UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(cid:4) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
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
Common Stock, par value $0.001 per share
Name of each exchange on which registered
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 (cid:4) No (cid:3).
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 (cid:4) No (cid:3).
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 (cid:3) No (cid:4)
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 (cid:3) No (cid:4)
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. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or
emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:4)
Non-accelerated filer (cid:4) (Do not check if a smaller reporting company)
Emerging growth
company
(cid:3)
Accelerated filer
Smaller reporting company
(cid:3)
(cid:4)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:3)
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes (cid:4) No (cid:3)
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, 2017 was approximately $557,701,832.
The number of outstanding shares of the registrant’s common stock as of March 1, 2018 was 37,619,452.
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 2018 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, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
FLEXION THERAPEUTICS, INC.
FORM 10-K—ANNUAL REPORT
For the Fiscal Year Ended December 31, 2017
TABLE OF CONTENTS
PART I
Item 1.
Business ................................................................................................................................................
Item 1A. Risk Factors ..........................................................................................................................................
Item 1B. Unresolved Staff Comments.................................................................................................................
Item 2.
Properties ..............................................................................................................................................
Item 3.
Legal Proceedings.................................................................................................................................
Item 4. Mine Safety Disclosures .......................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities...................................................................................................................................
Item 6.
Selected Financial Data ........................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations...............
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............................................................
Item 8.
Financial Statements and Supplementary Data ....................................................................................
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .............
Item 9A. Controls and Procedures .......................................................................................................................
Item 9B. Other Information .................................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance ...................................................................
Item 11. Executive Compensation ......................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ..................................................................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence .....................................
Item 14. Principal Accounting Fees and Services...............................................................................................
PART IV
Item 15. Exhibits, Financial Statement Schedules .............................................................................................
Item 16.
10-K Summary.....................................................................................................................................
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. We have 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 generated
limited revenue from ZILRETTA®, and have not received regulatory approval for any other product candidates; we
may require additional capital prior to completing development and commercializing any of our product candidates
in development; we may be unable to successfully commercialize ZILRETTA or any of our other product
candidates; we rely on third parties to manufacture and conduct the clinical trials of ZILRETTA and our
development-stage product candidates, which could limit our commercialization efforts or delay or limit their future
development or 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 Therapeutics Securities Corporation.
Overview
We are a biopharmaceutical 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. On October 6, 2017, the U.S. Food and Drug Administration, or FDA, approved
ZILRETTA® (triamcinolone acetonide extended-release injectable suspension), as the first and only extended-
release, intra-articular, or IA (meaning in the joint), injection indicated for the management of OA pain of the knee.
ZILRETTA is a non-opioid therapy that employs our proprietary microsphere technology to provide pain relief over
12 weeks. We established a full field sales force of Musculoskeletal Business Managers (MBMs) following
ZILRETTA’s approval. The MBMs were trained, certified and deployed in the field as of November 20, 2017, when
they began the process of informing and educating prescribing clinicians about ZILRETTA.
ZILRETTA combines a commonly administered steroid, triamcinolone acetonide, or TA, with poly lactic-co-
glycolic acid, referred to as PLGA, delivering a 32 mg dose of TA to provide extended therapeutic concentrations in
the joint and persistent analgesic effect. Both the magnitude and duration of pain relief provided by ZILRETTA in
clinical trials were clinically meaningful with the magnitude of pain relief amongst the largest seen to date in OA
clinical trials. ZILRETTA is not intended for repeat administration, as the efficacy and safety of repeat
administration of ZILRETTA have not been evaluated. The overall frequency of treatment-related adverse events in
these trials was similar to those observed with placebo and no drug-related serious adverse events were reported.
Based on the strength of our pivotal and other clinical trials, we believe that ZILRETTA represents an
important new treatment option for the millions of patients in the U.S. who are in need of safe and effective
extended relief from OA knee pain. ZILRETTA is uniquely distinguished by the following attributes:
(cid:129)
in the Phase 3 trial,
o
o
o
o
statistically significant pain relief against placebo (saline) as measured by the weekly mean of the
Average Daily Pain, or ADP, score:
(cid:3)
(cid:3)
demonstrated at week 12, the primary endpoint, a p-value of <0.0001, 2-sided, with benefits
extending through week 16; and
at each week beginning at week 1 and continuing through week 12 nearly 60% of patients
reported no pain or mild pain;
statistically significant change from baseline as compared to placebo in weekly ADP intensity score
through week 12 as measured by the area under effect curve (p<0.0001) (demonstrating a 50%
reduction from baseline);
numeric improvement when compared with placebo and immediate-release TA at each time point
through 12 weeks on exploratory measures – WOMAC A (pain), WOMAC B (stiffness) and
WOMAC C (function) and the Knee Injury and Osteoarthritis Outcome Score (KOOS) quality of
life subscale;
reduced rescue medicine consumption compared with placebo and immediate-release TA
(exploratory endpoint); and
o was superior to placebo, but the difference between ZILRETTA and immediate-release TA as
measured by ADP was not statistically significant;
(cid:129)
an acceptable safety profile with side effects similar to placebo;
4
(cid:129)
(cid:129)
statistically significant (p<0.05, 2-sided) reduction in the rise of blood glucose compared to that
observed following immediate-release TA injection in patients with Type 2 diabetes who also have knee
OA as measured by change in average blood glucose from baseline to 72 hours post injection; and
persistent concentrations of drug in the joint.
In summary, ZILRETTA has demonstrated significant, durable relief for OA knee pain and, as such, addresses
an important unmet need among patients, physicians and healthcare payers. We believe that ZILRETTA has the
potential to be prescribed as a first-line IA medicine for OA knee pain.
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 more than 30 million Americans, and these numbers are expected to grow as a
result of aging, obesity and sports injuries. 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 total joint arthroplasty, or TJA.
Because there is no cure for OA, controlling pain and delaying surgery are the primary goals of prescribing
clinicians. 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 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 they leave the joint
rapidly and often fail to produce or maintain clinically meaningful pain relief. Physicians may prescribe opioids,
which in addition to the serious 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 limitations, many OA patients experience persistent and worsening pain, which often culminates in
the decision to have 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.
According to IQVIA, in 2016 approximately 5 million patients in the United States received an IA injection
treatment for knee OA with approximately 4.3 million of these patients being treated with immediate-release
steroids. Furthermore, despite negative guidance from prominent medical societies, including the American
Academy of Orthopedic Surgeons and Osteoarthritis Research Society International that hyaluronic acid (HA) is an
ineffective treatment for knee OA, and the growing number of payers that no longer reimburse for the entire class of
HA products, HA sales in the United States were approximately $977 million in 2017, with a cost per treatment
ranging from $430 to $1,300. Our market research indicates that, given the limitations of immediate-release steroids
and HA, physicians are open to new treatment options which can provide their patients with extended pain relief.
Our pipeline includes FX101 and FX201. FX101 is a PLGA-based extended-release formulation of
fluticasone, a well-established corticosteroid, which aims to provide at least six months of pain relief from OA of
large joints. FX101 is a pre-clinical stage program. The results of our ongoing and planned early studies will
inform our decision on the next steps of the development process. FX201 is a gene therapy candidate designed to
stimulate the production of an anti-inflammatory protein, interleukin-1 receptor antagonist (IL-1Ra), with the goal of
providing at least one year of pain relief from OA of the knee. Based on its mechanism of action, we believe FX201
also has the potential to possibly arrest disease progression. FX201 is also a pre-clinical stage program, and subject
to positive data from our ongoing and planned early studies and the initiation and successful completion of Good
Laboratory Practice (GLP) toxicology studies, we plan to file an Investigational New Drug Application (IND) in
2019.
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We have worldwide commercialization rights for ZILRETTA and our product candidates, FX101 and FX201.
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. 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. In
addition, we own or have rights to various trademarks, copyrights and trade names used in our business, including
FLEXIONTM and ZILRETTA®. Our logos and trademarks are the property of Flexion Therapeutics, Inc. All other
brand names or trademarks appearing in this report are the property of their respective holders. Use or display by us
of other parties’ trademarks, trade dress, or products in this report is not intended to, and does not, imply a
relationship with, or endorsement or sponsorship of us, by the trademark or trade dress owners.
Our Strategy
Our goal is to cost-effectively develop and commercialize novel, locally administered medicines that can
safely and effectively address significant unmet medical needs. The principal elements of our strategy include the
following:
•
•
•
Focus initially on novel biopharmaceutical candidates that provide long-lasting analgesia locally
while minimizing the potential for systemic side effects. We are currently focusing on anti-
inflammatory and analgesic therapies for the treatment of patients with musculoskeletal conditions,
beginning with OA. Many OA patients will eventually require IA injection therapies to control their
pain as the disease progresses. Immediate-release IA steroids 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 a recurrence in, or increasing,
pain during that time. While some patients may obtain benefit from HA injections, they are not
recommended for OA pain by the American Academy of Orthopaedic Surgeons (AAOS) based on a
lack of efficacy. ZILRETTA was specifically designed to provide persistent and effective OA pain relief
with an acceptable safety profile. It is formulated using our proprietary PLGA-based microsphere
technology to slowly and continuously release drug in the joint for over 12 weeks, avoiding significant
plasma concentrations of drug.
Build a robust pipeline of additional locally administered therapies to address musculoskeletal
conditions. We seek to build a pipeline of additional product candidates and to mitigate development
risk by selecting product candidates that have at least demonstrated efficacy in animal models of disease
or have validated mechanisms of action. In 2017, we established the Flexion Innovation Lab in
Woburn, Massachusetts to support our development activities, including our two active pipeline
programs, FX101 and FX201. We aim to further build the pipeline through internal development and
the selective addition of external opportunities.
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 we can effectively commercialize
ZILRETTA in the United States with our own sales and marketing organization, and thereby retain
more of the commercial value of this product. We established a full field sales force of MBMs following
ZILRETTA’s approval on October 6, 2017. The MBMs were trained, certified and deployed in the field
as of November 20, 2017, when they began the process of informing and educating prescribing
clinicians about ZILRETTA. While we believe that the United States represents the most attractive
market for ZILRETTA, we continue to evaluate opportunities and potential partnerships to develop and
commercialize ZILRETTA in territories outside the United States where we believe there is the
potential for value-based pricing and reimbursement.
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Osteoarthritis
Overview
OA, also referred to as degenerative joint disease, is the most common joint disease in the United States
according to the U.S. Centers for Disease Control, affecting more than 30 million Americans. These numbers are
only expected to grow in the years ahead as a result of aging, obesity and sports injuries.
• With the U.S. population between the ages of 45 and 64 having grown 32% from 2000 through 2010
and accounting for 26% of the total population, we expect changing demographics will likely contribute
to a growing number of OA patients.
•
•
•
•
Approximately 35% 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
later in life by more than fivefold.
OA accounts for over $185 billion of annual healthcare expenditures, which does not include loss of
productivity costs.
As reported in an Osteoarthritis Research Society International (OARSI) white paper (Nov 2016),
“subjects in the US with symptomatic radiographic knee OA were 23% more likely to die prematurely
than people free from OA independent of age, sex, and race”.
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.
OA is a progressive disease for which there is no cure. As a result, current treatments are intended to address
the 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 the
development of new therapies which can meaningfully and durably relieve pain and improve function could
potentially delay TJA.
Common Treatments for OA
In early-stage 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. Physicians
may also treat OA pain with opioids, which are prescribed to approximately 50% of patients suffering from OA
pain. However, they have very serious drawbacks and are generally considered to be a suboptimal therapy for
chronic non-cancer pain, like that associated with osteoarthritis.
When non-pharmacologic therapy and oral pain medications prove inadequate, physicians typically transition
patients to IA injections. Immediate-release steroids have historically served as the first line IA therapy, and when
these no longer provide sufficiently durable pain relief, patients may progress to IA HA, a significantly more
expensive therapy with only marginally greater effect than placebo. TA, the corticosteroid used in ZILRETTA, is
amongst the most commonly prescribed IA corticosteroid injections.
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% of patients are dissatisfied with the outcome of this procedure. The
earlier a patient receives TJA, the more likely it is that the patient will need repeat replacement surgery in following
years. In 2010, inpatient costs exceeded $13 billion per year in the United States for total knee arthroplasty alone
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and based on some estimates the number of total knee arthroplasties is expected to increase six-fold to 3.5 million
procedures per year between 2011 and 2030. Our own market research has indicated that healthcare payers would be
willing to reimburse additional OA therapies that have the potential to delay the need for TJA.
Limitations of Common Treatments for OA
Oral therapies, such as NSAIDs, may offer adequate analgesia for early-stage OA pain, but they may be
associated with serious side effects such as gastrointestinal bleeding, cardiovascular events and other adverse events.
For example, SNRIs may have a role in worsening depression and the emergence of suicidality in certain patients. In
addition to their serious side effects, oral drugs may provide limited pain relief and eventually can become
insufficient to control OA pain for many patients as the disease progresses.
IA therapies, including immediate-release steroids and HA preparations, are generally well-tolerated but
provide pain relief that is often insufficient or inadequate in duration. Historically, all IA steroid therapies approved
for OA are immediate-release suspensions or solutions that leave the joint within hours to days, and they are rapidly
absorbed systemically, which may result in undesirable side effects. For example, IA immediate-release steroid
injections are associated with a rapid 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
clinical practice dictate that IA steroid suspensions not be administered more frequently than once every three
months. Based on internal analysis, we believe approximately 44% of patients receiving IA immediate-release
steroids are unsatisfied with the duration of benefit.
Despite U.S. sales of approximately $977 million in 2016 and 2017 sales estimated to exceed $1 billion, 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 non-operative management of knee OA published in May 2013, the AAOS concluded that data from
then-current published studies did not show clinically meaningful effectiveness for HA injections. As a result, the
guidelines do not recommend HA treatment for symptomatic knee OA due to lack of efficacy and, most recently,
certain insurance carriers are no longer providing policy coverage of HA.
