentrations of drug in the joint for several months. The
Zilretta microsphere PLGA formulation has gone through numerous iterations and has been optimized to provide
a controlled release of drug over an extended period of time. In developing this unique combination of
manufacturing process and formulation, we have established numerous trade secrets that relate to precise
pharmaceutical release profiles.

The active pharmaceutical ingredient in Zilretta, TCA, is manufactured and supplied by Farmabios SpA in

accordance with current good manufacturing practice standards, or cGMP. This supplier is subject to regular
inspections by the FDA. The PLGA material used in the manufacture of our finished product is currently
manufactured by Evonik Corporation, or Evonik, which is also subject to regular FDA inspections

In August 2015, we entered into Manufacturing and Technical Transfer Agreements with Patheon U.K.

Limited, or Patheon, for the manufacture of clinical and commercial supplies of Zilretta finished drug product.
Under the terms of the Technical Transfer Agreement, Patheon has agreed to undertake certain technical transfer
activities and construction services needed to prepare its United Kingdom facility for the manufacture of Zilretta
in dedicated manufacturing suites. We have agreed with Patheon, among other things, to provide them with the
equipment necessary to manufacture Zilretta in these suites, to pay for construction of the suites, and to make
payments related to their establishment and validation of manufacturing processes in the suites. Successful
completion of manufacturing process validation at Patheon, along with FDA approval of the Patheon facility,
must be secured prior to commercial launch of Zilretta.

We had previously planned to use both Evonik and Patheon to manufacture clinical and commercial

supplies of Zilretta finished drug product. Given the progress to date with Patheon and the benefits of their
dedicated manufacturing facility for Zilretta, we now plan to use Patheon as our sole supplier of clinical and
commercial finished drug product.

14

Our Technical Transfer Agreement with Patheon expires upon completion of the build out and FDA

approval of the dedicated manufacturing suites. We may terminate this agreement if Patheon does not meet
certain construction and manufacturing milestones, or at any time for convenience upon 90 days’ notice prior to
FDA approval of the Patheon dedicated suite for the manufacture of Zilretta (the “FDA Approval Date”). Either
we or Patheon may terminate this agreement in the event of an unremedied material breach by or bankruptcy of
the other party or if a material force majeure event remains uncured for a period of more than 90 days. If the
agreement is terminated before the FDA Approval Date, the Manufacturing Agreement will concurrently and
automatically terminate. If we terminate the Technical Transfer Agreement for convenience prior to the FDA
Approval Date, we would be obligated to pay Patheon a termination fee of 1.3 million British Pounds and pay for
the costs associated with removing our manufacturing equipment and for Patheon’s termination costs up to a
specified maximum amount.

The initial term of the Manufacturing Agreement is 10 years from the FDA Approval Date. We may
terminate this agreement upon one month’s notice if a regulatory authority causes the withdrawal from, or halts
development of, Zilretta (in either case for reasons outside our reasonable control) in the United States or any
other market that represents 80% of our overall sales. We may also terminate this agreement at any time for
convenience by providing (i) prior to the FDA Approval Date, three months’ notice and, (ii) after the FDA
Approval Date, 24 months’ notice. Either we or Patheon may terminate this Agreement in the event of (a) an
unremedied material breach or bankruptcy of the other party, (b) if a material force majeure event remains
uncured for a period of more than 90 days and (c) the granting of a permanent injunction to a third party claiming
intellectual property infringement of Zilretta in the United States or UK. Upon termination of this agreement, we
are obligated to pay for the costs associated with the removal of our manufacturing equipment and for Patheon’s
termination costs up to a specified maximum amount.

FX007

The active ingredient for FX007 is manufactured by AstraZeneca. Existing inventory of drug substance is

from AstraZeneca and is suitable for preclinical and early clinical development. If we initiate a PoC trial for
FX007 following the generation and evaluation of certain preclinical data, we would identify a new supplier to
manufacture drug substance for potential use in later-stage clinical development and, if approved, for commercial
supply.

Commercial Strategy

In advance of potential drug approval of Zilretta, we intend to build a commercial infrastructure in the

United States to effectively support the commercialization of Zilretta. We believe that we can effectively
promote Zilretta to the approximately 9,000 orthopedists and rheumatologists who perform more than 75% of
OA treatment injections in the United States with a targeted, sales force of approximately 60 to 100
representatives. Support for this team will include sales management, internal sales support, distribution support,
and an internal marketing group. Additional requisite capabilities will include focused management of key
accounts such as managed care organizations, pharmacy benefits managers, specialty pharmacies, group
purchasing organizations, and government accounts.

Of patients who are treated for OA, it is estimated that 70% receive IA injections from orthopedic surgeons

or sports medicine specialists. An additional 8% of patients receive IA injections from physical medicine and
rehabilitation (PM&R) specialists and rheumatologists. Finally, the remaining 22% of IA injections are
administered by a wider array of physicians, the largest subgroup being general practitioners. We believe we can
effectively cover all specialties and successfully execute our future commercial plans using a cost-efficient
strategy, particularly given that orthopedists and rheumatologists are familiar with IA injections utilizing the
same steroid in the same dose.

In clinical trials completed to date, Zilretta has demonstrated clinically meaningful and statistically

significant improvements in validated OA specific measures compared to commercially available
immediate-release TCA. We believe Zilretta’s prolonged analgesia could delay the need for TJA, a costly,

15

highly-invasive procedure with a protracted recovery time. Our own market research has indicated that
healthcare payors would be willing to reimburse any additional OA therapies that have the potential for
pharmacoeconomic benefits reflecting differential efficacy and durability and the potential to delay costly and
invasive TJAs. As a result of its potential to both provide increased patient satisfaction and to delay TJA, we
believe Zilretta will be priced competitively with existing HA therapies.

Outside of the United States, we are exploring selective partnerships with third parties for the development

and commercialization of Zilretta and our other product candidates.

Competition

Overview

Our industry is highly competitive and subject to rapid and significant technological change. The large size
and expanding scope of the pain market makes it an attractive therapeutic area for biopharmaceutical businesses.
Our potential competitors include pharmaceutical, biotechnology and specialty pharmaceutical companies.
Several of these companies have robust drug pipelines, readily available capital, and established research and
development organizations. We believe our success will be driven by the ability to actively manage a portfolio of
assets that remains highly focused on OA patients and their needs.

The key competitive factors affecting the success of all of our product candidates, if approved, are likely to
be their efficacy, durability, safety, price and the availability of reimbursement from government and other third-
party payors. We believe we will compete favorably by having:

•

•

•

product candidates that have validated mechanisms of action for pain relief;

sustained-release technology that enables our therapies to maintain persistent therapeutic
concentrations in the joint and provide substantial and durable efficacy; and

product candidates with attractive safety profiles with limited systemic exposures and the potential for
fewer side effects.

Zilretta Competition

Immediate-release steroids and HA are currently the two marketed classes of IA products that would

compete with Zilretta, if approved. Immediate-release steroids are generic and widely used as a first line
injectable therapy, but leave the joint rapidly after injection and typically fail to confer pain relief of sufficient
magnitude or duration. Zilretta has demonstrated in clinical trials that it persists in the joint at therapeutic
concentrations for at least 12 weeks following injection, whereas there was no measurable immediate-release
TCA in the joint by that time. In clinical trials, Zilretta also demonstrated clinically meaningful and statistically
significant improvements compared to with immediate-release TCA in validated OA specific measures. In
addition to immediate-release steroids, Zilretta would compete with HA in patients considering something
beyond an immediate-release steroid injection. The magnitude of pain relief demonstrated by Zilretta in clinical
trials to date is much greater than that seen in historic HA clinical trials, in which HA demonstrated only
marginal pain relief over placebo in knee OA patients, although to date Zilretta has not been evaluated in head-
to-head clinical trials against HA. Also on the market are platelet rich plasma injections, but these require on site
preparation from blood drawn from the patient, have generated questionable efficacy in controlled clinical trials
and we believe they are unlikely to be a broadly embraced therapeutic option for OA patients. Because platelet
rich plasma is a therapy derived from the individual patient’s blood, it does not require and has not received FDA
review or approval. For that reason, it is generally not reimbursed by payers and patients must pay out of pocket
to receive this therapy.

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In addition to marketed IA medications for OA, other companies have OA product candidates in advanced

stages of clinical development. These IA products include:

• Anika Therapeutics, Inc.’s Cingal®, which is a mixture of Anika’s Monovisc and a low dose of a

commonly used immediate-release steroid. Anika filed a Pre-Market Application with the FDA for
Cingal based on a single pivotal clinical trial. In December 2015, Anika announced that due to the
steroid component of the product, it will need to file this product candidate under an NDA.

• Carbylan Therapeutic’s Hydros-TA, which is a mixture of Carbylan’s own HA and a low dose of a

commonly used immediate release steroid. In February 2016, Carbylan announced that Hydros-TA met
only one of its two primary endpoints in its first Phase 3 study.

• Actavis plc/Hanmi Pharmaceuticals Co., Ltd.’s HA product Hyalrheuma, which is an HA preparation.
• TissueGene, Inc.’s Invossa™, which is a combination of human allogeneic chondrocytes and TGF-β1

transfected allogeneic chondrocytes. Invossa is currently in Phase 3 clinical studies.

• Ampio Pharmaceuticals, Inc.’s Ampion™, which is a derivative of human serum albumin, is described
as having anti-inflammatory properties, and is formulated for immediate-release. Ampion is currently
in Phase 3 clinical trials.

We believe that other programs, such as Orthotrophix’s TPX-100, Merck Serono’s FGF-18, Abbvie’s ABT-

981, Menarini’s MEN16132, Dong-A’s DA-5202, Mariel Therapeutics BMP-7, Samumed’s SM04690 and
Allergan, Inc.’s botulinum toxin, have not yet entered Phase 3 clinical trials. Autologous cartilage transplantation
products, like Carticel, are appropriate for focal defects in cartilage, not the kind of diffuse disease that is seen
with OA. Eupraxia’s EP-104 is a pre-clinical/Phase 1 therapy that combines an unapproved carrier technology
(Plexis) with a steroid (fluticasone) that is approved for uses other than for the treatment of knee OA. Stem cell
approaches to OA are being explored, but these are earlier in development, bear significant technical risks and it
remains to be seen how applicable they will be to the treatment of OA.

Finally, there are many new oral therapies in development for OA pain, but we believe these therapies are

likely to expose patients to systemic safety risks greater than that of Zilretta.

FX007 Competition

Numerous post-operative pain treatments exist, including local administration with combinations of existing

analgesic and anti-inflammatory drugs at the time of surgical wound closure, opioids, intravenous
acetaminophen, NSAIDs, epidural nerve blocks and regional nerve blocks. However, these all have limitations in
terms of inadequate magnitude and duration of pain relief, serious side effects or functional impairment. Pacira
Pharmaceuticals currently markets EXPAREL®, a product that combines bupivacaine with the DepoFoam® drug
delivery platform to provide up to 24 hours of postsurgical pain control following a single intraoperative
administration. In addition, other companies have locally administered post-operative pain product candidates in
advanced stages of clinical development. These include Durect Corporation’s Posidur, a bupivacaine based
product, Innocoll AG’s Xaracoll, a levobupivacaine based scaffold inserted into the surgical site, and Omeros’
OMS103HP-S, an intraoperative irrigation solution.

Intellectual Property/Patents and Proprietary Rights

Intellectual Property and Exclusivity

We seek to protect our product candidates and our technology through a combination of patents, trade

secrets, proprietary know-how, FDA exclusivity and contractual restrictions on disclosure.

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Patents and Patent Applications

Our policy is to seek to protect the proprietary position of our product candidates by, among other methods,

filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements
that are important to the development of our business. U.S. patents generally have a term of 20 years from the
earliest effective date of the application.

As of December 31, 2015, we own one U.S. patent, two pending U.S. applications, and counterpart foreign

patent applications, along with one pending international application and one pending U.S. provisional patent
application, all directed to Zilretta. Our issued U.S. patent directed to Zilretta relates to its composition of matter
and has an expiration date in 2031. The Zilretta composition of matter patent is the result of several unique
discoveries relating to a narrow drug load specification, a certain release profile of polymers, specific polymer
weights and ratios and clinical efficacy observed within a dose-range. Further, for Zilretta, we have foreign
patent applications pending in Australia, Canada, Europe, Japan, China and other foreign countries. Our two
related pending U.S. non-provisional applications could result in additional claims expiring in 2031 and an
additional pending international application, if pursued as a non-provisional international application whereby
patents, if granted, based on this international application would have an expiration in 2034. One pending
provisional application directed to Zilretta could, if pursued as a non-provisional patent application, result in a
patent expiring in 2035. We have also exclusively licensed issued patents, owned by SwRI, directed to our
proprietary microsphere manufacturing technology which cover the production of Zilretta. These patents are
scheduled to expire in 2025.

For our FX007 product candidate, there are two issued U.S. patents covering our TrkA antagonist
compound, which are owned by AstraZeneca and to which we have an exclusive license. These patents are
scheduled to expire in 2026 and 2028. We have also licensed counterpart foreign patents that have been granted
in Europe and 30 European validation states, Australia, Canada, and other foreign countries, such as China, India,
Russia and New Zealand, which are scheduled to expire in 2026. We have licensed counterpart patent
applications that are pending in a number of additional countries, which, if granted, will expire in 2026.

We have other patent applications on formulations or uses of compounds that are not relevant to our current

programs in development.

Trade Secrets and Proprietary Information

The Zilretta microsphere PLGA formulation has gone through numerous iterations and has been optimized

to deliver the drug substance with a controlled release of drug over an extended period of time. In developing this
unique combination of manufacturing process and formulation, we have established numerous trade secrets,
including those that relate to a precise pharmaceutical release profile. In addition, due to the complexity of the
sustained-release technology and the time, costs and technical risks involved in demonstrating bioequivalence
through clinical trials, we believe that the ability of manufacturers to gain market approval for generic
alternatives to our products upon expiration of our patents and FDA exclusivity will be challenging.

We seek to protect our proprietary information, including our trade secrets and proprietary know-how, by

requiring our employees to execute a Proprietary Information, Inventions, Non-Solicitation, and Non-
Competition Agreement upon the commencement of their employment. Consultants and other advisors are
required to sign consulting agreements. These agreements generally provide that all confidential information
developed or made known during the course of the relationship with us be kept confidential and not be disclosed
to third parties except in specific circumstances. In the case of our employees, the agreements also typically
provide that all inventions resulting from work performed for us, utilizing our property or relating to our business
and conceived or completed during employment shall be our exclusive property to the extent permitted by law.
Further, we require confidentiality agreements from entities that receive our confidential data or materials.

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License Agreements

AstraZeneca—FX007. On September 3, 2010, we entered into an exclusive license agreement with
AstraZeneca for FX007, which was subsequently amended on March 17, 2014. The agreement grants us an
exclusive, royalty-bearing, world-wide right and license (with a right to sublicense, subject to certain conditions
described below) under AstraZeneca’s patent rights and certain know-how covering FX007. We paid
AstraZeneca a non-refundable fee following execution of the agreement and will owe up to an aggregate of $21
million upon the achievement of certain regulatory and development milestones for a first licensed product for
OA indications or up to an aggregate of $15 million upon the achievement of certain regulatory and development
milestones for a first licensed product for non-OA indications. Upon commercialization of a product that results
from the technology licensed under the agreement, we will owe AstraZeneca tiered royalty payments on net sales
based on a percentage ranging from low single digits to low double digits, depending on the volume of sales of
the applicable product, as well as up to $75 million in additional payments based on the achievement of certain
sales milestones. Our obligation to pay royalties to AstraZeneca will continue on a country-by-country basis until
the later to occur of 12 years following the first commercial sale of the applicable product in the applicable
country, or the date that the product is no longer covered by AstraZeneca’s patent rights or any applicable data or
marketing exclusivity periods in such country.

Under the terms of the agreement, we may not grant sublicenses except in the territory of Japan prior to the

achievement of a specified development milestone. In addition, the agreement provides that in the event we
desire to offer rights to FX007 to a third party prior to the achievement of a specified development milestone, we
must make certain diligence materials available to AstraZeneca, and AstraZeneca will have the right to make an
offer to re-acquire rights to FX007. In such circumstances, we are not required to accept AstraZeneca’s offer, but
we may not enter into an agreement with a third party containing financial terms and conditions that on the whole
are more favorable to the third party than the terms and conditions last offered by AstraZeneca.

Unless earlier terminated, the agreement will continue in effect for as long as we are obligated to pay
royalties to AstraZeneca, after which the licenses granted to us will survive and become royalty-free, perpetual
and irrevocable. AstraZeneca has the right to terminate the agreement if we fail to use commercially reasonable
efforts to develop, commercialize and sell licensed products in major markets (subject to a good-faith negotiation
and cure period) or if we or any of our affiliates or sublicensees institute, prosecute or otherwise participate in
any proceeding challenging the AstraZeneca patent rights that are licensed under the agreement. AstraZeneca
also has a right to terminate the agreement in the event of a change of control of us prior to the achievement of a
specified development milestone, unless we pay a fee to AstraZeneca (which can be offset against future
milestone payments), in which case this termination right will be forfeited. We have the right to terminate the
agreement in its entirety, or on a country-by-country basis, for any reason upon three months’ prior written notice
to AstraZeneca. In addition, either party may terminate the agreement in the event of the other party’s uncured
material breach of the agreement, or in the event of the other party’s bankruptcy or insolvency.

AstraZeneca—FX005. On June 12, 2009, we entered into an exclusive license agreement with AstraZeneca

for FX005. The agreement grants us an exclusive, royalty-bearing, world-wide right and license (with a right to
sublicense) under AstraZeneca’s patent rights and certain know-how covering FX005. We paid AstraZeneca a
non-refundable fee upon execution of the agreement and will owe up to an aggregate of $17 million upon the
achievement of certain regulatory and development milestones for a first licensed product for OA indications or
up to an aggregate of $11 million upon the achievement of certain regulatory and development milestones for a
first licensed product for non-OA indications. Upon commercialization of a product that results from the
technology licensed under the agreement, we will owe AstraZeneca tiered royalty payments on net sales based on
a percentage ranging from low to high single digits, depending on the volume of sales of the applicable product,
as well as up to $45 million in additional payments based on the achievement of certain sales milestones. Our
obligation to pay royalties to AstraZeneca will continue on a country-by-country basis until the later to occur of
12 years following the first commercial sale of the applicable product in the applicable country, or the date that
the product is no longer covered by AstraZeneca’s patent rights or any applicable data or marketing exclusivity
periods in such country.

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The agreement provides that in the event we desire to offer rights to FX005 to a third party prior to the

achievement of a specified development milestone, we must make certain diligence materials available to
AstraZeneca and AstraZeneca will have the right to make an offer to re-acquire rights to FX005. However,
pursuant to a separate letter agreement entered into between the parties on December 3, 2012, AstraZeneca
agreed to waive this right for a specified period.

Unless earlier terminated, the agreement will continue in effect for as long as we are obligated to pay
royalties to AstraZeneca, after which the licenses granted to us will survive and become royalty-free, perpetual
and irrevocable. AstraZeneca has the right to terminate the agreement if we fail to use commercially reasonable
efforts to develop, commercialize and sell licensed products in major markets (subject to a good-faith negotiation
and cure period) or if we or any of our affiliates or sublicensees institute, prosecute or otherwise participate in
any proceeding challenging the AstraZeneca patent rights that are licensed under the agreement. We have the
right to terminate the agreement in its entirety, or on a country-by-country basis, for any reason upon three
months’ prior written notice to AstraZeneca. In addition, either party may terminate the agreement in the event of
the other party’s uncured material breach of the agreement, or in the event of the other party’s bankruptcy or
insolvency. AstraZeneca initially had a right to terminate the agreement in the event of a change of control of us
prior to the achievement of a specified development milestone for FX005. However, AstraZeneca agreed to
waive this right pursuant to the separate letter agreement described above. Pursuant to the same letter agreement,
we are now free to assign our rights under the agreement to our affiliates or to a third party in connection with a
change of control.

Southwest Research Institute Manufacturing® (SwRI) License. In July 2014, Flexion executed an

exclusive worldwide licensing agreement with SwRI to utilize proprietary microsphere manufacturing
technologies for production of Flexion’s sustained-release drug candidates, including Zilretta. The SwRI
technologies employ a uniquely controlled and continuous atomizing technology that will facilitate scale-up of
commercial supply. This exclusive agreement provides for an expanded field of use in a variety of
musculoskeletal disorders, as well as broader polymer and steroid ranges, which offers the flexibility to
potentially explore different doses, disease indications, and drug-PLGA combinations. Flexion made an up-front
payment upon execution of this license and will pay an additional milestone payment upon FDA approval of
Zilretta for knee OA. The license is non-royalty bearing and remains in effect through patent term expiry.

Government Regulation and Product Approval

Government authorities in the United States at the federal, state and local level, and in other countries
extensively regulate, among other things, the research, development, testing, manufacture, quality control,
approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval
monitoring and reporting, marketing and export and import of products such as those we are developing. Zilretta
and any other drug candidate that we develop must be approved by the FDA before they may be legally marketed
in the United States and by the corresponding foreign regulatory agencies before they may be legally marketed in
foreign countries.

U.S. Drug Development Process

In the United States, the FDA regulates drugs under the FDCA and implementing regulations. Drugs are

also subject to other federal, state and local statutes and regulations. The process of obtaining regulatory
approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and
regulations requires the expenditure of substantial time and financial resources. Failure to comply with the
applicable requirements at any time during the product development process, approval process or after approval,
may subject an applicant to a variety of administrative or judicial sanctions, such as the FDA’s refusal to approve
pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters,
product recalls, product seizures, total or partial suspension of production or distribution injunctions, fines,
refusals of government contracts, restitution, disgorgement of profits or civil or criminal penalties. Any agency or

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judicial enforcement action could have a material adverse effect on us. The process required by the FDA before a
drug may be marketed in the United States generally involves the following:

•

•

•

•

•

•

•

•

completion of preclinical laboratory tests, animal studies and formulation studies according to Good
Laboratory Practices, or GLP, or other applicable regulations;

submission to the FDA of an investigational new drug, or IND, application, which must become
effective before human clinical trials may begin;

approval by an independent institutional review board, or IRB, at each clinical site before each trial
may be initiated;

performance of adequate and well-controlled human clinical trials according to the FDA’s laws and
regulations pertaining to the conduct of human clinical studies, collectively referred to as Good
Clinical Practices, or GCP, and according to the International Conference of Harmonization, or ICH,
GCP guidelines, to establish the safety and efficacy of the proposed drug for its intended use;

submission to the FDA of an NDA for a proposed new drug;

satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the drug
is produced and tested to assess compliance with the FDA’s cGMP requirements, to assure that the
facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and
purity;

potential FDA audit of the non-clinical and clinical trial sites that generated the data in support of the
NDA; and

FDA review and approval of the NDA prior to any commercial marketing, sale or shipment of the drug.

The lengthy process of seeking required approvals and the continuing need for compliance with applicable
statutes and regulations require the expenditure of substantial resources and approvals are inherently uncertain.

Before testing any compounds with potential therapeutic value in humans, the drug candidate enters the
non-clinical testing stage, also referred to as preclinical testing. Preclinical tests include laboratory evaluations of
product chemistry, toxicity and formulation, as well as animal studies to assess the potential safety and activity of
the drug candidate. The conduct of the preclinical tests must comply with federal regulations and requirements
including GLP. The investigational new drug application, or IND, sponsor must submit the results of the
preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature
and a proposed clinical protocol, among other things, to the FDA as part of the IND. The IND automatically
becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions
related to one or more proposed clinical trials and places the trial on a clinical hold within that 30-day time
period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical
trial can begin. The FDA may also impose clinical holds on a drug candidate at any time before or during clinical
trials due to safety concerns or non-compliance. Accordingly, we cannot be sure that submission of an IND will
result in the FDA allowing clinical trials to begin, or that, once begun, issues will not arise that suspend or
terminate such trial.

Clinical trials involve the administration of the drug candidate to healthy subjects or patients with the target
disease under the supervision of qualified investigators, generally physicians not employed by or under the trial
sponsor’s control. Clinical trials are conducted under written study protocols detailing, among other things, the
objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to
be used to monitor subject safety. Each protocol must be submitted to the FDA as part of the IND. Clinical trials
must be conducted in accordance with the FDA’s regulations which reflect the ICH GCP requirements. Further,
each clinical trial must be reviewed and approved by an IRB at or servicing each institution at which the clinical
trial will be conducted. An IRB is charged with protecting the welfare and rights of trial participants and
considers such items as whether the risks to individuals participating in the clinical trials are minimized and are

21

reasonable in relation to anticipated benefits. The IRB also approves the informed consent form that must be
provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until it
is completed.

During the development of a new drug, sponsors are given opportunities to meet with the FDA at certain

points. These points may be prior to submission of an IND, at the end of Phase 2, and before an NDA is
submitted. Meetings at other times may be requested. These meetings can provide an opportunity for the sponsor
to share information about the data gathered to date, for the FDA to provide advice, and for the sponsor and FDA
to reach agreement on the next phase of development. Sponsors typically use the end of Phase 2 meeting to
discuss their Phase 2 clinical results and present their plans for the pivotal Phase 3 clinical trials that they believe
will support approval of the new drug.

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

• Phase 1. The drug is initially introduced into healthy human subjects and tested for safety, dosage

tolerance, absorption, metabolism, distribution and excretion. In the case of some products for severe
or life-threatening diseases, especially when the product may be too inherently toxic to ethically
administer to healthy volunteers, the initial human testing is often conducted only in patients having the
specific disease.

• Phase 2. The drug is evaluated in a limited patient population to identify possible adverse effects and
safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to
determine dosage tolerance, optimal dosage and dosing schedule for patients having the specific
disease.

• Phase 3. The drug is administered to an expanded patient population in adequate and well-controlled

clinical trials to generate sufficient data to statistically confirm the efficacy and safety of the product for
approval, to establish the overall risk-benefit profile of the product, and to provide adequate information
for the labeling of the product. Generally, at least two adequate and well-controlled Phase 3 clinical trials
are required by the FDA for approval of an NDA. In some cases, the FDA has approved a drug based on
the results of a single adequate and well-controlled Phase 3 study of excellent design and which provided
highly reliable and statistically strong evidence of important clinical benefit, such as an effect on survival,
and a confirmatory study would have been difficult to conduct on ethical grounds.

Post-approval studies, also referred to as Phase 4 clinical trials, may be conducted after initial marketing

approval. These studies are used to gain additional experience from the treatment of patients in the intended
therapeutic indication and may be required by the FDA as part of the approval process.

Progress reports detailing the status of drug development and results of the clinical trials must be submitted
at least annually to the FDA and written IND safety reports must be submitted to the FDA and the investigators
for serious and unexpected adverse events or any finding from tests in laboratory animals that suggests a
significant risk for human subjects or patients. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed
successfully within any specified period, if at all. The FDA or the sponsor or its data safety monitoring board (if
applicable) may suspend a clinical trial at any time on various grounds, including a finding that the research
subjects are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of
a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s
requirements or if the drug has been associated with unexpected serious harm to study subjects.

Concurrent with clinical trials, companies usually complete additional animal studies and must also develop

additional information about the chemistry and physical characteristics of the drug as well as finalize a process
for manufacturing the product in commercial quantities in accordance with cGMP requirements. The
manufacturing process must be capable of consistently producing quality batches of the drug candidate and,
among other things, the manufacturer must develop methods for testing the safety, identity, strength, quality and

22

purity of the final drug product. Additionally, appropriate packaging must be selected and tested and stability
studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration
over its shelf life.

FDA Review and Approval Processes

The results of product development, preclinical studies and clinical studies for claimed indications as well as

descriptions of the manufacturing process and controls, analytical tests conducted on the chemistry of the drug,
proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting
approval to market the product. Additionally, the results of product development, preclinical studies and clinical
trials for the claimed indications in all relevant pediatric subpopulations and the support for dosing and
administration for each pediatric subpopulation for which the product is safe and effective, are contained in an
NDA. The FDA may grant deferrals for submission of pediatric data or full or partial waivers after the initial
submission of a pediatric study plan following an end of Phase 2 meeting unless otherwise agreed upon by the
FDA and the sponsor. The submission of an NDA is subject to the payment of substantial user fees; a waiver of
such fees may be obtained under certain limited circumstances.

An NDA may also be submitted under the Fast Track program if the related product candidate has received
Fast Track Designation from the FDA for the intended indication. The FDA’s Fast Track program was designed
to facilitate the development and expedite the review of new drugs that are intended to treat serious or life-
threatening conditions and that demonstrate the potential to address unmet medical needs. Drugs with the Fast
Track Designation generally qualify for priority review if supported by clinical data at the time of NDA filing,
thereby expediting the FDA review process.

The FDA reviews all NDAs submitted before it accepts them for filing and may request additional

information rather than accepting an NDA for filing. Applications submitted under the FDA’s Fast Track
program allow companies to submit completed sections of a related NDA on a rolling basis and are subject to the
same review and acceptance procedures. Once the submission is complete and accepted for filing, the FDA
begins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under the Prescription
Drug User Fee Act, or PDUFA, the FDA has 12 months after submission of an NDA for a new molecular entity
in which to complete its initial review of a standard NDA and respond to the applicant, and eight months for a
priority review NDA. In addition, the FDA has 10 months after submission of an NDA for a non-new molecular
entity in which to complete its initial review of a standard NDA and respond to the applicant, and six months for
a priority review NDA. The FDA does not always meet its PDUFA goal dates for review of standard and priority
review NDAs. The review process and the PDUFA goal date may be extended by additional three month review
periods whenever the FDA requests or the NDA sponsor otherwise provides additional information or
clarification regarding information already provided in the submission at any time during the review cycle.

The FDA reviews the NDA to determine, among other things, whether the proposed product is safe and
effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure
and preserve the product’s identity, strength, quality and purity. The FDA may refer applications for novel drug
products or drug products which present difficult questions of safety or efficacy to an advisory committee,
typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to
whether the application should be approved and under what conditions. The FDA is not bound by the
recommendations of an advisory committee, but it considers such recommendations carefully when making
decisions. During the drug approval process, the FDA also will determine whether a risk evaluation and
mitigation strategy, or REMS, is necessary to assure the safe use of the drug. If the FDA concludes a REMS is
needed, the sponsor of the NDA must submit a proposed REMS; the FDA will not approve the NDA without a
REMS, if required.

Before approving an NDA, the FDA will typically inspect the facilities at which the product is to be

manufactured. When an inspection is undertaken, the FDA will not approve the product unless it determines that

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the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure
consistent production of the product within required specifications. Additionally, before approving an NDA, the
FDA will typically inspect one or more clinical sites to assure compliance with FDA regulations regarding
conduct of clinical trials for the product’s trials. If the FDA determines that the application, manufacturing
process or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and often
will request additional testing or information.

The NDA review and approval process is lengthy and difficult and the FDA may refuse to approve an NDA

if the applicable regulatory criteria are not satisfied or may require additional clinical data or other data and
information. Even if such data and information is submitted, the FDA may ultimately decide that the NDA does
not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA
may interpret data differently than we interpret the same data, which could delay, limit or prevent regulatory
approval. The FDA will issue a “complete response” letter if the agency decides not to approve the NDA. The
complete response letter usually describes all of the specific deficiencies in the NDA identified by the FDA. The
deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring
additional clinical trials. Additionally, the complete response letter may include recommended actions that the
applicant might take to place the application in a condition for approval. If a complete response letter is issued,
the applicant may either resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw
the application.

If a product receives regulatory approval, the approval may be significantly limited to specific diseases and

dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the
product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the
product labeling or REMS to assure safe use of the product through distribution or other controls. In addition, the
FDA may require post approval studies, referred to as Phase 4 testing, which involves clinical trials designed to
further assess a product’s safety and effectiveness and may require testing and surveillance programs to monitor
the safety of approved products that have been commercialized.

Post-Approval Requirements

Any drug products for which we receive FDA approvals are subject to continuing regulation by the FDA,
including, among other things, record-keeping requirements, reporting of adverse experiences with the product,
providing the FDA with updated safety and efficacy information, product sampling and distribution
requirements, complying with certain electronic records and signature requirements and complying with FDA
promotion and advertising requirements. These promotion and advertising requirements include, among other
things, standards for direct-to-consumer advertising, prohibitions against promoting drugs for uses or in patient
populations that are not described in the drug’s approved labeling (known as “off-label use”), rules for
conducting industry-sponsored scientific and educational activities, and promotional activities involving the
internet. Failure to comply with FDA requirements can have negative consequences, including adverse publicity,
enforcement letters from the FDA, mandated corrective advertising or communications with doctors, and civil or
criminal penalties. Although physicians may prescribe legally available drugs for off-label uses, manufacturers
may not market or promote such off-label uses.