While the consequences from the overuse and abuse of opioids are well-known, these powerful medicines are
still commonly prescribed for OA related pain, despite the fact that they are not an effective treatment for this
chronic condition. A recent study estimated that as many as 70% of patients who are prescribed a medicine for OA
pain will receive an opioid, and we believe this is a reflection of the fact that physicians have so few effective
treatment options. We believe that the growing societal awareness of the risks posed by opioids may make new
treatment options attractive for patients and physicians seeking non-opioid alternatives. Beyond the significant
concerns related to the potential for overuse, abuse and unintentional overdose, opioid use is also associated with a
host of other serious side effects including, respiratory depression, hypotension, constipation, cardiac events and,
increasingly, death.
The Flexion Extended-Release Technology
Our extended-release technology allows us to incorporate active pharmaceutical ingredients in PLGA
microspheres. We believe we are the first company to administer PLGA microspheres into a human joint. PLGA is a
proven extended-release delivery vehicle that is metabolized to carbon dioxide and water as it releases drug in the
IA space and is used in other approved drug products and surgical devices. The technology is designed to enable
novel formulations of pharmaceuticals by providing extended-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 concentrations of drug in the joint, while minimizing systemic
exposure. Utilizing our PLGA microsphere technology, ZILRETTA is the first and only approved extended-release,
IA therapy for patients confronting OA-related knee pain.
We believe ZILRETTA and our 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
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ZILRETTA, with a patent term into 2031. The U.S. PTO has also issued two patents directed at the methods of
manufacturing and using ZILRETTA with patent terms into 2031. 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.
The Flexion Pipeline
Our pipeline strategy is to continue to study ZILRETTA in other areas and, if feasible, expand ZILRETTA’s
label to include additional indications and broaden its scope of administration, and build a robust pipeline of
additional locally administered therapies to address musculoskeletal conditions, with an initial focus on OA.
FX101 (fluticasone ER)
FX101 utilizes our proprietary microsphere technology to create an extended-release formulation of
fluticasone, a well-known corticosteroid, within a PLGA matrix. The approach builds on our deep experience and
expertise in developing and commercializing microsphere-based, extended-release therapies. We are assessing
whether FX101 holds the potential to deliver meaningful OA pain relief for at least six months. FX101 has been
designed to provide sustained duration of analgesia after local administration of extended release formulation, while
potentially minimizing systemic side effects. The results of our ongoing and planned early studies will inform our
decision on the next steps of for the program.
FX201
FX201 is an IA gene therapy candidate which is designed to induce the local production of interleukin-1
receptor antagonist (IL-1Ra), an anti-inflammatory protein. Following injection of FX201, its genetic material is
incorporated into local cells, and IL-1Ra is expressed in response to inflammation in the joint tissues. Inflammation
is a known cause of pain, and chronic inflammation is thought to play a major role in the progression of OA. By
persistently suppressing inflammation, FX201 has the potential to both reduce pain and possibly arrest disease
progression. Based on preclinical data, we believe a single injection of FX201 could enable expression of IL-1Ra in
an osteoarthritic joint for at least a year. Pending successful results from additional preclinical studies and our GLP
toxicology studies, we intend to file an IND and initiate a proof-of-concept clinical trial in 2019. We acquired the
rights to FX201 via a definitive agreement with GeneQuine Biotherapeutics GmbH, or GeneQuine, and have an
exclusive license to the underlying intellectual property rights for human use of FX201 from Baylor College of
Medicine.
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ZILRETTA – FDA Approved Product for the Management of OA Knee Pain
Regulatory Developments
On October 6, 2017, ZILRETTA (triamcinolone acetonide extended-release injectable suspension) received
approval from the FDA for the management of OA pain of the knee. ZILRETTA is the first and only approved
extended-release, IA therapy for OA knee pain. It is a non-opioid medicine that employs our proprietary
microsphere technology to provide proven pain relief over 12 weeks. The approval was based upon data from the
pivotal Phase 3 clinical trial, a randomized, double-blind study which evaluated 486 patients at 37 centers
worldwide.
ZILRETTA’s label reflects its strong safety profile and states the most commonly reported adverse reactions
(incidence ≥1%) in clinical studies included sinusitis, cough and contusions. We believe ZILRETTA’s extended-
release profile may also provide effective treatment for OA pain of the shoulder and OA pain of the hip and have
initiated a clinical trial to investigate it in these joints.
Summary of Active and Key Completed Clinical Trials
Prior to approval, we completed seven clinical trials evaluating ZILRETTA (also known as FX006) against
either immediate release triamcinolone acetonide crystalline suspension (TAcs), placebo (saline), or both in patients
with OA of the knee. In total, 424 patients were treated with a single IA injection (32mg) of ZILRETTA in those
trials.
We currently have three active ZILRETTA clinical trials:
•
•
•
In February 2017, we initiated an open-label, Phase 3b trial to evaluate the safety of repeat
administration of ZILRETTA in patients with OA of the knee. The 208 study participants received an
initial IA injection of ZILRETTA on day 1 followed by evaluation at weeks 12, 16, 20 and 24 to
determine their eligibility for a second IA injection of ZILRETTA. Participants who received a repeat
administration of ZILRETTA will be followed for a total of 52 weeks after the initial injection,
regardless of when the second injection was administered. At specified times throughout the study,
participants undergo physical examinations, knee assessments and X-rays.
In January 2018, we reported initial data showing that of the 205 evaluable patients, 95% (195/205)
experienced clinical benefit by week 12 following the initial injection of ZILRETTA, as determined by
self-assessment and with the agreement of their physician. In the trial, 92% (179/195) of eligible
patients received a second dose of ZILRETTA between weeks 12 and 24. The full study results are
expected in the third quarter of 2018.
In December 2017, we enrolled the first patient in a trial to evaluate the pharmacokinetics and safety of
concurrent injections of ZILRETTA in patients with bilateral OA of the knee. The open-label, Phase 2
study is randomized (1:1) with patients receiving either two IA injections of 32 mg ZILRETTA or two
40 mg injections of immediate-release TA. The study was fully enrolled with 24 patients in January
2018 and results are anticipated in the second quarter of 2018.
Also in December 2017, we announced a study to evaluate the pharmacokinetics and safety of
ZILRETTA in patients with OA of the shoulder or hip. Known as the "SHIP" study, patients are
randomized (1:1) to receive either a single IA injection of 32 mg ZILRETTA or 40 mg immediate-
release TA. The open-label, Phase 2 trial is expected to recruit approximately 48 patients in total,
comprised of 24 patients with OA of the shoulder and 24 patients with OA of the hip. We expect to
report top-line results of the study in the second half of 2018.
Key Completed Studies
In November 2016, we announced top-line results from a clinical trial to assess the effects of ZILRETTA on
the blood glucose levels of adults with OA of the knee who also have Type 2 (adult) diabetes. The objective of the
double-blind, randomized, parallel group, single-dose study was to examine if ZILRETTA had effects on blood
glucose levels that differ from immediate-release TA. Investigators from seven study sites enrolled 33 patients,
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randomized 1:1 to receive a single IA injection of 32 mg ZILRETTA or 40 mg immediate-release TA. Blood
glucose levels were evaluated for a total of three weeks (one week prior to injection and two weeks post injection)
using a continuous glucose monitoring device. Patients returned for follow-up visits at day 8, day 15 and day 43
(week 6). The primary endpoint compared the change in average glucose values from the period of 72 hours before
to the period of 72 hours after injection with ZILRETTA versus immediate-release TA. The data demonstrate that
ZILRETTA is associated with a statistically significant (p-value of <0.05, 2-sided) and clinically relevant reduction
in the rise of blood glucose compared to that observed following TA injection in patients who also have knee OA. In
clinical trials, the “p-value” is the probability that the result was obtained by chance. For example, a “p-value” of
less than 0.10 (or p<0.10) would indicate that there is a less than 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 February 2016, we announced top-line results from our pivotal ZILRETTA study, a Phase 3 clinical trial
that evaluated 486 patients with moderate to severe OA knee pain. This Phase 3 trial randomized patients 1:1:1 to
ZILRETTA 32 mg, immediate release TA 40 mg or placebo (saline) injection. It met its primary endpoint at week
12, demonstrating highly statistically significant (p<0.0001) pain relief against placebo (saline). In addition,
ZILRETTA achieved a statistically significant change from baseline as compared to placebo in weekly ADP
intensity score through week 12 as measured by the area under effect curve (p<0.0001) (demonstrating a 50%
reduction from baseline). It also delivered persistent analgesia against placebo in this trial at each of weeks 1
through 16. Results showed ZILRETTA was superior to placebo on ADP, however a secondary exploratory analysis
showed a numeric but not statistically significant difference between ZILRETTA and immediate-release TA for the
change from baseline at Week 12 in weekly mean ADP.
In pre-specified exploratory analyses, compared to placebo and immediate-release TA, ZILRETTA also
demonstrated numeric improvement 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. WOMAC is a validated, widely accepted
questionnaire (in our surveys over 90% of treating orthopedists are familiar with WOMAC whereas only
approximately 10% are familiar with the Numeric Rating Scale which forms the basis for the ADP determination)
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. 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 have submitted the results, which have been accepted, for
publication in a peer-reviewed medical journal.
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 creates a competitive
advantage. The technology is designed to enable novel formulations of pharmaceuticals by providing extended-
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.
We utilize contract manufacturers to produce the drug substances and drug products used in ZILRETTA.
Manufacture of PLGA microspheres is a complex process and there are a limited number of contract manufacturing
sites with PLGA experience. Our proprietary injectable IA extended-release technology allows us to incorporate
pharmaceuticals in PLGA microspheres, such as TA, in the case of ZILRETTA, and fluticasone, in the case of
FX101, as well as potentially other product candidates. Following extensive development programs, we have
established that a single injection of ZILRETTA sustains local concentrations of TA in the joint for several months.
The ZILRETTA microsphere PLGA formulation has gone through numerous iterations and has been optimized to
release the 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.
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The active pharmaceutical ingredient in ZILRETTA, TA, is manufactured and supplied by Farmabios SpA in
accordance with current good manufacturing practice, or cGMP, standards. This supplier is subject to regular
inspections by the FDA. The PLGA material used in the manufacture of ZILRETTA is supplied by Evonik
Corporation, or Evonik. In November 2016, we entered into a Supply Agreement with Evonik for the purchase of
PLGA for clinical and commercial supply of ZILRETTA. The initial term of the Supply Agreement is until July
2021 and will renew for two successive two year terms upon mutual written consent by both parties. Under the
Supply Agreement, we are bound to purchase PLGA from Evonik at certain minimum purchase amounts, which
decrease over time, and at a specified price per gram, subject to adjustment from time to time, including due to
changes in price indices and in the event the initial term of the Supply Agreement is extended. Upon termination of
the Supply Agreement (other than termination due to the bankruptcy of either Evonik or us) we are obligated to pay
the costs associated with the binding supply forecast provided to Evonik.
In August 2015, we entered into a Manufacturing Agreement with Patheon U.K. Limited, or Patheon, for the
manufacture of clinical and commercial supplies of ZILRETTA finished drug product. In connection with the
agreement, Patheon undertook certain technical transfer activities and construction services to prepare its United
Kingdom facility for the manufacture of ZILRETTA in dedicated manufacturing suites. The initial term of our
Manufacturing Agreement with Patheon is until October 2027. 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 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.
Commercial Strategy
We have established a commercial infrastructure designed to drive the adoption and sales of ZILRETTA with
the approximately 9,500 prescribers who treat approximately 70% of patients diagnosed with OA pain of the knee
who receive an IA treatment. Of these prescribers, approximately 80% are orthopedists and rheumatologists. We
hired our full complement of MBMs immediately following ZILRETTA’s approval on October 6, 2017. The MBMs
were trained, certified and deployed in the field as of November 20, 2017, when they began the process of informing
and educating prescribing clinicians about ZILRETTA. We distribute ZILRETTA solely through a limited network
of contracted party specialty distributors and one specialty pharmacy. While we believe that the United States
represents the most attractive market for ZILRETTA, we continue to evaluate opportunities and potential
partnerships to develop and commercialize ZILRETTA in territories outside the United States where we believe
there is the potential for value-based pricing and reimbursement.
Of patients who are treated for OA pain of the knee with an IA injection, we estimate that 55% receive IA
injections from orthopedic surgeons. Approximately 8% of patients receive IA injections from physical medicine
and rehabilitation (PM&R) specialists and rheumatologists, and approximately 7% of patients are treated by sports
medicine specialists. Approximately 12% are treated by primary care physicians. The remaining 18% of IA
injections are administered by a wider array of providers, including physician’s assistants and nurse practitioners.
Competition
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, medical device 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 our ability to develop and commercialize
treatment options that make a meaningful difference for patients with musculoskeletal conditions, beginning with
OA.
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The key competitive factors that could affect the success of ZILRETTA’s launch are likely to be efficacy,
safety, price and the availability of reimbursement from government and other third-party payers. Immediate-release
steroids and HA are currently the two marketed classes of IA products that compete directly with ZILRETTA.
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.
In addition to marketed IA medications for OA, other companies have OA medical devices and product
candidates in advanced stages of clinical development. These IA products include:
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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.
Halyard Health, Inc.’s COOLIEF, which is a Cooled Radiofrequency (RF) device used to ablate sensory
nerves. In April 2017, Halyard received FDA clearance for COOLIEF to treat patients with chronic
moderate to severe OA knee pain and has a trial underway comparing COOLIEF to HA injection
(Synvisc-One® (hylan G-F 20)). The estimated primary completion date is Q2 2019.
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. We believe Invossa is planning to initiate Phase 3 clinical trials in
the U.S. in 2018.
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. Ampio stated that
Ampion is in Phase 3 development and has not announced a timeline for potentially submitting a BLA.
Centrexion Therapeutics Corporation’s CNTX-4975, which is a synthetic, ultra-pure injection of trans-
capsaicin. In February 2018, Centrexion announced that the first patient was treated in a Phase 3 clinical
trial for CNTX-4975, and according to clinicaltrials.gov, the study is expected to complete in February
2020.
• We believe that programs such as Orthotrophix’s TPX-100, Merck Serono’s sprifermin FGF-18,
Abbvie’s ABT-981, Menarini’s MEN16132, Dong-A’s DA-5202, Ember Therapeutics BMP-7,
Samumed’s SM04690, and Allergan, Inc.’s botulinum toxin, have not yet entered Phase 3 clinical trials.
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Eupraxia’s EP-104 is a Phase 1 therapy for knee OA that combines an unapproved carrier technology
(Plexis) with a steroid (fluticasone).
Taiwan Liposome Company’s TLC599, which is a liposomal formulation of dexamethasone sodium
phosphate. TLC599 is currently in Phase 2 clinical development.
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.
A number of investigational nerve growth factor antibodies are in development. Regeneron’s fasinumab
and Pfizer and Eli Lilly’s tanezumab are both in Phase 3 development.
Intellectual Property/Patents and Proprietary Rights
Intellectual Property and Exclusivity
We seek to protect ZILRETTA and our product candidates and 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 ZILRETTA and 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 January 31, 2018, we owned three U.S. issued patents, two pending U.S. applications, and counterpart
foreign patents and patent applications, all directed to ZILRETTA. One issued U.S. patent directed to ZILRETTA
relates to its composition of matter and has an expiration date in 2031. A second issued U.S. patent directed to
ZILRETTA relates to methods of manufacturing ZILRETTA and has an expiration date in 2031. A third issued U.S.
patent directed to ZILRETTA relates to methods of using ZILRETTA 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. The patents directed to ZILRETTA’s composition of matter and methods of using
ZILRETTA are listed in the FDA Orange Book. The two pending U.S. applications directed at ZILRETTA, if
resulting in issued patents, could provide additional claims expiring in 2031 and 2037.
During 2017, we expanded our patent portfolio with additional granted patents related to ZILRETTA outside
the United States. In 2017, we had patents granted in Australia, Canada, China, Indonesia and Singapore further
expanding to the scope of the previously granted patents in Australia, Japan, New Zealand, Saudi Arabia, South
Africa, Taiwan and Ukraine. Generally, these foreign patents are directed to compositions of matter for ZILRETTA,
methods of manufacturing ZILRETTA and/or methods of using ZILRETTA, and are similar in scope to the
protection in the United States described above. In addition, we have applications pending in Europe and additional
countries throughout the world directed to ZILRETTA and related inventions.
We have also exclusively licensed issued patents, owned by SwRI, directed to our proprietary microsphere
manufacturing technology used in the production of ZILRETTA. These patents are scheduled to expire in 2025.
As of January 31, 2018, we also have one pending Patent Cooperation Treaty patent application directed to the
formulation comprising our FX101 product candidate, as well as one pending U.S. provisional patent application
related to FX101. In addition, we have exclusively licensed patents and patent applications owned by Baylor
College of Medicine for human applications directed to our FX201 product candidate. The Baylor patents are issued
in China and Europe, with expiry dates in 2032, and pending in Australia, Eurasia, India, Japan and the U.S.
Finally, we have other patent applications directed to formulations and/or uses of compounds that are not directly
relevant to ZILRETTA or 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 released 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 extended-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 ZILRETTA 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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Intellectual Property Agreements
Southwest Research Institute Manufacturing® (SwRI) License
In July 2014, we executed an exclusive worldwide licensing agreement with SwRI to utilize proprietary
microsphere manufacturing technologies for production of our extended-release drug candidates, including
ZILRETTA. The SwRI technologies employ a uniquely controlled and continuous atomizing technology that
facilitated 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. We have no further payment
obligations following the amendment executed by the parties in February 2017 and the license remains in effect
through patent term expiry.
FX201 Related Agreements
In December 2017, we entered into a definitive agreement with GeneQuine to acquire the global rights to
FX201. As part of the asset purchase transaction with GeneQuine, we made an upfront payment of $2 million. We
may also be required to make additional milestone payments during the development of FX201, including up to $8.7
million through Phase 2 proof of concept (PoC) and, following successful PoC, up to an additional $54 million in
development and global regulatory approval milestone payments. As part of the transaction, we became the direct
licensee of certain underlying Baylor College of Medicine (Baylor) patents and other proprietary rights related to
FX201 for human applications. The Baylor license agreement grants us an exclusive, royalty-bearing, world-wide
right and license (with a right to sublicense) for human applications under its patent and other proprietary rights
directly related to FX201, with a similar non-exclusive license to certain Baylor intellectual property rights that are
not specific to FX201. The license agreement with Baylor includes a low single-digit royalty on net sales of FX201
and requires us to use reasonable efforts to develop FX201 according to timelines set out in the license agreement.
In December 2017, we also entered into a Master Production Services Agreement with SAFC Carlsbad, Inc., a part
of MilliporeSigma, for the manufacturing of pre-clinical and initial clinical supplies of FX201.
Termination of FX007 Agreement
On March 5, 2018, we sent AstraZeneca AB notice that we are terminating the Out-License Agreement
between the parties, dated as of September 13, 2010, related to our FX007 pyrazole formulation development
program. Pursuant to the terms of the Out-License Agreement, the termination will be effective three months after
our delivery of the notice. As previously disclosed, we have discontinued internal development of FX007. Upon
termination of the Out-License Agreement, our rights pertaining to FX007 will revert to AstraZeneca and our
milestone, royalty and patent maintenance obligations under the agreement will cease.
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 and commercializing.
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U.S. Biopharmaceutical Product Development Process
In the United States, the FDA regulates biopharmaceutical products under the Federal Food, Drug, and
Cosmetic Act, or FDCA, and implementing regulations. Biopharmaceutical products 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. The process required by the FDA before a biopharmaceutical
product may be marketed in the United States generally involves the following:
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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 Council for Harmonization, or ICH, GCP
guidelines, to establish the safety and efficacy of the proposed biopharmaceutical product for its
intended use;
submission to the FDA of an NDA for a proposed new drug product or a Biologics License Application,
or BLA, for a biological product;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the
biopharmaceutical product 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
biopharmaceutical product’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 or BLA; and
FDA review and approval or licensure of the NDA or BLA.
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 biopharmaceutical product
candidate enters the nonclinical 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 biopharmaceutical product candidate. The conduct of the preclinical tests must
comply with federal regulations and requirements including GLP. The 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 application. 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 biopharmaceutical product candidate at any time
before or during clinical trials due to safety concerns or non-compliance.
Clinical trials involve the administration of the biopharmaceutical product 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
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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 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.
Clinical trials for biopharmaceutical product candidates are typically conducted in humans in three sequential
phases that may overlap. In Phase 1 clinical trials, the biopharmaceutical product is initially introduced into healthy
human subjects and tested for safety or adverse effects, dosage, tolerance, metabolism, distribution, excretion and
clinical pharmacology. In Phase 2 clinical trials, the biopharmaceutical product is evaluated in a limited patient
population to identify possible adverse side effects and safety risks, evaluate preliminarily the efficacy of the
biopharmaceutical product for specific targeted indications and determine dosage tolerance, optimal dosage and
dosing schedule for patients having the specific disease. Once a biopharmaceutical product shows evidence of
effectiveness and is found to have an acceptable safety profile in Phase 2 evaluations, Phase 3 clinical trials are
undertaken to more fully evaluate clinical outcomes. In Phase 3 clinical trials, the biopharmaceutical product is
administered to an expanded patient population in adequate and well-controlled trials to generate sufficient data to
statistically confirm the efficacy and safety of the biopharmaceutical product for approval, to establish the overall
risk-benefit profile of the biopharmaceutical product and to provide adequate information for its labeling.
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 biopharmaceutical product 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
biopharmaceutical product 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 biopharmaceutical product 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 biopharmaceutical
product candidate and, among other things, the manufacturer must develop methods for testing the safety, identity,
strength, quality and purity of the final biopharmaceutical product. Additionally, appropriate packaging must be
selected and tested and stability studies must be conducted to demonstrate that the biopharmaceutical product
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 biopharmaceutical product,
proposed labeling and other relevant information are submitted to the FDA as part of an NDA or BLA 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
or BLA. 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 or BLA is subject to the payment of substantial user fees; a waiver of
such fees may be obtained under certain limited circumstances.
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The FDA reviews all NDAs and BLAs submitted before it accepts them for filing and may request additional
information rather than accepting the application for filing. Once the application is accepted for filing, the FDA
begins an in-depth review. 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 for a new molecular entity in which to complete its initial
review and respond to the applicant, and eight months for a priority review application. 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 applications. The review process and the
PDUFA goal date may be extended by additional three month review periods whenever the FDA requests or the
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 or BLA 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
biopharmaceutical 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 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 biopharmaceutical product. If the FDA concludes a
REMS is needed, the sponsor of the NDA must submit a proposed REMS; the FDA will not approve the application
without a REMS, if required.
Before approving an NDA or BLA, 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 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 application, 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 a complete response letter to the
applicant and often will request additional testing or information.
If a complete response letter is issued, the applicant may either resubmit the application, 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 products for which we receive FDA approval 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.
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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
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 biopharmaceutical products
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 payers.
In the United States, third-party payers include federal and state government payer programs, including
Medicare and Medicaid, managed care organizations, private health insurers and other organizations. The process
for determining whether a third-party payer will provide coverage for a drug product may be separate from the
process for setting the price or reimbursement rate that the third-party payer will pay for the drug product. Third-
party payers 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 payers 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 biopharmaceutical products may not be considered medically necessary or cost-effective.
A third-party payer’s decision to provide coverage for a drug product does not imply that an adequate
reimbursement rate will be approved. Further, one payer’s determination to provide coverage for a drug product
does not ensure that other payers 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 payer 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 payers 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 payers 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.
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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
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, and on prescription
drugs in particular, 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
Company.
Additionally, in order to be eligible for certain federal agencies and grantees to purchase ZILRETTA, or to
have it paid for with federal funds under the Medicaid and Medicare Part B programs, we participate in the
Department of Veterans Affairs (VA), Federal Supply Schedule (FSS) pricing program. We are obligated through
the FSS program to sell ZILRETTA through a FSS contract and charge a price that is no higher than the statutory
Federal Ceiling Price (FCP) to four federal agencies (VA, U.S. Department of Defense, Public Health Service, and
Coast Guard). The FCP is based on the non-federal Average Manufacturer Price (Non-FAMP), which we will need
to calculate and report to the VA on a quarterly and annual basis. These obligations contain extensive disclosure and
certification requirements.
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
MMA, changed the way Medicare covers and pays for pharmaceutical products. The MMA expanded Medicare
coverage to include outpatient prescription drug purchases made 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, the MMA provided authority for limiting the number of drugs that would be covered
in any therapeutic class under the Medicare Part D program. Cost reduction initiatives and other provisions of this
legislation could decrease the coverage and reimbursement rate that we receive for ZILRETTA and any of our other
approved products. While the MMA applies only to drug benefits for Medicare beneficiaries, private payers 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 payers.
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:
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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% of the average manufacturer price for branded and generic drugs, respectively;
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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%
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% 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; 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.
Since its enactment, there have been judicial and Congressional challenges to numerous provisions of
PPACA. Since January 2017, President Trump has signed two Executive Orders designed to delay the
implementation of certain provisions of the Health Care Reform Law or otherwise circumvent some of the
requirements for health insurance mandated by PPACA. Further, The Tax Cuts and Jobs Act of 2017, signed into
law on December 22, 2017, removed the individual mandate starting in 2019 that required individuals to have
insurance or face a penalty. Additionally, on January 23, 2018, President Trump signed a continuing resolution on
appropriations for fiscal year 2018 that delayed the implementation of certain PPACA-mandated fees. Congress may
consider additional legislation to repeal or replace other elements of PPACA.
We expect that PPACA reform, 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, including ZILRETTA. There has been
increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices,
including at the federal level several recent U.S. Congressional inquiries and proposed bills designed to, among
other things, increase drug pricing transparency, reduce the cost of drugs under Medicare, 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 payers. At the state level, legislatures have
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increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological
product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product
access and marketing cost disclosure and transparency measures, and, in some cases, to encourage importation from
other countries and bulk purchasing. The implementation of cost containment measures or other healthcare reforms
may prevent us from being able to generate revenue, attain profitability, or commercialize ZILRETTA and any
future products for which we receive regulatory approval.
Accelerated Approval for Regenerative Advanced Therapies
As part of the 21st Century Cures Act, Congress recently amended the FDCA to create an accelerated
approval program for regenerative advanced therapies, which include cell therapies, gene therapies, therapeutic
tissue engineering products, human cell and tissue products, and combination products using any such therapies or
products. Regenerative advanced therapies do not include those gene therapies, human cells, tissues, and cellular and
tissue based products regulated solely under section 361 of the Public Health Service Act and 21 CFR Part 1271.
The new program is intended to facilitate efficient development and expedite review of regenerative advanced
therapies, which are intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition. A
drug sponsor may request that the FDA designate a drug as a regenerative advanced therapy concurrently with or at
any time after submission of an IND. The FDA has 60 calendar days to determine whether the drug meets the
criteria, including whether there is preliminary clinical evidence indicating that the drug has the potential to address
unmet medical needs for a serious or life-threatening disease or condition. A NDA or BLA for a regenerative
advanced therapy may be eligible for priority review or accelerated approval through surrogate or intermediate
endpoints reasonably likely to predict long-term clinical benefit, or reliance upon data obtained from a meaningful
number of sites. Benefits of such designation also include early interactions with the FDA to discuss any potential
surrogate or intermediate endpoint to be used to support accelerated approval. A regenerative advanced therapy that
is granted accelerated approval and is subject to post-approval requirements may fulfill such requirements through
the submission of clinical evidence, clinical studies, patient registries, or other sources of real world evidence, such
as electronic health records; the collection of larger confirmatory data sets; or post-approval monitoring of all
patients treated with such therapy prior to its approval.
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” 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.
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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.
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 payers. 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.