We rely, and expect to continue to rely, on third parties for the production of clinical and commercial

quantities of our products. Manufacturers of our products are required to comply with applicable FDA
manufacturing requirements contained in the FDA’s cGMP regulations. cGMP regulations require, among other
things, quality control and quality assurance as well as the corresponding maintenance of records and
documentation. Drug manufacturers and other entities involved in the manufacture and distribution of approved
drugs are also required to register their establishments with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other
laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and
quality control to maintain cGMP compliance. Discovery of problems with a product after approval may result in

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restrictions on a product, manufacturer, or holder of an approved NDA. These restrictions may include
suspension of a product until the FDA is assured that quality standards can be met, continuing oversight of
manufacturing by the FDA under a consent decree of permanent injunction, which frequently includes the
imposition of costs and continuing inspections over a period of many years, as well as possible withdrawal of the
product from the market. In addition, changes to the manufacturing process generally require prior FDA approval
before being implemented. Other types of changes to the approved product, such as adding new indications and
additional labeling claims, are also subject to further FDA review and approval.

Pharmaceutical Coverage, Pricing and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any drug candidates for which

we obtain regulatory approval. In the United States and markets in other countries, sales of any products for
which we receive regulatory approval for commercial sale will depend in part on the availability of coverage and
adequate reimbursement from third-party payors.

In the United States, third-party payors include federal and state government payor programs, including
Medicare and Medicaid, managed care providers, private health insurers and other organizations. The process for
determining whether a third-party payor will provide coverage for a drug product may be separate from the
process for setting the price or reimbursement rate that the third-party payor will pay for the drug product. Third-
party payors may limit coverage to specific drug products on an approved list, or formulary, which might not
include all of the FDA-approved drug products for a particular indication. Third-party payors are increasingly
challenging the price and examining the medical necessity and cost-effectiveness of medical products and
services, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies
in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costs
required to obtain the FDA approvals. In addition, our drug candidates may not be considered medically
necessary or cost-effective.

A third-party payor’s decision to provide coverage for a drug product does not imply that an adequate
reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a drug product
does not ensure that other payors also will provide coverage or an adequate reimbursement rate for the drug
product. Adequate third party reimbursement may not be available to enable us to maintain price levels sufficient
to realize an appropriate return on our investment in product development.

The cost of pharmaceuticals continues to generate substantial governmental and third-party payor interest.
We expect that the pharmaceutical industry will continue experiencing pricing pressures due to the trend toward
managed healthcare, the increasing influence of managed care organizations and additional legislative proposals.
Third-party payors are increasingly challenging the prices charged for medical products and services and
examining the medical necessity and cost-effectiveness of medical products and services, in addition to their
safety and efficacy. If these third-party payors do not consider our products to be cost-effective compared to
other available therapies, they may not cover our products after approval as a benefit under their plans or, if they
do, the level of payment may not be sufficient to allow us to sell our products at a profit. The U.S. government,
state legislatures and foreign governments have shown significant interest in implementing cost containment
programs to limit the growth of government-paid healthcare costs, including price controls, restrictions on
reimbursement and requirements for substitution of generic products for branded prescription drugs. Adoption of
such controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and
measures, could limit payments for pharmaceuticals such as the drug candidates that we are developing and
could adversely affect our net revenue and results.

Different pricing and reimbursement schemes exist in other countries. In the European Community,
governments influence the price of pharmaceutical products through their pricing and reimbursement rules and
control of national healthcare systems that fund a large part of the cost of those products to consumers. Some
jurisdictions operate positive and negative list systems under which products may only be marketed once a

25

reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries may
require the completion of clinical trials that compare the cost-effectiveness of a particular drug candidate to
currently available therapies. Other member states allow companies to fix their own prices for medicines, but
monitor and control company profits. The downward pressure on healthcare costs in general, particularly
prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry
of new products. In addition, in some countries, cross-border imports from low-priced markets exert a
commercial pressure on pricing within a country. There can be no assurance that any country that has price
controls or reimbursement limitations for drug products will allow favorable reimbursement and pricing
arrangements for any of our products.

Healthcare Reform

In the United States and foreign jurisdictions, there have been a number of legislative and regulatory
changes to the healthcare system that could affect our future results of operations. In particular, there have been
and continue to be a number of initiatives at the United States federal and state levels that seek to reduce
healthcare costs, improve healthcare quality or expand access to healthcare.

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the

Medicare Modernization Act, changed the way Medicare covers and pays for pharmaceutical products. The
Medicare Modernization Act expanded Medicare coverage for drug purchases by the elderly by establishing
Medicare Part D and introduced a new reimbursement methodology based on average sales prices for physician
administered drugs under Medicare Part B. In addition, this legislation provided authority for limiting the number
of drugs that will be covered in any therapeutic class under the new Medicare Part D program. Cost reduction
initiatives and other provisions of this legislation could decrease the coverage and reimbursement rate that we
receive for any of our approved products. While the Medicare Modernization Act applies only to drug benefits
for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in
setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the Medicare
Modernization Act may result in a similar reduction in payments from private payors.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Affordability Reconciliation Act of 2010, or collectively PPACA, was enacted as a sweeping law
intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance
remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance
industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Among
the provisions of PPACA of importance to our potential drug candidates are the following:

•

•

•

•

•

an annual, non-deductible fee on any entity that manufactures or imports certain branded prescription
drugs and biologic agents, apportioned among these entities according to their market share in certain
government healthcare programs;

an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1%
and 13.0% of the average manufacturer price for branded and generic drugs, respectively;

a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate
Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer
50.0% point-of-sale discounts to negotiated prices of applicable brand drugs to eligible beneficiaries
during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered
under Medicare Part D;

extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who
are enrolled in Medicaid managed care organizations;

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•

•

•

•

•

•

•

•

•

expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer
Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for
certain individuals with income at or below 133.0% of the Federal Poverty Level, thereby potentially
increasing manufacturers’ Medicaid rebate liability;

expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing
program;

new requirements under the federal Open Payments program, created under Section 6002 of PPACA,
and its implementing regulations, that manufacturers of drugs, devices, biologics and medical supplies
for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program
(with certain exceptions) report annually to Centers for Medicare and Medicaid Services, or CMS,
information related to “payments or other transfers of value” made or distributed to physicians (defined
to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and that
applicable manufacturers and applicable group purchasing organizations report annually to CMS
ownership and investment interests held by physicians (as defined above) and their immediate family
members;

a requirement to annually report drug samples that manufacturers and distributors provide to
physicians;

expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback
Statute, new government investigative powers, and enhanced penalties for non-compliance;

an FDA-approval framework for follow-on biologic products;

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct
comparative clinical effectiveness research, along with funding for such research;

creation of the Independent Payment Advisory Board, which has authority to recommend certain
changes to the Medicare program that do not affect coverage or quality, which, among other things,
could result in reduced payments for prescription drugs and those recommendations could have the
effect of law even if Congress does not act on the recommendations; and

establishment of a Center for Medicare & Medicaid Innovation at CMS to test innovative payment and
service delivery models to lower Medicare and Medicaid spending, potentially including prescription
drug spending.

Substantial new provisions affecting compliance have also been enacted, which may require us to modify
our business practices with healthcare practitioners, and a significant number of provisions are not yet, or have
only recently become, effective. Although it is too early to determine the effect of PPACA, the new law appears
likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also
increase our regulatory burdens and operating costs.

In addition, other legislative changes have been proposed and adopted since PPACA was enacted. For
example, on August 2, 2011, the Budget Control Act of 2011 was enacted, which, among other things, created
the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions.
The Joint Select Committee on Deficit Reduction did not achieve a targeted deficit reduction of at least $1.2
trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government
programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year,
starting in 2013. On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted, which, among
other things, reduced Medicare payments to several providers and increased the statute of limitations period for
the government to recover overpayments to providers from three to five years. These new laws may result in
additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on
our customers and accordingly, our financial operations.

27

We expect that PPACA, as well as other healthcare reform measures that have been and may be adopted in

the future, may result in more rigorous coverage criteria and lower reimbursement, as well as additional
downward pressure on the price that we receive for any approved product. There has been increasing legislative
and enforcement interest in the United States with respect to specialty drug pricing practices, including several
recent U.S. Congressional inquiries and proposed bills designed to, among other things, increase drug pricing
transparency, review relationships between pricing and manufacturer patient assistance programs, and reform
government program drug reimbursement methodologies. Any reduction in reimbursement from Medicare or
other government-funded programs may result in a similar reduction in payments from private payors. The
implementation of cost containment measures or other healthcare reforms may prevent us from being able to
generate revenue, attain profitability, or commercialize our products.

Other U.S. Healthcare Laws and Compliance Requirements

In the United States, our activities are subject to regulation by various federal, state and local authorities in

addition to the FDA, including CMS, other divisions of the United States Department of Health and Human
Services (e.g., the Office of Inspector General), the United States Department of Justice and individual United
States Attorney offices within the Department of Justice, and state and local governments. For example, various
activities, including but not limited to sales, marketing and scientific/educational grant programs, must comply
with the anti-fraud and abuse provisions of the Social Security Act, the federal Anti-Kickback Statute, the federal
False Claims Act and similar state laws, each as amended. Failure to comply with such requirements could
potentially result in substantial penalties to us. Even if we structure our programs with the intent of compliance
with such laws, there can be no certainty that we would not need to defend against enforcement or litigation, in
light of the fact that there is significant enforcement interest in pharmaceutical companies in the United States,
and some of the applicable laws are quite broad in scope.

The federal Anti-Kickback Statute prohibits any person or entity, including a prescription drug manufacturer

(or a party acting on its behalf), from knowingly and willfully soliciting, receiving, offering or providing
remuneration, directly or indirectly, to induce or reward either the referral of business, or the furnishing,
recommending, or arranging for the purchase, lease or order of a good, facility, item or service, for which
payment may be made under a federal healthcare program, such as the Medicare or Medicaid program. This
statute has been interpreted broadly to apply to arrangements between pharmaceutical manufacturers on the one
hand and prescribers, purchasers, and formulary managers, among others, on the other. The term “remuneration”
is not defined in the federal Anti-Kickback Statute and has been broadly interpreted to include anything of value,
including for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of
cash, waivers of payments, ownership interests and providing anything at less than its fair market value.
Although there are a number of statutory exemptions and regulatory safe harbors protecting certain business
arrangements from prosecution, the exemptions and safe harbors are drawn narrowly and strict compliance is
required. Other practices that involve remuneration intended to induce prescribing, purchasing or recommending
may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all
cases meet all of the criteria for safe harbor protection from federal Anti-Kickback Statute liability. The reach of
the Anti-Kickback Statute was broadened by PPACA, which, among other things, amended the intent
requirement of the federal Anti-Kickback Statute such that a person or entity no longer needs to have actual
knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition,
PPACA provided that the government may assert that a claim including items or services resulting from a
violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal
False Claims Act (discussed below) or the civil monetary penalties statute, which imposes fines against any
person who is determined to have presented or caused to be presented claims to a federal healthcare program that
the person knows or should know is for an item or service that was not provided as claimed or is false or
fraudulent. Additionally, many states have adopted laws similar to the federal Anti-Kickback Statute, and some
of these state prohibitions apply to referral of patients for healthcare items or services reimbursed by any third-
party payor, not only the Medicare and Medicaid programs in at least some cases, and do not contain safe
harbors.

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Federal false claims and false statements laws, including the federal False Claims Act, prohibit, among other
things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for
items or services, including drugs, for payment to, or approval by, a federal healthcare program, including
Medicare or Medicaid. The qui tam provisions of the False Claims Act allow a private individual to bring a civil
action on behalf of the federal government alleging that the defendant has submitted a false claim to the federal
government, and to share in any monetary recovery. In recent years, the number of suits brought by private
individuals has increased dramatically. In addition, various states have enacted false claims laws analogous to the
False Claims Act. Many of these state laws apply where a claim is submitted to any third-party payor and are not
limited to claims submitted to a federal healthcare program. There are many potential bases for liability under the
False Claims Act. Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a
false claim for reimbursement to the federal government. For example, the False Claims Act has been used to
assert liability on the basis of inadequate care, kickbacks and other improper referrals, improperly reported
government pricing metrics such as Best Price or Average Manufacturer Price, improper use of Medicare
numbers when detailing the provider of services, improper promotion of off-label uses (i.e., uses not expressly
approved by FDA in a drug’s label), and allegations as to misrepresentations with respect to the services
rendered. Our future activities relating to the reporting of discount and rebate information and other information
affecting federal, state and third party reimbursement of our future products, and the sale and marketing of our
future products and our service arrangements or data purchases, among other activities, may be subject to
scrutiny under these laws. We are unable to predict whether we would be subject to actions under the False
Claims Act or a similar state law, or the impact of such actions. However, the cost of defending such claims, as
well as any sanctions imposed, could adversely affect our financial performance. Also, the Health Insurance
Portability and Accountability Act of 1996, or HIPAA, created several new federal crimes, including healthcare
fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and
willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including
third-party payors. The false statements statute prohibits knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with
the delivery of or payment for healthcare benefits, items or services.

In addition, we may be subject to, or our marketing activities may be limited by, data privacy and security

regulation by both the federal government and the states in which we conduct our business. For example, HIPAA
and its implementing regulations established uniform federal standards for certain “covered entities” (healthcare
providers, health plans and healthcare clearinghouses) governing the conduct of certain electronic healthcare
transactions and protecting the security and privacy of protected health information. Additionally, the Health
Information Technology for Economic and Clinical Health Act, referred to as HITECH, and its implementing
regulations make HIPAA’s privacy and security standards directly applicable to “business associates”—
independent contractors or agents of covered entities that create, receive, maintain, or transmit protected health
information in connection with providing a service for or on behalf of a covered entity. HITECH also increased
the civil and criminal penalties that may be imposed against covered entities, business associates and possibly
other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in
federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing
federal civil actions.

We may also be subject to various federal and state marketing expenditure tracking and reporting laws,
which generally require certain types of payments and other transfers of value, among other things, provided to
physicians, other healthcare professionals, and healthcare entities in the United States to be tracked and reported.
Compliance with such requirements may require investment in infrastructure to ensure that tracking and
reporting is performed properly, and some of these laws result in the public disclosure of the reported
information and relationships. Several states have enacted legislation requiring pharmaceutical companies to,
among other things, establish marketing compliance programs, file periodic reports with the state, make periodic
public disclosures on sales, marketing, pricing, clinical trials and other activities, or register their sales
representatives, as well as prohibiting pharmacies and other healthcare entities from providing certain physician
prescribing data to pharmaceutical companies for use in sales and marketing, and prohibiting certain other sales

29

and marketing practices. These laws may affect our sales, marketing, and other promotional activities by
imposing administrative and compliance burdens on us. If we fail to track and report as required by these laws or
otherwise comply with these laws, we could be subject to the penalty provisions of the pertinent state and federal
authorities.

Where our activities involve foreign government officials, they may also potentially be subject to the
Foreign Corrupt Practices Act. If we seek to have a product covered in the United States by the Medicaid
programs, various obligations, including government price reporting, are required under the Medicaid rebate
requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each
as amended, which generally require products to be offered at substantial rebates/discounts to such programs and
certain purchasers. In order to distribute products commercially, we must comply with state laws that require the
registration of manufacturers and wholesale distributors of pharmaceutical products in a state, including, in
certain states, manufacturers and distributors who ship products into the state even if such manufacturers or
distributors have no place of business within the state. Some states also impose requirements on manufacturers
and distributors to establish the pedigree of product in the chain of distribution, including some states that require
manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through
the distribution chain. Many of our current as well as possible future activities are potentially subject to federal
and state consumer protection and unfair competition laws. We must also comply with laws that require clinical
trial registration and reporting of clinical trial results on the publicly available clinical trial databank maintained
by the National Institutes of Health at www.ClinicalTrials.gov. We are subject to various environmental, health
and safety regulations, including those governing laboratory procedures and the handling, use, storage, treatment
and disposal of hazardous substances. From time to time, and in the future, our operations may involve the use of
hazardous materials.

Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it

is possible that some of our business activities could be subject to challenge under one or more of such laws. If
our operations are found to be in violation of any of the federal and state laws described above or any other
governmental regulations that apply to us, we may be subject to significant penalties, including the imposition of
significant civil, criminal and administrative penalties, damages, fines, disgorgement, individual imprisonment,
exclusion from participation in government healthcare programs, contractual damages, injunctions, recall or
seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product
approvals, private “qui tam” actions brought by individual whistleblowers in the name of the government, refusal
to allow us to enter into supply contracts, including government contracts, reputational harm, diminished profits
and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect
our ability to operate our business and our results of operations.

To the extent that any of our products are sold in a foreign country, we may be subject to similar foreign
laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety
surveillance, anti-fraud and abuse laws, and implementation of corporate compliance programs and reporting of
payments or transfers of value to healthcare professionals.

U.S. Marketing Exclusivity

Hatch-Waxman Exclusivity. Market exclusivity provisions under the FDCA can also delay the submission

or the approval of certain applications of other companies seeking to reference another company’s NDA. If the
new drug is a new chemical entity subject to an NDA, the FDCA provides a five-year period of non-patent
marketing exclusivity within the United States to the first applicant to obtain approval of an NDA for a new
chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug
containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance.
During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or
ANDA, or a Section 505(b)(2) NDA submitted by another company for another version of such drug where the
applicant does not own or have a legal right of reference to all the data required for approval. However, such an

30

application may be submitted after four years if it contains a certification of patent invalidity or non-infringement
to one of the patents listed with the FDA by the innovator NDA holder. The FDCA also provides three years of
marketing exclusivity for an NDA, or supplement to an existing NDA if new clinical investigations, other than
bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential
to the approval of the application, for example new indications, dosages or strengths of an existing drug. This
three-year exclusivity covers only the conditions associated with the new clinical investigations and does not
prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year
exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full
NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and
well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Europe/Rest of World Government Regulation

In addition to regulations in the United States, we will be subject to a variety of regulations in other
jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of our
future products.

Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from

regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of the
product in those countries. Certain countries outside of the United States have a similar process that requires the
submission of a clinical trial application much like the IND prior to the commencement of human clinical trials.
In the European Union, for example, a clinical trial application, or CTA, must be submitted to each country’s
national health authority and an independent ethics committee, much like the FDA and IRB, respectively. Once
the CTA is approved in accordance with a country’s requirements, the clinical trial described in that CTA may
proceed.

The requirements and process governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary from country to country. In all cases, the clinical trials must be conducted in accordance
with the ICH GCP and the applicable regulatory requirements and the ethical principles that have their origin in
the Declaration of Helsinki. In the European Economic Area, or EEA (which is comprised of the 27 Member
States of the European Union plus Norway, Iceland and Liechtenstein), medicinal products can only be
commercialized after obtaining a Marketing Authorization, or MA. There are two types of marketing
authorizations: the Community MA, which is issued by the European Commission through the Centralized
Procedure based on the opinion of the Committee for Medicinal Products for Human Use, a body of the
European Medicines Agency, or the EMA, and which is valid throughout the entire territory of the EEA; and the
National MA, which is issued by the competent authorities of the Member States of the EEA and only authorized
marketing in that Member State’s national territory and not the EEA as a whole.

The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal
products, orphan medicinal products, and medicinal products containing a new active substance indicated for the
treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral diseases. The
Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA,
or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the
interest of public health in the EU. The National MA is for products not falling within the mandatory scope of the
Centralized Procedure. Where a product has already been authorized for marketing in a Member State of the
EEA, this National MA can be recognized in another Member States through the Mutual Recognition Procedure.
If the product has not received a National MA in any Member State at the time of application, it can be approved
simultaneously in various Member States through the Decentralized Procedure. Under the Decentralized
Procedure an identical dossier is submitted to the competent authorities of each of the Member States in which
the MA is sought, one of which is selected by the applicant as the Reference Member state, or RMS. If the RMS
proposes to authorize the product, and the other Member States do not raise objections, the product is granted a
national MA in all the Member States where the authorization was sought. Before granting the MA, the EMA or

31

the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the
product on the basis of scientific criteria concerning its quality, safety and efficacy.

If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other
things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution.

Employees

As of December 31, 2015, we had 48 full-time employees. None of our employees is represented by labor
unions or covered by collective bargaining agreements. We consider our relationship with our employees to be
good.

Research and Development

We invested $32.7 million, $17.9 million, and $11.1 million in research and development in the years ended

December 31, 2015, 2014 and 2013, respectively.

Corporate and Other Information

We were incorporated in Delaware in November 2007. Our principal executive offices are located at 10

Mall Road, Suite 301, Burlington, Massachusetts 01803, and our telephone number is (781) 305-7777. Our
corporate website address is www.flexiontherapeutics.com. Information contained on or accessible through our
website is not a part of this Annual Report, and the inclusion of our website address in this Annual Report is an
inactive textual reference only. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act
are available free of charge on our website as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. We also regularly post copies of our press releases as well as copies of
presentations and other updates about our business on our website at www.flexiontherapeutics.com. Information
contained in our website does not constitute a part of this Annual Report or our other filings with the SEC. The
SEC maintains an internet site that contains our public filings with the SEC and other information regarding our
company, at www.sec.gov. These reports and other information concerning our company may also be accessed at
the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

This Annual Report contains references to our trademarks and to trademarks belonging to other entities.
Solely for convenience, trademarks and trade names referred to in this Form 10-K, including logos, artwork and
other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate,
in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights
thereto. We do not intend our use or display of other companies’ trade names or trademarks to imply a
relationship with, or endorsement or sponsorship of us by, any other companies.

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Item 1A. Risk Factors

Certain factors may have a material adverse effect on our business, financial condition and results of
operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you
to consider the following discussion of risk factors, in its entirety, in addition to other information contained in
this Annual Report as well as our other public filings with the Securities and Exchange Commission.

Risks Related to Our Financial Condition and Need for Additional Capital

We have incurred significant losses since our inception and anticipate that we will continue to incur
significant losses for the foreseeable future.

We have limited operating history. To date, we have focused primarily on developing our lead product

candidate, Zilretta. All of our product candidates will require substantial additional development time and
resources before we would be able to apply for or receive regulatory approvals and begin generating revenue
from product sales. We have incurred significant net losses in each year since our inception, including net losses
of $46.3 million, $27.3 million, and $18.2 million for fiscal years 2015, 2014, and 2013, respectively. As of
December 31, 2015, we had an accumulated deficit of $139.8 million.

We have devoted most of our financial resources to product development, including our non-clinical
development activities and clinical trials. To date, we have financed our operations exclusively through the sale
of equity securities and debt. The size of our future net losses will depend, in part, on the rate of future
expenditures and our ability to generate revenue. To date, none of our product candidates have been
commercialized, and if our product candidates are not successfully developed or commercialized, or if revenue is
insufficient following marketing approval, we will not achieve profitability and our business may fail. Even if we
successfully obtain regulatory approval to market our product candidates in the United States, our revenue is also
dependent upon the size of the markets outside of the United States, as well as our ability to obtain marketing
approval and achieve commercial success.

We expect to continue to incur substantial and increased expenses as we expand our development activities

and advance our clinical programs, particularly with respect to Zilretta and as we prepare for an NDA submission
of, scale up manufacturing for and prepare to commercialize Zilretta. We also expect a continued increase in our
expenses associated with our operations as a publicly-traded company. As a result of the foregoing, we expect to
continue to incur significant and increasing losses and negative cash flows for the foreseeable future.

We have never generated any revenue and may never be profitable.

Our ability to generate revenue and achieve profitability depends on our ability, alone or with collaborators,

to successfully complete the development of, obtain the necessary regulatory approvals for, and commercialize
our product candidates. We do not anticipate generating revenue from sales of our product candidates for the
foreseeable future, if ever. Our ability to generate future revenue from product sales depends heavily on our
success in:

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•

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completing clinical development of Zilretta, as well as advancing clinical development of our other
product candidates;

obtaining regulatory approval for Zilretta as well as our other product candidates; and

launching and commercializing any product candidates for which we receive regulatory approval,
either by building our own targeted sales force or by collaborating with third parties.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we
are unable to predict the timing or amount of increased expenses, when, or if, we will begin to generate revenue
from product sales, or when, or if, we will be able to achieve or maintain profitability. In addition, our expenses

33

could increase beyond expectations if we are required by the FDA to perform studies in addition to those that we
currently anticipate. In particular, while we believe that the data from our pivotal Phase 2b and Phase 3 trials of
Zilretta will be sufficient to support an NDA filing, the FDA may not agree with our assessment and could
require us to complete an additional pivotal trial prior to NDA submission or prior to approving our NDA, which
would be costly to complete and would delay our ability to eventually receive regulatory approval and generate
revenue from product sales.

Even if one or more of our product candidates is approved for commercial sale, to the extent we do not
engage a third party collaborator, we anticipate incurring significant costs associated with commercializing any
approved product candidate. Even if we are able to generate revenue from the sale of any approved products, we
may not become profitable and may need to obtain additional funding to continue operations.

If we fail to obtain additional financing, we would be forced to delay, reduce or eliminate our product
development programs and planned commercialization activities.

Developing and commercializing pharmaceutical products, including conducting preclinical studies and

clinical trials, and building and maintaining sales and marketing capabilities, is expensive. We expect our
expenses to substantially increase in connection with our ongoing activities, particularly as we advance our
clinical programs, including our on-going and planned clinical trials for Zilretta, continue our manufacturing
scale-up activities and build a sales and marketing organization to commercialize Zilretta.

As of December 31, 2015, we had cash, cash equivalents and marketable securities of $118.6 million and
working capital of $104.0 million. Based upon our current operating plan, we believe that our existing cash, cash
equivalents and marketable securities will enable us to fund our operating expenses and capital requirements for
at least the next twelve months, including through the submission of an NDA for Zilretta, assuming no additional
pivotal trials are required. Regardless of our expectations as to how long our cash, cash equivalents and
marketable securities will fund our operations, changing circumstances beyond our control may cause us to
consume capital more rapidly than we currently anticipate. For example, our clinical trials may encounter
technical, enrollment or other difficulties that could increase our development costs more than we expect or the
FDA could impose additional or different clinical development requirements on us prior to our submission of an
NDA for Zilretta. In any event, we may require additional capital prior to commercializing Zilretta or any of our
other product candidates.

Attempting to secure additional financing may divert our management from our day-to-day activities, which

may adversely affect our ability to develop and commercialize our product candidates. In addition, we cannot
guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. For
example, while we have the ability to borrow an additional $15.0 million under our credit facility, we may not be
able to satisfy the conditions to borrow the additional amounts at the time we desire to do so, including, if the
data from our recently completed Phase 3 clinical trial is not sufficient to file an NDA for Zilretta. If we are
unable to raise additional capital when required or on acceptable terms, we may be required to:

•

•

•

•

significantly delay, scale back or discontinue the development or commercialization of our product
candidates;

seek corporate partners for our product candidates at an earlier stage than otherwise would be desirable
or on terms that are less favorable than might otherwise be available;

relinquish or license on unfavorable terms, our rights to technologies or product candidates that we
otherwise would seek to develop or commercialize ourselves; or

significantly curtail, or cease, operations.

If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be

prevented from pursuing development and commercialization efforts, which will have a material adverse effect
on our business, operating results and prospects.

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We may sell additional equity or debt securities to fund our operations, which may result in dilution to
our stockholders and impose restrictions on our business.

In order to raise additional funds to support our operations, we may sell additional equity or debt securities,
which could adversely impact our existing stockholders as well as our business. The sale of additional equity or
convertible debt securities would result in the issuance of additional shares of our capital stock and dilution to all
of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and
could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt,
limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that
could adversely impact our ability to conduct our business.

Our credit and security agreement with MidCap Financial SBIC, LP, or MidCap, and Silicon Valley
Bank contains restrictions that limit our flexibility in operating our business. We may be required to
make a prepayment or repay the outstanding indebtedness earlier than we expect under our credit and
security agreement if a prepayment event or an event of default occurs, including a material adverse
change with respect to us, which could have a materially adverse effect on our business.

On August 4, 2015, we entered into a credit and security agreement with MidCap Financial Trust, as agent,

MidCap Financial Funding XIII Trust and Silicon Valley Bank, as agent, to borrow up to $30.0 million and
contemporaneously drew down $15.0 million under the credit facility. The agreement contains various covenants
that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among
other things:

•

incur or assume certain debt;

• merge or consolidate or acquire all or substantially all of the capital stock or property of another entity;

•

•

•

•

•

•

enter into any transaction or series of related transactions that would be deemed to result in a change in
control of us under the terms of the agreement;

change the nature of our business;

change our organizational structure or type;

amend, modify or waive any of our organizational documents;

license, transfer or dispose of certain assets;

grant certain types of liens on our assets;

• make certain investments;

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•

•

pay cash dividends;

enter into material transactions with affiliates; and

amend or waive provisions of material agreements in certain manners.

The restrictive covenants of the agreement could cause us to be unable to pursue business opportunities that

we or our stockholders may consider beneficial.

A breach of any of these covenants could result in an event of default under the agreement. As of

December 31, 2015 we were in compliance with these covenants. An event of default will also occur if, among
other things, a material adverse change in our business, operations or condition occurs, which could potentially
include negative results in our future clinical trials or unfavorable determinations by the FDA with respect to the
potential approval of Zilretta, or a material impairment of the prospect of our repayment of any portion of the
amounts we owe under the agreement occurs. In the case of a continuing event of default under the agreement,
the lenders could elect to declare all amounts outstanding to be immediately due and payable, proceed against the

35

collateral in which we granted the lenders a security interest under the agreement, or otherwise exercise the rights
of a secured creditor. Amounts outstanding under the agreement are secured by all of our existing and future
assets, excluding intellectual property, which is subject to a negative pledge arrangement.

We may not have enough available cash or be able to raise additional funds on satisfactory terms, if at all,
through equity or debt financings to repay our indebtedness at the time any such repayment is required. In such
an event, we may be required to delay, limit, reduce or terminate our product development or commercialization
efforts or grant to others rights to develop and market product candidates that we would otherwise prefer to
develop and market ourselves. Our business, financial condition and results of operations could be materially
adversely affected as a result.

Risks Related to Clinical Development and Regulatory Approval

We are substantially dependent on the success of our lead product candidate Zilretta, which is in a later
stage of development than our other product candidates. We cannot give any assurance that Zilretta will
successfully complete on-going or future clinical development or receive regulatory approval, which is
necessary before it can be commercialized.

Our business and future success is substantially dependent on our ability to successfully develop, obtain

regulatory approval for, and successfully commercialize our lead product candidate Zilretta, for which we
recently completed pivotal Phase 2b and Phase 3 clinical trials. Any delay or setback in the development or
regulatory approval of any of our product candidates, but particularly Zilretta, could adversely affect our business
and cause our stock price to decline. Should our on-going or planned Zilretta clinical development fail to be
completed in a timely manner or at all, or be sufficient to support regulatory approval, we may be forced to rely
on our other product candidates, which are at an earlier development stage and will require additional time and
resources to obtain regulatory approval and proceed with commercialization. We cannot assure you that our on-
going or planned clinical development for Zilretta will be completed in a timely manner, or at all, or that we will
be able to obtain approval for Zilretta from the FDA or any foreign regulatory authority.

Clinical development is a lengthy and expensive process with an uncertain outcome, and results of earlier
studies and trials may not be predictive of future trial results. Clinical failure can occur at any stage of
clinical development. We have never submitted an NDA.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain.
Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical
trials of our product candidates may not be predictive of the results of subsequent clinical trials. In particular, the
results generated in our recently completed Zilretta pivotal Phase 3 clinical trial does not ensure that any on-
going or future Zilretta clinical trial will be successful or consistent with the results generated in the Phase 3 trial.

We have conducted preclinical toxicology studies in healthy dogs with single and repeat doses of Zilretta,

blank microspheres and immediate-release TCA. The immediate-release TCA and Zilretta groups produced
similar findings in these studies. In the single-dose study, local cartilage findings of reduced extracellular matrix
were completely reversed by the end of the nine-month recovery period in both the Zilretta and immediate-
release TCA study arms. With repeat administrations of Zilretta and immediate-release TCA, a larger reduction
in extracellular matrix in cartilage partially recovered by six months following the last dose; however, structural
changes in cartilage were observed with repeat administrations of both Zilretta and immediate-release TCA.
Repeat administration of immediate-release TCA has a long history of safe clinical use in patients with OA, and
in a randomized, double-blind clinical trial conducted in 2003 by Raynauld et al, administration of immediate-
release TCA or saline every three months for up to two years in 68 OA patients was well-tolerated and
demonstrated no deleterious effects in the knee joint when assessed by clinical exam and X-ray evaluation. Using
a more sensitive MRI imaging technology in 2015, Driban et al again demonstrated that cartilage structure
changes between OA patients treated with immediate-release TCA and saline in patients were similar. We intend

36

to study Zilretta in a repeat dose safety clinical trial and to submit repeat dose data in a supplemental NDA
following submission of the NDA for single administration of Zilretta. It is possible that we could observe
detrimental effects on cartilage with repeated doses of Zilretta, similar to those outcomes observed in our
preclinical studies, which would limit Zilretta’s commercial potential and could harm our ability to maintain
regulatory approval.

Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits

despite having progressed through preclinical studies and initial clinical trials. In addition to the safety and
efficacy traits of any product candidate, clinical trial failures may result from a multitude of factors including
flaws in trial design, dose selection, placebo effect and patient enrollment criteria. A number of companies in the
biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or
adverse safety profiles, notwithstanding promising results in earlier trials. Based upon negative or inconclusive
results, we or our collaborators may decide, or regulators may require us, to conduct additional clinical trials or
preclinical studies. For example, although our Zilretta pivotal Phase 2b clinical trial showed statistical significant
pain relief with the 40 mg dose compared to placebo at weeks 1-11 and week 13, the result was not statistically
significant at week 12 and therefore the primary efficacy endpoint of the trial was not achieved. We believe after
consultations with external regulatory advisors that, based on our positive Phase 3 efficacy data, our Phase 2b
clinical trial could be considered a pivotal trial by the FDA. However, we cannot guarantee that the FDA will
accept the Phase 2b trial as pivotal or that we won’t be required to conduct an additional pivotal trial which
would delay our NDA submission or approval timeline and result in additional development costs. In addition,
data obtained from trials and studies are susceptible to varying interpretations, and regulators may not interpret
our data as favorably as we do, which may delay, limit or prevent regulatory approval. In any event, our future
clinical trials may not be successful.

If Zilretta or any other product candidate is found to be unsafe or lack efficacy, we will not be able to obtain

regulatory approval for it and our business would be materially harmed. If the results of any of our on-going or
future clinical trials for Zilretta demonstrate unexpected safety findings or do not achieve the primary efficacy
endpoint, the prospects for approval of Zilretta, or the commercial potential for Zilretta, if approved, as well our
stock price and our ability to create stockholder value would be materially and adversely affected.

If the FDA does not conclude that Zilretta satisfies the requirements for the Section 505(b)(2) regulatory
approval pathway, or if the requirements for Zilretta under Section 505(b)(2) are not as we expect, the
approval pathway for Zilretta will likely take significantly longer, cost significantly more and entail
significantly greater complications and risks than anticipated, and in either case may not be successful.

We intend to seek FDA approval through the Section 505(b)(2) regulatory pathway for Zilretta. The Drug
Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Amendments,
added Section 505(b)(2) to the FDCA. Section 505(b)(2) permits the filing of an NDA where at least some of the
information required for approval comes from studies not conducted by or for the applicant and for which the
applicant has not obtained a right of reference.

Even if we are allowed to pursue the Section 505(b)(2) regulatory pathway, we may still need to conduct
additional trials and we cannot guarantee that Zilretta will receive the requisite approvals for commercialization.
If this were to occur, the time and financial resources required to obtain FDA approval for Zilretta, and
complications and risks associated with Zilretta, would likely substantially increase. We may also need to obtain
additional funding, which could result in significant dilution to the ownership interests of our then existing
stockholders to the extent we issue equity securities or convertible debt. We cannot assure you that we would be
able to obtain such additional financing on terms acceptable to us, if at all. Moreover, inability to pursue the
Section 505(b)(2) regulatory pathway could result in new competitive products reaching the market faster than
Zilretta, which could materially adversely impact our competitive position and prospects.

In addition, notwithstanding the approval of a number of products by the FDA under Section 505(b)(2) over

the last few years, some pharmaceutical companies and others have objected to the FDA’s interpretation of

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Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may be
required to change its Section 505(b)(2) policies and practices, which could delay or even prevent the FDA from
approving any NDA that we submit under Section 505(b)(2), including our planned NDA submission for Zilretta.

Delays in clinical trials are common and have many causes, and any delay could result in increased costs
to us and jeopardize or delay our ability to obtain regulatory approval and commence product sales.

We may experience delays in clinical trials of our product candidates. Our clinical trials may not begin on
time, have an effective design, enroll a sufficient number of patients, or be completed on schedule, if at all. Our
clinical trials can be delayed for a variety of reasons, including:

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•

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•

•

inability to raise funding necessary to initiate or continue a trial;

delays in obtaining regulatory approval to commence a trial;

delays in reaching agreement with the FDA on final trial design;

imposition of a clinical hold for safety reasons or following an inspection of our clinical trial operations
or trial sites by the FDA or other regulatory authorities;

delays in reaching agreement on acceptable terms with prospective contract research organizations, or
CROs, and clinical trial sites;

delays in obtaining required institutional review board approval at each site;

delays in recruiting suitable patients to participate in a trial;

delays in having patients complete participation in a trial or return for post-treatment follow-up;

clinical sites dropping out of a trial to the detriment of enrollment;

time required to add new clinical sites; or

delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials.

For example, our previously completed Phase 2b dose-ranging clinical trial for Zilretta was initially subject
to a clinical hold imposed by the FDA due to the observation of effects of PLGA microspheres on synovial tissue
from Zilretta injections. While we were able to begin enrollment initially at non-U.S. sites and later at U.S. sites
after the clinical hold was lifted without restriction by the FDA, the hold delayed our completion of the trial and
resulted in additional expense. Also in September 16, 2014, the FDA notified us that it had placed a clinical hold
on the Zilretta IND due to a single occurrence of what was then reported to be septic arthritis, an infection of the
injected knee joint, of a patient in the clinical trial. While the clinical hold was lifted on December 1, 2014
following our successful completion of testing and investigation requested by the FDA, the hold delayed the
completion of our previously completed pivotal Phase 2b clinical trial and delayed the initiation of our recently
completed pivotal Phase 3 clinical trial.

If initiation or completion of our clinical trials are delayed for any of the above reasons or other reasons, our

development costs may increase, our approval process could be delayed and our ability to commercialize and
commence sales of our product candidates could be materially harmed, which could have a material adverse
effect on our business.

Our product candidates may cause adverse events or have other properties that could delay or prevent
their regulatory approval or limit the scope of any approved label or market acceptance.

Adverse events, or AEs, caused by our product candidates or other potentially harmful characteristics of our

product candidates could cause us, other reviewing entities, clinical trial sites or regulatory authorities to
interrupt, delay or halt clinical trials and could result in the denial of regulatory approval.

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For example, while no serious adverse events, or SAEs, assessed as related to study drug have been

observed in any of our completed clinical trials of Zilretta to date, there have been some AEs assessed as at least
possibly related to the study drug. Excluding our recently completed Phase 3 clinical trial, the most common AEs
that were observed in greater than five percent of the Zilretta patients in our completed studies were arthralgia
(pain in any joint) and headache and were generally mild to moderate in severity. If drug-related SAEs are
observed in any of our clinical trials, our ability to obtain regulatory approval for our product candidates may be
adversely impacted.

Further, if any of our approved products cause serious or unexpected side effects after receiving market

approval, a number of potentially significant negative consequences could result, including:

•

•

regulatory authorities may withdraw their approval of the product or impose restrictions on its
distribution in the form of a modified Risk Evaluation and Mitigation Strategy;

regulatory authorities may require the addition of labeling statements, such as warnings or
contraindications;

• we may be required to change the way the product is administered or conduct additional clinical

studies;

• we could be sued and held liable for harm caused to patients; or

•

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product
candidate and could substantially increase the costs of commercializing our product candidates.

The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time
consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval
for our product candidates, our business will be substantially harmed.

The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but
typically takes many years following the commencement of clinical trials and depends upon numerous factors,
including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the
type and amount of clinical data necessary to gain approval may change during the course of a product
candidate’s clinical development and may vary among jurisdictions. For example, we cannot guarantee that the
FDA will not require additional or different clinical trials in support of our submission of an NDA for Zilretta
despite the most recent guidance we have received from the FDA. In particular, we plan to meet with the FDA
following the recent completion of our pivotal Phase 3 clinical trial to discuss, among other topics, whether data
from this trial and our pivotal Phase 2b clinical trial will be sufficient to support an NDA submission for Zilretta,
and cannot guarantee that the FDA will agree that additional pivotal trials are not required. We have not obtained
regulatory approval for any product candidate, and it is possible that none of our existing product candidates or
any product candidates we may seek to develop in the future will ever obtain regulatory approval.

Our product candidates could fail to receive regulatory approval for many reasons, including the following:

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the FDA or comparable foreign regulatory authorities may disagree with the design, scope or
implementation of our clinical trials;

• we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory

authorities that a product candidate is safe and effective for its proposed indication;

•

the results of clinical trials may not meet the level of statistical significance required by the FDA or
comparable foreign regulatory authorities for approval;

• we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its

safety risks;

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•

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•

•

the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from
preclinical studies or clinical trials;

the data collected from clinical trials of our product candidates may not be sufficient to support the
submission of an NDA or other submission or to obtain regulatory approval in the United States or
elsewhere;

the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes
or facilities of third party manufacturers with which we contract for clinical and commercial supplies;
and

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may
change significantly in a manner rendering our clinical data insufficient for approval.

In addition, despite our receipt of Fast Track Designation for Zilretta, we may not experience a faster
development process, review or approval compared to conventional FDA procedures. The FDA may also
withdraw Fast Track Designation if it believes that the designation is no longer supported by data from our
clinical development program or otherwise. The lengthy approval process, as well as the unpredictability of
future clinical trial results, may result in our failing to obtain regulatory approval to market Zilretta or our other
product candidates, which would harm our business, results of operations and prospects significantly.

In addition, even if we were to obtain approval, regulatory authorities may approve any of our product
candidates for fewer or more limited indications than we request, may not approve the price we intend to charge
for our products, may grant approval contingent on the performance of costly post-marketing clinical trials, or
may approve a product candidate with a label that does not include the labeling claims necessary or desirable for
the successful commercialization of that product candidate. Any of the foregoing scenarios could harm the
commercial prospects for our product candidates. For example, we believe that, to the extent our clinical
development of Zilretta continues to focus on knee OA, any initial indication of Zilretta would be limited to the
treatment of knee OA, as opposed to the treatment of OA generally. If an initial indication is limited to knee OA,
we would likely need to conduct additional clinical trials in order to market Zilretta for other indications and
expand its market potential. In addition, we are choosing to pursue an initial approval of Zilretta for single-dose
administration. While we intend to develop and submit clinical data for repeated dosing of Zilretta in a
supplemental NDA, if we were unable to expand the label for Zilretta to include repeat dosing, our ability to fully
market Zilretta would be limited.

We have not previously submitted an NDA or any similar drug approval filing to the FDA or any
comparable foreign authority for any product candidate, and we cannot be certain that any of our product
candidates will be successful in clinical trials or receive regulatory approval. Further, our product candidates may
not receive regulatory approval even if they are successful in clinical trials. If we do not receive regulatory
approval for our product candidates, we may not be able to continue our operations. Even if we successfully
obtain regulatory approval to market one or more of our product candidates, our revenue will be dependent, to a
significant extent, upon the size of the markets in the territories for which we gain regulatory approval. If the
markets for patients or indications that we are targeting are not as significant as we estimate, we may not
generate significant revenue from sales of such products, if approved.

The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the
promotion of off-label uses.

If any of our product candidates are approved and we are found to have improperly promoted off-label uses
of those products, we may become subject to significant liability. The FDA and other regulatory agencies strictly
regulate the promotional claims that may be made about prescription products, such as our product candidates, if
approved. In particular, a product may not be promoted for uses that are not approved by the FDA or such other
regulatory agencies as reflected in the product’s approved labeling. For example, if we receive marketing

40

approval for Zilretta as a single-dose therapy for knee OA, physicians may nevertheless use Zilretta for their
patients in a manner that is inconsistent with the approved label, potentially including repeat dosing or as an
injection in other joints. If we are found to have promoted such off-label uses, we may become subject to
significant liability. The federal government has levied large civil and criminal fines against companies for
alleged improper promotion of off-label use and has enjoined several companies from engaging in off-label
promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions
under which specified promotional conduct is changed or curtailed. If we cannot successfully manage the
promotion of our product candidates, if approved, we could become subject to significant liability, which would
materially adversely affect our business and financial condition.

Even if we obtain regulatory approval for Zilretta or other product candidates, we will still face extensive
regulatory requirements and our products may face future development and regulatory difficulties.

Even if we obtain regulatory approval in the United States, the FDA may still impose significant restrictions

on the indicated uses or marketing of our product candidates, or impose ongoing requirements for potentially
costly post-approval studies or post-market surveillance. Zilretta and our other product candidates, if approved,
will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety
surveillance, advertising, promotion, record-keeping and reporting of safety and other post-market information.
The holder of an approved NDA is obligated to monitor and report AEs and any failure of a product to meet the
specifications in the NDA. The holder of an approved NDA must also submit new or supplemental applications
and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process.
Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition
to other potentially applicable federal and state laws.

In addition, manufacturers of drug products and their facilities are subject to payment of user fees and
continual review and periodic inspections by the FDA and other regulatory authorities for compliance with
current good manufacturing practices, or cGMP, and adherence to commitments made in the NDA. If we or a
regulatory agency discovers previously unknown problems with a product, such as AEs of unanticipated severity
or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose
restrictions relative to that product or the manufacturing facility, including requiring recall or withdrawal of the
product from the market or suspension of manufacturing.

If we fail to comply with applicable regulatory requirements following approval of a product candidate, a

regulatory agency may:

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issue a warning letter asserting that we are in violation of the law;

seek an injunction or impose civil or criminal penalties or monetary fines;

suspend or withdraw regulatory approval;

suspend any ongoing clinical trials;

refuse to approve a pending NDA or supplements to an NDA submitted by us;

seize product; or

refuse to allow us to enter into supply contracts, including government contracts.

Any government investigation of alleged violations of law could require us to expend significant time and
resources in response and could generate negative publicity. The occurrence of any event or penalty described
above may inhibit our ability to commercialize our products and generate revenue.

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Any relationships with healthcare professionals, principal investigators, consultants, actual and potential
customers, and third-party payors in connection with our current and future business activities are and
will continue to be subject, directly or indirectly, to federal and state healthcare laws. If we are unable to
comply, or have not fully complied, with such laws, we could face criminal sanctions, civil penalties,
contractual damages, reputational harm, diminished profits and future earnings, and curtailment or
restructuring of our operations.

Our operations may be directly or indirectly subject to various federal and state healthcare laws, including

without limitation, fraud and abuse laws, false claims laws, marketing expenditure tracking and disclosure (or
“sunshine”) laws, government price reporting, and health information privacy and security laws. If we obtain
FDA approval for any of our product candidates and begin commercializing those products in the United States,
our potential exposure under such laws will increase significantly, and our costs associated with compliance are
also likely to increase. These laws may impact, among other things, our current activities with investigators and
research subjects, as well as proposed sales, marketing, promotion, manufacturing, distribution, pricing,
discounting, customer, incentive programs, education programs and other business arrangements and activities.
In addition, we may be subject to patient privacy regulation by the federal government and by the U.S. states and
foreign jurisdictions in which we conduct our business. The laws that may affect our ability to operate include,
but are not limited to:

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•

•

the federal Anti-Kickback Statute, which prohibits, among other things, individuals and entities from
knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in
cash or in kind, to induce or reward, or in return for, either the referral of an individual, or the purchase,
order or recommendation of an item or service for which payment may be made under a federal
healthcare program, such as the Medicare and Medicaid programs;

federal civil and criminal false claims laws and civil monetary penalties laws, including the civil False
Claims Act, which prohibit, among other things, individuals or entities from knowingly presenting, or
causing to be presented, to the federal government claims for payment that are false or fraudulent or
making a false statement to avoid, decrease or conceal an obligation to pay money to the federal
government;

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes
criminal and civil liability for, among other things, executing a scheme to defraud any healthcare
benefit program or making false statements relating to healthcare matters;

• HIPAA, as amended by the Health Information Technology and Clinical Health Act of 2009, and their

respective implementing regulations, which impose requirements on certain covered healthcare
providers, health plans, and healthcare clearinghouses as well as their business associates that perform
services involving the use or disclosure of individually identifiable health information, relating to the
privacy, security and transmission of individually identifiable health information;

•

•

the federal Open Payments program, created under Section 6002 of the Patient Protection and
Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010,
collectively, PPACA, and its implementing regulations, requires manufacturers of drugs, devices,
biologics and medical supplies for which payment is available under Medicare, Medicaid or the
Children’s Health Insurance Program (with certain exceptions) to report annually to CMS information
related to “payments or other transfers of value” made to physicians (defined to include doctors,
dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and applicable
manufacturers and applicable group purchasing organizations to report annually to CMS ownership and
investment interests held by physicians (as defined above) and their immediate family members;

state and foreign law equivalents of each of the above federal laws and regulations, such as anti-
kickback and false claims laws which may apply to sales or marketing arrangements and claims
involving healthcare items or services reimbursed by any third-party payor, including commercial
insurers; state and foreign laws that require pharmaceutical companies to comply with the

42

pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance
promulgated by the federal government or otherwise restrict payments that may be made to healthcare
providers; state and foreign laws that require drug manufacturers to report information related to
payments and other transfers of value to physicians and other healthcare providers or marketing
expenditures; and state and foreign laws governing the privacy and security of health information in
certain circumstances, many of which differ from each other in significant ways and may not have the
same effect, and often are not preempted by HIPAA, thus complicating compliance efforts;

the Foreign Corrupt Practices Act, a U.S. law which regulates certain financial relationships with
foreign government officials (which could include, for example, certain medical professionals);

federal and state consumer protection and unfair competition laws, which broadly regulate marketplace
activities and activities that potentially harm consumers; and

state and federal government price reporting laws that require us to calculate and report complex
pricing metrics to government programs, where such reported prices may be used in the calculation of
reimbursement, rebates and/or discounts on our marketed drugs (participation in these programs and
compliance with the applicable requirements may subject us to potentially significant discounts on our
products, increased infrastructure costs, and potentially limit our ability to offer certain marketplace
discounts).

•

•

•

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare

laws and regulations may involve substantial costs. It is possible that governmental and enforcement authorities
will conclude that our business practices may not comply with current or future statutes, regulations or case law
interpreting applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be
in violation of any of the laws described above or any other governmental regulations that apply to us, we may be
subject to penalties, including, without limitation, civil, criminal, and administrative penalties, damages, fines,
disgorgement, imprisonment, possible exclusion from participation in Medicare, Medicaid and other government
healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and
curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our
business and our results of operations.

Even if we obtain FDA approval for Zilretta or any other product candidate in the United States, we may
never obtain approval for or commercialize our product candidates outside of the United States, which
would limit our ability to realize their full market potential.

In order to market any products outside of the United States, we must establish and comply with numerous
and varying regulatory requirements of other countries regarding safety and efficacy. Clinical trials conducted in
one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one
country does not mean that regulatory approval will be obtained in any other country. Approval processes vary
among countries and can involve additional product testing and validation and additional administrative review
periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional
non-clinical studies or clinical trials which could be costly and time consuming. Regulatory requirements can
vary widely from country to country and could delay or prevent the introduction of our products in those
countries. We do not have any product candidates approved for sale in any jurisdiction, including international
markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to
comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if
regulatory approval in international markets are delayed, our target market will be reduced and our ability to
realize the full market potential of our products will be harmed.

43

If we fail to develop, acquire or in-license other product candidates or products, our business and
prospects will be limited.

Our long-term growth strategy is to develop, acquire or in-license and commercialize a portfolio of product

candidates in addition to Zilretta and our other existing product candidates. We do not have internal new drug
discovery capabilities. As a result, our primary means of expanding our pipeline of product candidates is to
develop improved formulations and delivery methods for existing FDA-approved products and/or select and
acquire or in-license product candidates for the treatment of therapeutic indications that complement or augment
our current pipeline, or that otherwise fit into our development or strategic plans on terms that are acceptable to
us. Developing new formulations of existing products or identifying, selecting and acquiring or licensing
promising product candidates requires substantial technical, financial and human resources expertise. Efforts to
do so may not result in the actual development, acquisition or license of a particular product candidate,
potentially resulting in a diversion of our management’s time and the expenditure of our resources with no
resulting benefit. If we are unable to add additional product candidates to our pipeline, our long-term business
and prospects will be limited.

Risks Related to Our Reliance on Third Parties

We rely on third parties to conduct our preclinical studies and clinical trials. If these third parties do not
successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain
regulatory approval for or commercialize our product candidates and our business could be substantially
harmed.

We rely upon and plan to continue to rely upon third party CROs to monitor and manage data for our
preclinical and clinical programs. We rely on these parties for execution of our preclinical studies and clinical
trials, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each
of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards
and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs are
required to comply with FDA laws and regulations regarding current good clinical practice, or GCP, which are
also required by the Competent Authorities of the Member States of the European Economic Area and
comparable foreign regulatory authorities in the form of International Conference on Harmonization guidelines
for all of our products in clinical development. Regulatory authorities enforce GCP through periodic inspections
of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply with applicable
GCP, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable
foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing
applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory
authority will determine that any of our clinical trials comply with GCP regulations. In addition, our clinical
trials must be conducted with product produced under cGMP regulations. While we have agreements governing
activities of our CROs, we have limited influence over their actual performance. In addition, portions of the
clinical trials for our product candidates are being conducted outside of the United States, which will make it
more difficult for us to monitor CROs and perform visits of our clinical trial sites and will force us to rely heavily
on CROs to ensure the proper and timely conduct of our clinical trials and compliance with applicable
regulations, including GCP. Failure to comply with applicable regulations in the conduct of the clinical trials for
our product candidates may require us to repeat clinical trials, which would delay the regulatory approval
process.

Some of our CROs have an ability to terminate their respective agreements with us if, among other reasons,
it can be reasonably demonstrated that the safety of the subjects participating in our clinical trials warrants such
termination, if we make a general assignment for the benefit of our creditors or if we are liquidated. If any of our
relationships with these third party CROs terminate, we may not be able to enter into arrangements with
alternative CROs or to do so on commercially reasonable terms. In addition, our CROs are not our employees,
and except for remedies available to us under our agreements with such CROs, we cannot control whether or not
they devote sufficient time and resources to our preclinical and clinical programs. If CROs do not successfully

44

carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the
quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical
protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated
and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates.
Consequently, our results of operations and the commercial prospects for our product candidates would be
harmed, our costs could increase substantially and our ability to generate revenue could be delayed significantly.

Switching or adding additional CROs involves additional cost and requires management time and focus. In
addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which
can materially impact our ability to meet our desired clinical development timelines. Though we carefully
manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or
delays in the future or that these delays or challenges will not have a material adverse impact on our business,
financial condition and prospects.

We rely completely on third parties to manufacture our preclinical and clinical drug supplies and we
intend to rely on third parties to produce commercial supplies of any approved product candidate.

If we were to experience an unexpected loss of supply of our product candidates for any reason, whether as

a result of manufacturing, supply or storage issues or otherwise, we could experience delays, disruptions,
suspensions or terminations of, or be required to restart or repeat clinical trials. We do not currently have nor do
we plan to acquire the infrastructure or capability internally to manufacture our preclinical and clinical drug
supplies and we lack the resources and the capability to manufacture any of our product candidates on a clinical
or commercial scale. The facilities used by our contract manufacturers or other third party manufacturers to
manufacture our product candidates, including Patheon with respect to supplies of Zilretta, must be approved by
the FDA. While we work closely with our third party manufacturers on the manufacturing process for our
product candidates, including quality audits, we generally do not control the implementation of the
manufacturing process of, and are completely dependent on, our contract manufacturers or other third party
manufacturers for compliance with cGMP regulatory requirements and for manufacture of both active drug
substances and finished drug products. If our contract manufacturers or other third party manufacturers cannot
successfully manufacture material that conforms to applicable specifications and the strict regulatory
requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval for their
manufacturing facilities.

In addition, we have no control over the ability of our contract manufacturers or other third party

manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a
comparable foreign regulatory authority does not approve these facilities for the manufacture of our product
candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing
facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our
product candidates, if approved.

We are particularly reliant on Patheon with respect to constructing new Zilretta manufacturing suites and

establishing and validating the Zilretta manufacturing process in those suites. These Patheon facilities will need
to be approved by the FDA as a condition to any NDA approval for Zilretta, as we intend to rely exclusively on
Patheon for initial commercial supply of Zilretta. In addition, because Patheon will be manufacturing Zilretta in
the United Kingdom, or U.K., it will need to update its facility license with the applicable U.K. regulatory
agencies and any delay or inability to do so would delay or prevent Patheon from being able to produce
commercial supplies of Zilretta. Furthermore, the manufacturing process for Zilretta is unique and involves
specialized equipment and proprietary processes, and Patheon has not previously manufactured Zilretta, which
subjects us to heighted risks that Patheon will experience delays in constructing the suites or in establishing and
validating the manufacturing process. If Patheon experiences such delays, particularly delays in producing
Zilretta in compliance with cGMP regulations, our ability to submit an NDA for Zilretta would be impaired or
the FDA may refuse to file or approve the NDA. In addition, due to the fact that all prior cGMP batches of

45

Zilretta have been produced by Evonik, and any cGMP batches produced at Patheon’s facilities will not have
been subject to longer-term stability testing by the time we anticipate submitting an NDA for Zilretta, we will
need to demonstrate that Zilretta produced at Patheon’s facilities is comparable to Zilretta previously produced
by Evonik. If we are unable to demonstrate such comparability to the satisfaction of the FDA, we may be
required to delay our planned NDA submission until such time that batches of Zilretta produced by Patheon have
demonstrated sufficient stability.

We also rely on our manufacturers to purchase from third party suppliers the materials necessary to produce

our product candidates for our clinical trials. There are a limited number of suppliers for raw materials that we
use to manufacture our drugs and there may be a need to assess alternate suppliers to prevent a possible
disruption of the manufacture of the materials necessary to produce our product candidates for our clinical trials,
and if approved, for commercial sale. We do not have any control over the process or timing of the acquisition of
these raw materials by our manufacturers. Moreover, we currently do not have any agreements for the
commercial production of these raw materials. Although we generally do not begin a clinical trial unless we
believe we have a sufficient supply of a product candidate to complete the clinical trial, any significant delay in
the supply of a product candidate, or the raw material components thereof, for an ongoing clinical trial due to the
need to replace a contract manufacturer or other third party manufacturer could considerably delay completion of
our clinical trials, product testing and potential regulatory approval of our product candidates. If our
manufacturers or we are unable to purchase these raw materials after regulatory approval has been obtained for
our product candidates, the commercial launch of our product candidates would be delayed or there would be a
shortage in supply, which would impair our ability to generate revenue from the sale of our product candidates.

We expect to continue to depend on contract manufacturers or other third party manufacturers for the
foreseeable future. Other than our commercial supply agreement with Patheon, we have not entered into long-
term commercial supply agreements with our current contract manufacturers. Although we intend to do so prior
to any commercial launch in order to ensure that we maintain adequate supplies to manufacture finished drug
product, we may be unable to enter into such an agreement or do so on commercially reasonable terms, which
could have a material adverse impact upon our business.

We rely on certain sole sources of supply for our product candidates and any disruption in the chain of
supply may cause delay in developing and commercializing our product candidates.

Currently, we use the following sole sources of supply for manufacturing Zilretta: Farmabios SpA for TCA,

Evonik Corporation for PLGA, and Patheon for finished microspheres drug product. Because of the unique
equipment and process for loading TCA onto PLGA microspheres, transferring finished drug product
manufacturing activities for Zilretta to an alternate supplier would be a time-consuming and costly endeavor, and
there are only a limited number of manufacturers that we believe are capable of performing this function for us.
Switching Zilretta finished drug suppliers may involve substantial cost and could result in a delay in our desired
clinical, regulatory and commercial timelines. For Zilretta, we expect that for the foreseeable future we will only
seek to qualify Patheon as a commercial supplier with the FDA. As a result, if supply from Patheon is
interrupted, there could be a significant disruption in commercial supply. Any alternative vendor would need to
be qualified through an NDA supplement which could result in further delay. The FDA or other regulatory
agencies outside of the United States may also require additional studies if a new Zilretta supplier is relied upon
for commercial production.

These factors could cause the delay of clinical trials, regulatory submissions, required approvals or

commercialization of Zilretta or any of our product candidates, cause us to incur higher costs and prevent us from
commercializing them successfully. Furthermore, if our suppliers fail to deliver the required commercial
quantities of active pharmaceutical ingredient on a timely basis and at commercially reasonable prices and we are
unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost, our
clinical trials may be delayed or we could lose potential revenue in the event of a product stockout if Zilretta or
any other product candidate is approved and launched.

46

Our agreements with Patheon may expose us to unanticipated expenses and we may never realize an
adequate return on our investment.

We and Patheon have entered into Manufacturing and Technical Transfer Agreements for the manufacture

of Zilretta. Under the terms of the Technical Transfer Agreement, Patheon has agreed to undertake certain
technical transfer activities and construction services needed to prepare its United Kingdom facility for the
manufacture of Zilretta in dedicated manufacturing suites. We have agreed with Patheon, among other things, to
provide the equipment necessary to manufacture Zilretta in these suites, to pay for construction of the suites, and
to make payments related to their establishment and validation of manufacturing processes in the suites, and we
expect these costs to be substantial.

Due to the complexity of the Zilretta manufacturing process and the fact that Patheon has never

manufactured Zilretta, the establishment and validation of the Zilretta manufacturing process in the Patheon suits
may be subject to heighted risk of cost overruns and delays. If the construction of the Patheon suites is delayed, if
Patheon experiences unanticipated cost overruns, if Patheon experiences delays in validating the Zilretta
manufacturing process, or if the Patheon suites do not receive regulatory approvals in the timeframe anticipated,
if at all, this could have a material adverse effect on our business, financial position and results of operations. In
particular, if we are unable to obtain regulatory approval for Zilretta or subsequent commercial supply of Zilretta
from Patheon, we may not realize an appropriate return, or any return, on our significant investment in
establishing and validating the Patheon manufacturing suites.

Manufacturing issues may arise that could increase product and regulatory approval costs or delay
commercialization.

As we scale up manufacturing of our product candidates and conduct required stability testing, we may
encounter product, packaging, equipment and process-related issues that may require refinement or resolution in
order to proceed with our planned clinical trials and obtain regulatory approval for commercial marketing. In the
future, we may identify impurities, which could result in increased scrutiny by regulatory authorities, delays in
our clinical program and regulatory approval, increases in our operating expenses, or failure to obtain or maintain
approval for our product candidates.

We may not be successful in establishing development and commercialization collaborations which could
adversely affect, and potentially prohibit, our ability to develop our product candidates.

Because developing pharmaceutical products, conducting clinical trials, obtaining regulatory approval,

establishing manufacturing capabilities and marketing approved products are expensive, we are exploring
collaborations with third parties outside of the United States that have more resources and experience. For
example, we are exploring selective partnerships with third parties for Zilretta development and
commercialization outside of the United States. If we are unable to obtain a partner for Zilretta, we may be
unable to advance the development of Zilretta in territories outside of the United States, which may limit the
market potential for this product candidate. In situations where we enter into a development and commercial
collaboration arrangement for a product candidate, we may also seek to establish additional collaborations for
development and commercialization in territories outside of those addressed by the first collaboration
arrangement for such product candidate. If any of our product candidates receives marketing approval, we may
enter into sales and marketing arrangements with third parties with respect to otherwise unlicensed or
unaddressed territories outside of the United States. There are a limited number of potential partners, and we
expect to face competition in seeking appropriate partners. If we are unable to enter into any development and
commercial collaborations and/or sales and marketing arrangements on acceptable terms, if at all, we may be
unable to successfully develop and seek regulatory approval for our product candidates and/or effectively market
and sell future approved products, if any, in all of the territories outside of the United States where it may
otherwise be valuable to do so. For example, although we plan to seek partners for the development of FX005, if
we are unable to secure a partner, FX005 may not be developed further.

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In addition, under the terms of our license agreement with AstraZeneca AB, or AstraZeneca, for FX007, we
may not, without the consent of AstraZeneca, grant sublicenses to FX007 except in the territory of Japan prior to
the achievement of a specified development milestone. Further, the agreement provides that in the event we
desire to offer rights to FX007 to a third party prior to the achievement of a specified development milestone, we
must make certain diligence materials available to AstraZeneca, and AstraZeneca will have the right to make an
offer to re-acquire rights to FX007. In such circumstances, we are not required to accept AstraZeneca’s offer, but
we may not enter into an agreement with a third party containing financial terms and conditions that on the whole
are more favorable to the third party than the terms and conditions last offered by AstraZeneca. These provisions
may limit our ability to partner with a third party during the early development stages of FX007.