The federal Physician Payments Sunshine Act requires certain manufacturers of drugs, devices, biologics and
medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance
Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS,
information related to payments or other transfers of value made to physicians and teaching hospitals, as well as
ownership and investment interests held by physicians and their immediate family members.
Also, many states have similar laws and regulations, such as anti-kickback and false claims laws that may be
broader in scope and may apply regardless of payer, in addition to items and services reimbursed under Medicaid
and other state programs. Additionally, we may be subject to state laws that require pharmaceutical companies to
comply with the federal government’s and/or pharmaceutical industry’s voluntary compliance guidelines, state 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, as well as state and foreign laws governing the privacy
and security of health information, many of which differ from each other in significant ways and often are not
preempted by HIPAA.
Where our activities involve foreign government officials, they may also potentially be subject to the Foreign
Corrupt Practices Act, which prohibits companies and individuals from engaging in specified activities to obtain or
retain business or to influence a person working in an official capacity. Under the FCPA, it is illegal to pay, offer to
pay, or authorize the payment of anything of value to any foreign government official, governmental staff members,
political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person
working in an official capacity. The FCPA also requires public companies to make and keep books and records that
accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of
internal accounting controls.
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.
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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 delay the submission or
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 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.
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.
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, 2017, we had 251 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 $51.2 million, $41.3 million, and $32.7 million in research and development in the years ended
December 31, 2017, 2016 and 2015, respectively.
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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.
ITEM 1A. RISK FACTORS
You should consider carefully the risks described below, together with the other information contained in this
Annual Report on Form 10-K and other documents we file with the Securities and Exchange Commission. The risks
and uncertainties below are those identified by us as material, but there are also additional risks and uncertainties
that we are unaware of that may become important factors that affect us. If any of the following risks actually
occurs, our business, financial condition, results of operations and future growth prospects would likely be
materially and adversely affected.
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 a limited operating history. To date, we have focused primarily on developing our commercialized
product, ZILRETTA. Any additional product candidates we develop will require substantial 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
$137.5 million, $71.9 million, and $46.3 million for fiscal years 2017, 2016, and 2015, respectively. As of
December 31, 2017, we had an accumulated deficit of $349.2 million. We expect to incur net losses over the next
few years as we invest in the commercialization of ZILRETTA and advance our development programs.
We have devoted most of our financial resources to product development, including our nonclinical
development activities and clinical trials, and more recently to commercial efforts. 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. The U.S. Food and Drug Administration,
or FDA, granted marketing approval and we launched commercial sales of ZILRETTA in the fourth quarter of 2017.
We have not generated significant revenues from sales of ZILRETTA and cannot guarantee that our
commercialization efforts will result in substantial product revenues.
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We also expect to continue to incur substantial and increased expenses as we invest in the commercialization
of ZILRETTA, scale up commercial manufacturing of ZILRETTA, conduct additional clinical trials for this product
and continue our development activities with respect to ZILRETTA, FX101 and FX201. 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 not generated significant revenue and may never be profitable.
Our ability to generate significant revenue and achieve profitability depends primarily on our ability to
successfully commercialize ZILRETTA, as well as our ability to obtain regulatory approval for and commercialize
other product candidates. We may never succeed in these activities and may never generate revenues that are
significant enough to achieve profitability. Our ability to generate significant revenue from product sales depends
heavily on our success in commercializing ZILRETTA and any other product candidates for which we receive
regulatory approval.
Because of the numerous risks and uncertainties associated with new pharmaceutical products and
development efforts, we are unable to predict the timing or amount of increased expenses, when, or if, we will begin
to generate meaningful revenue from product sales, or when, or if, we will be able to achieve or maintain
profitability. In addition, our expenses could increase beyond expectations if we determine that additional sales and
marketing personnel or other resources are necessary to successfully commercialize ZILRETTA or if we face any
product liability claims that may be brought against us following the commercial launch of ZILRETTA.
If we are unable to generate significant revenues from product sales, particularly from sales of ZILRETTA, or
to maintain an acceptable cost structure related to our operations, we may not become profitable and may need to
obtain additional funding to continue operations.
If we fail to obtain additional financing, we may be forced to delay, reduce or eliminate our product
development programs and/or 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 expand our sales and marketing
activities, commercialize ZILRETTA and advance our clinical programs.
As of December 31, 2017, we had cash, cash equivalents and marketable securities of $423.9 million and
working capital of $367.4 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 from the issuance date of the financial statements included in this report. 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.
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. If we are
unable to raise additional capital when required or on acceptable terms, we may be required to:
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significantly scale back or discontinue commercialization of ZILRETTA or the further development of
ZILRETTA or 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;
seek corporate partners to assist in the commercialization of ZILRETTA on terms that are less favorable
than might otherwise be available;
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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.
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 existing indebtedness contains restrictions that limit our flexibility in operating our business. In
addition, we may be required to make a prepayment or repay our outstanding indebtedness earlier than we
expect, which could have a materially adverse effect on our business, or may otherwise be unable to repay
our indebtedness as it becomes due.
On August 4, 2015, we entered into a credit and security agreement with MidCap Financial SBIC, LP, or
MidCap, as administrative agent, MidCap Funding XIII Trust and Silicon Valley Bank, as agent lenders, to borrow
up to $30.0 million and contemporaneously drew down $15.0 million under the credit facility. The credit agreement
contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit
our ability to, among other things:
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incur or assume certain debt;
• merge or consolidate or acquire all or substantially all of the capital stock or property of another entity;
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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 in the credit agreement could prevent us from pursuing 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 credit agreement. 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 a material impairment of the prospect of our repayment of any portion of the
amounts we owe under the credit agreement occurs. In the case of a continuing event of default under the credit
agreement, the lenders could elect to declare all amounts outstanding to be immediately due and payable, proceed
against the collateral in which we granted the lenders a security interest under the credit agreement, or otherwise
exercise the rights of a secured creditor. Amounts outstanding under the credit agreement are secured by all of our
existing and future assets, excluding intellectual property, which is subject to a negative pledge arrangement.
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In April 2017, we also issued $201.3 million principal amount of our 3.375% Convertible Senior Notes due
2024, or the 2024 Convertible Notes. The 2024 Convertible Notes will mature on May 1, 2024, unless earlier
redeemed, repurchased or converted in accordance with the terms of the indenture governing the notes. If specified
bankruptcy, insolvency or reorganization-related events of default occur, or if certain other events of default occur
and the trustee or certain holders of the 2024 Convertible Notes elect, the principal of, and accrued and unpaid
interest on, all of the then-outstanding 2024 Convertible Notes will automatically become due and payable. In
addition, if we undergo certain fundamental change transactions specified in the indenture governing the 2024
Convertible Notes, the holders of the notes may require us to repurchase their notes at a price equal to 100% of the
principal amount of the notes, plus any accrued and unpaid interest.
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 or refinance our indebtedness at the time any such repayment or
repurchase 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 Commercialization Activities
Our prospects are highly dependent on the successful commercialization of ZILRETTA. To the extent
ZILRETTA is not commercially successful, our business, financial condition and results of operations may
be materially adversely affected.
ZILRETTA is our only drug that has been approved for sale and it has only been approved for the
management of osteoarthritis, or OA, pain of the knee for patients in the United States. We are focusing a significant
portion of our activities and resources on ZILRETTA, and we believe our prospects are highly dependent on, and a
significant portion of the value of our company relates to, our ability to successfully commercialize ZILRETTA in
the United States.
Successful commercialization of ZILRETTA is subject to many risks. We have never, as an organization,
commercialized a product, and there is no guarantee that we will be able to do so successfully with ZILRETTA for
its approved indication. There are numerous examples of failures to meet high expectations of market potential,
including by pharmaceutical companies with more experience and resources than us.
Market acceptance of ZILRETTA and any other product for which we receive approval, will depend on a
number of factors, including:
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the efficacy and safety as demonstrated in clinical trials;
the timing of market introduction of the product as well as competitive products;
the clinical indications for which the product is approved;
acceptance by physicians, the medical community and patients of the product as a safe and effective
treatment;
the ability to distinguish safety and efficacy from existing, less expensive generic alternative therapies;
the convenience of prescribing, administrating and initiating patients on the product;
the potential and perceived advantages of the product over alternative treatments;
the potential and perceived value of the product 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 payers and
government authorities;
the uptake of ZILRETTA in light of the miscellaneous J-code for reimbursement;
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the prevalence and severity of adverse side effects; and
the effectiveness of sales and marketing efforts.
With respect to ZILRETTA, while we have established our commercial team and sales force, there are many
factors that could cause the commercialization of ZILRETTA to be unsuccessful, including a number of factors that
are outside our control. The commercial success of ZILRETTA depends on the extent to which patients and
physicians accept and adopt ZILRETTA as a treatment for OA pain of the knee, and we do not know whether our or
others’ revenue estimates in this regard will be accurate. For example, if the patient population suffering from OA
pain of the knee is smaller than we estimate or if physicians are unwilling to prescribe or patients are unwilling to
use ZILRETTA, the commercial potential of ZILRETTA will be limited. In addition, if ZILRETTA is not
convenient for physicians to use, then it may not achieve widespread adoption, regardless of its efficacy and safety.
For example, ZILRETTA must be administered only by a health care professional in an office, clinic or hospital
setting. In addition, ZILRETTA requires a multi-step preparation process, which may discourage some physicians
from using ZILRETTA. Moreover, ZILRETTA’s label indicates that it is not intended for repeat administration; this
may negatively impact our commercialization efforts. We also do not know how physicians, patients and payers will
respond to the pricing of ZILRETTA in the long-term. In particular, as part of our initial launch strategy we have
provided some product as samples during a trial period, and do not know whether physicians that initially use
ZILRETTA will continue to do so after using the product samples.
Physicians may not prescribe ZILRETTA and patients may be unwilling to use ZILRETTA if coverage is not
provided or reimbursement is inadequate to cover a significant portion of the cost. Additionally, any negative
development for ZILRETTA in clinical development in additional indications, may adversely impact the
commercial results and potential of ZILRETTA. Thus, significant uncertainty remains regarding the commercial
potential of ZILRETTA.
If the commercialization of ZILRETTA is unsuccessful or perceived as disappointing, our stock price could
decline significantly and the long-term success of the product and our company could be harmed.
If we are unable to differentiate 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 ZILRETTA,
our ability to successfully commercialize ZILRETTA would be adversely affected.
Immediate-release TA and other injectable immediate-release steroids, which are the current intra-articular, or
IA, standard of care for OA pain, are available in generic form and are therefore relatively inexpensive compared to
the pricing for ZILRETTA. These generic steroids also have well-established market positions and familiarity with
physicians, healthcare payers and patients. Although we believe the proven and extended pain relief evidenced in
our clinical trial demonstrate that ZILRETTA represents a clinically meaningful and highly efficacious option for
patients and physicians, it is possible that as we receive data from additional clinical trials or in a post-marketing
setting from physician and patient experiences with the commercial product that does not continue to support such
interpretations. It is also possible that the FDA, physicians and healthcare payers will not agree with our
interpretation of our existing and future clinical trial data. If we are unable to demonstrate the value of ZILRETTA
based on our data, our opportunity for ZILRETTA to maintain premium pricing and be commercialized successfully
would be adversely affected. For example, although ZILRETTA showed numeric improvements through week 12 in
validated, OA specific pain, stiffness, function and quality of life exploratory measures and showed numeric
improvements in average daily pain, it did not achieve statistical significance at the week 12 timepoint compared to
immediate-release TA. As a result, it is possible that healthcare payers will not agree with our assessment that
ZILRETTA’s proven pain relief supports premium pricing. In addition, these OA specific data are not included in
the ZILRETTA label, which limits our ability to discuss these important results with physicians and healthcare
payers.
In addition to existing generic steroids, such as immediate-release TA, the FDA or other applicable regulatory
authorities may approve generic products that could compete with ZILRETTA, if we cannot adequately protect it
with our patent portfolio. 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
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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 ZILRETTA.
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 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, including ZILRETTA.
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 and biotechnology companies. For
example, the injectable OA treatment market today includes many injectable immediate-release steroids, including
TA, the active ingredient in ZILRETTA, as well as hyaluronic acid, or 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 an extended 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 product 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 ability to distinguish safety and efficacy from existing, less expensive generic alternative therapies;
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;
the ability to protect intellectual property rights related to our product candidates;
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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.
If our competitors market products that are more effective, safer or less expensive than ZILRETTA or our
other future products, if any, or that reach the market sooner than any 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 maintain sales and marketing capabilities or enter into agreements with third parties to
market, distribute and sell our product candidates, we may be unable to generate adequate revenue.
Our strategy is to commercialize ZILRETTA in the United States with a targeted sales and marketing
organization. While we have established our commercial team and our sales force, we do not have prior experience
commercializing pharmaceutical products as an organization. In order to successfully market ZILRETTA, we must
continue to build and maintain our sales, marketing, managerial, compliance and related capabilities or make
arrangements with third parties to perform these services. These efforts will continue to be expensive and time-
consuming, and we will be competing with other pharmaceutical and biotechnology companies to recruit, hire, train
and retain marketing and sales personnel. If we are unable to maintain adequate sales, marketing and distribution
capabilities, whether independently or with third parties, we may not be able to appropriately commercialize
ZILRETTA and may not become profitable.
Additionally, our strategy in the United States includes distributing ZILRETTA solely through a limited
network of third-party specialty distributors and one specialty pharmacy. While we have entered into agreements
with a specialty pharmacy and specialty distributors to distribute ZILRETTA in the United States, they may not
perform as agreed or they may terminate their agreements with us. For example, we currently rely on a single
specialty pharmacy, which we estimate represents approximately 10% of the ZILRETTA distribution channel, and
the loss of that specialty pharmacy or its failure to distribute effectively would adversely affect ZILRETTA’s
distribution. Also, we may need to enter into agreements with additional specialty distributors or specialty
pharmacies, and there is no guarantee that we will be able to do so on commercially reasonable terms or at all. In
the event that our specialty distributors or specialty pharmacy do not fulfill their contractual obligations to us, or the
agreements are terminated without adequate notice, or we are unable to expand our network, shipments of
ZILRETTA through, and associated revenues from, these sales channels would be adversely affected. In addition,
we expect that it would take a significant amount of time if we were required to change our specialty distributors or
specialty pharmacy.