We may not be successful in maintaining development and commercialization collaborations, and our
partners may not devote sufficient resources to the development or commercialization of our product
candidates or may otherwise fail in development or commercialization efforts, which could adversely
affect our ability to develop certain of our product candidates and our financial condition and operating
results.

Even if we are able to establish collaboration arrangements, any such collaboration may not ultimately be
successful, which could have a negative impact on our business, results of operations, financial condition and
growth prospects. If we partner with a third party for development and commercialization of a product candidate,
we can expect to relinquish some or all of the control over the future success of that product candidate to the
third party. It is possible that a partner may not devote sufficient resources to the development or
commercialization of our product candidate or may otherwise fail in development or commercialization efforts,
in which event the development and commercialization of such product candidate could be delayed or terminated
and our business could be substantially harmed. In addition, the terms of any collaboration or other arrangement
that we establish may not prove to be favorable to us or may not be perceived as favorable, which may negatively
impact the trading price of our common stock. In some cases, we may be responsible for continuing development
of a product candidate or research program under collaboration and the payment we receive from our partner may
be insufficient to cover the cost of this development. Moreover, collaborations and sales and marketing
arrangements are complex and time consuming to negotiate, document and implement and they may require
substantial resources to maintain.

We are subject to a number of additional risks associated with our dependence on collaborations with third
parties, the occurrence of which could cause our collaboration arrangements to fail. Conflicts may arise between
us and partners, such as conflicts concerning the interpretation of clinical data, the achievement of milestones,
the interpretation of financial provisions or the ownership of intellectual property developed during the
collaboration. If any such conflicts arise, a partner could act in its own self-interest, which may be adverse to our
best interests. Any such disagreement between us and a partner could result in one or more of the following, each
of which could delay or prevent the development or commercialization of our product candidates, and in turn
prevent us from generating sufficient revenue to achieve or maintain profitability:

•

•

•

reductions in the payment of royalties or other payments we believe are due pursuant to the applicable
collaboration arrangement;

actions taken by a partner inside or outside our collaboration which could negatively impact our rights
or benefits under our collaboration; or

unwillingness on the part of a partner to keep us informed regarding the progress of its development
and commercialization activities or to permit public disclosure of the results of those activities.

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Risks Related to Commercialization of Our Product Candidates

Our commercial success depends upon attaining significant market acceptance of our product
candidates, if approved, among physicians, healthcare payors, patients and the medical community.

Even if we obtain regulatory approval for Zilretta or any of our other product candidates, the product may
not gain market acceptance among physicians, healthcare payors, patients and the medical community, which is
critical to commercial success. Market acceptance of any product candidate for which we receive approval
depends on a number of factors, including:

•

•

•

•

•

•

•

•

•

•

•

the efficacy and safety as demonstrated in clinical trials;

the timing of market introduction of the product candidate as well as competitive products;

the clinical indications for which the product candidate is approved;

acceptance by physicians, the medical community and patients of the product candidate as a safe and
effective treatment;

the convenience of prescribing and initiating patients on the product candidate;

the potential and perceived advantages of such product candidate over alternative treatments;

the cost of treatment in relation to alternative treatments, including any similar generic treatments;

the availability of coverage and adequate reimbursement and pricing by third-party payors and
government authorities;

relative convenience and ease of administration;

the prevalence and severity of adverse side effects; and

the effectiveness of sales and marketing efforts.

If our product candidates, including Zilretta, are approved but fail to achieve an adequate level of

acceptance by physicians, healthcare payors, patients and the medical community, we will not be able to generate
significant revenue, and we may not become or remain profitable.

Guidelines and recommendations published by various organizations can reduce the use of our product
candidates.

Government agencies promulgate regulations and guidelines directly applicable to us and to our product
candidates. In addition, professional societies, such as the American Academy of Orthopedic Surgeons, practice
management groups, private health and science foundations and organizations involved in various diseases from
time to time may also publish guidelines or recommendations to the healthcare and patient communities.
Recommendations of government agencies or these other groups or organizations may relate to such matters as
usage, dosage, route of administration and use of concomitant therapies. Recommendations or guidelines
suggesting the reduced use of our product candidates or the use of competitive or alternative products as the
standard of care to be followed by patients and healthcare providers could result in decreased use of our product
candidates.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties
to market and sell our product candidates, we may be unable to generate any revenue.

Although we intend to establish a targeted sales and marketing organization to promote any approved
products in the United States, we currently have no such organization or capabilities, and the cost of establishing
and maintaining such an organization may exceed the cost-effectiveness of doing so. In order to market any
products that may be approved, we must build sales, marketing, managerial and other non-technical capabilities

49

or make arrangements with third parties to perform these services. We may enter into strategic partnerships with
third parties to commercialize our product candidates outside of the United States.

To date, we have not entered into any strategic partnerships for any of our product candidates. We face
significant competition in seeking appropriate strategic partners, and these strategic partnerships can be intricate
and time consuming to negotiate and document. We may not be able to negotiate strategic partnerships for
territories outside of the United States on acceptable terms, or at all. We are unable to predict when, if ever, we
will enter into any strategic partnerships outside of the United States because of the numerous risks and
uncertainties associated with establishing strategic partnerships. To the extent that we enter into collaboration
arrangements, our future collaboration partners may not dedicate sufficient resources to the commercialization of
our product candidates or may otherwise fail in their commercialization due to factors beyond our control. If we
are unable to establish effective collaborations to enable the sale of our product candidates in territories outside
of the United States, or if our potential future collaboration partners do not successfully commercialize our
product candidates in these territories, our ability to generate revenue from product sales will be adversely
affected.

If we are unable to negotiate a strategic partnership or obtain additional financial resources for a product

candidate, we may be forced to curtail the development of such product candidate, delay potential
commercialization, reduce the scope of our sales or marketing activities or undertake development or
commercialization activities at our own expense. In addition, without a partnership, we will bear all the risk
related to the development of the product candidate, including in territories outside of the United States. If we
elect to increase our expenditures to fund development or commercialization activities ourselves, we will need to
obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have
sufficient funds, we will not be able to bring Zilretta or any other product candidates to market or generate
product revenue.

We and any collaboration partners that we may engage will be competing with many companies that
currently have extensive and well-funded marketing and sales operations. If we, alone or with commercialization
partners, are unable to compete successfully against these established companies, the commercial success of any
approved products will be limited.

If we are unable to effectively train and equip our sales force, our ability to successfully commercialize
Zilretta will be harmed.

Even if we establish a sales force, Zilretta, if approved, will be a newly-marketed drug and, therefore, none

of the members of our sales force will have ever promoted Zilretta prior to its launch. As a result, we will be
required to expend significant time and resources to train our sales force in marketing Zilretta. In addition, we
must train our sales force to ensure that an appropriate and compliant message about Zilretta is being delivered.
If we are unable to effectively train our sales force and equip them with compliant and effective materials,
including medical and sales literature to help them appropriately inform and educate regarding the potential
benefits of Zilretta and its proper administration, our efforts to successfully commercialize Zilretta could be put
in jeopardy, which would negatively impact our ability to generate product revenues.

If we obtain approval to commercialize any approved products outside of the United States, a variety of
risks associated with international operations could materially adversely affect our business.

If Zilretta or other product candidates are approved for commercialization, we may enter into agreements

with third parties to market these products outside of the United States. We expect that we will be subject to
additional risks related to entering into international business relationships, including:

•

•

different regulatory requirements for drug approvals in foreign countries;

reduced protection for intellectual property rights;

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•

•

•

•

•

unexpected changes in tariffs, trade barriers and regulatory requirements;

economic weakness, including inflation, or political instability in particular foreign economies and
markets;

compliance with tax, employment, immigration and labor laws for employees living or traveling
abroad;

foreign taxes, including withholding of payroll taxes;

foreign currency fluctuations, which could result in increased operating expenses and reduced revenue,
and other obligations incidental to doing business in another country;

• workforce uncertainty in countries where labor unrest is more common than in the United States;

•

•

production shortages resulting from any events affecting raw material supply or manufacturing
capabilities abroad; and

business interruptions resulting from geopolitical actions, including war and terrorism, or natural
disasters, including earthquakes, typhoons, floods and fires.

If we are unable to differentiate our lead product candidate, Zilretta, from existing generic therapies for
the treatment of OA, or if the FDA or other applicable regulatory authorities approve generic products
that compete with any of our product candidates, the ability to successfully commercialize those product
candidates would be adversely affected.

Immediate-release TCA and other injectable immediate-release steroids, which are the current IA standard
of care for OA pain, are available in generic form and are therefore relatively inexpensive compared to the price
we would expect to receive for Zilretta. These generic steroids also have well-established market positions and
familiarity with physicians, healthcare payors and patients. Although we believe Zilretta has the potential for
clinically meaningful differentiation as compared to immediate-release TCA based on our clinical trial data, it is
possible that as we receive data from additional clinical trials, the data will not continue to support such
differentiation. It is also possible that the FDA, physicians and healthcare payors will not agree with our
interpretation of our existing and future clinical trial data for Zilretta. If we are unable to demonstrate significant
differentiation for Zilretta from immediate-release TCA and other injectable immediate-release steroids, our
opportunity for Zilretta to achieve premium pricing and be commercialized successfully, if approved, would be
adversely affected. For example, although Zilretta, compared to immediate-release TCA, achieved statistical
significance through 12 weeks in validated, OA specific pain, stiffness, function and quality of life secondary
measures in our recently completed Phase 3 trial and was numerically superior at weeks 2 through 12 on the daily
pain rating scale, it did not achieve statistical significance in the daily pain rating scale during the course of the
trial. As a result, it is possible that healthcare payors will not agree with our assessment that Zilretta is
sufficiently differentiated from immediate-release TCA to support premium pricing for Zilretta.

In addition to existing generic steroids, such as immediate-release TCA, the FDA or other applicable
regulatory authorities may approve generic products that could compete with our product candidates. Once an
NDA, including a Section 505(b)(2) application, is approved, the product covered thereby becomes a “listed
drug” which can, in turn, be cited by potential competitors in support of approval of an abbreviated new drug
application, or ANDA. The FDCA, FDA regulations and other applicable regulations and policies provide
incentives to manufacturers to create modified, non-infringing versions of a drug to facilitate the approval of an
ANDA or other application for generic substitutes. These manufacturers might only be required to conduct a
relatively inexpensive study to show that their product has the same active ingredient(s), dosage form, strength,
route of administration, conditions of use, or labeling as our product candidate and that the generic product is
bioequivalent to ours, meaning it is absorbed in the body at the same rate and to the same extent as our product
candidate. These generic equivalents, which must meet the same quality standards as branded pharmaceuticals,
would be significantly less costly than ours to bring to market and companies that produce generic equivalents

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are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a
significant percentage of the sales of any branded product is typically lost to the generic product. Accordingly,
competition from generic equivalents to our product candidates would materially adversely impact our ability to
successfully commercialize our product candidates.

We face significant competition from other biopharmaceutical companies, and our operating results will
suffer if we fail to compete effectively.

The biopharmaceutical industries are intensely competitive and subject to rapid and significant

technological change. In addition, the competition in the pain and OA market is intense. We have competitors
both in the United States and internationally, including major multinational pharmaceutical companies,
biotechnology companies and universities and other research institutions. For example, the injectable OA
treatment market today includes many injectable immediate-release steroids, including TCA, the active
ingredient in Zilretta, as well as HA injections. In addition, we expect that injectable therapies such as Zilretta
will continue to be used primarily after oral medications no longer provide adequate pain relief. To the extent
that new or improved oral pain medications are introduced that demonstrate better long-term efficacy and safety,
patients and physicians may further delay the introduction of injectable therapies such as Zilretta in the OA
treatment continuum. Zilretta could also face competition from other formulations or devices that deliver pain
medication on a sustained basis, such as transdermal delivery systems or implantable devices.

Many of our competitors have substantially greater financial, technical and other resources, such as larger

research and development staffs and experienced commercial and manufacturing organizations. Mergers and
acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being
concentrated in our competitors. As a result, these companies may obtain regulatory approval more rapidly than
we are able and may be more effective in selling and marketing their products as well. Smaller or early-stage
companies may also prove to be significant competitors, particularly through collaborative arrangements with
large, established companies. Competition may increase further as a result of advances in the commercial
applicability of technologies and greater availability of capital for investment in these industries. Our competitors
may succeed in developing, acquiring or licensing on an exclusive basis drug products or drug delivery
technologies that are more effective or less costly than Zilretta or any other drug candidate that we are currently
developing or that we may develop.

We believe that our ability to successfully compete will depend on, among other things:

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the efficacy and safety of our product candidates, including as relative to marketed products and
product candidates in development by third parties;

the time it takes for our product candidates to complete clinical development and receive marketing
approval;

the ability to maintain a good relationship with regulatory authorities;

the ability to commercialize and market any of our product candidates that receive regulatory approval;

the price of our products, including in comparison to branded or generic competitors;

• whether coverage and adequate levels of reimbursement are available under private and governmental

health insurance plans, including Medicare;

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the ability to protect intellectual property rights related to our product candidates;

the ability to manufacture on a cost-effective basis and sell commercial quantities of any of our product
candidates that receive regulatory approval; and

acceptance of any of our product candidates that receive regulatory approval by physicians and other
healthcare providers.

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If our competitors market products that are more effective, safer or less expensive than our future products,
if any, or that reach the market sooner than our future products, if any, we may not achieve commercial success.
In addition, the biopharmaceutical industry is characterized by rapid technological change. Because we have
limited research and development capabilities, it may be difficult for us to stay abreast of the rapid changes in
each technology. If we fail to stay at the forefront of technological change, we may be unable to compete
effectively. Technological advances or products developed by our competitors may render our technologies or
product candidates obsolete, less competitive or not economical.

If we are unable to achieve and maintain adequate levels of third-party payor coverage and
reimbursement for Zilretta or any other product candidates, if approved, on reasonable pricing terms,
their commercial success may be severely hindered.

Successful sales of any approved product candidates depend on the availability of adequate coverage and

reimbursement from third-party payors. Patients who are prescribed medicine for the treatment of their
conditions generally rely on third-party payors to reimburse all or part of the costs associated with their
prescription drugs. Adequate coverage and reimbursement from governmental healthcare programs, such as
Medicare and Medicaid, and commercial payors is critical to new product acceptance. Coverage decisions may
depend upon clinical and economic standards that disfavor new drug products when more established or lower
cost therapeutic alternatives are already available or subsequently become available. Assuming we obtain
coverage for a given product, the resulting reimbursement payment rates might not be adequate or may require
co-payments that patients find unacceptably high.

Payors may require documented proof that patients meet certain eligibility criteria in order to be reimbursed

for Zilretta, requiring that a patient first try and fail generic immediate-release TCA. Payors may even require
that pre-approval, or prior-authorization, be obtained from the payor for reimbursement of Zilretta. Patients are
unlikely to use our products, including Zilretta, if approved, unless coverage is provided and reimbursement is
adequate to cover a significant portion of the cost of our products.

In addition, the market for Zilretta and any of our other product candidates will depend significantly on

access to third-party payors’ drug formularies, or lists of medications for which third-party payors provide
coverage and reimbursement. The industry competition to be included in such formularies often leads to
downward pricing pressures on pharmaceutical companies. Also, third-party payors may refuse to include a
particular branded drug in their formularies or otherwise restrict patient access to a branded drug when a less
costly generic equivalent or other alternative is available.

Third-party payors, whether foreign or domestic, or governmental or commercial, are developing

increasingly sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform
policy of coverage and reimbursement for drug products exists among third-party payors. Therefore, coverage
and reimbursement for drug products can differ significantly from payor to payor. As a result, the coverage
determination process is often a time-consuming and costly process that will require us to provide scientific and
clinical support for the use of our products to each payor separately, with no assurance that coverage and
adequate reimbursement will be obtained.

Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions
both in the United States and in international markets. Third party coverage and reimbursement for Zilretta or
any of our other product candidates for which we may receive regulatory approval may not be available or
adequate in either the United States or international markets, or may be more limited than the indications for
which the drug is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for
coverage and reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our
costs, including research, development, manufacture, sale and distribution. If coverage and reimbursement are
not available or only available at limited levels, we may not be able to successfully commercialize any product

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candidate for which we obtain marketing approval, which could have a material adverse effect on our business,
results of operations, financial condition and prospects.

Recently enacted and future legislation, including health care reform measures, may increase the
difficulty and cost for us to commercialize our product candidates and may affect the prices we may
obtain.

The United States and some foreign jurisdictions are considering, or have enacted, a number of legislative
and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our product
candidates profitably, once they are approved for sale. Among policy makers and third-party payors in the United
States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated
goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the
pharmaceutical industry has been a particular focus of these efforts and has been, and may continue to be,
significantly affected by major legislative, congressional and enforcement initiatives. Moreover, in some foreign
jurisdictions, pricing of prescription pharmaceuticals is already subject to government control.

In March 2010, PPACA was enacted, which was intended to broaden access to health insurance, reduce or

constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add transparency
requirements for the healthcare and health insurance industries, impose taxes and fees on the health industry and
impose additional health policy reforms. Among the PPACA provisions of importance to the pharmaceutical
industry are the following:

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an annual, non-deductible fee on any entity that manufactures or imports certain branded prescription
drugs and biologic agents, apportioned among these entities according to their market share in certain
government healthcare programs;

an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1%
and 13.0% of the average manufacturer price for branded and generic drugs, respectively;

a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate
Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer
50.0% point-of-sale discounts to negotiated prices of applicable brand drugs to eligible beneficiaries
during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered
under Medicare Part D;

extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who
are enrolled in Medicaid managed care organizations;

expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer
Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for
certain individuals with income at or below 133.0% of the Federal Poverty Level, thereby potentially
increasing manufacturers’ Medicaid rebate liability;

expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing
program;

new requirements under the federal Open Payments program, created under Section 6002 of PPACA,
and its implementing regulations that manufacturers of drugs, devices, biologics and medical supplies
for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program
(with certain exceptions) report annually to CMS information related to “payments or other transfers of
value” made or distributed to physicians (defined to include doctors, dentists, optometrists, podiatrists
and chiropractors) and teaching hospitals, and that applicable manufacturers and applicable group
purchasing organizations report annually to CMS ownership and investment interests held by

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physicians (as defined above) and their immediate family members, with data collection and reporting
to CMS currently required by the 90th day of each calendar year;

a requirement to annually report drug samples that manufacturers and distributors provide to
physicians;

expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback
Statute, new government investigative powers, and enhanced penalties for non-compliance;

an FDA-approval framework for follow-on biologic products;

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct
comparative clinical effectiveness research, along with funding for such research;

creation of the Independent Payment Advisory Board, which has authority to recommend certain
changes to the Medicare program that do not affect coverage or quality, which, among other things,
could result in reduced payments for prescription drugs and those recommendations could have the
effect of law even if Congress does not act on the recommendations; and

establishment of a Center for Medicare & Medicaid Innovation at CMS to test innovative payment and
service delivery models to lower Medicare and Medicaid spending, potentially including prescription
drug spending.

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We expect that PPACA, as well as other healthcare reform measures that may be adopted in the future, may

result in more rigorous coverage criteria and lower reimbursement, as well as additional downward pressure on
the price that we receive for any approved product. There has been increasing legislative and enforcement
interest in the United States with respect to specialty drug pricing practices, including several recent U.S.
Congressional inquiries and proposed bills designed to, among other things, increase drug pricing transparency,
review relationships between pricing and manufacturer patient assistance programs, and reform government
program drug reimbursement methodologies. Any reduction in reimbursement from Medicare, Medicaid or other
government-funded programs may result in a similar reduction in payments from private payors. The
implementation of cost containment measures or other healthcare reforms may prevent us from being able to
generate revenue, attain profitability or commercialize our drugs. Additionally, we are currently unable to predict
what additional legislation or regulation, if any, relating to the healthcare industry may be enacted in the future or
what effect recently enacted federal legislation or any such additional legislation or regulation would have on our
business.

Risks Related to Our Business Operations and Industry

Our future success depends on our ability to retain key executives and to attract, retain and motivate
qualified personnel.

We are highly dependent on the principal members of our executive team, the loss of whose services may
adversely impact the achievement of our objectives. While we have entered into employment agreements or offer
letters with each of our executive officers, any of them could leave our employment at any time, as all of our
employees are “at will” employees. Recruiting and retaining other qualified employees for our business,
including scientific and technical personnel, will also be critical to our success. There is currently a shortage of
skilled executives in our industry, which is likely to continue. As a result, competition for skilled personnel is
intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms
given the competition among numerous pharmaceutical companies for individuals with similar skill sets. In
addition, failure to succeed in clinical studies may make it more challenging to recruit and retain qualified
personnel. The inability to recruit or the loss of the services of any executive or key employee might impede the
progress of our development and commercialization objectives.

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We will need to expand our organization, and we may experience difficulties in managing this growth,
which could disrupt our operations.

As of December 31, 2015, we had 48 full-time employees. As our company matures, we expect to expand

our employee base to increase our managerial, scientific and engineering, operational, sales, marketing, financial
and other resources and to hire more consultants and contractors. Future growth would impose significant
additional responsibilities on our management, including the need to identify, recruit, maintain, motivate and
integrate additional employees, consultants and contractors. Also, our management may need to divert a
disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of
time to managing these growth activities. For example, we expect to hire an employee in the United Kingdom to
support our manufacturing activities at Patheon and we have never operated outside the United States. We also
expect to hire significant additional personnel, including adding a sales and marketing organization. We may not
be able to effectively manage the expansion of our operations, which may result in weaknesses in our
infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced
productivity among remaining employees. Future growth could require significant capital expenditures and may
divert financial resources from other projects, such as the development of our existing or future product
candidates. If our management is unable to effectively manage our growth, our expenses may increase more than
expected, our ability to generate and/or grow revenue could be reduced, and we may not be able to implement
our business strategy. Our future financial performance and our ability to commercialize Zilretta and our other
product candidates, if approved, and compete effectively will depend, in part, on our ability to effectively
manage any future growth.

We face potential product liability, and, if successful claims are brought against us, we may incur
substantial liability.

The use of our product candidates in clinical trials and the sale of any products for which we obtain
marketing approval exposes us to the risk of product liability claims. Product liability claims might be brought
against us by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming
into contact with our product candidates. If we cannot successfully defend against product liability claims, we
could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability
claims may result in:

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impairment of our business reputation;

• withdrawal of clinical trial participants;

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costs due to related litigation;

distraction of management’s attention from our primary business;

substantial monetary awards to patients or other claimants;

the inability to commercialize our product candidates; and

decreased demand for our product candidates, if approved for commercial sale.

Our current product liability insurance coverage may not be sufficient to reimburse us for any expenses or

losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and in the future we
may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against
losses due to liability. If and when we obtain marketing approval for Zilretta or any of our other product
candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we
may be unable to obtain such product liability insurance on commercially reasonable terms or in adequate
amounts. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had
unanticipated adverse effects. A successful product liability claim or series of claims brought against us could
cause our stock price to decline and, if judgments exceed our insurance coverage, could adversely affect our
results of operations and business.

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We rely significantly on information technology and any failure, inadequacy, interruption or security
lapse of that technology, including any cybersecurity incidents, could harm our ability to operate our
business effectively.

Despite the implementation of security measures, our internal computer systems and those of third parties

with which we contract are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access,
natural disasters, terrorism, war and telecommunication and electrical failures. System failures, accidents or
security breaches could cause interruptions in our operations, and could result in a material disruption of our
clinical activities and business operations, in addition to possibly requiring substantial expenditures of resources
to remedy. The loss of clinical trial data could result in delays in our regulatory approval efforts and significantly
increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to
result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or
proprietary information, we could incur liability and our development programs and the development of our
product candidates could be delayed.

Business interruptions could delay us in the process of developing our product candidates and could
disrupt our sales.

Our headquarters are located in Burlington, Massachusetts. We are vulnerable to natural disasters such as

hurricanes, tornadoes and severe storms, as well as other events that could disrupt our operations. We do not
carry insurance for natural disasters and we may not carry sufficient business interruption insurance to
compensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on
our business operations.

Risks Related to Our Intellectual Property

If we are unable to obtain or protect intellectual property rights related to our product candidates, we may
not be able to compete effectively in our market.

We rely upon a combination of patents, trade secret protection, confidentiality agreements and proprietary

know how, and intend to seek marketing exclusivity for any approved product, in order to protect the intellectual
property related to product candidates, and to date we have only one issued patent covering Zilretta. The strength
of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can
be uncertain. The patent applications that we own or in-license may fail to result in issued patents with claims
that cover our product candidates in the United States or in other foreign countries. If this were to occur, early
generic competition could be expected against Zilretta and potentially our other product candidates in
development. Even if patents do successfully issue, third parties may challenge their validity, enforceability or
scope, which may result in such patents being narrowed or invalidated. Also, a third party may challenge our
ownership of patents and patent applications assigned to us, or may challenge our exclusive rights to patents and
patent applications that we license from third parties. Furthermore, even if they are unchallenged, our patents and
patent applications may not adequately protect our intellectual property or prevent others from designing around
our claims. If the additional patent applications we hold with respect to Zilretta or our other product candidates
fail to issue or if their breadth or strength of protection is threatened, it could dissuade companies from
collaborating with us to develop them and threaten our ability to commercialize any resulting products. We
cannot offer any assurances about which, if any, patents will issue or whether any issued patents will not be
found invalid and unenforceable or will go unthreatened by third parties. Further, if we encounter delays in
regulatory approvals, the period of time during which we could market Zilretta or any other product candidate
under patent protection could be reduced. Furthermore, patent applications by third parties can result in an
interference proceeding in the United States being provoked by a third party or instituted by us to determine who
was the first to invent any of the subject matter covered by the patent claims of our applications. See “Business—
Patents and Patent Applications” for additional information regarding our material patents and patent
applications.

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In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality
agreements to protect proprietary know-how that is not patentable, processes for which patents are difficult to
enforce and any other elements of our drug development process that involve proprietary know-how, information
or technology that is not covered by patents. For example, we maintain trade secrets with respect to certain of the
formulation and manufacturing techniques related to the TCA-formulated PLGA microspheres in Zilretta,
including those that relate to precise pharmaceutical release. Although we generally require all of our employees
to assign their inventions to us, and all of our employees, consultants, advisors and any third parties who have
access to our proprietary know-how, information or technology to enter into confidentiality agreements, we
cannot provide any assurances that all such agreements have been duly executed or that our trade secrets and
other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access
to our trade secrets or independently develop substantially equivalent information and techniques. Further, the
laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the
laws of the United States. As a result, we may encounter significant problems in protecting and defending our
intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the
non-patented intellectual property related to our technologies to third parties, and there is no guarantee that we
will have any such enforceable trade secret protection, we may not be able to establish or maintain a competitive
advantage in our market, which could materially adversely affect our business, results of operations and financial
condition.

Third party claims of intellectual property infringement may prevent or delay our development and
commercialization efforts.

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights
of third parties. There is a substantial amount of litigation, both within and outside the United States, involving
patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent
infringement lawsuits, interferences, oppositions and inter party reexamination proceedings before the U.S. PTO.
Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties,
exist in the fields in which we and our collaborators are developing product candidates. As the biotechnology and
pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may
be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that we are employing their proprietary technology without authorization. There
may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture
or methods for treatment related to the use or manufacture of Zilretta and/or our other product candidates.
Because patent applications can take many years to issue, there may be currently pending patent applications
which may later result in issued patents that our product candidates may infringe. In addition, third parties may
obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party
patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our product
candidates, any drug substance formed during the manufacturing process or any final product itself, the holders
of any such patents may be able to block our ability to commercialize such product candidate unless we obtain a
license under the applicable patents, or until such patents expire. Similarly, if any third party patent were held by
a court of competent jurisdiction to cover aspects of our formulations or methods of use, the holders of any such
patent may be able to block our ability to develop and commercialize the applicable product candidate unless we
obtain a license or until such patent expires. In either case, such a license may not be available on commercially
reasonable terms or at all.

Parties making claims against us may request and/or obtain injunctive or other equitable relief, which could

effectively block our ability to further develop and commercialize one or more of our product candidates.
Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a
substantial diversion of employee resources from our business. In the event of a successful claim of infringement
against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful
infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products or

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manufacturing processes, which may be impossible or require substantial time and monetary expenditure. We
cannot predict whether any such license would be available at all or whether it would be available on
commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses
from third parties to advance our research, manufacture clinical trial supplies or allow commercialization of our
product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at
all. In that event, we would be unable to further develop and commercialize one or more of our product
candidates, which could harm our business significantly. We cannot provide any assurances that third party
patents do not exist which might be enforced against our products, resulting in either an injunction prohibiting
our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of
compensation to third parties.

If we fail to comply with our obligations in the agreements under which we license rights to technology
from third parties, or if the license agreements are terminated for other reasons, we could lose license
rights that are important to our business.

We are a party to a number of technology licenses that are important to our business and expect to enter into

additional licenses in the future. For example, our rights to FX007 and FX005 are the subject of separate
exclusive license agreements with AstraZeneca. If we fail to comply with our obligations under our agreements
with AstraZeneca (including, among other things, if we fail to use commercially reasonable efforts to develop,
commercialize and sell products based on FX007 and FX005 in major markets) or our other license agreements,
or we are subject to a bankruptcy or insolvency, the licensor may have the right to terminate the license. In
addition, under our agreement with AstraZeneca for FX007, AstraZeneca has a right to terminate the agreement
in the event of a change of control of us prior to the achievement of a specified development milestone, unless
we pay a fee to AstraZeneca. In the event that any of our important technology licenses were to be terminated by
the licensor, we would likely cease further development of the related program or be required to spend significant
time and resources to modify the program to not use the rights under the terminated license.

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which
could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents or the patents of our licensors. To counter infringement or

unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming.
In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or
is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our
patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could
put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent
applications at risk of not issuing.

Interference proceedings provoked by third parties or brought by us may be necessary to determine the
priority of inventions with respect to our patents or patent applications or those of our collaborators or licensors.
An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it
from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on
commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if
successful, may result in substantial costs and distract our management and other employees. We may not be able
to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in
countries where the laws may not protect those rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual
property litigation, there is a risk that some of our confidential information could be compromised by disclosure
during this type of litigation. There could also be public announcements of the results of hearings, motions or
other interim proceedings or developments. If securities analysts or investors perceive these results to be
negative, it could have a material adverse effect on the price of our common stock.

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Obtaining and maintaining our patent protection depends on compliance with various procedural,
document submissions, fee payment and other requirements imposed by governmental patent agencies,
and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees on any issued patent are due to be paid to the U.S. PTO and foreign patent
agencies in several stages over the lifetime of the patent. The U.S. PTO and various foreign governmental patent
agencies require compliance with a number of procedural, documentary, fee payment and other similar
provisions during the patent application process. While an inadvertent lapse can in many cases be cured by
payment of a late fee or by other means in accordance with the applicable rules, there are situations in which
non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or
complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in
abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to
official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit
formal documents. If we or our licensors that control the prosecution and maintenance of our licensed patents fail
to maintain the patents and patent applications covering our product candidates, our competitors might be able to
enter the market, which would have a material adverse effect on our business.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully
used or disclosed confidential information of third parties.

We employ individuals who were previously employed at other biotechnology or pharmaceutical

companies. We may be subject to claims that we or our employees, consultants or independent contractors have
inadvertently or otherwise used or disclosed confidential information of our employees’ former employers or
other third parties. We may also be subject to claims that former employers or other third parties have an
ownership interest in our patents. Litigation may be necessary to defend against these claims. There is no
guarantee of success in defending these claims, and if we are successful, litigation could result in substantial cost
and be a distraction to our management and other employees.

Risks Related to Ownership of Our Common Stock

The market price of our common stock may be highly volatile, you may not be able to resell your shares
at a desired market price and you could lose all or part of your investment.

The trading price of our common stock is likely to be volatile. Our stock price could be subject to wide

fluctuations in response to a variety of factors, including the following:

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adverse results or delays in clinical trials;

inability to obtain additional funding;

any delay in filing an NDA for any of our product candidates and any adverse development or
perceived adverse development with respect to the FDA’s review of that NDA;

failure to successfully develop and commercialize our product candidates;

changes in laws or regulations applicable to our product candidates;

inability to obtain adequate product supply for our product candidates, or the inability to do so at
acceptable prices;

adverse regulatory decisions;

introduction of new products or technologies by our competitors;

failure to meet or exceed product development or financial projections we provide to the public;

failure to meet or exceed the estimates and projections of the investment community;

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the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment
community;

announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments
by us or our competitors;

disputes or other developments relating to proprietary rights, including patents, litigation matters and
our ability to obtain patent protection for our technologies;

additions or departures of key scientific or management personnel;

significant lawsuits, including patent or stockholder litigation;

changes in the market valuations of similar companies;

sales of our common stock by us or our stockholders in the future; and

trading volume of our common stock.