To date, we have not entered into any strategic collaborations for ZILRETTA or any of our product
candidates. We face significant competition in seeking appropriate strategic partners, and these strategic
collaborations can be intricate and time consuming to negotiate and finalize. We may not be able to negotiate
strategic collaborations 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 collaboration outside of the United States because of the
numerous risks and uncertainties associated with establishing strategic collaborations. To the extent that we enter
into strategic collaborations, our future collaborators 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 ZILRETTA or our other product candidates in
territories outside of the United States, or if our potential future collaborators do not successfully commercialize our
product candidates in these territories, our ability to generate revenue from product sales will be adversely affected.
We and any future collaborators 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 ZILRETTA or any
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other approved products will be limited. In addition, if we are unable to effectively develop and maintain our
commercial team, including our U.S. sales force, or maintain and, if needed, expand, our network of specialty
distributors and specialty pharmacies, our ability to effectively commercialize ZILRETTA and generate product
revenues would be limited.
If we are unable to effectively train and equip our sales force, our ability to successfully commercialize
ZILRETTA will be harmed.
ZILRETTA is a newly-marketed drug and, therefore, the members of our sales force do not have significant
experience promoting ZILRETTA. As a result, we are required to expend significant time and resources to train our
sales force to be credible, persuasive and compliant with applicable laws in marketing ZILRETTA for the treatment
of patients with OA of the knee. 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 maintain an effectively trained 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 and safety 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 are unable to achieve and maintain adequate levels of third-party payer coverage and reimbursement
for ZILRETTA, or, if approved, any other product candidates, on reasonable pricing terms, their
commercial success may be severely hindered.
Successful sales of ZILRETTA and any other approved product candidates depend on the availability of
adequate coverage and reimbursement from third-party payers. Patients who are prescribed medicine for the
treatment of their conditions generally rely on third-party payers 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 payers 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. The resulting reimbursement
payment rates for ZILRETTA and, if approved, our other product candidates, might not be adequate or may require
co-payments that patients find unacceptably high.
Payers may require documented proof that patients meet certain eligibility criteria in order to be reimbursed
for ZILRETTA, for example requiring that a patient first try and fail treatment with an injection of generic
corticosteroid. Payers may even require that pre-approval, or prior-authorization, be obtained from the payer for
reimbursement of ZILRETTA. Patients are unlikely to use ZILRETTA and, if approved, any other products, unless
coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. For
example, ZILRETTA is sold to physicians on a “buy and bill” basis. Buy and bill products must be purchased by
healthcare providers before they can be administered to patients. Healthcare providers subsequently must seek
reimbursement for the product from the applicable third party payer, such as Medicare or a health insurance
company. Healthcare providers may be reluctant to administer ZILRETTA because they would have to fund the
purchase of the product and then seek reimbursement, which may be different from their purchase price, or because
they do not want the additional administrative burden required to obtain reimbursement for the product.
Further, the status of reimbursement codes for ZILRETTA could also affect reimbursement. J-Codes and Q-
Codes are reimbursement codes maintained by the Centers for Medicare and Medicaid Services, or CMS that are a
component of the Healthcare Common Procedure Coding System (HCPCS) and are typically used to report
injectable drugs that ordinarily cannot be self-administered. We do not currently have a specific J-Code or Q-Code
for ZILRETTA. Until we can obtain a specific reimbursement code for ZILRETTA, we will need to use a non-
specific miscellaneous J-Code for ZILRETTA, which is a temporary code to facilitate reimbursement for physician-
administered ZILRETTA. Since miscellaneous J-Codes may be used for a wide variety of products, health plans
may have more difficulty determining the actual product used and billed for the patient. As a result, these claims
must often be submitted with additional information and manually processed, which can create delays in claims
processing times as well as increasing the likelihood for claim errors.
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In addition, the market for ZILRETTA and any of our other product candidates may depend significantly on
access to third-party payers’ medical policies, drug formularies, or lists of medications for which third-party payers
provide coverage and reimbursement. The industry competition to be included in such policies or formularies often
leads to downward pricing pressures on pharmaceutical companies, and we may be required to offer discounted rates
to certain government and other payers to ensure coverage of our drugs. Also, third-party payers may refuse to
include a particular branded drug in their policies or formularies or otherwise restrict patient access to a branded
drug when a less costly generic equivalent or other alternative is available.
Third-party payers, whether foreign or domestic, or governmental or commercial, are developing increasingly
sophisticated methods of controlling healthcare costs. The U.S. government, state legislatures and foreign
governments have shown significant interest in implementing cost-containment programs, including price controls,
restrictions on reimbursement and requirements for substitution of generic products. In addition, in the United
States, no uniform policy of coverage and reimbursement for drug products exists among third-party payers.
Therefore, coverage and reimbursement for drug products can differ significantly from payer to payer. 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 payer 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, if
approved, any of our other product candidates, 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,
sales and distribution costs. If coverage and reimbursement are not available or only available at limited levels, we
may not be able to successfully commercialize any product candidate for which we obtain marketing approval,
including ZILRETTA, which could have a material adverse effect on our business, results of operations, financial
condition and prospects.
Guidelines and recommendations published by various organizations can reduce the use of ZILRETTA
and any other products we may commercialize.
Government agencies promulgate regulations and guidelines directly applicable to us and to our products and
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 that do not
recognize ZILRETTA or our other product candidates, suggest the reduced use of ZILRETTA or our other product
candidates, or suggest 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 ZILRETTA or any future products.
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ZILRETTA is available to a much larger number of patients and in broader populations through our
commercialization efforts as compared to the patients in the clinical studies. We do not know whether the
results of ZILRETTA’s use in such larger number of patients and broader populations will be consistent
with the results from our clinical studies.
While the FDA granted approval of ZILRETTA based on the data included in the NDA, including data from
our completed pivotal Phase 3 clinical trial, we do not know whether the results when a large number of patients and
broader populations are exposed to ZILRETTA, including results related to safety and efficacy, will be consistent
with the results from earlier clinical studies of ZILRETTA that served as the basis for the approval of ZILRETTA.
New data relating to ZILRETTA, including from adverse event reports, our on-going repeat-dose safety study, or
our studies of ZILRETTA in hip and shoulder OA and bilateral knee OA, may result in changes to the product label
and may adversely affect sales, or result in withdrawal of ZILRETTA from the market. The FDA and regulatory
authorities in other jurisdictions may also consider any new data in connection with further marketing approval
applications. If ZILRETTA or any additional approved products cause serious or unexpected side effects after
receiving market approval, a number of potentially significant negative consequences could result, including:
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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 promoted or 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 maintaining market acceptance of the affected product and could
substantially increase the costs of commercializing ZILRETTA or any additional products.
Recently enacted and future legislation, including health care reform measures, may increase the difficulty
and cost for us to commercialize ZILRETTA and any future products 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 ZILRETTA, and if
approved for sale, our other potential products, profitably. Among policy makers and third-party payers 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% 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;
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a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50%
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% 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 physicians
(as defined above) and their immediate family members, with data collection and reporting to CMS
currently required by March 31st, 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; 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.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of PPACA.
Since January 2017, President Trump has signed two Executive Orders designed to delay the implementation of
certain provisions of the Health Care Reform Law or otherwise circumvent some of the requirements for health
insurance mandated by PPACA. Further, The Tax Cuts and Jobs Act of 2017, signed into law on December 22,
2017, removed the individual mandate starting in 2019 that required individuals to have insurance or face a penalty.
Additionally, on January 23, 2018, President Trump signed a continuing resolution on appropriation for fiscal year
2018 that delayed the implementation of certain PPACA-mandated fees. Congress may consider additional
legislation to replace or repeal other elements of PPACA.
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, including ZILRETTA. There has been increasing legislative and
enforcement interest in the United States with respect to specialty drug pricing practices, including at the federal
level several recent U.S. Congressional inquiries and proposed bills designed to, among other things, increase drug
pricing transparency, reduce the cost of drugs under Medicare, 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 payers. At the state level, legislatures have increasingly passed
legislation and implemented regulations designed to control pharmaceutical and biological product pricing,
including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing
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cost disclosure and transparency measures, and, in some cases, to encourage importation from other countries and
bulk purchasing. The implementation of cost containment measures or other healthcare reforms may prevent us
from being able to generate revenue, attain profitability or commercialize ZILRETTA and any future products for
which we receive regulatory approval. 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 Product Development and Regulatory Compliance
We may never obtain regulatory approval of ZILRETTA for additional indications or any approval of our
other product candidates in the United States, or we may never obtain approval for or commercialize
ZILRETTA or our other product candidates outside of the United States, which would limit our ability to
realize their full market potential.
While ZILRETTA has been approved by the FDA for the treatment of patients with OA of the knee, it has not
been approved by the FDA for any other indications, and it has not been approved in any other jurisdiction for this
indication or for any other indication. In order to market ZILRETTA for other indications or in other jurisdictions,
or in order to market any of our other product candidates, we must obtain regulatory approval for each indication
and in each applicable jurisdiction, and we may never be able to get such approval for ZILRETTA or our other
product candidates. In particular, FX101 and FX201 are at early stages of development and may never reach IND
submission or human clinical trials, in which case we may never recover our investment in these product candidates.
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 potential
future products in those countries. Other than ZILRETTA in the United States, we do not have any products
approved for sale in any jurisdiction, and we do not have experience in obtaining regulatory approval in
international markets. If we do not receive marketing approval for ZILRETTA for any other indication or from
any regulatory agency other than the FDA, we will never be able to commercialize ZILRETTA for any other
indication in the United States or for any indication in any other jurisdiction. If we fail to comply with regulatory
requirements in international markets or to obtain and maintain required approvals for our other product candidates,
or if regulatory approval in international markets is delayed, our potential market will be reduced and our ability to
realize the full market potential of ZILRETTA or our other product candidates will be harmed. Even if we do
receive additional regulatory approvals, we may not be successful in commercializing those opportunities.
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.
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 completed ZILRETTA pivotal Phase 3 clinical trial do not ensure that any ongoing or future
ZILRETTA clinical trial, including our ongoing repeat dose safety clinical trial or our clinical trials of ZILRETTA
in hip and shoulder OA and bilateral knee OA, 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 TA. The immediate-release TA 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
TA study arms. With repeat administrations of ZILRETTA and immediate-release TA, a larger reduction in
extracellular matrix in cartilage partially recovered by six months following the last dose; however, structural
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changes in cartilage were observed with repeat administrations of both ZILRETTA and immediate-release TA.
Repeat administration of immediate-release TA 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
TA 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 TA and saline in patients were similar. In 2017, the same authors reporting
on the same data set concluded that there was a relative loss of cartilage in the immediate-release TA group. We are
studying ZILRETTA in a repeat dose safety clinical trial and if the data from the repeat dose trial are supportive, we
intend to seek inclusion of these data in the label for ZILRETTA through submission of a supplemental NDA. It is
possible that we could observe detrimental effects on joint structure with repeated doses of ZILRETTA, which
would limit ZILRETTA’s commercial potential and could harm our ability to maintain regulatory approval or obtain
approval to market ZILRETTA in additional indications or additional jurisdictions.
Product candidates 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 trials 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. 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 in particular indications,
we will not be able to obtain regulatory approval for the indication and our business could be materially harmed.
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 for our product candidates.
We may experience delays in clinical trials of our products and 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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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 ZILRETTA IND was placed on clinical hold at two points during product development,
which delayed completion of our trials and resulted in additional expense. We cannot guarantee that any existing or
future IND we submit will not be subject to similar holds.
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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 our
product candidates could be materially harmed, which could have a material adverse effect on our business.
The regulatory approval process of the FDA is lengthy, time consuming and inherently unpredictable, and
if we are ultimately unable to obtain regulatory approval for our product candidates or for ZILRETTA in
additional indications, our business will be 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. Although we received regulatory approval of ZILRETTA
for the treatment of patients with OA of the knee, it is possible that none of our other product candidates will ever
obtain regulatory approval or that we will not be able to obtain regulatory approval for ZILRETTA in additional
indications.
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;
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.
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 in additional indications or to market our other product
candidates at all, which would harm our business, results of operations and prospects.
In addition, even if we were to obtain approval for other product candidates or for ZILRETTA in other
indications, regulatory authorities may approve any of our product candidates for fewer or more limited indications
than we request, 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, ZILRETTA has initially been approved for single-dose
administration and is not intended for repeat administration, which may limit the extent to which payers reimburse
ZILRETTA and physicians prescribe ZILRETTA to their patients. We are conducting a repeat dose clinical trial and
intend to use the resulting data to inform our clinical and regulatory perspectives and to create a basis for further
interactions with the FDA. However, if we are unable to expand the label for ZILRETTA to include repeat dosing,
our ability to fully market ZILRETTA may be limited.
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Our product candidates may not receive regulatory approval despite success in clinical trials. 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 granted marketing approval of ZILRETTA for the treatment of patients with OA pain of the
knee, and we could face liability if a regulatory authority determines that we are promoting ZILRETTA for
any off-label uses.