In addition, the stock market in general, and the Nasdaq Global Market in particular, have experienced

extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of these companies. Broad market and industry factors may negatively affect the market price of our
common stock, regardless of our actual operating performance.

Our principal stockholders and management own a significant percentage of our stock and will be able to
exert significant control over matters subject to stockholder approval.

As of December 31, 2015, our executive officers, directors and stockholders affiliated with our officers and

directors beneficially owned approximately 19.1% of our voting stock. Therefore, these stockholders may have
the ability to influence us through this ownership position. These stockholders may be able to determine or
significantly influence all matters requiring stockholder approval. For example, these stockholders, acting
together, may be able to control or significantly influence elections of directors, amendments of our
organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This
may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may believe
are in your best interest as one of our stockholders.

We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements
applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startup Act, or JOBS Act.

For as long as we continue to be an emerging growth company, we may take advantage of exemptions from
various reporting requirements that are applicable to other public companies that are not “emerging growth
companies,” including exemption from compliance with the auditor attestation requirements of Section 404 of
the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a
non-binding advisory vote on executive compensation. We will remain an emerging growth company until the
earlier of (a) the last day of the fiscal year in which we have total annual gross revenue of at least $1 billion,
(b) December 31, 2019, (c) the date on which we are deemed to be a large accelerated filer, which would occur at
the beginning of a year if the market value of our common stock that is held by non-affiliates exceeds $700
million as of the prior June 30th, and (d) the date on which we have issued more than $1 billion in non-
convertible debt during the prior three-year period.

Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller
reporting company” which would allow us to take advantage of many of the same exemptions from disclosure
requirements including exemption from compliance with the auditor attestation requirements of Section 404 of

61

the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic
reports and proxy statements. We cannot predict if investors will find our common stock less attractive because
we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may
be a less active trading market for our common stock and our stock price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting
standards until such time as those standards apply to private companies. We have irrevocably elected not to avail
ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same
new or revised accounting standards as other public companies that are not emerging growth companies.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able
to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence
in our financial and other public reporting, which would harm our business and the trading price of our
common stock.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports

and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to
implement required new or improved controls, or difficulties encountered in their implementation could cause us
to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404
of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm, may
reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or
that may require prospective or retroactive changes to our consolidated financial statements or identify other
areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence
in our reported financial information, which could have a negative effect on the trading price of our common
stock.

We will continue to incur significant increased costs as a result of operating as a new public company,
and our management is required to devote substantial time to new compliance initiatives.

We completed our initial public offering on February 18, 2014. As a new public company, we incur

significant legal, accounting and other expenses that we did not incur as a private company. For example, we are
now subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, which require,
among other things, that we file with the SEC annual, quarterly and current reports with respect to our business
and financial condition. We have incurred and will continue to incur costs associated with the preparation and
filing of these reports. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the
SEC, and the Nasdaq Global Market have imposed various other requirements on public companies. In July
2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted.
There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act
that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy
access. Stockholder activism, the current political environment and the current high level of government
intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which
may lead to additional compliance costs and impact (in ways we cannot currently anticipate) the manner in which
we operate our business. Our management and other personnel devote a substantial amount of time to these
compliance initiatives. Moreover, these rules and regulations have and will continue to increase our legal and
financial compliance costs and will make some activities more time-consuming and costly. For example, these
rules and regulations have made it more difficult and more expensive for us to obtain director and officer liability
insurance and we may be required to incur substantial costs to maintain our current levels of such coverage.

Sales of a substantial number of shares of our common stock in the public market by our existing
stockholders could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market or the perception that
these sales might occur, could depress the market price of our common stock and could impair our ability to raise

62

capital through the sale of additional equity and/or convertible debt securities. We are unable to predict the effect
that sales may have on the prevailing market price of our common stock.

Certain holders of our securities are entitled to rights with respect to the registration of their shares under the

Securities Act of 1933, as amended, or the Securities Act. Registration of these shares under the Securities Act
would result in the shares becoming freely tradable without restriction under the Securities Act. Any sales of
securities by these stockholders could have a material adverse effect on the trading price of our common stock.

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant
to our equity incentive plans, could result in additional dilution of the percentage ownership of our
stockholders and could cause our stock price to fall.

We expect that significant additional capital will be needed in the future to continue our planned operations.
To the extent we raise additional capital by issuing equity securities; our stockholders may experience substantial
dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions
at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or
other equity securities in more than one transaction, investors may be materially diluted by subsequent sales.
These sales may also result in material dilution to our existing stockholders, and new investors could gain rights
superior to our existing stockholders.

Pursuant to the 2013 plan, our management is authorized to grant stock options and other equity-based

awards to our employees, directors and consultants. The number of shares available for future grant under the
2013 plan will automatically increase each year by 4% of all shares of our capital stock outstanding as of
December 31 of the prior calendar year, subject to the ability of our board of directors to take action to reduce the
size of the increase in any given year. Currently, we plan to register the increased number of shares available for
issuance under the 2013 plan each year. If our board of directors elects to increase the number of shares available
for future grant by the maximum amount each year, our stockholders may experience additional dilution, which
could cause our stock price to fall.

We are at risk of securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in

the market price of its securities. This risk is especially relevant for us because pharmaceutical companies have
experienced significant stock price volatility in recent years. If we face such litigation, it could result in
substantial costs and a diversion of management’s attention and resources, which could harm our business.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

Section 382 of the Internal Revenue Code of 1986, as amended, or Section 382, contains rules that limit the

ability of a company that undergoes an ownership change to utilize its net operating losses, or NOLs, and tax
credits existing as of the date of such ownership change. Under the rules, such an ownership change is generally
any change in ownership of more than 50% of a company’s stock within a rolling three-year period. The rules
generally operate by focusing on changes in ownership among stockholders considered by the rules as owning,
directly or indirectly, 5% or more of the stock of a company and any change in ownership arising from new
issuances of stock by the company. During the quarter ended June 30, 2014, we completed a Section 382 study
through February 11, 2014. The results of this study showed that as of February 11, 2014, one historical
ownership change within the meaning of Section 382 had occurred in 2009. As a result of this Section 382
limitation, approximately $0.3 million of NOLs will expire unutilized. In addition, we recently completed
another Section 382 study through December 31, 2014. The results of this study showed that we experienced an
ownership change in 2014 as part of the follow-on offering, however, none of the NOLs will expire due to the
Section 382 limitation associated with the ownership change, assuming sufficient future taxable income and no

63

future limitations. Subsequent ownership changes as defined by Section 382 may further limit the amount of
NOL carryforwards that could be utilized annually to offset future taxable income.

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our
stock.

We have never declared or paid any cash dividend on our common stock. We currently anticipate that we
will retain future earnings for the development, operation and expansion of our business and do not anticipate
declaring or paying any cash dividends for the foreseeable future. Additionally, our credit and security agreement
with MidCap and Silicon Valley Bank contains covenants that restrict our ability to pay dividends. Any return to
stockholders will therefore be limited to the appreciation of their stock.

Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of
Delaware law, could make it more difficult for a third party to acquire us or increase the cost of
acquiring us, even if doing so would benefit our stockholders, and may prevent or frustrate attempts by
our stockholders to replace or remove our current management.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could
discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may
prevent attempts by our stockholders to replace or remove our current management. These provisions include:

•

•

•

•

•

•

authorizing the issuance of “blank check” preferred stock, the terms of which may be established and
shares of which may be issued without stockholder approval;

limiting the removal of directors by the stockholders;

creating a staggered board of directors;

prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken
at a meeting of our stockholders;

eliminating the ability of stockholders to call a special meeting of stockholders; and

establishing advance notice requirements for nominations for election to the board of directors or for
proposing matters that can be acted upon at stockholder meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current
management by making it more difficult for stockholders to replace members of our board of directors, which is
responsible for appointing the members of our management. In addition, we are subject to Section 203 of the
Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a
broad range of business combinations with an interested stockholder of such corporation for a period of three
years following the date on which the stockholder became an interested stockholder, unless such transactions are
approved by our board of directors. This provision could have the effect of delaying or preventing a change of
control, whether or not it is desired by or beneficial to our stockholders. Further, other provisions of Delaware
law may also discourage, delay or prevent someone from acquiring us or merging with us.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

Our offices are located in Burlington, MA at a leased facility used primarily for corporate functions. Due to

increased headcount and future growth plans, during 2015, the Company amended the original lease to expand
the facility from 11,754 square feet to approximately 22,000 square feet. Our lease expires in October 2019.

64

Item 3. Legal Proceedings

We are not currently a party to any material legal proceedings.

Item 4. Mine Safety Disclosures

Not applicable.

65

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

PART II

Equity Securities

Market Information

Our common stock began trading on the Nasdaq Global Market on February 12, 2014 and trades under the
symbol “FLXN”. Prior to February 12, 2014, there was no public market for our common stock. The following
table sets forth the high and low sales prices per share of our common stock as reported on The NASDAQ Global
Market for the periods indicated.

Year Ended December 31, 2015
First Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31, 2014
First Quarter (beginning February 12, 2014) . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High
$30.37
$23.70
$29.09
$21.71

High
$20.85
$18.23
$21.23
$23.64

Low
$19.08
$15.50
$13.71
$13.08

Low
$14.05
$11.06
$11.71
$14.50

On March 2, 2016, the last reported sale price of our common stock was $10.02.

Comparative Stock Performance Graph

The following performance graph and related information shall not be deemed “soliciting material” or to be

“filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the
Securities Act or Exchange Act, except to the extent that we specifically incorporate it by reference into such
filing.

The following graph shows a comparison from February 12, 2014 (the date our common stock commenced

trading on The NASDAQ Global Market) through December 31, 2015 of the cumulative total return for our
common stock, the Russell 2000 Growth and Biotech index and the NASDAQ Composite Index (CCMP). The
graph assumes an initial investment of $100 on February 12, 2014. The comparisons in the graph are not
intended to forecast or be indicative of possible future performance of our common stock.

Comparison of 23 Month Cumulative Total Return
Assumes Initial Investment of $100
December 2015

180.00

160.00

140.00

120.00

100.00

80.00

60.00

40.00

20.00

0.00

2/12/2014

3/31/2014

6/30/2014

9/30/2014

12/31/2014

3/31/2015

6/30/2015

9/30/2015

12/31/2015

Flexion Therapeutics, Inc.

NASDAQ Composite-Total Returns

Russell 2000 Growth & Biotech Index

66

Holders of Record

As of March 2, 2016, there were approximately 20 stockholders of record of our common stock. Certain
shares are held in “street” name and accordingly, the number of beneficial owners of such shares is not known or
included in the foregoing number.

Dividend Policy

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all
available funds and any future earnings to support our operations and finance the growth and development of our
business. We do not intend to pay cash dividends on our common stock for the foreseeable future. In addition,
pursuant to our credit and security agreement with MidCap and Silicon Valley Bank, we are prohibited from
paying cash dividends without the prior consent of MidCap and Silicon Valley Bank. Any future determination
related to our dividend policy will be made at the discretion of our board of directors and will depend upon,
among other factors, our results of operations, financial condition, capital requirements, contractual restrictions,
business prospects and other factors our board of directors may deem relevant.

Securities Authorized for Issuance under Equity Compensation Plans

Information about our equity compensation plans is incorporated herein by reference to Item 12 of Part III

of this Annual Report.

67

Item 6. Selected Financial Data

The following selected financial data should be read together with “Item 7. Management’s Discussion and

Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and
related notes included elsewhere in this Annual Report. The selected consolidated financial data in this section
are not intended to replace our consolidated financial statements and the related notes. Our historical results are
not necessarily indicative of the results that may be expected in the future and results of interim periods are not
necessarily indicative of the results for the entire year.

The selected consolidated statement of operations data for the years ended December 31, 2015, 2014, and
2013 and the selected consolidated balance sheet data as of December 31, 2015 and 2014 are derived from our
audited consolidated financial statements appearing elsewhere in this Annual Report. The selected consolidated
statement of operations data for the years ended December 31, 2012 and 2011 and the selected consolidated
balance sheet data as of December 31, 2013, 2012 and 2011 are derived from our audited consolidated financial
statements not included in this document. The selected consolidated financial data for all periods presented
reflects the 1-for-8.13 reverse stock split we affected on January 27, 2014.

Year Ended December 31,

2015

2014

2013

2012

2011

(in thousands)

Consolidated Statement of Operations Data:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:

Research and development
. . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . .

Total operating expenses . . . . . . . . . . . . . . . . .

$ — $ — $ — $ — $ —

32,691
13,372

46,063

17,923
9,064

26,987

11,061
6,704

17,765

11,065
3,947

15,012

8,241
3,047

11,288

Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(46,063)

(26,987)

(17,765)

(15,012)

(11,288)

Other income (expense):

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Other income (expense), net

1,246
(571)
(927)

479
(401)
(404)

234
(449)
(207)

194
—
(164)

173
—
(332)

Total other income (expense) . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net loss per share attributable to common stockholders,
basic and diluted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted average common shares outstanding, basic

(252)

(159)
$(46,315) $(27,313) $(18,187) $(14,982) $(11,447)

(326)

(422)

30

$

(2.15) $

(1.97) $ (23.02) $ (27.58) $ (23.26)

and diluted(1)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,497

13,894

790

543

492

2015

2014

2013

2012

2011

Consolidated Balance Sheet Data:
Cash, cash equivalents, marketable securities, and

long-term investments . . . . . . . . . . . . . . . . . . . . . . . .
Working capital(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible preferred stock . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity (deficit) . . . . . . . . . . . . . . . .

$118,604
104,044
127,139
15,002
—

103,986

$151,625
145,328
153,348
3,564
—

144,942

$ 16,438
11,583
18,731
5,002
74,806
(64,704)

$ 29,383
27,147
30,008
—
74,806
(47,523)

$ 10,542
9,024
10,939
—
41,836
(32,682)

(1) See Note 3 to our consolidated financial statements appearing elsewhere in this Annual Report for further
details on the calculation of basic and diluted net loss per share attributable to common stockholders.

(2) We define working capital as current assets less current liabilities.

68

(3) Total debt includes the current and long-term portion of our debt net of debt issuance costs. In April 2015,

the FASB issued ASU 2015-03, Interest—Imputation of Interest, which requires that debt issuance costs
related to a recognized debt liability be presented in the balance sheet as a direct deduction from the
carrying amount of the related debt liability. The Company elected to early adopt this standard in the year
ended December 31, 2015 which requires retrospective application and represents a change in accounting
principle.

69

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in
conjunction with “Item 6. Selected Financial Data” and our consolidated financial statements and related notes
appearing elsewhere in this Annual Report. This discussion and analysis and other parts of this Annual Report
contain forward-looking statements based upon current beliefs, plans and expectations that involve risks,
uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and
projections. Our actual results and the timing of selected events could differ materially from those anticipated in
these forward-looking statements as a result of several factors, including those set forth under “Item 1A. Risk
Factors”. You should carefully read the “Risk Factors” section of this Annual Report to gain an understanding
of the important factors that could cause actual results to differ materially from our forward-looking statements.
Please also see the section entitled “Special Note Regarding Forward-Looking Statements.”

Overview

We are a specialty pharmaceutical company focused on the development and commercialization of novel,

local therapies for the treatment of patients with musculoskeletal conditions, beginning with osteoarthritis, a type
of degenerative arthritis, referred to as OA. Our portfolio of product candidates addresses the OA pain treatment
spectrum, from moderate to severe pain, and provides us with multiple unique opportunities to achieve our goal
of commercializing novel, patient-focused therapies. Our pipeline consists of two proprietary product candidates:
Zilretta, a late-stage sustained-release, intra-articular steroid, and FX007, a pre-clinical TrkA receptor antagonist
for post-operative pain. We retain the exclusive worldwide rights to our product candidates.

We were incorporated in Delaware in November 2007, and to date we have devoted substantially all of our
resources to our development efforts relating to our product candidates, including conducting clinical trials with
our product candidates, providing general and administrative support for these operations and protecting our
intellectual property. We do not have any products approved for sale and have not generated any revenue from
product sales. From our inception through December 31, 2015, we have funded our operations primarily through
the sale of our common stock and convertible preferred stock and, to a lesser extent, debt financing. From our
inception through December 31, 2015, we have raised $259.4 million from such transactions, including from our
initial and follow-on public offerings. Until such time, if ever, as we can generate substantial product revenue,
we expect to finance our cash needs through a combination of equity offerings, debt or other financings,
government or third-party funding, and licensing or collaboration arrangements.

We have incurred net losses in each year since our inception in 2007. Our net losses were $46.3 million,
$27.3 million, and $18.2 million for the years ended December 31, 2015, 2014 and 2013, respectively. As of
December 31, 2015, we had an accumulated deficit of $139.8 million. Substantially all of our net losses resulted
from costs incurred in connection with our development programs and from general and administrative expenses
associated with our operations.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable
future. We anticipate that our expenses will increase substantially in connection with our ongoing activities, as
we:

•

•

•

•

•

continue the development of our lead product candidate, Zilretta, including our on-going and future
clinical trials;

seek to obtain regulatory approvals for Zilretta;

continue to scale-up manufacturing activities including the supply of clinical trial materials and
registration and commercial batches;

prepare for the potential launch and commercialization of Zilretta, if approved;

establish a sales and marketing infrastructure for the commercialization of Zilretta, if approved;

70

•

expand our development activities and advance additional product candidates;

• maintain, expand and protect our intellectual property portfolio; and

•

add operational, financial and management information systems and personnel, including personnel to
support our product development and commercialization efforts and operations as a public company.

We do not expect to generate revenue from product sales unless and until we successfully complete
development and obtain marketing approval for Zilretta or one of our other product candidates, which is subject
to significant uncertainty. We anticipate that we will need to raise additional capital after FDA approval of
Zilretta and completing clinical development of any of our other product candidates. Until such time that we can
generate substantial revenue from product sales, if ever, we expect to finance our operating activities through a
combination of equity offerings, debt or other financings, including convertible debt financings, government or
other third-party funding and collaborations, and licensing arrangements. However, we may be unable to raise
additional funds or enter into such arrangements when needed on favorable terms, or at all, which would have a
negative impact on our financial condition and could force us to delay, limit, reduce or terminate our
development programs or commercialization efforts or grant to others, rights to develop or market product
candidates that we would otherwise prefer to develop and market ourselves. Failure to receive additional funding
could cause us to cease operations, in part or in full.

Financial Overview

Revenue

We have not generated any revenue since our inception. We do not have any products approved for sale, and

we do not expect to generate any revenue from the sale of products in the near future. In the future, if our
research and development efforts result in clinical success and regulatory approval, we may generate revenue
from the sales of our product candidates, including Zilretta, or we may generate revenue from licensing rights to
our product candidates to third parties. If we fail to complete the development of Zilretta or our other product
candidates, our ability to generate future revenue, and our results of operations and financial position will be
adversely affected.

Operating Expenses

The majority of our operating expenses to date have been related the development activities of Zilretta, and

to a lesser extent FX007 and FX005.

Research and Development Expenses.

Since our inception, we have focused our resources on our development activities, including: preclinical
studies, clinical trials and chemistry manufacturing and controls, or CMC. Our development expenses consist
primarily of:

•

•

•

•

•

•

expenses incurred under agreements with consultants, contract research organizations, or CROs, and
investigative sites that conduct our preclinical studies and clinical trials;

costs of acquiring, developing and manufacturing clinical trial materials;

personnel costs, including salaries, benefits, stock-based compensation and travel expenses for
employees engaged in scientific research and development functions;

costs related to compliance with regulatory requirements;

expenses related to the in-license of certain technologies from pharmaceutical companies; and

allocated expenses for rent and maintenance of facilities, insurance and other general overhead.

71

We expense research and development costs as incurred. Our direct research and development expenses
consist primarily of external-based costs, such as fees paid to investigators, consultants, investigative sites, CROs
and companies that manufacture our clinical trial materials and potential future commercial supplies, and are
tracked on a program-by-program basis. We do not allocate personnel costs, facilities or other indirect expenses
to specific research and development programs. These indirect expenses are included within the amounts
designated as “Personnel and other costs” in the table below.

The following table summarizes our research and development expenses for the periods presented:

Direct research and development expenses by program:

Zilretta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FX007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FX005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total direct research and development expenses . . . . . . . .
Personnel and other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended
December 31,

2015

2014

2013

(in thousands)

$22,046
669
247

22,962
9,729

$11,627
738
211

12,576
5,347

$ 5,593
370
1,659

7,622
3,439

Total research and development expenses . . . . . . . . . . . . . . . . .

$32,691

$17,923

$11,061

Related costs incurred under the grant from the U.S. Department of Defense are included in research and

development expenses. We are reimbursed and offset research and development expenses when invoices for
allowable costs are prepared and submitted to the U.S. Department of Defense. Payments under cost
reimbursable grants with agencies of the U.S. government are provisional payments subject to adjustment upon
audit by the U.S. government. When the final determination of the allowable costs for any year has been made,
research and development expenses may be adjusted accordingly. The grant also provides the U.S. government
agency the ability to terminate the grant for various reasons, including if we fail to meet our obligations as set
forth in the grant.

Our research and development expenses are expected to increase in the foreseeable future. Specifically, our

costs associated with Zilretta will increase as we conduct additional clinical trials, further the manufacturing
process in anticipation of validation and commercialization, including the costs for the build-out of the portion of
the dedicated manufacturing facility with our contract manufacturer, Patheon UK Limited, or Patheon, make
initial investments for commercial product supply, and otherwise advance our Zilretta development program.
Evonik Corporation, or Evonik, is our supplier of PLGA and has manufactured drug product for our Zilretta
clinical trial materials, however we have recently decided to use Patheon as our sole supplier of future Zilretta
drug product for clinical trials and commercial supply. To that end, we will incur wind down costs with the
technology transfer from Evonik to Patheon but are currently unable to estimate those costs. In addition, we are
currently conducting a future use and impairment analysis of approximately $2.4 million in manufacturing
equipment located at the Evonik facility. We cannot determine with certainty the duration of and completion
costs associated with future clinical trials of Zilretta. The duration, costs and timing associated with the
development and commercialization of Zilretta and our other product candidates will depend on a variety of
factors, including uncertainties associated with the results of our clinical trials and our ability to obtain regulatory
approval. As it relates to FX007, we will decide how much funding to direct to the program on an ongoing basis
in response to its preclinical and clinical success, as well as ongoing assessments of the commercial potential of
the product candidate. As a result of these uncertainties, we are currently unable to estimate with any precision
our future research and development expenses for any product candidate, when or if we will achieve regulatory
approval, generate revenue from sales of any product candidate or achieve a positive cash flow position.

72

General and Administrative Expenses.

General and administrative expenses consist primarily of personnel costs, including salaries, related
benefits, travel expenses and stock-based compensation of our executive, finance, business development,
commercial, information technology, legal and human resources functions. Other general and administrative
expenses include an allocation of facility-related costs, patent filing expenses, and professional fees for legal,
consulting, auditing and tax services.

We anticipate that our general and administrative expenses will increase in the future as we continue to
build our corporate and commercial infrastructure to support the continued development and potential launch of
Zilretta or any of our other product candidates. Additionally, we anticipate increased expenses related to the
audit, legal and compliance, regulatory, investor relations and tax-related services associated with maintaining
compliance with the Securities and Exchange Commission Nasdaq requirements and healthcare laws and
compliance requirements, director and officer insurance premiums and other costs associated with operating as a
publicly-traded company.

Other Income (Expense)

Interest income. Interest income consists of interest earned on our cash, cash equivalents, marketable

securities, and long-term investments balances. The primary objective of our investment policy is capital
preservation.

Interest expense. In January 2013, we borrowed $5.0 million under a credit facility with MidCap Financial
SBIC, LP, or MidCap, and began to incur interest related to this borrowing at a fixed rate of 8.0% per annum. In
March 2015, we paid MidCap $3,236,019 to satisfy our obligation related to the credit facility.

In August 2015, we borrowed $15.0 million under a credit facility with MidCap Financial Funding XIII
Trust and Silicon Valley Bank, and began to incur interest related to this borrowing at a fixed rate of 6.25% per
annum. We expect to incur future interest expense related to this borrowing until February 1, 2020. See
“Liquidity and Capital Resources” for a more detailed description of our credit facility.

Other expense. Other expense consists of the net amortization and accretion of premiums and discounts
related to our marketable securities, and our realized gains (losses) on redemptions of our marketable securities.
We will continue to incur expenses related to net amortization of premiums on marketable securities for as long
as we hold these investments.

Income Taxes

As of December 31, 2015, we had $62.4 million and $56.9 million of federal and state net operating loss
carryforwards, respectively, and $3.6 million and $2.7 million of federal and state research and development tax
credit carryforwards, respectively, available to offset our future taxable income, if any. These federal net
operating loss carryforwards and research and development tax credit carryforwards expire at various dates
beginning in 2029, if not utilized and are subject to review and possible adjustment by the Internal Revenue
Service. The state net operating loss carryforwards and research and development tax credit carryforwards expire
at various dates beginning in 2030 and 2025, respectively, if not utilized and are subject to review and possible
adjustment by the state tax authorities. At December 31, 2015, a full valuation allowance was recorded against
our net operating loss carryforwards and our research and development tax credit carryforwards.

If we experience a greater than 50 percent aggregate change in ownership of certain stockholders over a
three-year period, utilization of our then-existing net operating loss carryforwards and research and development
tax credit carryforwards will be subject to an annual limitation.

73

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on

our financial statements, which we have prepared in accordance with generally accepted accounting principles in
the United States, or GAAP. The preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported revenue and expenses during the reported
periods. We evaluate these estimates and judgments, including those described below, on an ongoing basis. We
base our estimates on historical experience, known trends and events, contractual milestones and various other
factors that we believe are reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 3 to our consolidated financial
statements appearing elsewhere in this Form 10-K, we believe that the estimates and assumptions involved in the
following accounting policies may have the greatest potential impact on our financial statements and, therefore,
consider these to be critical for fully understanding and evaluating our financial condition and results of
operations.

Research and Development Costs

As part of the process of preparing our financial statements, we are required to estimate our accrued and
third-party prepaid research and development expenses. We base our accrued expenses related to clinical trials on
estimates of patient enrollment and related expenses at clinical investigator sites, as well as estimates for services
received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct
and manage clinical trials on our behalf. We review new and open contracts and communicate with applicable
internal and vendor personnel to identify services that have been performed on our behalf and estimate the level
of service performed and the associated costs incurred for the service when we have not yet been invoiced or
otherwise notified of the actual cost for accrued expenses. The majority of our service providers invoice us
monthly in arrears for services performed; however, some require advanced payments. For any services that
require such advanced payments, we perform a review, with applicable internal and vendor personnel, to estimate
the level of services that have been performed and the associated costs that have been incurred at each reporting
period. We accrue expenses related to clinical trials based on contractual amounts applied to the level of patient
enrollment and activity according to the protocol. We make estimates of our accrued and prepaid expenses as of
each balance sheet date in our financial statements based on facts and circumstances known to us. If timelines or
contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we
modify our estimates of accrued expenses accordingly on a prospective basis. If we do not identify costs that we
have begun to incur, or if we underestimate or overestimate the level of services performed or the costs of these
services, our actual expenses could differ from our estimates. To date, we have not adjusted our estimates at any
particular balance sheet date in any material amount.

Stock-Based Compensation

We measure stock-based awards granted to employees and directors at fair value on the date of the grant and

recognize the corresponding compensation expense for those awards, net of estimated forfeitures, over the
requisite service period, which is generally the vesting period of the respective award, using the straight-line
method. We measure stock-based awards granted to non-employees for services received based on the fair value
of the equity instrument issued. The measurement date of the fair value of the equity instrument issued to non-
employees is the earlier of the date on which the counterparty’s performance is complete or the date on which
there is a commitment to perform.

The fair value of each stock-based award granted is estimated using the Black-Scholes option-pricing

model. Until February 11, 2014, we were a private company and we lacked company-specific historical and

74

implied volatility information. Therefore, we estimated our expected stock volatility based on the historical
volatility of our publicly-traded peer companies for periods that are commensurate with the expected term (in
years) of our stock-based awards, and we expect to continue to do so until such time as we have adequate
historical data regarding the volatility of our traded stock price. The expected term of our stock options has been
determined utilizing the “simplified” method for awards that qualify as “plain vanilla” options. The expected
term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free
interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award
for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the
fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.
The assumptions used to determine the fair value of stock-based awards using the Black-Scholes option-pricing
model were as follows:

Year Ended December 31,

2015

2014

2013

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.49-1.92% 1.54-2.04% 1.00%
0%

0%

0%

6.0

6.0

6.0

76.4-83.9% 61.9-68.0% 71%

We recognize compensation expense only for the portion of awards that are expected to vest. In developing

a forfeiture rate estimate, we have considered our historical experience to estimate pre-vesting forfeitures for
service-based awards. The impact of a forfeiture rate adjustment will be recognized in full in the period of
adjustment, and if the actual forfeiture rate is materially different from our estimate, we may be required to
record adjustments to stock-based compensation expense in future periods. These assumptions represent our best
estimates, but involve inherent uncertainties and the application of our judgment. As a result, if factors change
and we use significantly different assumptions or estimates, our stock-based compensation expense could be
materially different.

RESULTS OF OPERATIONS

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

The following table summarizes our results of operations for the years ended December 31, 2015 and

2014 (certain items may not foot due to rounding):

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:

Research and development . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . .

Total operating expenses . . . . . . . . . . . . . . .

Year Ended December 31,

2015

2014

Change

$ —

(in thousands)
$ —

$ —

32,691
13,372

46,063

17,923
9,064

26,987

14,768
4,308

19,076

Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . .

(46,063)

(26,987)

(19,076)

Other income (expense):

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total other income (expense) . . . . . . . . . . .

1,246
(571)
(927)

(252)

479
(401)
(404)

(326)

767
(170)
(523)

74

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(46,315)

$(27,313)

$(19,002)

75

Research and Development Expenses

Direct research and development expenses by program:

Zilretta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FX007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FX005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total direct research and development expenses . . . . .
Personnel and other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2015

2014

Change

(in thousands)

$22,046
669
247

22,962
9,729

$11,627
738
211

12,576
5,347

$10,419
(69)
36

10,386
4,382

Total research and development expenses . . . . . . . . . . . . . .

$32,691

$17,923

$14,768

Research and development expenses were $32.7 million and $17.9 million for the years ended

December 31, 2015 and 2014, respectively. The increase in research and development expenses year over year of
$14.8 million was primarily due to $10.4 million in Zilretta program expenses related to the previously
completed pivotal Phase 2b clinical trial, the conduct of the recently completed Phase 3 clinical trial, and
manufacturing expenses related to clinical trial and potential commercial supplies. In addition, $4.4 million in
personnel and other employee-related costs for additional headcount, stock compensation expense, and
consulting costs contributed to the increase.

General and Administrative Expenses

General and administrative expenses were $13.4 million and $9.1 million for the years ended December 31,
2015 and 2014, respectively. The increase in general and administrative expenses year over year of $4.3 million
was primarily due to salary and related costs associated with additional headcount, costs related to the creation of
commercial marketing and sales capabilities and stock compensation expense.

Other Income (Expense)

Interest income was $1.2 million and $0.5 million for the years ended December 31, 2015 and 2014,
respectively. The increase in interest income was primarily due to a larger average investment balance during
2015.

Interest expense was $0.6 million and $0.4 million for the years ended December 31, 2015 and 2014,

respectively. The increase in interest expense was primarily due to interest incurred on the $15.0 million
borrowed under our credit facility with MidCap Financial Funding XIII Trust and Silicon Valley Bank, which we
entered into on August 4, 2015.

Other expense was $0.9 million and $0.4 million for the years ended December 31, 2015 and 2014,

respectively. Other expense increased due to a net amortization of premiums on larger average marketable
securities and long-term investments balances.

76

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

The following table summarizes our results of operations for the years ended December 31, 2014 and 2013

(certain items may not foot due to rounding):

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:

Research and development . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . .

Total operating expenses . . . . . . . . . . . . . . . .

Year Ended December 31,

2014

2013

Change

$ —

(in thousands)
$ —

$ —

17,923
9,064

26,987

11,061
6,704

17,765

6,862
2,360

9,222

Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . .

(26,987)

(17,765)

(9,222)

Other income (expense):

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total other income (expense) . . . . . . . . . . . .

479
(401)
(404)

(326)

234
(449)
(207)

(422)

245
48
(197)

96

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(27,313)

$(18,187)

$(9,126)

Research and Development Expenses

Direct research and development expenses by program:

Zilretta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FX007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FX005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total direct research and development expenses . . . . .
Personnel and other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2014

2013

Change

(in thousands)

$11,627
738
211

12,576
5,347

$ 5,593
370
1,659

7,622
3,439

$ 6,034
368
(1,448)

4,954
1,908

Total research and development expenses . . . . . . . . . . . . . .

$17,923

$11,061

$ 6,862

Research and development expenses were $17.9 million and $11.1 million for the years ended

December 31, 2014 and 2013, respectively. The increase in research and development expenses of $6.9 million
was primarily due to year over year increases of $6.0 million in development expenses related to our Zilretta
program, $0.4 million related to our FX007 program, and $1.9 million in personnel and other costs, offset by a
year over year decrease $1.4 million in development expenses related to our FX005 program. The increase of
$6.0 million in the Zilretta program expenses related to costs associated with our pivotal Phase 2b clinical trial
and material costs related to this trial and start-up costs for the Phase 3 clinical trial. The increase year over year
of $1.9 million in personnel and other costs, including stock compensation and consulting expenses, primarily
related to an increase in headcount. The decrease year over year of $1.4 million in FX005 program expenses was
due to the completion of toxicology and pharmacology studies in 2013. The increase of $0.4 million in FX007
program expenses was due to an increase in preclinical studies.

77

General and Administrative Expenses

General and administrative expenses were $9.1 million and $6.7 million for the years ended December 31,
2014 and 2013, respectively. The increase in general and administrative expenses of $2.4 million was primarily
due to a year over year increase of $1.9 million in salary and related costs due to an increase in headcount to
augment our corporate infrastructure, an increase in stock compensation expense, and $0.5 million in insurance
costs due to becoming a publicly-traded company.

Other Income (Expense)

Interest income was $0.5 million and $0.2 million for the years ended December 31, 2014 and 2013,

respectively. Interest income increased due to an increase in marketable securities in our portfolio.

Interest expense was $0.4 million and $0.4 million for the years ended December 31, 2014 and 2013,

respectively. Interest expense associated with the MidCap loan was consistent year over year.

Other expense was $0.4 million and $0.2 million for the years ended December 31, 2014 and 2013,

respectively. Other expense increased due to a net amortization of premiums on marketable securities.

Liquidity and Capital Resources

To date, we have not generated any revenue and have incurred losses since our inception in 2007. As of
December 31, 2015, we had an accumulated deficit of $139.8 million. We anticipate that we will continue to
incur losses for the foreseeable future. We expect that our research and development and general and
administrative expenses will continue to increase and, as a result, we will need additional capital to fund our
operations, which we may seek to obtain through one or more equity offerings, debt and convertible debt
financings, government or other third-party funding, and licensing or collaboration arrangements.

Since our inception through February 2014, we have funded our operations through the receipt of funds
from the private placement of $80.0 million of equity and debt securities. On February 18, 2014, we completed
the initial public offering of our common stock, which resulted in net proceeds to us of approximately $67.2
million, after deducting underwriting discounts, commissions and offering costs. An additional follow-on
offering of our common stock was completed on December 17, 2014, which resulted in net proceeds to us of
approximately $92.2 million after deducting underwriting discounts, commissions, and offering costs paid by the
Company. As of December 31, 2015, we had cash and cash equivalents of $62.9 million, marketable securities of
$48.3 million, and long-term investments of $7.4 million.

We anticipate that our existing cash, cash equivalents, and marketable securities will fund our operations for

at least the next twelve months. Cash in excess of immediate requirements is invested in accordance with our
investment policy, primarily with a view to capital preservation.

The following table shows a summary of our cash flows for each of the years ended December 31, 2015,

2014 and 2013:

Cash flows used in operating activities . . . . . . . . . . . . . . . . . . . . .
Cash flows (used in) provided by investing activities . . . . . . . . . .
Cash flows provided by financing activities . . . . . . . . . . . . . . . . .

$(38,948)
(13,245)
12,040

(in thousands)
$ (23,145)
(49,451)
159,505

$(16,187)
15,641
3,899

Net increase (decrease) in cash and cash equivalents . . . . . .

$(40,153)

$ 86,909

$ 3,353

Year Ended December 31,

2015

2014

2013

78

Net Cash Used in Operating Activities

Operating activities used $38.9 million of cash in the year ended December 31, 2015. The cash used in
operating activities in the year ended December 31, 2015 resulted primarily from our 2015 net loss of $46.3
million offset by changes in our operating assets and liabilities of $1.5 million and non-cash charges of $5.9
million. Changes in our operating assets and liabilities consisted primarily of a $1.6 million increase in our
accounts payable, and an increase of $0.4 million in accrued expenses. The increase in accounts payable, accrued
expenses and other current liabilities was primarily attributable to increased expenses related to clinical research
and contract manufacturing services. These changes were partially offset by an increase in other assets of $0.5
million. Non-cash charges consisted primarily of $4.6 million of stock-based compensation expense and $0.4
million in depreciation expense and loss on disposal of property and equipment and $0.9 amortization and
accretion related to our investments.

Operating activities used $23.1 million of cash in the year ended December 31, 2014. The cash used in
operating activities in the year ended December 31, 2014 resulted primarily from our net loss of $27.3 million for
the period, offset by non-cash charges of $3.0 million and changes in our operating assets and liabilities of $1.2
million. Non-cash charges consisted of $0.5 million related to depreciation expense and amortization of
premiums on marketable securities and $2.5 million of stock-based compensation expense. Changes in our
operating assets and liabilities consisted primarily of a $0.5 million increase in our accounts payable and a $1.0
million increase in accrued expenses and other current liabilities, offset by a $0.3 million increase in our prepaid
expenses and other current assets. The increase in accounts payable was primarily due to the timing of our
payments to manufacturers, CROs and legal counsel. The $1.0 million increase in accrued expenses and other
current liabilities was primarily attributable to higher clinical research and contract manufacturing expenses. The
increase in prepaid expenses and other current assets was primarily due to higher prepaid insurance costs due to
becoming a publicly-traded company.

Operating activities used $16.2 million of cash in the year ended December 31, 2013. The cash used in
operating activities in the year ended December 31, 2013 resulted primarily from our net loss of $18.2 million for
the period, offset by non-cash charges of $1.3 million and changes in our operating assets and liabilities of $0.7
million. Non-cash charges consisted of $0.2 million related to depreciation expense and amortization of
premiums on marketable securities and $1.0 million of stock-based compensation expense. Changes in our
operating assets and liabilities consisted primarily of a $0.5 million increase in our accounts payable and a $0.3
million decrease in our prepaid expenses and other current assets partially offset by a $0.1 million decrease in
accrued expenses and other current liabilities. The increase in accounts payable was primarily due to the timing
of our payments to manufacturers, CROs and legal counsel. The decrease in prepaid expenses and other current
assets was primarily due to a $0.1 million decrease in prepaid patent application fees for Zilretta, which were
expensed in 2013 when the applications were filed, a $0.1 million reduction in interest receivable on our
marketable securities, which decreased during the period, a decrease in prepaid expenses related to the
conclusion of the Phase 2b dose-ranging clinical trial of Zilretta and the refund of a security deposit resulting
from our office relocation. The $0.1 million decrease in accrued expenses and other current liabilities was
primarily attributable to a decrease of expenses related to clinical research and contract manufacturing expenses.

Net Cash (Used in) Provided by Investing Activities

Net cash used in investing activities was $13.2 million in the year ended December 31, 2015. Net cash used

in investing activities consisted primarily of cash used to purchase marketable securities of $145.8 million,
partially offset by cash received from the redemption and sale of marketable securities of $137.7 million. In
addition, $5.2 million of cash was used to purchase property and equipment.

Net cash used in investing activities was $49.5 million in the year ended December 31, 2014. Net cash used

in investing activities in the year ended December 31, 2014 consisted primarily of cash paid to purchase
marketable securities of $79.4 million and to purchase property and equipment of $0.8 million, offset by cash
received from the redemption of marketable securities of $30.7 million.

79

Net cash provided by investing activities was $15.6 million in the year ended December 31, 2013. Net cash
provided by investing activities in the year ended December 31, 2013 consisted primarily of cash received from
the redemption of marketable securities of $31.2 million, partially offset by cash used for the purchase of
marketable securities of $15.0 million and to purchase property and equipment of $0.4 million.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $12.0 million, $159.5 million and $3.9 million in the years
ended December 31, 2015, 2014 and 2013, respectively. Net cash provided by financing activities in the year
ended December 31, 2015 consisted of $15.0 million borrowed under our credit facility with MidCap Financial
Funding XIII Trust and Silicon Valley Bank in August 2015, offset by $3.5 million paid to satisfy our 2013 loan
obligation. In addition, we received $0.9 million in proceeds from the exercise of stock options and the issuance
of common stock related to our employee stock purchase plan that was partially offset by $0.2 million in
financing costs associated with our follow-on financing in late 2014 and $0.1 million in issuance costs associated
with our long-term loan obligation.

Net cash provided by financing activities in the year ended December 31, 2014 consisted of $162.1 million

in proceeds from public offerings of our common stock and $0.3 million from the exercise of stock options,
partially offset by the payment of fees incurred in connection with our initial public offering and follow-on
financing of $1.5 million and debt payments of $1.5 million.

Net cash provided by financing activities in the year ended December 31, 2013 consisted of $5.0 million in

proceeds from borrowings under our term loan, partially offset by the payment of fees incurred in connection
with our initial public offering of $1.1 million.

Contractual Obligations

The following table discloses aggregate information about our contractual obligations and the periods in

which payments are due as of December 31, 2015:

Payments Due By Period

Total

Less Than
1 Year

1 – 3
Years

3 – 5
Years

More
Than 5
Years

. . . . . . . .
Long-term debt obligation (including interest)(1)
. . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations(2)
. . . . . . . . . . . . . . . . . . . . . .
Monthly base fee to Patheon(3)
Southwest Research Institute(4) . . . . . . . . . . . . . . . . . . . . . .

$ 18,926
2,669
79,380
120

(in thousands)
$15,783
1,495
14,231
—

$ 953
527
2,891
—

$ 2,190
647
17,788
20

$ —
—
44,470
100

Total(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$101,095

$4,371

$31,509

$20,645

$44,570

(1) Represents the contractually required principal and interest payments on our credit facility in accordance

with the required payment schedule and the 9% final payment to the lender on February 1, 2020. Amounts
associated with future interest payments to be made were calculated using the fixed interest rate of
6.25% per annum.

(2) Represents the contractually required payments under our operating lease obligations in existence as of
December 31, 2015 in accordance with the required payment schedule. No assumptions were made with
respect to renewing the lease terms at the expiration date of their initial terms.

(3) Represents the contractually required monthly base fee to Patheon for the operation of the manufacturing

suite.

(4) Represents the contractually required payment for our exclusive worldwide license agreement for the use of
the Southwest Research Institute’s microsphere manufacturing technologies for certain steroids formulated

80

with PLGA, including Zilretta. $120,000 will be due if the Company’s NDA for Zilretta is approved by the
FDA for the treatment of knee OA (the “Milestone Event”). If the Milestone Event has not been achieved by
December 31, 2019, $20,000 will be due on January 1, 2020, $40,000 on January 1, 2021, and $60,000 on
January 1, 2022. The time-based payments are fully creditable against the payment due upon achievement of
the Milestone Event such that the aggregate amount owed shall not exceed $120,000.

(5) Milestone payments of up to $184.0 million will become due under our agreements with AstraZeneca as we
achieve regulatory and commercial milestones related to FX007. In addition, we will pay tiered royalties on
product sales. We have not included these amounts in this table as we cannot estimate or predict when, or if,
those amounts will become due.

The table above reflects only payment obligations that are fixed or determinable. We enter into contracts in

the normal course of business with CROs for clinical trials, with contract manufacturers for clinical and
commercial supply manufacturing, and with vendors for preclinical research studies, research supplies and other
services and products for operating purposes. These contracts generally provide for termination on notice, and
therefore we believe that our non-cancelable obligations under these agreements are not material.

In July 2015, we amended the lease for our primary office space which increased the size of our leased
premises and extended the lease term through October 31, 2019. In September 2015, we exercised an option to
lease an additional 5,400 square feet under this amended lease. The total cash obligation for the base rent from
inception through the lease termination date for the office space committed to under the lease, as amended, is
approximately $2,900,000.

Also in July 2015, we and Patheon U.K. Limited, or Patheon, entered into a Manufacturing and Supply
Agreement (“the Manufacturing Agreement”) and Technical Transfer and Service Agreement, or the Technical
Transfer Agreement, for the manufacture of clinical and commercial supplies of Zilretta.

Under the terms of the Technical Transfer Agreement, Patheon has agreed to undertake certain technical
transfer activities and construction services needed to prepare its United Kingdom facility for the manufacture of
Zilretta in dedicated manufacturing suites. This agreement will remain in effect unless and until it expires or is
terminated. Upon termination of this agreement (other than termination by us in the event that Patheon does not
meet the construction and manufacturing milestones or for a breach by Patheon), we will pay for the wind down
costs related to the removal of our manufacturing equipment and for Patheon’s termination costs up to a capped
amount.

Under the terms of the Manufacturing and Supply Agreement, following the FDA approval date of the
suites, we have agreed to purchase finished, packaged or unpackaged product from Patheon. In addition, we will
pay a monthly base fee to Patheon for the operation of the manufacturing suites, and will reimburse Patheon for
purchases of raw materials and equipment made on its behalf, certain nominal expenses and additional services.
We estimate that the aggregate monthly base fees and reimbursement costs for equipment will be approximately
100 million GBP over the entire term of the Manufacturing Agreement. Unless earlier terminated, this agreement
will expire on the 10th anniversary of the FDA approval date for the initial manufacturing suite. Future
expenditures associated with the purchase of finished Zilretta product from Patheon are primarily driven by the
potential commercial requirements and demand for our products which cannot be fully determined at this time.

In addition, we have an exclusive worldwide license agreement with Southwest Research Institute, or SwRI,

with respect to the use of SwRI’s proprietary microsphere manufacturing technologies for certain steroids
formulated with PLGA, including Zilretta. Under the agreement, if our NDA for Zilretta is approved by the FDA
for the treatment of knee OA (the “Milestone Event”), $120,000 is payable to SwRI; provided, however, that if
the Milestone Event has not been achieved by December 31, 2019 and until the Milestone Event has been
achieved, $20,000 will be payable to SwRI on January 1, 2020, $40,000 on January 1, 2021, and $60,000 on
January 1, 2022. The time-based payments to SwRI are fully creditable against the payment due to SwRI upon
achievement of the Milestone Event such that the aggregate amount owed to SwRI shall not exceed $120,000.

81

Off-Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any off-balance sheet

arrangements that are reasonably likely to have a current or future material effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources.

Recent Accounting Pronouncements

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest, which requires that debt

issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from
the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will
include the face amount of the debt liability and the effective interest rate. The update requires retrospective
application and represents a change in accounting principle. The update is effective for fiscal years beginning
after December 15, 2015. Early adoption is permitted for financial statements that have not been previously filed.
The Company elected to early adopt this standard in the year ended December 31, 2015, accordingly debt
issuance costs of $136,446 were deducted from the carrying amount of the debt liabilities at December 31, 2015.
In accordance with ASU 2015-03, during the year ended December 31, 2015, we reclassified $28,875 of our debt
issuance costs related to our 2013 term loan from an asset to a reduction of the carrying amount of the 2013 term
loan as of December 31, 2014.

In May 2014, the FASB issued guidance which supersedes all existing revenue recognition requirements,
including most industry-specific guidance. The new standard requires a company to recognize revenue when it
transfers goods or services to customers in an amount that reflects the consideration that the company expects to
receive for those goods or services. This guidance will be effective prospectively for fiscal years, and interim
periods within those years, beginning after December 15, 2016, and early adoption is not permitted. The
Company is currently evaluating the potential impact that the adoption of this guidance and the related transition
guidance may have on the Company’s financial statements.

In August 2014, the FASB issued accounting guidance for the disclosure of uncertainties related to an
entity’s ability to continue as a going concern. The new standard requires management to perform an assessment
at interim and annual periods as to the entity’s ability to continue as a going concern and provides specific
disclosure guidance. This guidance will be effective for fiscal years, and interim periods within those years,
beginning after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the
potential impact that the adoption of this guidance may have on the Company’s financial statements.

In May 2015, the FASB issued Accounting Standards Update 2015-07, Fair Value Measurement (Topic

820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent). Under the new guidance, investments measured at net asset value (“NAV”), as a practical expedient
for fair value, are excluded from the fair value hierarchy. This guidance will be effective for fiscal years, and
interim periods within those years, beginning after December 15, 2015. The Company does not measure any of
its current investments using NAV as a practical expedient and therefore the adoption of this guidance is not
expected to have an impact on the Company’s financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), to simplify the presentation

of deferred income taxes. Under the new standard, both deferred tax liabilities and assets are required to be
classified as noncurrent in a classified balance sheet. ASU 2015-17 will become effective for fiscal years, and the
interim periods within those years, beginning after December 15, 2016, with early adoption allowed. The
Company is currently evaluating the potential impact that the adoption of this guidance may have on the
Company’s financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), to increase transparency and
comparability among organizations by recognizing lease assets and liabilities, including for operating leases, on

82

the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is
currently evaluating the impact that the adoption of this guidance may have on the Company’s financial
statements.

JOBS Act

On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging
growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the
Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth
company” can delay the adoption of certain accounting standards until those standards would otherwise apply to
private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a
result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such
standards is required for other public companies.

We are relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject
to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of
these exemptions, including without limitation, (i) providing an auditor’s attestation report on our system of
internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act, and
(ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board
regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information
about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an
emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary
of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1.0
billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our
common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on
which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the
general level of U.S. interest rates. Due to the short-term duration of our investment portfolio and the low risk
profile of our investments, an immediate 10.0% change in interest rates would not have a material effect on the
fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be
affected to any significant degree by a sudden change in market interest rates on our investment portfolio.

• Our term loan carries a fixed interest rate and, thus, we are not subject to interest rate risk.

• We have borrowed $15.0 million under our credit facility. Amounts outstanding under the credit

facility bear interest at a fixed rate equal to 6.25% per annum. As of December 31, 2015, the carrying
value of the term loan was $15 million.

We do not believe that our cash, cash equivalents and marketable securities have significant risk of default

or illiquidity. While we believe our cash and cash equivalents and certificates of deposit do not contain excessive
risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse
changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or
more financial institutions that are in excess of federally insured limits.

Most of our transactions are conducted in U.S. dollars. We do have certain material agreements with
vendors located outside the United States, which have transactions conducted primarily in British Pounds and
Euros. As of December 31, 2015 we had approximately $1.1 million in payables to vendors denominated in
currencies other than the U.S. dollar. A hypothetical 10% change in foreign exchange rates would not have a
material effect on the value of our liability.

83

Item 8.

Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Operations and Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) . . .

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

85

86

87

88

89

90

84

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
of Flexion Therapeutics, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
operations and comprehensive loss, of changes in convertible preferred stock and stockholders’ equity (deficit)
and of cash flows present fairly, in all material respects, the financial position of Flexion Therapeutics, Inc. and
its subsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2015 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 11, 2016

85

Flexion Therapeutics, Inc.

Consolidated Balance Sheets

December 31,

2015

2014

Assets
Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 62,944,044
48,302,507
95,285
760,872

$103,097,522
48,527,156

—
485,814

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

112,102,708
7,442,477
7,357,423
155,904
80,000

152,110,492
1,109,391
—
—
128,000

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 127,138,512

$153,347,883

Liabilities, Convertible Preferred Stock and Stockholders’ Equity
Current liabilities:

Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . .

$

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

—
3,692,414
4,366,560

8,058,974
15,002,039
91,055

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,152,068

1,983,500
1,584,822
3,213,704

6,782,026
1,580,958
43,008

8,405,992

Commitments and contingencies:

Preferred Stock, $0.001 par value; 10,000,000 shares authorized at
December 31, 2015 and 2014, 0 shares issued and outstanding at
December 31, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Stockholders’ equity (deficit):

Common stock, $0.001 par value; 100,000,000 shares authorized at
December 31, 2015 and 2014; 21,570,395 and 21,440,058 shares
issued and outstanding at December 31, 2015 and 2014,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,570
243,853,799
(96,651)
(139,792,274)

21,440
238,402,514
(5,240)
(93,476,823)

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103,986,444

144,941,891

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 127,138,512

$153,347,883

The accompanying notes are an integral part of these consolidated financial statements.

86

Flexion Therapeutics, Inc.

Consolidated Statements of Operations and Comprehensive Loss

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:

$

Year Ended December 31,

2015

2014

2013

— $

— $

—

. . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . .

32,691,445
13,371,631

17,923,348
9,063,926

11,060,912
6,704,297

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . .

46,063,076

26,987,274

17,765,209

Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(46,063,076)

(26,987,274)

(17,765,209)

Other income (expense):

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . .

1,246,133
(570,990)
(927,518)

Total other income (expense) . . . . . . . . . . . . . . . . . . . . .

(252,375)

478,715
(401,370)
(403,735)

(326,390)

233,999
(448,889)
(206,625)

(421,515)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(46,315,451) $(27,313,664) $(18,186,724)

Net loss per share attributable to common stockholders, basic and
diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

(2.15) $

(1.97) $

(23.02)

Weighted average common shares outstanding, basic and

diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,497,119

13,893,961

790,038

Other comprehensive (loss):

Unrealized (losses) gains from available-for-sale securities,

net of tax of $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total other comprehensive (loss) . . . . . . . . . . . . . . . . . .

(91,411)

(91,411)

(5,212)

(5,212)

(2,478)

(2,478)

Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(46,406,862) $(27,318,876) $(18,189,202)

The accompanying notes are an integral part of these consolidated financial statements.

87

Flexion Therapeutics, Inc.

Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Series A and B
Convertible Preferred
Stock

Common Stock

Shares

Amount

Shares

Par Value

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income (Loss)

Accumulated
Deficit

Total
Stockholders’
Equity
(Deficit)

Balance at December 31,

2012 . . . . . . . . . . . . . . . . 72,780,250 $ 74,806,213

789,222

$

789

$

450,070

$ 2,450

$ (47,976,435) $ (47,523,126)

Exercise of stock

options . . . . . . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . .
Other comprehensive

income . . . . . . . . . . . . . .

Balance at December 31,

—

—
—

—

—

—
—

—

4,868

5

12,266

—
—

—

—
—

—

996,167
—

—

—
—

—

—

(18,186,724)

12,271

996,167
(18,186,724)

—

(2,478)

—

(2,478)

2013 . . . . . . . . . . . . . . . . 72,780,250 $ 74,806,213

794,090

$

794

$

1,458,503

$

(28)

$ (66,163,159) $ (64,703,890)

Conversion of Series A and
Series B Convertible
Preferred Stock . . . . . . . (72,780,250) (74,806,213) 8,952,057

8,952

74,797,261

Issuance of Common Stock
net of issuance costs . . .

Exercise of stock

options . . . . . . . . . . . . . .

Employee Stock Purchase

Plan . . . . . . . . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . .
Other comprehensive

loss . . . . . . . . . . . . . . . . .

Balance at December 31,

2014 . . . . . . . . . . . . . . . .

Exercise of stock

options . . . . . . . . . . . . . .

Employee Stock Purchase

Plan . . . . . . . . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . .
Other comprehensive

loss . . . . . . . . . . . . . . . . .

Balance at December 31,

2015 . . . . . . . . . . . . . . . .

—

—

—

—
—

—

—

—

—
—

—

— 11,546,000

11,546

159,311,192

—

—

—
—

—

141,141

141

304,355

6,770

7

80,624

—
—

—

—
—

—

2,450,579
—

—

—

—

—
—

—

74,806,213

— 159,322,738

—

304,496

80,631

—

(27,313,664)

2,450,579
(27,313,664)

—

(5,212)

—

(5,212)

$

— 21,440,058

$21,440

$238,402,514

$ (5,240)

$ (93,476,823) $144,941,891

—

—

—
—

—

109,441

20,896

—
—

—

109

21

—
—

—

592,678

275,928

4,582,679
—

—

—
—

—

592,787

275,949

—

(46,315,451)

4,582,679
(46,315,451)

—

(91,411)

—

(91,411)

$

— 21,570,395

$21,570

$243,853,799

$(96,651)

$(139,792,274) $103,986,444

The accompanying notes are an integral part of these consolidated financial statements.

88

Flexion Therapeutics, Inc.

Consolidated Statements of Cash Flows

Year Ended December 31,

2015

2014

2013

Cash flows from operating activities

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net loss to cash used in operating activities:

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of premium (discount) on marketable securities . . . .
Loss on disposal of property and equipment . . . . . . . . . . . . . . . . . .
Other non-cash charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:

$ (46,315,451) $ (27,313,664) $(18,186,724)

238,153
4,582,679
871,215
149,983
41,103

120,341
2,450,579
366,231
—
16,500

79,808
996,167
151,138
14,111
63,167

Prepaid expenses and other current and long-term assets . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current and long-term liabilities . .

(526,247)
1,581,164
428,769

(320,352)
518,032
1,017,412

343,896
475,821
(124,328)

Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(38,948,632)

(23,144,921)

(16,186,944)

Cash flows from investing activities

Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5,197,326)
48,000
(145,797,556)
137,702,156

(802,481)

—

(79,383,553)
30,735,000

(405,315)
(98,000)
(15,015,663)
31,160,000

Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . .

(13,244,726)

(49,451,034)

15,641,022

Cash flows from financing activities

Proceeds from borrowings under term loan . . . . . . . . . . . . . . . . . . . . . .
Payments of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of public offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of Series A Convertible Preferred Stock, net of
issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of Series B Convertible Preferred Stock, net of
issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the issuance of common stock . . . . . . . . . . . . . . . . . . . . .
Proceeds from the exercise of stock options . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Employee Stock Purchase Plan . . . . . . . . . . . . . . . . . . . .

15,003,533
(107,741)
(3,500,000)
(224,648)

—
—

5,000,000
(40,715)

(1,500,000)
(1,517,484)

(1,072,710)

—

—
—

592,787
275,949

—

—

162,137,580
304,496
80,631

—

—
—
12,271
—

Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . .

12,039,880

159,505,223

3,898,846

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . .

(40,153,478)
103,097,522

86,909,268
16,188,254

3,352,924
12,835,330

Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 62,944,044

$103,097,522

$ 16,188,254

Supplemental disclosures of cash flow information:

Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

572,340

$

364,889

$

367,778

Supplemental disclosures of non-cash financing activities:

Deferred initial public offering costs included in accounts payable or

accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Public offering costs included in accounts payable or accrued

expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conversion of convertible preferred stock into common stock . . . . . . . .
Purchases of property, plant and equipment included in accounts

payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$
$

$

— $

— $

550,830

— $
224,648
— $ 74,806,213

1,575,907

$

52,011

$
$

$

—
—

—

The accompanying notes are an integral part of these consolidated financial statements.

89

Flexion Therapeutics, Inc.

Notes to Consolidated Financial Statements

1. Nature of the Business

Flexion Therapeutics, Inc. (“Flexion” or the “Company”) was incorporated under the laws of the state of
Delaware on November 5, 2007. Flexion is a specialty pharmaceutical company focused on the development and
commercialization of novel, local therapies for the treatment of patients with musculoskeletal conditions,
beginning with osteoarthritis, a type of degenerative arthritis (“OA”) and post-operative pain. Flexion’s portfolio
of product candidates addresses the OA pain treatment spectrum, from moderate to severe pain, and provides the
Company with multiple opportunities to achieve its goal of commercializing novel, patient-focused therapies.

The Company is subject to risks and uncertainties common to early-stage companies in the

biopharmaceutical industry, including, but not limited to, new technological innovations, dependence on key
personnel, protection of proprietary technology, compliance with government regulations, and ability to secure
additional capital to fund operations. Product candidates currently under development will require significant
additional research and development efforts, including extensive preclinical and clinical testing and regulatory
approval prior to commercialization. These efforts require significant amounts of additional capital, adequate
personnel infrastructure and extensive compliance reporting capabilities. The Company’s product candidates are
all in the development stage. There can be no assurance that development efforts, including clinical trials, will be
successful. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the
Company will realize significant revenue from product sales.

The accompanying consolidated financial statements have been prepared on a basis which assumes that the

Company will continue as a going concern and which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business. The Company has incurred recurring losses and
negative cash flows from operations. As of December 31, 2015 and 2014, the Company had cash, cash
equivalents, marketable securities, and long-term investments of $118,603,974 and $151,624,678, respectively.
Management believes that current cash, cash equivalents and marketable securities on hand at December 31,
2015 should be sufficient to fund operations for at least the next twelve months. The future viability of the
Company is dependent on its ability to raise additional capital to finance its operations and to fund increased
research and development costs in order to seek approval for commercialization of its product candidates. The
Company may not be able to obtain financing on acceptable terms, or at all. The Company’s failure to raise
capital as and when needed would have a negative impact on its financial condition and its ability to pursue its
business strategies. This capital is necessary for the Company to perform the research and development activities
required to develop the Company’s product candidates in order to generate future revenue streams.

2.

Financing Transactions

On February 18, 2014, the Company completed an initial public offering (“IPO”) of its common stock,
which resulted in the sale of 5,750,000 shares of common stock at a price to the public of $13.00 per share,
including shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares.
The Company received net proceeds from the IPO of $67.2 million after deducting underwriting discounts,
commissions, and offering costs paid by the Company. In preparation for the IPO, the Company’s Board of
Directors and stockholders approved a 1-for-8.13 reverse stock split of the Company’s common stock and a
proportional adjustment to the existing conversion ratios for each series of Convertible Preferred Stock, effective
January 27, 2014. All share and per share amounts in the consolidated financial statements and notes thereto have
been retroactively adjusted, where necessary, to give effect to this reverse stock split. In connection with the
closing of the IPO, all of the Company’s outstanding redeemable convertible preferred stock automatically
converted to common stock as of February 18, 2014, resulting in an additional 8,952,057 shares of common stock
of the Company becoming outstanding.

90

On December 17, 2014, the Company completed a follow-on public offering of its common stock, which
resulted in the sale of 5,796,000 shares of the Company’s common stock at a price to the public of $17.00 per
share including shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional
shares. The Company received net proceeds from the follow-on financing of $92.2 million after deducting
underwriting discounts, commissions, and offering costs paid by the Company.

The Company’s total issued common stock as of December 31, 2015 was 21,570,395 shares.

3.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with the rules and

regulations of the Securities and Exchange Commission (the “SEC”) and Generally Accepted Accounting
Principles (“GAAP”) for financial information, including the accounts of the Company and its wholly owned
subsidiary after elimination of all significant intercompany accounts and transactions.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates

and judgments that may affect the reported amounts of assets and liabilities, expenses and related disclosures.
The Company bases estimates and judgments on historical experience and on various other factors that it believes
to be reasonable under the circumstances. The most significant estimates in these consolidated financial
statements include useful lives with respect to long-lived assets, such as property and equipment and leasehold
improvements, accounting for stock-based compensation, and accrued expenses, including clinical research
costs. The Company’s actual results may differ from these estimates under different assumptions or conditions.
The Company evaluates its estimates on an ongoing basis. Changes in estimates are reflected in reported results
in the period in which they become known by the Company’s management.

Consolidation

The accompanying consolidated financial statements include the Company and its wholly-owned subsidiary,

Flexion Securities Corporation, Inc. The Company has eliminated all intercompany transactions. In addition,
Flexion Therapeutics, Inc. is registered to do business in the United Kingdom through its branch office located in
Swindon, United Kingdom.

U.S. Government Grant

The Company performs research and development for a U.S. Government agency under a cost reimbursable
grant for clinical development of Zilretta. The related costs incurred under the grant are included in research and
development expense in the statement of operations. The Company is reimbursed and offsets research and
development expenses in the statement of operations when invoices for allowable costs are prepared and
submitted to the U.S. Government agency. Payments under cost reimbursable grants with agencies of the U.S.
Government are provisional payments subject to adjustment upon audit by the U.S. government. When the final
determination of the allowable cost for any year has been made, research and development expenses may be
adjusted accordingly. The grant also provides the U.S. government agency the ability to terminate the grant for
various reasons, including if the Company fails to meet its obligations as set forth in the grant.

Accounts Receivable

Accounts receivable represents allowable costs under the Company’s U.S. Government agency grant for

which the Company has not yet received reimbursement. The Company invoices the government on a quarterly

91

basis for reimbursable costs under the grant. Reimbursable costs that have not been invoiced on the last day of
the quarter are recorded as unbilled accounts receivable. As of December 31, 2015 and 2014, there were unbilled
accounts receivable of $95,285 and $0, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less at the date of

purchase to be cash equivalents. The Company currently invests available cash in money market funds of a major
financial institution, corporate bonds, government obligations and commercial paper.

Marketable Securities

Marketable securities consist of investments with original maturities greater than ninety days and less than

one year from the balance sheet date. Long-term investments consist of investments with maturities of greater
than one year. The Company classifies all of its investments as available-for-sale securities. Accordingly, these
investments are recorded at fair value, which is based on quoted market prices. Realized gains and losses are
determined on a specific identification basis and are included in other income (loss). Amortization and accretion
of discounts and premiums is recorded in other income.