A company may not promote “off-label” uses for its drug products. An off-label use is the use of a product for
an indication that is not described in the product’s FDA-approved label in the United States or for uses in other
jurisdictions that differ from those approved by the applicable regulatory agencies. Physicians, on the other hand,
may prescribe products for off-label uses. Although the FDA and other regulatory agencies do not regulate a
physician’s choice of drug treatment made in the physician’s independent medical judgment, they do restrict
promotional communications from pharmaceutical companies or their sales force with respect to off-label uses of
products for which marketing clearance has not been issued. A company that is found to have promoted off-label use
of its product may be subject to significant liability, including civil and criminal sanctions. We intend to comply
with the requirements and restrictions of the FDA and other regulatory agencies with respect to our promotion of
ZILRETTA and any future products, but we cannot be sure that the FDA or other regulatory agencies will agree that
we have not violated their restrictions. For example, as part of our promotion strategy for ZILRETTA we
communicate certain results from our Phase 3 clinical trial and other clinical data that are consistent with, but not
directly included in, the product label. While we believe our communication of this data is in accordance with FDA
guidance and applicable laws, we cannot be certain that the FDA or other regulatory agencies will agree with our
use of this data or our sales force may use such data in a way that is inconsistent with our policies. As a result, we
may be subject to criminal and civil liability. In addition, our management’s attention could be diverted to handle
any such alleged violations. A significant number of pharmaceutical companies have been the target of inquiries and
investigations by various U.S. federal and state regulatory, investigative, prosecutorial and administrative entities in
connection with the promotion of products for unapproved uses and other sales practices, including the Department
of Justice and various U.S. Attorneys’ Offices, the Office of Inspector General of the Department of Health and
Human Services, the FDA, the Federal Trade Commission and various state Attorneys General offices. These
investigations have alleged violations of various U.S. federal and state laws and regulations, including claims
asserting antitrust violations, violations of the Federal Food, Drug, and Cosmetic Act, or the FDCA, the federal
False Claims Act, the Prescription Drug Marketing Act, anti-kickback laws, and other alleged violations in
connection with the promotion of products for unapproved uses, pricing and Medicare and/or Medicaid
reimbursement. If the FDA or any other governmental agency initiates an enforcement action against us or if we are
the subject of a qui tam suit and it is determined that we violated prohibitions relating to the promotion of products
for unapproved uses, we could be subject to substantial civil or criminal fines or damage awards and other sanctions
such as consent decrees and corporate integrity agreements pursuant to which our activities would be subject to
ongoing scrutiny and monitoring to ensure compliance with applicable laws and regulations. Any such fines, awards
or other sanctions would have an adverse effect on our revenue, business, financial prospects and reputation.
Even though the FDA has granted approval of ZILRETTA for the treatment of patients with OA pain of
the knee, the terms of the approval may limit its commercial potential. Additionally, ZILRETTA is still
subject to substantial, ongoing regulatory requirements, and our other product candidates may face future
development and regulatory difficulties.
Even though the FDA has granted approval of ZILRETTA, the scope and terms of the approval may limit our
ability to commercialize ZILRETTA effectively and, therefore, our ability to generate substantial sales revenues.
The FDA has approved ZILRETTA only for the treatment of patients with OA of the knee. If any other ongoing
clinical studies of ZILRETTA are negative, the FDA could decide to withdraw approval, add warnings or narrow the
approved indication in the product label.
ZILRETTA and, if approved, our other product candidates, 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
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and report adverse events, or 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.
We rely on third party collaborators to assist us in meeting our reporting and related obligations. While we
work closely with these third parties, we do not control all of their activities. If our third party collaborators do not
meet the relevant commitments, we may fail to meet our applicable regulatory requirements.
If we fail to comply with applicable regulatory requirements for ZILRETTA or for any other approved
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.
Any relationships with healthcare professionals, principal investigators, consultants, actual and potential
customers, and third-party payers 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,
administrative penalties, contractual damages, reputational harm, diminished profits and future earnings,
and curtailment or restructuring of our operations.
Our operations are 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. Our potential exposure under
such laws increased significantly with the commercialization of ZILRETTA in the United States through our
dedicated sales force. 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
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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 PPACA, and its implementing
regulations, which 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 payer, including commercial
insurers; state and foreign laws that require pharmaceutical companies to comply with the
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, including activities undertaken by third parties on our behalf, 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,
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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, additional reporting requirements and/or oversight if we become
subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these
laws, and curtailment or restructuring of our operations. Moreover, while we do not bill third-party payers directly
and our customers make the ultimate decision on how to submit claims, from time-to-time we may provide
reimbursement guidance to patients and healthcare providers. If a government authority were to conclude that we
provided improper advice and/or encouraged the submission of a false claim for reimbursement, we could face
action against us by government authorities. If any of the physicians or other providers or entities with whom we do
business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or
administrative sanctions, including exclusions from government funded healthcare programs and imprisonment. If
any of the above occurs, it could adversely affect our ability to operate our business and our results of operations. In
addition, the approval and commercialization of any of our product candidates outside of the United States will also
likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.
If we fail to develop, acquire or in-license other potential future 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 potential
future product candidates in addition to ZILRETTA. Our primary means of expanding our pipeline of product
candidates is to 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, and/or develop improved formulations and delivery methods for existing FDA-approved
products. Developing new formulations or delivery methods of existing or potential future product candidates or
identifying, selecting and acquiring or in-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
in-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 completely on third parties to manufacture our commercial supplies of ZILRETTA and our
preclinical and clinical drug supplies for our other product candidates.
If we were to experience an unexpected loss of supply of ZILRETTA or our other product candidates for any
reason, whether as a result of manufacturing, supply or storage issues or otherwise, we could experience disruptions
in commercial supply of ZILRETTA or delays, suspensions or terminations of clinical trials or regulatory
submissions. 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 products and product candidates, including Patheon with respect
to supplies of ZILRETTA, must obtain and maintain approval by the FDA. While we work closely with our third
party manufacturers on the manufacturing process for our products and 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.
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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, or withdraws approval for, these facilities for the
manufacture of our products and product candidates, we may need to find alternative manufacturing facilities, which
would significantly impact our ability to commercialize, develop, or obtain or maintain regulatory approval for our
products and product candidates.
We are particularly reliant on Patheon with respect to maintaining ZILRETTA manufacturing suites. These
Patheon facilities required approval from the FDA as a condition of regulatory approval for ZILRETTA, as we rely
exclusively on Patheon for commercial supplies of ZILRETTA. In addition, because Patheon manufactures
ZILRETTA in the United Kingdom, or U.K., it needs to maintain and 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, which subjects us to heightened risks that Patheon will
experience delays in the manufacturing process.
We also rely on our manufacturers to purchase from third party suppliers the materials necessary to produce
ZILRETTA and our other product candidates for our clinical trials and commercial sales. There are a limited
number of suppliers for raw materials that we use to manufacture our products and product candidates and we may
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 ZILRETTA 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 for ZILRETTA or for any other
approved products, there would be a shortage in supply, which would impair our ability to generate revenue from
the sale of our products, including ZILRETTA.
We expect to continue to depend on contract manufacturers or other third party manufacturers for the
foreseeable future. We have entered into long-term commercial supply agreements with our current contract
manufacturers in order to maintain adequate supplies to manufacture finished ZILRETTA drug product. We may,
however, be unable to enter into such agreements or do so on commercially reasonable terms for potential future
product candidates, which could have a material adverse impact upon our business.
We rely on certain sole sources of supply for our products and product candidates and any disruption in the
chain of supply may disrupt commercialization of ZILRETTA or cause delay in developing, obtaining
approval for, and commercializing our products and product candidates.
Currently, we use the following sole sources of supply for manufacturing ZILRETTA: Farmabios SpA for
TA, Evonik Corporation for PLGA, and Patheon for finished microspheres drug product. Because of the unique
equipment and process for loading TA 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 failure to maintain adequate
supplies of ZILRETTA. We expect that for the foreseeable future Patheon will be the only manufacturer qualified as
a commercial supplier of ZILRETTA 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.
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Our other product candidates, including FX201, also rely on sole sources of supply for the pre-clinical and
clinical supply of materials. The manufacturing processes for FX201 and our other product candidates are complex
and it may difficult or impossible to finalize appropriate processes for the scaled manufacture of the product
candidates.
These factors could cause the disruption of the commercialization of ZILRETTA; delay clinical trials,
regulatory submissions, required approvals or commercialization of any of our other product or product candidates;
cause us to incur higher costs; or prevent us from commercializing them successfully. Furthermore, if our suppliers
fail to deliver the required clinical or 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 for ZILRETTA or any of our other product candidate that is approved and launched.
Manufacturing issues may arise that could increase product and regulatory approval costs or disrupt or
delay commercialization.
As we scale up manufacturing of our products and product candidates, 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 or maintain regulatory approval for commercial marketing. In the future, we may identify impurities or
other product related issues, which could result in increased scrutiny by regulatory authorities, suspensions of
commercial activities or product recalls, delays in our clinical program and regulatory approval, increases in our
operating expenses, or failure to obtain or maintain approval for our products or product candidates.
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 Council 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 be
certain 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
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sufficient time and resources to our preclinical and clinical programs. If CROs do not successfully 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 may not be successful in establishing development and commercialization collaborations, which could
adversely affect, and potentially prohibit, our ability to fully commercialize ZILRETTA or 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’s 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 its market potential. 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,
in addition to ZILRETTA, 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, or at all, we may be unable to successfully develop and seek regulatory approval for our product
candidates and/or effectively market and sell ZILRETTA and any other future approved products, if any, in all of
the territories outside of the United States where it may otherwise be valuable to do so.
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 products or
product candidates or may otherwise fail in development or commercialization efforts, which could
adversely affect our ability to develop or commercialize certain of our products or 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 or
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.
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We may become 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 division of development or commercialization responsibilities or expenses, 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 products or product candidates, and in turn prevent us from
generating sufficient revenue to achieve or maintain profitability:
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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.
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 the commercialization of ZILRETTA or clinical studies of our product candidates 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.
We have recently undergone a significant expansion of our organization, and we may experience
difficulties in managing this growth, which could disrupt our operations.
As of December 31, 2017, we had 251 full-time employees, with approximately 100 of these employees being
MBMs hired following approval of ZILRETTA in the United States. In addition, as our company matures, we
expect to further 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. This growth will 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. 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 successfully
commercialize ZILRETTA and, if approved, our other product candidates, and compete effectively will depend, in
part, on our ability to effectively manage our recent and future growth.
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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 ZILRETTA and any other 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 products or 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 and perception of our products in the market;
withdrawal or suspension of marketing approvals;
withdrawal of clinical trial participants;
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 products 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. 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.
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.
We plan to enter into agreements with third parties to market ZILRETTA, and if approved, our other product
candidates, outside of the United States. We expect that we will be subject to additional risks related to entering into
international business relationships, including:
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different regulatory requirements for drug approvals in foreign countries;
reduced protection for intellectual property rights;
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.
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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 commercial and
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 or commercializing our products and
product candidates.
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, 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, including ZILRETTA, in order to
protect the intellectual property related to our products and product candidates, and to date we have three issued
patents covering ZILRETTA in the United States.
The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific
questions and can be uncertain. As a result, the issuance, scope, validity, enforceability and commercial value of our
patent rights and our current or future licensors’ or collaborators’ patent rights are highly uncertain. The patent
applications that we own or in-license may fail to result in issued patents with claims that cover our products or
product candidates in the United States or in other foreign countries. Even for our issued patents and if other patents
do successfully issue, third parties may challenge their inventorship, ownership, validity, enforceability or scope in
the courts or patent offices in the United States and abroad. This may result in such patents being narrowed or
invalidated, which could limit our ability to stop others from using or commercializing similar or identical
technologies or products, or limit the duration of the patent protection for our technologies and products. If this were
to occur, early generic competition could be expected against ZILRETTA and potentially reduce the value of our
product candidates in development. Also, a third party may challenge our 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 our patent applications 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
ZILRETTA or our other product candidates 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 for additional indications or in additional jurisdictions, the period of time during which we could market
ZILRETTA or any product candidate under patent protection could be reduced. See “Business—Patents and Patent
Applications” in this Annual Report on Form 10-K 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 TA-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. Patent
and Trademark Office, or 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 commercializing or
developing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are
issued, the risk increases that our products and 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 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 products or 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 products or 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 or 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 or 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 products or 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 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
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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 products or 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.
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 issued patents, licensed patents or our other intellectual property. In some cases,
it may be difficult or impossible to detect third-party infringement or misappropriation of our intellectual property
rights, even in relation to issued patent claims, and proving any such infringement may be even more difficult.
Accordingly, for such undetectable infringement or misappropriation our ability to recover damages will be
negligible, and we could be at a market disadvantage because we may lack the resources of some of our competitors
to monitor for and detect infringement. To counter infringement or unauthorized use, we may be required to file
infringement claims, which can be expensive and time consuming. Any claims we assert against perceived infringers
could provoke these parties to assert counterclaims against us alleging that we infringe their patents. In addition, in
any patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or
in part, construe the patent’s claims narrowly or refuse to stop the other party from using the technology at issue on
the grounds that our patents do not cover the technology. An adverse result in litigation proceedings could put one or
more of our patents at risk of being invalidated or interpreted narrowly. 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.
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 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 not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on all of our product candidates throughout the world would be
prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws
of the United States. Consequently, we may not be able to prevent third parties from infringing on our intellectual
property rights in all countries outside the United States, and competitors may use our technologies in jurisdictions
where we have not obtained patent protection to develop their own products and further, may export otherwise
infringing products to territories where we have patent protection, but enforcement is not as strong as that in the
United States. These products may compete with our products in jurisdictions where we do not have any issued
patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them
from so competing.
Many companies have encountered significant problems in protecting and defending intellectual property
rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do
not favor the enforcement of patents and other intellectual property protection, which could make it difficult for us
to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights
generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert
our efforts and attention from other aspects of our business.
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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.
Our owned or licensed patents directed to our product candidates may expire or have limited commercial
life before the product candidate is approved for marketing in a relevant jurisdiction.
Given the amount of time required for the development, testing and regulatory review of new product
candidates, patents protecting our product candidates might expire before or shortly after our product candidates
obtain regulatory approval, which may subject us to increased competition and reduce or eliminate our ability to
recover our development costs. As a result, our owned and licensed patent portfolio may not provide us with
sufficient rights to exclude others from commercializing products similar or identical to ours. Although we may be
able to seek extensions of patent terms where available, including in the United States under the Drug Price
Competition and Patent Term Restoration Act of 1984, which permits a patent term extension of up to five years
beyond the expiration of the patent, we cannot be certain that an extension will be granted, or if granted, what the
applicable time period or the scope of patent protection afforded during any extended period will be. The applicable
authorities, including the EMA, FDA, and any equivalent regulatory authority in other countries, may not agree with
our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may
grant more limited extensions than we request. If this occurs, our competitors may take advantage of our investment
in development and trials by referencing our clinical and pre-clinical data and launch their product earlier than might
otherwise be the case.