Restricted Cash

The Company purchased a $30,000 certificate of deposit to collateralize a credit card account with a

commercial bank that was classified as long-term restricted cash as of December 31, 2015 and 2014.

In addition, the Company posted a letter of credit to the lessor of the Company’s Burlington facility in the
amount of $98,000 as a security deposit pursuant to the lease agreement in the year ended December 31, 2014.
The remaining amount, $50,000 and $98,000, remained as long-term restricted cash at December 31, 2015 and
2014, respectively.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization

expense is recognized using the straight-line method over the following estimated useful lives:

Computers and office equipment
. . . . . . . . . . . . . . . . . . . . .
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3
7
7
5

Estimated
Useful Life
(Years)

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the

related asset. Costs of major additions and betterments are capitalized and depreciated on a straight-line basis
over their useful lives. Repairs and maintenance costs are expensed as incurred. Upon retirement or sale, the cost
of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting
gain or loss is credited or charged to income. Property and equipment includes construction-in-progress, which is
not yet in service, and is estimated to have a useful life of 7 years once placed into service.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets, including property and equipment, for impairment whenever

events or changes in business circumstances indicate that the carrying amount of the assets may not be fully

92

recoverable. Factors that the Company considers in deciding when to perform an impairment review include
significant underperformance of the business in relation to expectations, significant negative industry or
economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is
performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted
cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value.
An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from
the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the
carrying value of the impaired asset over its fair value, determined based on discounted cash flows.

Debt Issuance Costs, net

Debt issuance costs, net represent legal costs related to the Company’s Credit and Security Agreement (Note

9). In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest, which requires that debt
issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from
the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will
include the face amount of the debt liability and the effective interest rate. The update requires retrospective
application and represents a change in accounting principle. The update is effective for fiscal years beginning
after December 15, 2015. Early adoption is permitted for financial statements that have not been previously filed.
The Company elected to early adopt this standard in the year ended December 31, 2015.

As of December 31, 2015 and 2014, the carrying value of debt issuance costs was $124,041 and $28,875,

respectively, presented as a direct deduction from the carrying amounts of long-term debt. In addition, $41,103,
$16,500 and $16,500 respectively, of debt issuance costs were amortized and recognized as interest expense in
the statement of operations for the years ended December 31, 2015, 2014 and 2013.

Deferred Offering Costs

The Company capitalizes certain legal, accounting and other third-party fees that are directly associated
with in-process equity financings as other assets until such financings are consummated. After consummation of
the equity financing, these costs are recorded in stockholders’ deficit as a reduction of additional paid-in capital
generated as a result of the offering. If the equity financing is no longer considered probable of being
consummated, the deferred offering costs would be expensed immediately as a charge to operating expenses in
the consolidated statement of operations. The Company completed its initial public offering in February 2014
and recorded deferred offering costs of $1,623,540 as a reduction to additional paid-in capital. The Company did
not record any deferred offering costs during the year ended December 31, 2015.

Research and Development

Research and development expenses are comprised of costs incurred in performing research and

development activities, including salaries and benefits, facilities costs, overhead costs, depreciation, clinical trial
and related clinical manufacturing costs, contract services and other related costs. Research and development
costs are expensed to operations as the related obligation is incurred.

Patent Costs

All patent-related costs incurred in connection with filing and prosecuting patent applications are recorded

as general and administrative expenses as incurred, as recoverability of such expenditures is uncertain.

Accounting for Stock-Based Compensation

The Company measures all stock options and other stock based-awards granted to employees at the fair

value at the date of grant using the Black-Scholes option-pricing model. The fair value of the awards is

93

recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the
vesting period of the respective award. The straight-line method of expense recognition is applied to all awards
with service-only conditions.

For stock-based awards granted to non-employees, compensation expense is recognized over the period

during which services are rendered by such non-employees until completed. At the end of each financial
reporting period prior to completion of the service, the fair value of these awards is re-measured using the then
current fair value of the Company’s common stock and updated assumption inputs in the Black-Scholes option-
pricing model.

The Company classifies stock-based compensation expense in the consolidated statements of operations in
the same manner in which the award recipient’s payroll costs are classified, or in the case of a non-employee, in
the same manner as the award recipient’s service costs are classified.

The Company recognizes compensation expense only for the portion of awards that are expected to vest. In

developing a forfeiture rate estimate, the Company has considered its historical experience to estimate pre-
vesting forfeitures for service-based awards. The impact of a forfeiture rate adjustment will be recognized in full
in the period of adjustment, and if the actual forfeiture rate is materially different from the Company’s estimate,
the Company may be required to record adjustments to stock-based compensation expense in future periods.

Concentration of Credit Risk and Significant Suppliers

Financial instruments that potentially expose the Company to concentration of credit risk consist primarily

of commercial paper and corporate bonds. The Company generally invests its cash in money market funds,
government and corporate bonds, and commercial paper at one financial institution. The Company does not
believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking
relationships.

The Company is completely dependent on third-party manufacturers and product suppliers for research and

potential commercial activities. In particular, the Company relies and expects to continue to rely on a limited
number of manufacturers and relies on them to purchase from third-party suppliers the materials necessary to
produce its product candidates for its clinical trials, and if Zilretta is approved, for commercial supply. These
programs would be adversely affected by a significant interruption in the supply of active pharmaceutical
ingredients.

Comprehensive Loss

Comprehensive income (loss) includes net loss as well as other changes in stockholders’ deficit that result

from transactions and economic events other than those with stockholders. The Company’s only element of other
comprehensive income (loss) in all periods presented was unrealized gains (losses) on available-for-sale
securities.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Under this method, deferred

tax assets and liabilities are recognized for the estimated future tax consequences of events that have been
recognized in the financial statements or in the Company’s tax returns. Deferred taxes are determined based on
the differences between financial statement carrying amounts of existing assets and liabilities and their respective
tax basis. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which these
temporary differences are expected to be recovered or settled. Changes in deferred tax assets and liabilities are
recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will
be recovered from future taxable income and, to the extent it believes, based upon the weight of available

94

evidence, that it is more likely than not that all or a portion of deferred tax assets will not be realized, a valuation
allowance is established through a charge to income tax expense. Potential recovery of deferred tax assets is
evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning
strategies.

The Company accounts for uncertainty in income taxes recognized in the financial statements by applying a

two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be
evaluated to determine the likelihood that it will be sustained upon external examination by the taxing
authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to
determine the amount of benefit to recognize in the financial statements. The amount of benefit that may be
recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate
settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax
benefits, that are considered appropriate as well as the related net interest and penalties.

Fair Value Measurements

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants at the measurement date. Valuation techniques used to measure fair
value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets
and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair
value hierarchy, of which the first two are considered observable and the last is considered unobservable:

• Level 1 — Quoted market prices in active markets for identical assets or liabilities. Level 1 consists primarily

of financial instruments whose value is based on quoted market prices, such as exchange-traded
instruments and listed equities.

• Level 2 — Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for

similar assets or liabilities, quoted prices in markets that are not active for identical or similar
assets or liabilities, or other inputs that are observable or can be corroborated by observable market
data.

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to
determining the fair value of the assets or liabilities, including pricing models, discounted cash
flow methodologies and similar techniques.

The Company’s financial instruments consist of cash equivalents, marketable securities, restricted cash,

accounts payable and accrued expenses, and its term loan (Note 9). The estimated fair value of the Company’s
financial instruments approximates their carrying values.

Net Loss Per Share

The Company follows the two-class method when computing net loss per share as the Company has issued
shares that meet the definition of participating securities. The two-class method determines net loss per share for
each class of common and participating securities according to dividends declared or accumulated and
participation rights in undistributed earnings. The two-class method requires income available to common
stockholders for the period to be allocated between common and participating securities based on their respective
rights to receive dividends as if all income for the period had been distributed.

The Company’s convertible preferred shares contractually entitle the holders of such shares to participate in
dividends, but do not contractually require the holders of such shares to participate in the losses of the Company.
Accordingly, in periods in which the Company reports a net loss or a net loss attributable to common
stockholders resulting from preferred stock dividends, net losses are not allocated to participating securities. In
periods of net loss, the Company does not increase its net loss attributable to common stockholders by accreting
dividends on preferred stock, as the dividends are not cumulative under the terms of the preferred stock. As of

95

December 31, 2015, there were no shares of preferred stock issued and outstanding. The Company reported a net
loss attributable to common stockholders for the years ended December 31, 2015, 2014 and 2013.

Basic net loss per share attributable to common stockholders is computed by dividing the net loss

attributable to common stockholders by the weighted average number of shares of common stock outstanding for
the period. Diluted net loss attributable to common stockholders is computed by adjusting net loss attributable to
common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities,
including outstanding stock options and unvested restricted common stock. Diluted net loss per share attributable
to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the
weighted average number of common shares outstanding for the period, including potential dilutive common
shares assuming the dilutive effect of outstanding stock options and unvested restricted common stock. For
periods in which the Company has reported net losses, diluted net loss per share attributable to common
stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common
shares are not assumed to have been issued if their effect is anti-dilutive. Potential common shares will always be
anti-dilutive for periods in which the Company has reported a net loss. Diluted net loss per share attributable to
common stockholders is the same as basic net loss per share attributable to common stockholders for the years
ended December 31, 2015, 2014 and 2013.

Segment Data

The Company manages its operations as a single operating segment for the purposes of assessing

performance and making operating decisions. The Company is a specialty pharmaceutical company focused on
the development and commercialization of novel, local therapies. No revenue has been generated since inception,
and all assets are held in the United States.

Recently Issued and Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or

ASU, 2014-09, Revenue from Contracts with Customers, which requires that an entity recognize the amount of
revenue to which it expects to be entitled for the transfer of promised goods or services to its customers. In order
to achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a
customer; (2) identify the performance obligations in the contract; (3) determine the transaction price;
(4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when
(or as) the entity satisfies a performance obligation. In August 2015, the FASB issued Accounting Standards
Update 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date. This latest standard
defers the effective date of revenue standard ASU 2014-09 by one year and permits early adoption on a limited
basis. This update will replace existing revenue recognition guidance under GAAP when it becomes effective for
the Company beginning January 1, 2018, with early adoption permitted in the first quarter of 2017. The updated
standard will permit the use of either the retrospective or cumulative effect transition method. The Company is
currently evaluating the potential impact that the adoption of this guidance and the related transition guidance
may have on the Company’s financial statements.

In August 2014, the FASB issued accounting guidance for the disclosure of uncertainties related to an
entity’s ability to continue as a going concern. The new standard requires management to perform an assessment
at interim and annual periods as to the entity’s ability to continue as a going concern and provides specific
disclosure guidance. This guidance will be effective for fiscal years, and interim periods within those years,
beginning after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the
potential impact that the adoption of this guidance may have on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest, which requires that debt

issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from
the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will

96

include the face amount of the debt liability and the effective interest rate. The update requires retrospective
application and represents a change in accounting principle. The update is effective for fiscal years beginning
after December 15, 2015. Early adoption is permitted for financial statements that have not been previously
issued. The Company elected to early adopt this standard in the year ended December 31, 2015, accordingly debt
issuance costs of $136,446 were deducted from the carrying amount of the debt liabilities at December 31, 2015.
In accordance with ASU 2015-03, during the year ended December 31, 2015, we reclassified $28,875 of our debt
issuance costs related to our 2013 term loan from an asset to a reduction of the carrying amount of the 2013 term
loan as of December 31, 2014.

In May 2015, the FASB issued Accounting Standards Update 2015-07, Fair Value Measurement (Topic

820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent). Under the new guidance, investments measured at net asset value (“NAV”), as a practical expedient
for fair value, are excluded from the fair value hierarchy. This guidance will be effective for fiscal years, and
interim periods within those years, beginning after December 15, 2015. The Company does not measure any of
its current investments using NAV as a practical expedient and therefore the adoption of this guidance is not
expected to have an impact on the Company’s financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), to simplify the presentation

of deferred income taxes. Under the new standard, both deferred tax liabilities and assets are required to be
classified as noncurrent in a classified balance sheet. ASU 2015-17 will become effective for fiscal years, and the
interim periods within those years, beginning after December 15, 2016, with early adoption allowed. The
Company is currently evaluating the potential impact that the adoption of this guidance may have on the
Company’s financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), to increase transparency and
comparability among organizations by recognizing lease assets and liabilities, including for operating leases, on
the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is
currently evaluating the impact that the adoption of this guidance may have on the Company’s financial
statements.

4.

Fair Value of Financial Assets

The following tables present information about the Company’s assets and liabilities that are measured at fair

value on a recurring basis as of December 31, 2015 and 2014 and indicate the level of the fair value hierarchy
utilized to determine such fair value:

Assets:
Cash equivalents . . . . . . . . . . . . . . . . . . .
Marketable securities . . . . . . . . . . . . . . .

Assets:
Cash equivalents . . . . . . . . . . . . . . . . . . .
Marketable securities . . . . . . . . . . . . . . .

Fair Value Measurements as of December 31, 2015 Using:

Level 1

Level 2

Level 3

Total

$—
—

$—

$ 61,533,797
55,659,930

$117,193,727

$—
—

$—

$ 61,533,797
55,659,930

$117,193,727

Fair Value Measurements as of December 31, 2014 Using:

Level 1

Level 2

Level 3

Total

$101,687,995
48,527,156

$150,215,151

$—
—

$—

$101,687,995
48,527,156

$150,215,151

$—
—

$—

97

As of December 31, 2015 and 2014, the Company’s cash equivalents that are invested in money market

funds are valued based on Level 2 inputs. The Company measures the fair value of marketable securities using
Level 2 inputs and primarily relies on quoted prices in active markets for similar marketable securities. During
the years ended December 31, 2015 and 2014, there were no transfers between Level 1, Level 2 and Level 3.
Amortization and accretion of discounts and premiums are recorded in other income.

As outlined in Note 9, the 2013 term loan with MidCap Financial SBIC, LP (“2013 term loan”) and 2015
term loan with MidCap Financial Trust (“2015 term loan”), outstanding under the Company’s credit and security
agreements, are reported at their carrying value in the accompanying consolidated balance sheet. The Company
determined the fair value of the term loans using an income approach which utilizes a discounted cash flow
analysis based on current market interest rates for debt issuances with similar remaining years to maturity,
adjusted for credit risk. The term loans were valued using Level 2 inputs as of December 31, 2015 and
December 31, 2014. The result of the calculation yielded a fair value that approximates carrying value.

5. Marketable Securities

As of December 31, 2015 and 2014, the fair value of available-for-sale marketable securities by type of

security was as follows:

December 31, 2015

Amortized
Cost

Gross Unrealized
Gains

Gross Unrealized
Losses

Fair Value

Corporate bonds . . . . . . . . . . . . . .

55,756,581

$55,756,581

3,783

$3,783

(100,434)

55,659,930

$(100,434)

$55,659,930

December 31, 2014

Amortized
Cost

Gross Unrealized
Gains

Gross Unrealized
Losses

Commercial paper . . . . . . . . . . . .
U.S. Government obligations . . . .
Corporate bonds . . . . . . . . . . . . . .

$ 8,991,820
28,300,921
11,239,655

$48,532,396

$7,570
181
2

$7,753

$

—
(5,101)
(7,892)

Fair Value

$ 8,999,390
28,296,001
11,231,765

$ (12,993)

$48,527,156

At December 31, 2014, marketable securities consisted of investments that mature within twelve months. At

December 31, 2015, marketable securities consisted of $48,302,507 of investments that mature within twelve
months and $7,357,423 of investments that mature within fifteen months.

6.

Prepaid Expenses, Other Current Assets, and Other Assets

Prepaid expenses and other current assets and other assets consisted of the following as of December 31,

2015 and 2014:

December 31,

2015

2014

Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest receivable on marketable securities . . . . . . . . . . .
Employee advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$135,002
182,009
441,766
2,095

$269,199
—
216,615
—

Total prepaid expenses and other current assets . . . .

$760,872

$485,814

98

7.

Property and Equipment, Net

Property and equipment, net, as of December 31, 2015 and 2014 consisted of the following:

December 31,

2015

2014

Computer and office equipment
. . . . . . . . . . . . . . . . .
Manufacturing equipment . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . .
Construction—in Progress . . . . . . . . . . . . . . . . . . . . .

$ 393,148
2,533,737
290,577
341,906
239,456
4,133,893

$ 229,980
153,140
181,366
77,454
134,573
601,317

Less: Accumulated depreciation . . . . . . . . . . . . . . . . .

$7,932,717
$ (490,240)

$1,377,830
$ (268,439)

Total property and equipment, net

. . . . . . . . . . .

$7,442,477

$1,109,391

Depreciation expense for the years ended December 31, 2015, 2014 and 2013, was $238,153, $120,341, and
$79,808, respectively. During the years ended December 31, 2015 and 2014, $166,335 and $113,502 of property
and equipment was disposed of, resulting in a loss of $149,983 and $0, respectively.

8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities at December 31, 2015 and 2014 consisted of the following:

December 31,

2015

2014

Clinical research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract manufacturing services . . . . . . . . . . . . . . . . . . . . . . . . .
Payroll and other employee-related expenses . . . . . . . . . . . . . . .
Preclinical services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consultant fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 552,325
1,443,600
1,648,447
—
63,875
70,000
433,453
80,729
74,131

$1,035,510
294,900
1,172,978
119,500
—
26,900
439,874
24,111
99,931

Total accrued expenses and other current liabilities . . . . . .

$4,366,560

$3,213,704

9. Long-term Debt

On January 3, 2013, the Company entered into a credit and security agreement with MidCap Financial
SBIC, LP (“MidCap”) under which it immediately borrowed $5,000,000 as a term loan (“2013 term loan”). The
term loan accrued interest monthly at an interest rate of 8.0% per annum and had a term of 45 months. As the
term loan had a 15-month interest-only period, the term loan principal balance, along with any accrued interest,
was to be paid in 30 equal monthly installments beginning April 1, 2014 and ending September 1, 2016. In
addition to these principal payments, the Company was required to make a payment of $175,000 to the lender on
September 1, 2016, which was being accreted to the carrying value of the debt using the effective interest rate
method. On March 31, 2015, the Company paid MidCap $3,236,019, representing the outstanding principal of
the debt along with accrued interest as of that date, the $175,000 final payment, a prepayment fee of $30,000 and
associated legal expenses to satisfy the Company’s obligation under the credit and security agreement.

In connection with the credit and security agreement dated January 3, 2013, the Company incurred total debt
issuance costs of $61,876. The Company was amortizing these debt issuance costs over the estimated term of the

99

debt using the straight-line method. On March 31, 2015, the Company paid off the debt, including $28,875 of
debt issuance costs incurred.

Prior to the debt repayment, the term loan outstanding under the Company’s credit and security agreement
with MidCap was reported at its carrying value in the accompanying consolidated balance sheets. The Company
determined the fair value of the term loan using an income approach, utilizing a discounted cash flow analysis
based on current market interest rates for debt issuances with similar remaining years to maturity, adjusted for
credit risk. The term loan was valued using Level 2 inputs as of December 31, 2014. The result of the calculation
yielded a fair value that approximated carrying value.

On August 4, 2015, the Company entered into a credit and security agreement with MidCap Financial Trust,

as agent, MidCap Financial Funding XIII Trust and Silicon Valley Bank, as lenders, (the “Lenders”), to borrow
up to $30,000,000 in term loans, (“2015 term loan”). The Company concurrently borrowed $15,000,000 under an
initial term loan. The remaining $15,000,000 under the facility may be drawn down in the form of a second term
loan at the Company’s option through September 2016, subject to the Company’s receipt of positive Phase 3
Zilretta clinical trial data meeting the trial’s primary endpoint which is sufficient to file a New Drug Application
(NDA) for Zilretta, as well as other customary conditions for funding. The Company granted the Lenders a
security interest in substantially all of its personal property, rights and assets, other than intellectual property, to
secure the payment of all amounts owed under the credit facility. The Company also agreed not to encumber any
of its intellectual property without the Lenders’ prior written consent. The Company must maintain a balance in
cash or cash equivalents at Silicon Valley Bank equal to the principal balance of the loan plus 5 percent for so
long as the Company maintains any cash or cash equivalents in non-secured bank accounts. The credit and
security agreement also contains certain representations, warranties, and covenants of the Company, as well as a
material adverse event clause. As of December 31, 2015, the Company was compliant with all covenants and
there were no material adverse events.

Borrowings under the credit facility accrue interest monthly at a fixed interest rate of 6.25% per annum.

Following an interest-only period of 19 months, principal will be due in 36 equal monthly installments
commencing March 1, 2017 and ending February 1, 2020 (the “maturity date”). Upon the maturity date, the
Company will be obligated to pay a final payment equal to 9% of the total principal amounts borrowed under the
facility. The final payment amount is being accreted to the carrying value of the debt using the effective interest
rate method. As of December 31, 2015, the carrying value of the term loan was $15,126,080, the entire balance
of which is classified as long-term debt on the consolidated balance sheets as of December 31, 2015.

In connection with entering into a credit and security agreement dated August 4, 2015, the Company
incurred debt acquisition costs of $136,446. The Company elected the early adoption of ASU 2015-03, Interest –
Imputation of Interest, and accordingly deducted the debt issuance costs from the carrying amount of the debt as
of December 31, 2015. In addition, the Company reclassified $28,875 of debt issuance costs related to our 2013
term loan from an asset to a reduction of the carrying amount of the 2013 term loan as of December 31, 2014.

The Company is amortizing these debt issuance costs over the estimated term of the debt using the straight-
line method, which approximates the effective interest method. Total amortization expense of the debt issuance
costs arising from the credit and security agreement dated August 4, 2015 was $12,228 for the year ended
December 31, 2015. Total amortization expense of the debt issuance costs associated with the credit and security
agreement dated January 3, 2013 was $16,500 for each of the years ended December 31, 2014 and 2013.

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As of December 31, 2015, annual payments due under the Company’s 2015 term loan are as follows (in

thousands):

Year

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Aggregate
Minimum
Payments

$

953,125
5,017,868
5,541,088
5,224,248
2,190,060

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Less final payment

$18,926,389
(2,574,350)
(1,350,000)

Long-term debt

. . . . . . . . . . . . . . . . . . . . . . . . .

$15,002,039

10. Convertible Preferred Stock

As of December 31, 2013, the Company’s Certificate of Incorporation, as amended, authorized the
Company to issue 73,780,250 shares of preferred stock with a par value of $0.001 per share. The Company
issued Series A and Series B Convertible Preferred Stock (collectively, the “Convertible Preferred Stock”). Of
the 73,780,250 authorized shares, 72,780,250 shares were issued; 55,043,464 of the issued shares were
designated as Series A Convertible Preferred Stock (“Series A Preferred Stock”) and 18,736,786 were designated
as Series B Convertible Preferred Stock (“Series B Preferred Stock”).

In December 2012, the Company issued 17,736,786 shares of Series B Preferred Stock at a purchase price

of $1.1276 per share (“Series B Original Issue Price”). The Series B Preferred Stock issuance resulted in net
proceeds of $19,888,478. Included in the Series B Preferred Stock issuance were contingently issuable warrants
for the purchase of 218,160 shares of common stock at $0.01 per share. These warrants were contingently
issuable if the Company did not initiate and enroll the first patient in a multi-dose Phase 2b clinical trial with
planned enrollment of at least 100 patients for the Company’s product candidate identified as FX005 by
February 15, 2014. Additionally, the obligation to issue the warrants would terminate on the earlier to occur of
(i) the consummation of a registered initial public offering, which is defined as a firmly underwritten public
offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of common stock for the account of the Company and (ii) the occurrence of a liquidation event
or the consummation of a deemed liquidation event. The Company determined that the contingently issuable
common stock warrants were equity in nature. As such, the Company allocated the Series B Preferred Stock
proceeds to both the Series B Preferred Stock and the contingently issuable common stock warrants based on
relative fair values at the issuance date. Given the low probability assessed by the Company of not satisfying the
contingency and having to issue the warrants, the amount ascribed to the warrants was immaterial and the full
amount of the proceeds was allocated to the Series B Preferred Stock.

On February 18, 2014, the Company completed an initial public offering (“IPO”) of its common stock. In

preparation for the IPO, the Company’s Board of Directors and stockholders approved a 1-for-8.13 reverse stock
split of the Company’s common stock and a proportional adjustment to the existing conversion ratios for each
series of Convertible Preferred Stock. On January 27, 2014, the Company and holders of a majority of the
Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock entered into a
Conversion, Amendment and Waiver Agreement. This agreement amended the milestone date associated with
the contingently issuable common stock warrants from February 15, 2014 to February 21, 2014. In connection
with the closing of the IPO, all of the Company’s outstanding redeemable convertible preferred stock
automatically converted to common stock as of February 18, 2014, resulting in an additional 8,952,057 shares of

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common stock of the Company becoming outstanding. As the Company’s IPO was completed prior to
February 21, 2014 these warrants expired.

The following is a summary of the Company’s Convertible Preferred Stock as of December 31, 2013:

December 31, 2013

Preferred
Shares
Authorized

Preferred
Shares
Issued and
Outstanding

Carrying
Value

Liquidation
Preference

Common
Stock
Issuable
Upon
Conversion

Series A Preferred Stock . . . . . . . . . . . . . . .
Series B Preferred Stock . . . . . . . . . . . . . . .

55,043,464
18,736,786

55,043,464
17,736,786

$54,917,735
19,888,478

$55,043,464
20,000,000

6,770,411
2,181,646

73,780,250

72,780,250

$74,806,213

$75,043,464

8,952,057

The holders of the preferred stock had the following rights and preferences:

Voting Rights

The holders of preferred stock were entitled to vote, together with the holders of common stock, on all
matters submitted to stockholders for a vote. Each preferred stockholder was entitled to the number of votes
equal to the number of shares of common stock into which each preferred share is convertible at the time of such
vote.

Dividends

The holders of both Series A and B Preferred Stock were entitled to receive, out of funds legally available,
non-cumulative dividends at an annual rate of 8.0%, when and if declared by the board of directors. Holders of
Series B Preferred Stock receive such dividends in preference to any dividend on Series A Preferred Stock or
common stock. After payment of any amounts payable to holders of Series B Preferred Stock, the holders of
Series A Preferred Stock were entitled to receive such dividends in preference to any dividend on common stock.
No dividends have been declared or paid from inception to December 31, 2015.

Liquidation

Prior to the conversion of the Company’s Series A and Series B preferred stock on February 18, 2014, in
connection with the closing of the Company’s IPO, the following liquidation preferences and conversion rates
were in effect. The Company does not currently have any holders of securities with either liquidation preferences
or conversion rights.

Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary (each, a

“Liquidation Event”), before any distribution or payment would have been made to the holders of any common
stock, the Company would have made payment to the holders of preferred stock as follows: The holders of the
Series B Preferred Stock, in preference to the holders of the Series A Preferred Stock and common stock, were
entitled to be paid out of the assets of the Company legally available for distribution for each share of Series B
Preferred Stock held by them, an amount per share equal to the applicable Series B Original Issue Price plus all
declared and unpaid dividends on such shares of Series B Preferred Stock, if any (the “Series B Liquidation
Preference”).

After the payment of the full liquidation preference of the Series B Preferred Stock, the holders of Series A
Preferred Stock, in preference to holders of common stock, would have been entitled to be paid out of the assets
of the Company legally available for distribution for each share of Series A Preferred Stock held by them, an
amount per share of Series A Preferred Stock equal to the Series A Original Issue Price plus all declared and
unpaid dividends on the Series A Preferred Stock, if any (the “Series A Liquidation Preference”).

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After payment in full of the Series B Liquidation Preference and the Series A Liquidation Preference as set

forth above, the remaining assets of the Company legally available for distribution, if any, would have been
distributed ratably to the holders of the common stock.

Shares of Series A and B Preferred Stock would not have been entitled to be converted into shares of
common stock in order to participate in any distribution, or series of distributions, as shares of common stock,
without first foregoing participation in the distribution, or series of distributions, as shares of Series A and B
Preferred Stock.

Conversion

Each share of Series A and B Preferred Stock was convertible at any time at the option of the stockholder
into fully paid and non-assessable shares of common stock. The number of shares of common stock to which a
holder of any series of Series A and B Preferred Stock was entitled upon conversion was the product obtained by
multiplying the Conversion Rate then in effect for such series of preferred stock by the number of shares of such
series of preferred stock being converted.

The conversion rate in effect at any time for conversion of the preferred stock (the “Conversion Rate”) was

(i) for the Series A Preferred Stock, the quotient obtained by dividing the Series A Original Issue Price by the
Conversion Price of the Series A Preferred Stock and (ii) for the Series B Preferred Stock, the quotient obtained
by dividing the Series B Original Issue Price by the Conversion Price of the Series B Preferred Stock.

The Conversion Price of Series A Preferred Stock was $8.13 as of December 31, 2013, and the Conversion

Price of Series B Preferred Stock was $9.166575 as of December 31, 2013. As of December 31, 2013, all
outstanding shares of Series A Preferred Stock and Series B Preferred Stock were convertible into common stock
on a 0.123001-for-1 basis. The Conversion Price of each series of preferred stock was subject to adjustment for
stock splits, stock dividends and other recapitalizations in accordance with the Company’s Certificate of
Incorporation, as amended.

In addition to the above optional conversion feature, the Series A and B Preferred Stock included a

mandatory conversion feature whereby upon a qualifying initial public offering, all outstanding shares of Series
A and B Preferred Stock would automatically be converted into shares of common stock at the then effective
conversion rate. A qualifying initial public offering was an initial public offering in which (i) the per share price
was at least $27.48 (as adjusted for any stock splits, dividends, combinations, recapitalizations and the like after
the filing date), and (ii) the gross cash proceeds to the Company (before underwriting discounts, commissions
and fees) were at least $40,000,000. All shares that were required to be surrendered per the provisions above
were deemed to have been retired and canceled and may not be reissued as shares of preferred stock.

11. Preferred Stock

On February 17, 2014, the Company filed an amended and restated Certificate of Incorporation (the

“Restated Certificate”) in connection with the closing of the Company’s initial public offering. As of
December 31, 2015, under the Restated Certificate, the Company is authorized to issue 10,000,000 shares of
preferred stock with a par value of $0.001 per share.

12. Common Stock

Upon inception of the Company on November 5, 2007, the Company authorized 10,000,000 shares of

common stock and issued 109 shares to the founders. In 2009, the Company amended its Certificate of
Incorporation and authorized an additional 69,000,000 shares of common stock, $0.001 par value, bringing the
total number of shares of common stock authorized to 79,000,000. In 2012, the Company amended its Certificate
of Incorporation and authorized an additional 15,000,000 shares of common stock, $0.001 par value, bringing the

103

total number of shares of common stock authorized to 94,000,000. In 2014, the Company amended its Certificate
of Incorporation and authorized an additional 6,000,000 shares of common stock, $0.001 par value, bringing the
total number of shares of common stock authorized to 100,000,000.

On February 18, 2014, the Company completed an initial public offering (“IPO”) of its common stock,
which resulted in the sale of 5,750,000 shares of common stock at a price to the public of $13.00 per share,
including shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares. In
connection with the closing of the IPO, all of the Company’s outstanding redeemable convertible preferred stock
automatically converted to common stock as of February 18, 2014, resulting in an additional 8,952,057 shares of
common stock of the Company becoming outstanding.

On December 17, 2014, the Company completed a follow-on public offering of its common stock, which
resulted in the sale of 5,796,000 shares of the Company’s common stock at a price to the public of $17.00 per
share including shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional
shares.

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the
Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the
board of directors, if any, subject to the preferential dividend rights of any holders of Preferred Stock. As of
December 31, 2015, no dividends have been declared.

13. Commitments and Contingencies

Operating Leases

In May 2013, the Company entered into a lease for office space in Burlington, Massachusetts. The lease is

for a 42-month term with minimum monthly lease payments beginning at $17,588 per month and escalating over
the lease term. The Company provided a letter of credit to the lessor in the amount of $98,000 as a security
deposit pursuant to the lease agreement to secure its obligations under the lease. During 2015, this letter of credit
was reduced to $50,000 pursuant to the original lease agreement.

In July 2015 the Company entered into a first amendment to its existing lease for approximately 4,700

square feet of additional office space (the “Additional Space”) in Burlington, Massachusetts, as well as
approximately 6,700 square feet of temporary space to be leased prior to the delivery of the Additional Space
(which is anticipated to be delivered on May 1, 2016). The amendment extended the term of the original lease
through October 31, 2019, contemporaneous with the Additional Space, and also provided the Company with an
option to lease an additional 5,400 square feet of office space (the “Option Space”). On September 30, 2015, the
Company exercised its option for the Option Space. In addition, the Company has the option to extend the term
of a portion or the entire lease space for one additional three-year period. The Company may terminate the
amendment for convenience with nine months’ notice upon the occurrence of certain events connected to its
clinical stage programs. The total cash obligation for the base rent from inception through the lease termination
date for the office space committed to under the original lease, and the amendment including the Option Space, is
approximately $2,900,000. In addition to the base rent, the Company is also responsible for its share of operating
expenses and real estate taxes.

The Company incurred rent expense of $373,202, $242,946, and $227,381 for the years ended

December 31, 2015, 2014 and 2013, respectively.

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Future minimum lease payments under the Company’s lease obligations are as follows:

Year Ending December 31,

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 527,231
736,425
758,299
647,106

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,669,061

Manufacturing and Supply Agreement with Patheon U.K. Limited

In July 2015, the Company and Patheon U.K. Limited (“Patheon”) entered into a Manufacturing and Supply

Agreement (the “Manufacturing Agreement”) and Technical Transfer and Service Agreement (the “Technical
Transfer Agreement”) for the manufacture of Zilretta, the Company’s lead program, which is an intra-articular
(IA), sustained-release steroid for the treatment of osteoarthritis.

Patheon has agreed in the Technical Transfer Agreement to undertake certain transfer activities and
construction services needed to prepare Patheon’s United Kingdom facility for the commercial manufacture of
Zilretta in dedicated manufacturing suites. The Company will provide Patheon with certain equipment and
materials necessary to manufacture Zilretta and it will pay Patheon a monthly fee for such activities and
reimburse Patheon for certain material, equipment and miscellaneous expenses and additional services.

The initial term of the Manufacturing Agreement is 10 years from approval by the U.S. Food and Drug
Administration, or FDA, of the Patheon manufacturing suites for Zilretta. The Company will pay a monthly base
fee to Patheon for the operation of the manufacturing suites and a per product fee for each vial based upon a
forecast of commercial demand. The Company will also reimburse Patheon for purchases of materials and
equipment made on its behalf, certain nominal expenses and additional services. The Company estimates that the
aggregate monthly base fees and reimbursement costs for equipment will be approximately 100 million British
Pounds (GBP) over the entire term of the Manufacturing Agreement. The Manufacturing Agreement will remain
in full effect unless and until it expires or is terminated. Upon termination of the Manufacturing Agreement
(other than termination by Flexion in the event that Patheon does not meet the construction and manufacturing
milestones or for a breach by Patheon), Flexion will be obligated to pay for the costs incurred by Patheon
associated with the removal of our manufacturing equipment and for Patheon’s termination costs up to a capped
amount.

Future minimum payments under the Company’s agreed obligations are as follows:

Year Ending December 31,

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,890,598
6,670,620
7,560,036
8,894,160
53,364,960

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$79,380,374

Southwest Research Institute License Agreement

On July 25, 2014, the Company entered into an exclusive worldwide license agreement with Southwest

Research Institute (“SwRI”) with respect to the use of SwRI’s proprietary microsphere manufacturing
technologies for certain steroids formulated with PLGA, including Zilretta. Under the agreement, if the

105

Company’s NDA for Zilretta is approved by the FDA for the treatment of knee OA (the “Milestone Event”),
$120,000 is payable to SwRI; provided, however, that if the Milestone Event has not been achieved by
December 31, 2019 and until the Milestone Event has been achieved, $20,000 will be payable to SwRI on
January 1, 2020, $40,000 on January 1, 2021, and $60,000 on January 1, 2022. The time-based payments to
SwRI are fully creditable against the payment due to SwRI upon achievement of the Milestone Event such that
the aggregate amount owed to SwRI shall not exceed $120,000.

AstraZeneca License Agreements

On September 3, 2010, the Company entered into an exclusive license agreement with AstraZeneca for

FX007. The agreement grants the Company an exclusive, royalty-bearing right and license to the patent rights
detailed in the agreement. Per the terms of the license agreement, the Company was required to pay a
nonrefundable fee of $1,000,000: $500,000 within thirty days of the execution of the agreement and $500,000 six
months after the execution of the agreement. The Company recorded $1,000,000 as research and development
expense during 2010. The agreement includes terms for potential future milestone payments including up to an
aggregate of $21 million upon the achievement of certain regulatory and development milestones for a first
licensed product for OA indications, or up to an aggregate of $15 million upon the achievement of certain
regulatory and development milestones for a first-licensed product for non-OA indications. Upon
commercialization of a product that results from the technology licensed under the agreement, the Company will
owe AstraZeneca tiered royalty payments on net sales based on a percentage ranging from low single digits to
low double digits, depending on the volume of sales of the applicable product, as well as up to $75 million in
additional payments based on the achievement of certain sales milestones. There were no payments made or
expenses recorded under this agreement in 2015, 2014 or 2013.

On June 12, 2009, the Company entered into an exclusive license agreement with AstraZeneca for FX005.

The agreement grants the Company an exclusive, royalty-bearing right and license to the patent rights detailed in
the agreement. Per the terms of the license agreement, the Company paid a nonrefundable fee of $1,000,000 upon
execution of the agreement. The Company recorded the $1,000,000 payment as research and development
expense during 2009. The agreement includes terms for potential future milestone payments including up to an
aggregate of $17 million upon the achievement of certain regulatory and development milestones for a first
licensed product for OA indications, or up to an aggregate of $11 million upon the achievement of certain
regulatory and development milestones for a first-licensed product for non-OA indications. Upon
commercialization of a product that results from the technology licensed under the agreement, the Company will
owe AstraZeneca tiered royalty payments on net sales based on a percentage ranging from low to high single
digits, depending on the volume of sales of the applicable product, as well as up to $45 million in additional
payments based on the achievement of certain sales milestones. There were no payments made or expenses
recorded under this agreement in 2015, 2014 or 2013.

14. Stock-Based Compensation

2013 Equity Incentive Plan

On January 27, 2014, the Company’s stockholders approved the 2013 Equity Incentive Plan (the “2013

Plan”), which became effective on February 11, 2014, the date of execution of the underwriting agreement
pursuant to which the Company’s common stock was priced for its initial public offering. Prior to the effective
date of the 2013 Plan, the Company granted stock-based awards pursuant to the 2009 Stock Incentive Plan (the
“2009 Plan), which had similar features to the 2013 Plan. The 2013 Plan provides for the grant of incentive stock
options (“ISOs”), non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock
unit awards, performance-based stock awards, and other forms of equity compensation. Initially, the maximum
number of shares of the Company’s common stock that may be issued pursuant to stock awards under the 2013
Plan was 2,337,616, which is the sum of (i) 1,230,012 shares, plus (ii) the number of shares remaining available
for grant under the 2009 Plan, plus (iii) any shares subject to outstanding stock options or other stock awards that

106

would have otherwise returned to the 2009 Plan (such as upon the expiration or termination of a stock award
prior to vesting). Additionally, the number of shares of common stock reserved for issuance under the 2013 Plan
will automatically increase on January 1 of each year, beginning on January 1, 2015 and continuing through and
including January 1, 2023, by 4% of the total number of shares of the Company’s capital stock outstanding on
December 31 of the preceding calendar year, or a lesser number of shares determined by the board of directors.
The maximum number of shares that may be issued upon the exercise of ISOs under the 2013 Plan is 4,684,989
shares. As of December 31, 2015, there were 530,680 options outstanding under the 2009 Plan.

The Company currently grants stock-based awards pursuant to the 2013 Plan. As of December 31, 2015,
1,287,381 shares were available for future issuance under the 2013 Plan. Stock option vesting typically occurs
over four years for employees and directors and is at the discretion of the board of directors. Options granted
have a maximum term of up to 10 years. As of December 31, 2015, there were 1,126,575 options outstanding
under the 2013 Plan.

Stock Options

During the years ended December 31, 2015, 2014 and 2013, the Company granted stock options for the
purchase of 657,250, 727,575, and 201,721 shares of common stock, respectively, to certain employees and
directors. The vesting conditions for most of these awards are time-based, and the awards typically vest 25%
after one year and monthly thereafter for the next 36 months, except for annual option grants to non-employee
directors of the Company whose initial grants vest 25% after one year and monthly thereafter for the next 24
months and whose annual grants vest in equal monthly installments during the 12-month period following the
grant date, pursuant to the Company’s Non-Employee Director Compensation Policy. Awards typically expire
after 10 years.

Stock options for the purchase of 403,382 shares of common stock were granted in 2012; of these, 264,944

were granted with performance-based vesting conditions to certain executives. The options were to vest in the
event of a corporate transaction with the amount to vest contingent upon the transaction. The grant date fair value
of these options was $236,940. In September 2012, performance-based options for the purchase of 18,450 shares
of common stock were forfeited. No expense was recognized related to these options for the year ended
December 31, 2012 as the performance conditions were not considered probable of achievement at December 31,
2012. On July 16, 2013, in connection with the Company’s proposed initial public offering, the board of directors
exercised its election to change the vesting conditions of these stock options from performance-based vesting to
time-based vesting. As a result, these stock options now vest over a four-year period commencing effective
August 29, 2012. The change in the vesting conditions was accounted for as a modification of these stock
options. The modification resulted in an aggregate increase in the fair value of the options of $2,185,729, of
which $481,729 was recorded as stock-based compensation expense on the modification date, July 16, 2013, and
$1,704,000 was unrecognized stock-based compensation expense, which is expected to be recognized over the
remaining vesting terms of the options through August 2016.

107

Stock Option Valuation

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-

pricing model. The Company historically has been a private company and lacks company-specific historical and
implied volatility information. Therefore, it estimates its expected stock volatility based on the historical
volatility of its publicly-traded peer companies and expects to continue to do so until such time as it has adequate
historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock
options has been determined utilizing the “simplified” method for awards that qualify as “plain vanilla” options.
The expected term of stock options granted to non-employees is equal to the contractual term of the option
award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time
of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend
yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash
dividends in the foreseeable future. The relevant data used to determine the value of the stock option grants for
the years ended December 31, 2015, 2014 and 2013 is as follows:

December 31,

2015

2014

2013

Risk-free interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.49-1.92% 1.54-2.04% 1.00%
0.00% 0.00%

0.00%
6.0

6.0

6.0

76.4-83.9% 61.9-68.0% 71%

The following table summarizes stock option activity for the year ended December 31, 2015:

Shares
Issuable
Under
Options

Weighted
Average
Exercise
Price

Outstanding as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled or forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,289,082
657,250
(109,441)
(179,636)

Outstanding as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .

1,657,255

Options vested and expected to vest at December 31, 2015 . . . . .

1,541,800

Options exercisable at December 31, 2015 . . . . . . . . . . . . . . . . . . .

728,621

$10.26
21.84
5.44
18.42

$14.28

13.92

8.81

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the
options and the fair value of the Company’s common stock for those options that had exercise prices lower than
the fair value of the Company’s common stock. A total of 109,441, 141,141, and 4,868 options were exercised
during the years ended December 31, 2015, 2014 and 2013, respectively. The aggregate intrinsic value of stock
options exercised was $1,584,657, $1,476,861, and $45,125 for the years ended December 31, 2015, 2014 and
2013, respectively.

At December 31, 2015, 2014 and 2013 the Company had options for the purchase of 1,657,255, 1,289,082,

and 834,983 shares of common stock outstanding, with a weighted average remaining contractual term of 7.9,
8.1, and 8.5 years, respectively, and with a weighted average exercise price of $14.28, $10.26, and $2.99 per
share, respectively. At December 31, 2015, 2014 and 2013 there were options for the purchase of 728,621,
450,109, and 386,334 shares of common stock exercisable under these stock option awards, with a weighted
average remaining contractual life of 6.9, 6.7, 6.9 years , respectively, and an aggregate intrinsic value of
$7,714,057, $7,489,976, $4,071,356, respectively.

108

The weighted average grant date fair value of options granted during the years ended December 31, 2015,

2014 and 2013 was $15.08, $9.99, and $6.99, respectively.

Restricted Common Stock

The Company’s 2009 and 2013 Plans provide for the award of restricted stock. The Company has granted
restricted common stock with time-based vesting conditions. Unvested shares of restricted common stock may
not be sold or transferred by the holder. These restrictions lapse according to the time-based vesting.

During the years ended December 31, 2015, 2014, and 2013 the Company did not issue any shares of

restricted common stock.

As of December 31, 2015 and 2014, there were no shares related to restricted stock awards that were

unvested and subject to repurchase.

Stock-based Compensation

The Company recorded stock-based compensation expense related to stock options and restricted stock for

the years ended December 31, 2015, 2014 and 2013 as follows:

Research and development . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . .

$1,412,153
3,170,526

$ 684,511
1,766,068

$347,470
648,697

$4,582,679

$2,450,579

$996,167

Year Ended December 31,

2015

2014

2013

As of December 31, 2015, unrecognized stock-based compensation expense for stock options outstanding

was $8,629,518, which is expected to be recognized over a weighted average period of 2.6 years.

Employee Stock Purchase Plan

On January 27, 2014, the Company’s stockholders approved the Employee Stock Purchase Plan. A total of
209,102 shares of common stock were reserved for issuance under this plan. The Employee Stock Purchase Plan
became effective on February 11, 2014, the date of execution of the underwriting agreement pursuant to which
the Company’s common stock was priced for its initial public offering. During the year ended December 31,
2015 and 2014, 20,896 and 6,770 shares, respectively, were purchased by employees under the plan.
Additionally, the number of shares of common stock reserved for issuance under the Employee Stock Purchase
Plan will automatically increase on January 1 of each year, beginning on January 1, 2015 and continuing through
and including January 1, 2023, by 1% of the total number of shares of the Company’s capital stock outstanding
on December 31 of the preceding calendar year, or a lesser number of shares determined by the board of
directors.

109

15. Net Loss Per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows for the

years ended December 31, 2015, 2014 and 2013:

Year Ended December 31,

2015

2014

2013

Numerator:

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of dividends on convertible preferred stock . . . . . .
Net income attributable to participating securities . . . . . . . . .

$(46,315,451) $(27,313,664) $(18,186,724)

—
—

—
—

—
—

Net loss attributable to common stockholders: . . . . . . . .

$(46,315,451) $(27,313,664) $(18,186,724)

Denominator:

Weighted average common shares outstanding, basic and

diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,497,119

13,893,961

790,038

Net loss per share attributable to common stockholders,

basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

(2.15) $

(1.97) $

(23.02)

Stock options for the purchase of 1,655,394, 1,185,253, and 648,591 weighted average shares of common
stock were excluded from the computation of diluted net loss per share attributable to common stockholders for
the years ended December 31, 2015, 2014 and 2013, respectively, because those options had an anti-dilutive
impact due to the net loss attributable to common stockholders incurred for those periods. In addition, 0 weighted
average shares of unvested restricted common stock were excluded from the computation of basic and diluted net
loss per share attributable to common stockholders for the years ended December 31, 2015, 2014 and 2013,
respectively.

16. Income Taxes

The Company has generated losses since inception. The Company has recorded no income tax benefits for

those losses during the years ended December 31, 2015 and 2014, respectively, due to its uncertainty of realizing
a benefit from those losses.

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is

as follows:

Year Ended December 31,
2013
2014
2015

Federal statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes, net of federal benefit
. . . . . . . . . . . . . . . . . . . . . .
Federal and state research and development tax credits . . . . .
Change in deferred tax asset valuation allowance . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

34.0% 34.0% 34.0%
4.7
4.9
3.5
4.7
(37.8)
(45.4)
(4.4)
1.8

4.8
3.7
(38.1)
(4.4)

Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — % — % — %

110

The Company’s net deferred tax assets consisted of the following:

December 31,

2015

2014

Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . .
Research and development tax credit carryforwards . . . . . .
Capitalized research and development expenses, net . . . . . .
Accruals and other temporary differences . . . . . . . . . . . . . .

$ 24,226,949
5,368,524
22,838,452
2,339,444

$ 17,728,075
3,185,552
12,780,675
131,571

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54,773,369
(54,773,369)

33,825,873
(33,825,873)

Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . .

$

—

$

—

As of December 31, 2015, the Company had federal and state net operating loss carryforwards of

approximately $62,423,730 and $56,872,736, respectively, which begin to expire in 2029 for federal purposes
and in 2030 for state purposes. In addition, the Company had federal and state research and development tax
credit carryforwards of approximately $3,593,673 and $2,689,168, respectively, available to reduce future tax
liabilities, which begin to expire in 2029 for federal purposes and 2025 for state purposes. Management of the
Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax
assets, which are comprised principally of net operating loss carryforwards and capitalized research and
development expenses. Management has considered the Company’s history of cumulative net losses incurred
since inception, as well as its lack of commercialization of any products or generation of any revenue from
product sales since inception, and determined that it is more likely than not that the Company will not realize the
benefits of its deferred tax assets. As a result, a full valuation allowance has been established at December 31,
2015 and 2014.

Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”), contains rules that limit the

ability of a company that undergoes an ownership change to utilize its net operating losses (“NOLs”) and tax
credits existing as of the date of such ownership change. Under the rules, such an ownership change is generally
any change in ownership of more than 50% of a company’s stock within a rolling three-year period. The rules
generally operate by focusing on changes in ownership among stockholders considered by the rules as owning,
directly or indirectly, 5% or more of the stock of a company and any change in ownership arising from new
issuances of stock by the company. During the quarter ended June 30, 2014, the Company completed a
Section 382 study through February 11, 2014. The results of this study showed that as of February 11, 2014, one
historical ownership change within the meaning of Section 382 had occurred in 2009. As a result of this
Section 382 limitation, approximately $0.3 million of NOLs will expire unutilized. In addition, the Company
completed another Section 382 study through December 31, 2014. The results of this study showed that the
Company experienced an ownership change in 2014 as part of the follow-on offering, however, none of the
NOLs will expire due to the Section 382 limitation associated with the ownership change, assuming sufficient
future taxable income and no future limitations. Subsequent ownership changes as defined by Section 382 may
potentially limit the amount of net operating loss carryforwards that could be utilized annually to offset future
taxable income. The Company has generated losses since inception and therefore has recorded no income tax
benefits for those losses due to its uncertainty of realizing a benefit from those losses.

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2015 and 2014
were as follows:

Year Ended December 31,

2015

2014

2013

Valuation allowance as of beginning of year . . . . . . . . . . . . . . . . .
Decreases recorded as benefit to income tax provision . . . . .
Increases recorded to income tax provision . . . . . . . . . . . . . .

$(33,825,873) $(23,493,416) $(16,548,999)
1,726,638
(8,671,055)

2,857,886
(23,805,382)

2,020,565
(12,353,022)

Valuation allowance as of end of year . . . . . . . . . . . . . . . . . . . . . .

$(54,773,369) $(33,825,873) $(23,493,416)

111

In each reporting period, the Company considers whether a tax position of the Company is more likely than
not to be sustained upon examination, including resolution of any related appeals of litigation processes, based on
the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount
recognized in the financial statements is reduced by the largest benefit that has a greater than fifty percent
likelihood of being realized upon the ultimate settlement with the relevant taxing authority. No liabilities for
unrecognized tax benefits were recorded as of December 31, 2015 and 2014.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the

normal course of business, the Company is subject to examination by federal and state jurisdictions, where
applicable. There are currently no pending tax examinations. The Company’s tax years are still open under
statute from 2012 to the present. Earlier years may be examined to the extent that tax credit or net operating loss
carryforwards are used in future periods. The resolution of tax matters is not expected to have a material effect on
the Company’s consolidated financial statements.

17. Quarterly Financial Data (unaudited)

The following information has been derived from unaudited consolidated financial statements that, in the

opinion of management, include all recurring adjustments necessary for a fair statement of such information.

Three Months Ended

March 31,
2015

June 30,
2015

September 30,
2015

December 31,
2015

Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss per common share—basic and diluted . . .
Weighted average common shares—basic and

$ 9,014,943
(9,173,523)

$ 12,543,819
(12,436,594)

$ 11,025,625
(11,136,412)

$

(0.43) $

(0.58) $

(0.52) $

$ 13,478,689
(13,568,922)
(0.63)

diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,451,317

21,474,763

21,506,721

21,554,310

Three Months Ended

March 31,
2014

June 30,
2014

September 30,
2014

December 31,
2014

Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss per common share—basic and diluted . . .
Weighted average common shares—basic and

$ 6,434,760
(6,542,244)

$ 5,848,825
(5,930,602)

$ 6,962,319
(7,035,607)

$

(0.86) $

(0.38) $

(0.45) $

$ 7,741,370
(7,805,211)
(0.47)

diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,632,786

15,619,151

15,624,963

16,523,385

18. Subsequent Events

Restricted Common Stock Units

On January 4, 2016, the Company granted restricted common stock units with performance-based vesting

conditions to certain executives. The restricted stock units vest, and the underlying shares of common stock
become deliverable, in the event the Company receives approval from the U.S. Food and Drug Administration of
a new drug application for Zilretta (the “Milestone”). Depending on when and if the Milestone is achieved, the
maximum aggregate number of shares of the Company’s common stock available to be earned under the awards
is 189,300 with an approximate value of $3,445,000 as of the grant date. If the Milestone is not achieved prior to
July 1, 2018, the awards will not vest, will be forfeited in their entirety and no shares of common stock will be
delivered.

112

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We are responsible for maintaining disclosure controls and procedures, as defined in Rules 13a-15(e) and

15d-15(e) under the Exchange Act. Disclosure controls and procedures are controls and other procedures
designed to ensure that the information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the
SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our principal executive officer
and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Based on our management’s evaluation (with the participation of our principal executive officer and our
principal financial officer) of our disclosure controls and procedures as required by Rules 13a-15(e) and Rule
15d-15(e) under the Exchange Act, our principal executive officer and our principal financial officer have
concluded that our disclosure controls and procedures were effective to achieve their stated purpose as of
December 31, 2015, the end of the period covered by this report.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a
process designed under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America.

As of December 31, 2015, our management assessed the effectiveness of our internal control over financial

reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
in Internal Control-Integrated Framework (2013 Framework). Based on this assessment, our management
concluded that, as of December 31, 2015, our internal control over financial reporting was effective based on
those criteria. All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.

This annual report does not include an attestation report of our registered public accounting firm due to a

transition period established by the JOBS Act for emerging growth companies.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended
December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

113

Item 9B. Other Information

We expect that our 2016 annual meeting of stockholders, or the Annual Meeting, will be held on or about

June 15, 2016. To be considered for inclusion in the Company’s proxy materials for the Annual Meeting,
stockholder proposals must be submitted in writing between the date of this Annual Report and April 19, 2016, to
the attention of the Secretary of Flexion Therapeutics, Inc. at 10 Mall Road, Suite 301, Burlington, Massachusetts
01803. If stockholders wish to submit a proposal (including a director nomination) at the Annual Meeting that is
not to be included in our proxy materials for the Annual Meeting, the written request must be received by the
Secretary of Flexion Therapeutics, Inc. no later than the close of business on April 19, 2016. Stockholders are
also advised to review our Bylaws, which contain additional requirements about advance notice of stockholder
proposals and director nominations.

114

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item and not set forth below will be set forth in the section headed
“Election of Directors” and “Executive Officers” in our Proxy Statement for our 2016 Annual Meeting of
Stockholders, or Proxy Statement, to be filed with the SEC within 120 days after the end of the fiscal year ended
December 31, 2015, and is incorporated herein by reference.

We have adopted a written code of business conduct and ethics that applies to our directors, officers and

employees, including our principal executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. A current copy of the code is available on the Corporate
Governance section of our website, www.flexiontherapeutics.com. We intend to disclose on our website any
amendments to, or waivers from, our code of business conduct and ethics that are required to be disclosed
pursuant to SEC rules.

Item 11. Executive Compensation

The information required by this item will be set forth in the section headed “Executive Compensation” in

our Proxy Statement and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

The information required by this item will be set forth in the section headed “Security Ownership of Certain

Beneficial Owners and Management” in our Proxy Statement and is incorporated herein by reference.

The information required by Item 201(d) of Regulation S-K will be set forth in the section headed

“Executive Compensation” in our Proxy Statement and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be set forth in the section headed “Transactions With Related

Persons” in our Proxy Statement and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

The information required by this item will be set forth in the section headed “Ratification of Selection of
Independent Registered Public Accounting Firm” in our Proxy Statement and is incorporated herein by reference.

115

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) Documents filed as part of this report.

1. Financial Statements

The financial statements of Flexion Therapeutics, Inc. listed below are set forth in Item 8 of this report for

the year ended December 31, 2015:

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Operations and Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) . . .

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

85

86

87

88

89

90

2. Financial Statement Schedules

These schedules have been omitted because the required information is included in the consolidated

financial statements or notes thereto or because they are not applicable or not required.

3. Exhibits

For a list of exhibits filed with this Annual Report on Form 10-K, refer to the exhibit index. Each

management contract or compensatory plan or arrangement required to be identified by this item is so designated
in such list.

116

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 11th
day of March, 2016.

SIGNATURES

FLEXION THERAPEUTICS, INC.

By:

/s/ Michael D. Clayman, M.D.

Michael D. Clayman, M.D.

President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes

and appoints Michael D. Clayman, M.D. and Frederick W. Driscoll, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this
report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by

the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ Michael D. Clayman, M.D.
Michael D. Clayman, M.D.

President, Chief Executive Officer and
Member of the Board of Directors
(Principal Executive Officer)

March 11, 2016

/s/ Frederick W. Driscoll
Frederick W. Driscoll

/s/ Patrick J. Mahaffy
Patrick J. Mahaffy

/s/ Scott Canute
Scott Canute

/s/ Samuel D. Colella
Samuel D. Colella

/s/ Heath Lukatch, Ph.D.
Heath Lukatch, Ph.D.

/s/ Sandesh Mahatme
Sandesh Mahatme

/s/ Ann Merrifield
Ann Merrifield

/s/ Alan Milinazzo
Alan Milinazzo

Chief Financial Officer
(Principal Financial and Accounting Officer)

March 11, 2016

Chairman of the Board of Directors

March 11, 2016

Member of the Board of Directors

March 11, 2016

Member of the Board of Directors

March 11, 2016

Member of the Board of Directors

March 11, 2016

Member of the Board of Directors

March 11, 2016

Member of the Board of Directors

March 11, 2016

Member of the Board of Directors

March 11, 2016

117

EXHIBIT INDEX

Unless otherwise indicated, all references to previously filed Exhibits refer to Flexion’s filings with the
Securities and Exchange Commission, or SEC, under File No. 001-36287. Any Exhibit that was not previously
filed is filed herewith.

Exhibit
Number

3.1

3.2

4.1

4.2

4.3

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

10.9

10.10

10.11

Description

Amended and Restated Certificate of Incorporation of Flexion (Exhibit 3.1, Current Report on
Form 8-K filed on February 19, 2014)

Amended and Restated Bylaws of Flexion (Exhibit 3.2, Current Report on Form 8-K filed on
February 19, 2014)

Form of Common Stock Certificate of Flexion (Exhibit 4.1, Registration Statement on Form S-1
(File No. 333-193233), as amended, filed on January 29, 2014)

Amended and Restated Investor Rights Agreement, dated December 3, 2012, between Flexion and
certain of its stockholders (Exhibit 4.2, Registration Statement on Form S-1 (File No. 333-193233)
filed on January 8, 2014)

Conversion, Amendment and Waiver Agreement, dated January 27, 2014, between Flexion and
certain of its stockholders (Exhibit 4.3, Registration Statement on Form S-1 (File No. 333-193233),
as amended, filed on January 29, 2014)

Management Contracts and Compensatory Plans

Form of Indemnity Agreement between Flexion and its directors and officers (Exhibit 10.1,
Registration Statement on Form S-1 (File No. 333-193233) filed on January 8, 2014)

Flexion Therapeutics, Inc. 2009 Equity Incentive Plan and Forms of Stock Option Agreement, Notice
of Exercise and Stock Option Grant Notice thereunder (Exhibit 10.2, Registration Statement on
Form S-1 (File No. 333-193233) filed on January 8, 2014)

Flexion Therapeutics, Inc. 2013 Equity Incentive Plan and Forms of Stock Option Agreement, Notice
of Exercise and Stock Option Grant Notice thereunder (Exhibit 10.3, Registration Statement on
Form S-1 (File No. 333-193233), as amended, filed on January 29, 2014)

Form of Restricted Stock Unit Award Agreement and Restricted Stock Unit Grant Notice under the
Flexion Therapeutics, Inc. 2013 Equity Incentive Plan (Exhibit 99.1, Current Report on Form 8-K
filed on December 22, 2015)

Flexion Therapeutics, Inc. 2013 Employee Stock Purchase Plan (Exhibit 10.4, Registration Statement
on Form S-1 (File No. 333-193233), as amended, filed on January 29, 2014)

Flexion Therapeutics, Inc. Non-Employee Director Compensation Policy, as revised

Amended and Restated Offer Letter between Flexion and Michael D. Clayman, M.D. (Exhibit 10.6,
Registration Statement on Form S-1 (File No. 333-193233) filed on January 8, 2014)

Amendment to Amended and Restated Offer Letter between Flexion and Michael D. Clayman, M.D.
(Exhibit 10.7, Annual Report on Form 10-K filed on March 28, 2014)

Amended and Restated Offer Letter between Flexion and Neil Bodick, M.D., Ph.D. (Exhibit 10.7,
Registration Statement on Form S-1 (File No. 333-193233) filed on January 8, 2014)

Amendment to Amended and Restated Offer Letter between Flexion and Neil Bodick, M.D., Ph.D.
(Exhibit 10.9, Annual Report on Form 10-K filed on March 28, 2014)

Amended and Restated Offer Letter between Flexion and Fred Driscoll (Exhibit 10.9, Registration
Statement on Form S-1 (File No. 333-193233) filed on January 8, 2014)

Exhibit
Number

10.12

10.13

10.14*

10.15*

10.16*

10.17*

10.18

10.19

10.20

10.21+

10.22*

10.23*

10.24

21.1

23.1

24.1

31.1

31.2

32.1

32.2

Description

Amendment to Amended and Restated Offer Letter between Flexion and Fred Driscoll (Exhibit
10.11, Annual Report on Form 10-K filed on March 28, 2014)

Flexion Therapeutics, Inc. Change in Control Bonus Plan (Exhibit 99.1, Current Report on Form 8-
K filed on September 2, 2014)

Other Agreements

Out-License Agreement, dated June 12, 2009, between Flexion (as successor in interest to Flexion
Therapeutics AG) and AstraZeneca AB (Exhibit 10.10, Registration Statement on Form S-1 (File
No. 333-193233), as amended, filed on January 29, 2014)

Letter Agreement, dated December 3, 2012, between Flexion and AstraZeneca AB (Exhibit 10.12,
Registration Statement on Form S-1 (File No. 333-193233) filed on January 8, 2014)

Out-License Agreement, dated September 3, 2010, between Flexion and AstraZeneca AB (Exhibit
10.11, Registration Statement on Form S-1 (File No. 333-193233), as amended, filed on January 29,
2014)

Letter Agreement, dated March 17, 2014, between Flexion and AstraZeneca AB (Exhibit 10.7,
Quarterly Report on Form 10-Q filed on May 12, 2014)

Lease, dated February 22, 2013, between Flexion and The Trustees of Mall Road Trust (Exhibit
10.14, Registration Statement on Form S-1 (File No. 333-193233) filed on January 8, 2014)

First Amendment of Lease, dated July 13, 2015, between Flexion and CIP II/RJK 10-20 BMR
Owner, LLC (as successor in interest to The Trustees of Mall Road Trust) (Exhibit 10.3, Quarterly
Report on Form 10-Q filed on November 9, 2015)

Second Amendment of Lease, dated December 15, 2015, between Flexion and CIP II/RJK 10-20
BMR Owner, LLC

Exclusive License Agreement, dated July 25, 2014, between Flexion and Southwest Research
Institute

Manufacturing and Supply Agreement, dated July 31, 2015, between Flexion and Patheon UK
Limited (Exhibit 10.1, Quarterly Report on Form 10-Q filed on November 9, 2015)

Technical Transfer and Service Agreement, dated July 31, 2015, between Flexion and Patheon UK
Limited (Exhibit 10.2, Quarterly Report on Form 10-Q/A filed on January 26, 2016)

Credit and Security Agreement, dated August 4, 2015, between Flexion and MidCap Financial
Trust, as administrative agent, and the Lenders listed on the Credit Facility Schedule attached
thereto (Exhibit 10.4, Quarterly Report on Form 10-Q filed on November 9, 2015)

Subsidiaries of Flexion Therapeutics, Inc.

Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm

Power of Attorney (reference is made to the signature page thereto)

Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934

Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934

Certification of Principal Executive Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the
Exchange Act and 18 U.S.C. Section 1350

Certification of Principal Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the
Exchange Act and 18 U.S.C. Section 1350

101.INS

XBRL Instance Document

Exhibit
Number

Description

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

+

*

Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions
have been filed separately with the SEC.
Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions
have been filed separately with the SEC.