We have in-licensed or acquired a portion of our intellectual property necessary to develop our product
candidates, and if we fail to comply with our obligations under any of these arrangements, we could lose
such intellectual property rights.
We are a party to and rely on several arrangements with third parties, which give us rights to intellectual
property that is necessary for the manufacture of ZILRETTA and the development of FX201. In addition, we may
enter into similar arrangements in the future. Our current arrangements impose various development, royalty and
other obligations on us. If we materially breach these obligations or if our counterparts fail to adequately perform
their respective obligations, these exclusive arrangements could be terminated, which would result in our inability to
develop, manufacture and sell products that are covered by such intellectual property.
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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the success or perceived success of the commercialization of ZILRETTA;
failure to successfully develop and commercialize additional product candidates;
adverse results or delays in clinical trials;
inability to obtain additional funding;
changes in laws or regulations applicable to our products or product candidates;
51
•
•
•
•
•
•
•
•
•
•
•
•
•
inability to obtain adequate product supply for our products or 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;
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, product liability 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.
The trading price of our common stock may also be dependent upon the valuations and recommendations of
the analysts who cover our company. If our results do not meet these analysts’ forecasts, the expectations of our
investors or any financial guidance or expectations we provide to investors in any period, the market price of our
common stock could decline. Our ability to meet analysts’ forecasts (including revenue and profitability), investors’
expectations and our own guidance or financial expectations is substantially dependent on our ability to increase
sales of ZILRETTA and to successfully commercialize ZILRETTA in the United States. Because we are in the early
stages of the ZILRETTA launch, we and the analysts who cover our company have limited ability to accurately
predict future sales results, and actual results may differ materially from our expectations or those of such analysts.
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 are able to
exert significant control over matters subject to stockholder approval.
As of December 31, 2017, our executive officers, directors and stockholders affiliated with our officers and
directors beneficially owned approximately 13.8% 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.
52
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 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 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 public company, we incur significant
legal, accounting and other expenses that we did not incur as a private company. For example, we are 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 annually, 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
53
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 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.
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 may need significant additional capital 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 our 2013 equity incentive 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
54
of Section 382 had occurred in 2009. As a result of this Section 382 limitation, approximately $0.3 million of NOLs
will expire unutilized. Through the quarter ending December 31, 2017, the Company has completed periodic
updates to its Section 382 study through October 31, 2017, which have indicated ownership changes within the
meaning of Section 382 have occurred in December 2014 and June 2016, however, it is not anticipated that a portion
of the Company’s NOLs will expire unutilized as a result of the Section 382 limitations arising from these
ownership changes. 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.
Under the newly enacted federal income tax law, federal NOLs incurred in 2018 and in future years may be
carried forward indefinitely, but the deductibility of such federal NOLs is limited. It is uncertain if and to what
extent various states will conform to the newly enacted federal tax law.
The recently passed comprehensive tax reform bill could adversely affect our business and financial
condition.
On December 22, 2017, President Trump signed into law new legislation that significantly revises the Internal
Revenue Code of 1986, as amended. The newly enacted federal income tax law, among other things, contains
significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of
35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for
certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income
and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless
of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions),
immediate deductions for certain new investments instead of deductions for depreciation expense over time, and
modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate
income tax rate, the overall impact of the new federal tax law is uncertain and our business and financial condition
could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the newly
enacted federal tax law. The impact of this tax reform on holders of our common stock is also uncertain and could
be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and
the potential tax consequences of investing in or holding our common stock.
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;
55
•
•
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, Massachusetts at a leased facility used primarily for corporate functions.
Due to increased headcount and future growth plans, during 2017, the Company amended the original lease to
expand the facility to approximately 30,000 square feet, with another approximately 6,450 square feet of space
commencing in April 2018. The lease for the office space expires in October 2023. In addition, the Company has
laboratory space in Woburn, Massachusetts of approximately 5,300 square feet at a leased facility which lease
expires in 2022.
Item 3.
Legal Proceedings
We are not currently a party to any material legal proceedings.
Item 4.
Mine Safety Disclosures
Not applicable.
56
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
Our common stock is listed on the Nasdaq Global Market and trades under the symbol “FLXN”. 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, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$
$
$
$
$
$
$
$
29.41
29.00
26.71
32.25
High
19.42
17.87
19.63
23.57
$
$
$
$
$
$
$
$
17.91
16.51
20.15
19.06
Low
7.56
8.16
14.78
15.93
On March 1, 2018, the last reported sale price of our common stock was $25.16.
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, 2017 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.
57
Holders of Record
As of March 1, 2018, there were approximately 15 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.
58
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.
We have derived the consolidated statements of operations data for the years ended December 31, 2017, 2016
and 2015 and the consolidated balance sheet data as of December 31, 2017 and December 31, 2016 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, 2014 and 2013 and the selected consolidated
balance sheet data as of December 31, 2015, 2014 and 2013 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 effected on January 27, 2014.
2017
2016
Year Ended December 31,
2015
(in thousands)
2014
2013
Consolidated Statement of Operations Data:
Revenues:
Product revenue, net
Operating expenses:
Cost of sales
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other expense
Total other income (expense)
Net loss
Net loss per share attributable to common
stockholders, basic and diluted(1)
Weighted average common shares outstanding,
basic and diluted(1)
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)
$
355 $
— $
— $
— $
—
4
51,231
78,801
130,036
(129,681)
—
41,314
28,466
69,780
(69,780)
—
32,691
13,372
46,063
(46,063)
—
17,923
9,064
26,987
(26,987)
—
11,061
6,704
17,765
(17,765)
3,718
(11,268)
(250)
(7,800)
234
(449)
(207)
(422)
(137,481) $ (71,894) $ (46,315) $ (27,313) $ (18,187)
1,521
(1,748)
(1,887)
(2,114)
1,246
(571)
(927)
(252)
479
(401)
(404)
(326)
$
(4.16) $
(2.84) $
(2.15) $
(1.97) $
(23.02)
33,027
25,297
21,497
13,894
790
2017
2016
2015
2014
2013
$ 423,916 $ 210,329 $ 118,604 $ 151,625 $ 16,438
11,583
367,418 191,853 104,044 145,328
18,731
441,317 226,262 127,139 153,348
3,564
160,010
5,002
74,806
—
—
(64,704)
260,274 187,032 103,986 144,942
30,533
—
15,002
—
(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.
(3)
Total debt includes the current and long-term portion of our term loan, net of debt issuance costs and the 2024
convertible notes, net of the portion of the proceeds allocated to the conversion option and net of debt issuance
costs.
59
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 biopharmaceutical 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. On October 6, 2017, the U.S. Food and Drug Administration, or FDA, approved
ZILRETTA® (triamcinolone acetonide extended-release injectable suspension), as the first and only extended-
release, intra-articular, or IA (meaning in the joint), injection indicated for the management of OA pain of the knee.
ZILRETTA is a non-opioid therapy that employs our proprietary microsphere technology to provide pain relief over
12 weeks. We established a full field sales force of Musculoskeletal Business Managers (MBMs) following
ZILRETTA’s approval. The MBMs were trained, certified and deployed in the field as of November 20, 2017, when
they began the process of informing and educating prescribing clinicians about ZILRETTA.
We were incorporated in Delaware in November 2007, and to date we have devoted substantially all of our
resources to developing our product candidates, including conducting clinical trials with our product candidates,
preparing for the commercialization of ZILRETTA, providing general and administrative support for these
operations and protecting our intellectual property. From our inception through December 31, 2017, we have raised
approximately $756 million and funded our operations primarily through the sale of our common stock, convertible
preferred stock, follow-on public offerings, convertible debt, and debt financing. Until such time, if ever, 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 $137.5 million,
$71.9 million, and $46.3 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of
December 31, 2017, we had an accumulated deficit of $349.2 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 and commercialization of our lead product, ZILRETTA, including our on-
going and future clinical trials;
continue to scale-up manufacturing activities including the supply of clinical trial materials and
registration and commercial batches;
• maintain a sales and marketing infrastructure for the commercialization of ZILRETTA;
•
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.
60
As part of the commercialization of ZILRETTA, we are closely monitoring the launch, and focus on a number
of quantitative metrics. During the fourth quarter, following our launch on November 20th, our MBMs called on
approximately 3,600 physicians out of the approximately 9,500 physicians in around 3,500 accounts in our target
list. In addition, during this period, our MBMs and Field Access Managers conducted in-depth discussions around
reimbursement or product preparation training at approximately 350 accounts and 390 accounts gained experience
with ZILRETTA through either purchases or samples. Of the accounts that purchased ZILRETTA, around 20%
placed a reorder for additional product within the fourth quarter. On the payer front, we engaged about 20 key
commercial insurers that represent roughly 141 million covered lives and greater than 95% of the benefits
verifications processed through our FlexForward service resulted in coverage of ZILRETTA.
We may need to raise additional capital for the commercialization 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, 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
Net product sales consist of sales of ZILRETTA, which was approved by the FDA on October 6, 2017 and
launched in the United States in October 2017. We had not generated any revenue prior to the launch of
ZILRETTA.
Cost of Product Sales
Cost of product sales consists of third-party manufacturing costs, freight and indirect overhead costs
associated with sales of ZILRETTA. Cost of product sales also includes period costs related to certain inventory
manufacturing services, inventory adjustment charges, and unabsorbed manufacturing and overhead costs. Based on
our policy to expense costs associated with the manufacture of our products prior to regulatory approval, the vast
majority of the costs of ZILRETTA recognized as revenue during the year ended December 31, 2017 were expensed
prior to the October 2017 FDA approval and, therefore, are not included in cost of sales during the period. We
expect cost of sales to increase in relation to product revenues as we deplete these inventories.
Operating Expenses
The majority of our operating expenses to date have been related to the development activities of ZILRETTA,
and to a lesser extent portfolio expansion efforts.
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;
61
• manufacturing costs for ZILRETTA;
•
•
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.
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 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. Inventory acquired prior to receipt of the marketing approval of ZILRETTA was recorded
as research and development expense as incurred. We began capitalizing the costs associated with the production of
ZILRETTA after the FDA approval on October 6, 2017.
The following table summarizes our research and development expenses for the periods presented:
(In thousands)
Direct research and development expenses by program:
Zilretta
FX007
FX005
FX101
Portfolio expansion
Other
Total direct research and development expenses
Personnel and other costs
Total research and development expenses
Year Ended
December 31,
2016
2015
2017
$
$
20,040
47
—
655
4,341
1,080
26,163
25,068
51,231
$
$
$
24,609
349
13
234
620
25,825
15,489
41,314
$
22,046
669
247
—
—
22,962
9,729
32,691
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 in an effort to expand
ZILRETTA’s label to include additional indications and broaden its scope of administration. The ZILRETTA
related research and development costs incurred in 2017 were comprised of $15.9 million related to OA knee pain,
$3.4 million related to OA knee pain repeat administration, $0.3 million related to shoulder and hip OA pain, and
$0.4 million related to bilateral knee OA pain. The primary increase in the portfolio expansion costs in 2017 was
due to the December 2017 acquisition of the global rights to FX201 from GeneQuine Biotherapeutics GmbH, or
GeneQuine, which required an upfront payment to GeneQuine of $2 million. Evonik Corporation, or Evonik, our
supplier of PLGA for ZILRETTA, had previously manufactured finished drug product for our ZILRETTA clinical
trial materials; however, in early 2016 we decided to use Patheon UK Limited (part of Thermo Fisher Scientific), or
Patheon, as our sole supplier of ZILRETTA finished drug product for clinical trials and commercial supply. We
impaired approximately $2,265,000 in manufacturing equipment located at the Evonik facility, resulting in a loss of
$2,180,000 which was recorded in research and development expenses during the year ended December 31, 2016.
We cannot determine with certainty the duration of and completion costs associated with ongoing and future
clinical trials or the regulatory approval process associated with post-marketing development of ZILRETTA or
development of any product candidates in our pipeline. The duration, costs and timing associated with the further
development of ZILRETTA or the development of other product candidates will depend on a variety of factors,
including uncertainties associated with the results of our clinical trials. As a result of these uncertainties, we are
currently unable to estimate with any precision our future research and development expenses for expanded
indications for ZILRETTA or any product candidates in our pipeline, or when we may generate sufficient revenue to
achieve a positive cash flow position.
62
We previously performed research and development for the U.S. Department of Defense under a cost
reimbursable grant for a Phase 2 clinical trial investigating ZILRETTA in active military and medically retired
veterans with post-traumatic knee OA. Reimbursements were recorded as an offset to research and development
expenses when invoices for allowable costs were prepared and submitted to the U.S. Department of Defense. We
discontinued this Phase 2 trial and terminated the grant as of July 31, 2016. Payments under cost reimbursable
grants with agencies of the U.S. government were approximately $757,000.
Selling, General and Administrative Expenses.
Selling, 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 launch of ZILRETTA or any
other product candidates. In particular, since ZILRETTA was approved by the FDA on October 6, 2017, we expect
to incur material and ongoing increases in general and administrative expenses related to our hiring of a field sales
force to market ZILRETTA in the United States. 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 and 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 April 2017, we issued approximately $201.3 million in principle amount of convertible
notes, or the 2024 Convertible Notes, which accrue interest at a rate of 3.375% per annum, payable semi-annually.
We expect to pay interest through the maturity of the 2024 Convertible Notes on May 1, 2024. We have also
borrowed $30.0 million under our 2015 term loan facility, and we 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.
Foreign currency gain (loss). We maintain a bank account denominated in British Pounds. All foreign
currency payables and cash balances are measured at the applicable exchange rate at the end of the reporting period.
All associated gains and losses from foreign currency transactions are reflected in the consolidated statements of
operations, within other income and expense.
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, 2017, we had $190.9 million and $147.8 million of federal and state net operating loss
carryforwards, respectively, and $5.4 million and $2.9 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
63
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, 2017, 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% 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.
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.
Revenue Recognition
On October 6, 2017, the FDA approved ZILRETTA. We entered into a limited number of arrangements with
customers that are specialty distributors and a specialty pharmacy in the U.S. to distribute ZILRETTA. These
arrangements are our initial contracts with customers and, as a result we adopted Accounting Standards Codification
(“ASC”) Topic 606 - Revenue from Contracts with Customers (“Topic 606”) as of January 1, 2017. The transition to
Topic 606 had no impact on our financial statements because we had no historical revenue prior to the launch of
ZILRETTA. This standard applies to all contracts with customers, except for contracts that are within the scope of
other standards, such as leases, insurance and financial instruments. Under Topic 606, an entity recognizes revenue
when its customer obtains control of promised goods or services, in an amount that reflects the consideration which
the entity expects to be entitled to in exchange for those goods or services.
To determine revenue recognition for arrangements that an entity determines are within the scope of Topic
606, the entity performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the
performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the
performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance
obligation. We only apply the five-step model to arrangements that meet the definition of a contract with a customer
under Topic 606, including when it is probable that the entity will collect the consideration it is entitled to in
exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined
to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine
those that are performance obligations, and we then assess whether each promised good or service is distinct. We
then recognize as revenue the amount of the transaction price that is allocated to the respective performance
obligation when (or as) the performance obligation is satisfied. For a complete discussion of accounting for product
revenue, see Product Revenue, Net (below).
64
Product Revenue, Net— We sell ZILRETTA to a limited number of specialty distributors and a specialty
pharmacy in the U.S. These customers subsequently resell ZILRETTA to physicians, clinics and certain medical
centers or hospitals. In addition to distribution agreements with our customers, we enter into arrangements with
government payers that provide for government mandated rebates and chargebacks with respect to the purchase of
ZILRETTA
We recognize revenue on product sales when the customer obtains control of ZILRETTA, which occurs at a
point in time (upon delivery to the customer). We have determined that the delivery of ZILRETTA to our customers
constitutes a single performance obligation. There are no other promises to deliver goods or services beyond what is
specified in each accepted customer order. Management has assessed the existence of a significant financing
component in the agreements with our customers. The trade payment terms with our customers do not exceed one
year and therefore management has elected to apply the practical expedient and no amount of consideration has been
allocated as a financing component. Product revenues are recorded net of applicable reserves for variable
consideration, including discounts and allowances.
Transaction Price, including Variable Consideration— Revenues from product sales are recorded at the net
sales price (transaction price), which includes estimates of variable consideration for which reserves are established.
Components of variable consideration include trade discounts and allowances, product returns, government
chargebacks, discounts and rebates, and other incentives, such as voluntary patient assistance, and other fee for
service amounts that are detailed within our contracts with our customers relating to the sale of ZILRETTA. These
reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified
as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is
payable to a party other than a customer). These estimates take into consideration a range of possible outcomes
which are probability-weighted in accordance with the expected value method in Topic 606 for relevant factors such
as current contractual and statutory requirements, specific known market events and trends, industry data, and
forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of
consideration to which we are entitled based on the terms of the respective underlying contracts.
The amount of variable consideration which is included in the transaction price may be constrained, and is
included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the
cumulative revenue recognized under the contract will not occur in a future period. Our analyses also contemplate
application of the constraint in accordance with the guidance, under which it determined a material reversal of
revenue would not occur in a future period for the estimates detailed in our financial statements as of December 31,
2017 and, therefore, the transaction price was not reduced further during the year ended December 31, 2017. Actual
amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from
our original estimates, we will adjust these estimates, which would affect net product revenue and earnings in the
period such variances become known.
Trade Discounts and Allowances—We compensate (through trade discounts and allowances) our customers
for sales order management, data, and distribution services. However, we have determined such services received to
date are not distinct from our sale of products to the customers and, therefore, these payments have been recorded as
a reduction of revenue within the statement of operations and comprehensive loss through December 31, 2017, as
well as a reduction to trade receivables, net on the condensed consolidated balance sheets.
Product Returns— Consistent with industry practice, we generally offers our customers a limited right of
return for product that has been purchased from us based on the product’s expiration date. We estimate the amount
of our product sales that may be returned by our customers and record this estimate as a reduction of revenue in the
period the related product revenue is recognized, as well as within accrued expenses and other current liabilities, net
on the condensed consolidated balance sheets. We currently estimate product return liabilities using available
industry data and our own sales information, including our visibility into the inventory remaining in the distribution
channel. We have not received any returns to date and we believe that returns of our products will be minimal.
65
Government Chargebacks, Discounts and Rebates— Chargebacks for fees and discounts to qualified
government healthcare providers represent the estimated obligations resulting from contractual commitments to sell
products to qualified VA hospitals and 340b entities at prices lower than the list prices charged to customers who
directly purchase the product from us. The 340b Drug Discount Program is a US federal government program
created in 1992 that requires drug manufacturers to provide outpatient drugs to eligible health care organizations and
covered entities at significantly reduced prices. Customers charge us for the difference between what they pay for
the product and the statutory selling price to the qualified government entity. These reserves are established in the
same period that the related revenue is recognized, resulting in a reduction of product revenue and trade receivables,
net. Chargeback amounts are generally determined at the time of resale to the qualified government healthcare
provider by customers, and we generally issue credits for such amounts within a few weeks of the customer’s
notification to us of the resale. Reserves for chargebacks consist of credits that we expect to issue for units that
remain in the distribution channel inventories at each reporting period-end that we expect will be sold to qualified
healthcare providers, and chargebacks that customers have claimed, but for which we have not yet issued a credit.
Government Rebates— We are subject to discount obligations under state Medicaid programs and Medicare.
These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product
revenue and the establishment of a current liability which is included in accrued expenses and other current
liabilities on the condensed consolidated balance sheets. For Medicare, we also estimate the number of patients in
the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program.
We anticipate our exposure to utilization from the Medicare Part D coverage gap discount program to be immaterial.
For Medicaid programs, we estimate the portion of sales attributed to Medicaid patients and record a liability for the
rebates to be paid to the respective state Medicaid programs. Our liability for these rebates consists of invoices
received for claims from prior quarters that have not been paid or for which an invoice has not yet been received,
estimates of claims for the current quarter, and estimated future claims that will be made for product that has been
recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.
Other Incentives— Other incentives which we offer include voluntary patient assistance programs, such as the
co-pay assistance program, which are intended to provide financial assistance to qualified commercially-insured
patients with prescription drug co-payments required by payers. The calculation of the accrual for co-pay assistance
is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has
been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.
The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of
product revenue and the establishment of a current liability which is included as a component of accrued expenses
and other current liabilities on the condensed consolidated balance sheets.
To date, our only source of product revenue has been from the U.S. sales of ZILRETTA, which we began
shipping to customers in October 2017.
The following table summarizes activity in each of the product revenue allowance and reserve categories for
the year ended December 31, 2017:
(In thousands)
Beginning Balance
Provision related to sales in the
current year
Credit and payments made
Ending Balance
Trade Discounts,
Allowances and
Government chargebacks
Government rebates
and other incentives
Returns
Total
$
$
— $
100
(40)
60 $
— $
15
0
15 $
— $
2
0
2 $
—
117
(40)
77
66
Product Revenue Reserves and Allowances – Chargebacks and fees are recorded as reductions of trade
receivables, net on the condensed consolidated balance sheets. Government and other rebates and returns are
recorded as a component of accrued expenses and other current liabilities on the condensed consolidated balance
sheets.
Inventory—We value our inventories at the lower of cost or estimated net realizable value. We determine the
cost of our inventories, which includes amounts related to materials and manufacturing overhead, on a first-in, first-
out basis. We perform an assessment of the recoverability of capitalized inventory during each reporting period, and
write down any excess and obsolete inventories to their estimated realizable value in the period in which the
impairment is first identified. Such impairment charges, should they occur, are recorded within cost of product
revenues. The determination of whether inventory costs will be realizable requires estimates by management. If
actual market conditions are less favorable than projected by management, additional write-downs of inventory may
be required, which would be recorded as a cost of product sales in the consolidated statements of operations and
comprehensive loss.
The Company capitalizes inventory costs associated with the Company’s products after regulatory approval
when, based on management’s judgment, future commercialization is considered probable and the future economic
benefit is expected to be realized. Inventory acquired prior to receipt of marketing approval of a product candidate is
expensed as research and development expense as incurred. Inventory that can be used in either the production of
clinical or commercial product is expensed as research and development expense when selected for use in a clinical
manufacturing campaign. Inventory produced that will be used in promotional marketing campaigns is expensed to
selling, general and administrative expense when it is selected for use in a marketing program.
Shipping and handling costs for product shipments are recorded as incurred in cost of product revenues along
with costs associated with manufacturing the product, and any inventory write-downs.
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
67
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 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:
Risk-free interest rate
Dividend yield
Expected term (in years)
Expected volatility
2017
Year Ended December 31,
2016
2015
1.97%-
2.29%
0.00%
6.0
69.9%-
72.8%
0.74-1.75%
1.49-1.92%
0.00%
5.6
0.00%
6.0
67.3-99.9%
76.4-83.9%
We recognize compensation expense only for the portion of awards that are expected to vest. On January 1,
2017, we began accounting for forfeitures as they occur rather than estimating future forfeitures. As such, any
previously recognized compensation expense for an award will be reversed in the period that the award is forfeited.
RESULTS OF OPERATIONS
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The following table summarizes our results of operations for the years ended December 31, 2017 and
2016:
(In thousands)
Revenues:
Product revenue, net
Operating expenses:
Cost of sales
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other expense
Total other income (expense)
Net loss
Year Ended December 31,
2017
2016
Change
% Increase/
(Decrease)
$
355 $
— $
355
—
4
51,231
78,801
130,036
(129,681)
3,718
(11,268)
(250)
(7,800)
(137,481)
—
41,314
28,466
69,780
(69,780)
1,521
(1,748)
(1,887)
(2,114)
(71,894) $
4
9,917
50,335
60,256
(59,901)
2,197
(9,520)
1,637
(5,686)
(65,587)
100.0%
24.0%
176.8%
86.4%
85.8%
144.4%
544.6%
(86.8)%
269.0%
91.2%
68
Product Revenue
We began commercially selling ZILRETTA within the United States in October, 2017, following FDA
approval on October 6, 2017. For the year ended December 31, 2017, we recorded $0.4 million of net product
revenue. For further discussion regarding our revenue recognition policy, see Note 3 to our consolidated financial
statements appearing elsewhere in this Form 10-K.
Cost of Sales
Cost of sales was approximately $4 thousand for the year ended December 31, 2017. Based on our policy to
expense costs associated with the manufacture of our products prior to regulatory approval, the vast majority of the
costs of ZILRETTA recognized as revenue during the year ended December 31, 2017 were expenses prior to the
October 2017 FDA approval of ZILRETTA and, therefore, are not included in cost of sales during the period. We
expect cost of sales to increase in relation to product revenues as we deplete these inventories.
Research and Development Expenses
(In thousands)
Direct research and development expenses by program:
Zilretta
FX007
FX005
FX101
Portfolio expansion
Other
Total direct research and development expenses
Personnel and other costs
Total research and development expenses
Year Ended December 31,
2017
2016
Change
% Increase/
(Decrease)
$
$
20,040 $
47
—
655
4,341
1,080
26,163
25,068
51,231 $
24,609 $
349
13
—
234
620
25,825
15,489
41,314 $
(4,569)
(302)
(13)
655
4,107
460
338
9,579
9,917
(18.6)%
(86.5)%
(100.0)%
100.0%
1755.1%
74.2%
1.3%
61.8%
24.0%
Research and development expenses were $51.2 million and $41.3 million for the years ended December 31,
2017 and 2016, respectively. The increase in research and development expenses year over year of $9.9 million was
primarily due to a $5.2 million increase in preclinical expenses related to our portfolio expansion, other program
costs, FX101 and a $9.6 million increase in personnel and other employee-related costs for additional headcount and
stock compensation expense. This was offset by a $4.9 million decrease in development expenses for ZILRETTA,
including CMC and clinical trial costs. The primary increase in the portfolio expansion costs in 2017 is due to the
December 2017 acquisition of the global rights to FX201 from GeneQuine which required an upfront payment of $2
million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $78.8 million and $28.5 million for the years ended
December 31, 2017 and 2016, respectively for a year over year increase of $50.3 million. Selling expenses were
$45.9 million and $11.1 million for the years ended December 31, 2017 and 2016. The increase in selling expenses
year over year of $34.8 million was primarily due to salary and related costs associated with additional headcount
(an increase of 138 employees) and costs related to the creation of commercial marketing and sales capabilities.
General and administrative expenses were $32.9 million and $17.4 million for the years ended December 31,
2017 and 2016. The increase in general and administrative expenses year over year of $15.5 million was primarily
due to salary and related costs associated with additional headcount and increased stock compensation expense.
69
Other Income (Expense)
Interest income was $3.7 million and $1.5 million for the years ended December 31, 2017 and 2016,
respectively. The increase in interest income was primarily due to a larger average investment balance during 2017.
Interest expense was $11.3 million and $1.7 million for the years ended December 31, 2017 and 2016,
respectively. The increase in interest expense was primarily due to interest incurred on the 2024 Convertible Notes.
Other expense was $0.3 million and $1.9 million for the years ended December 31, 2017 and 2016,
respectively. Other expense decreased primarily due to foreign currency related gains realized during the year ended
December 31, 2017 versus foreign currency losses incurred during the year ended December 31, 2016.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The following table summarizes our results of operations for the years ended December 31, 2016 and 2015
(certain items may not foot due to rounding):
(In thousands)
Revenues:
Product revenues, net
Operating expenses:
Cost of sales
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other expense
Total other income (expense)
Net loss
Research and Development Expenses
(In thousands)
Direct research and development expenses by program:
Zilretta
FX007
FX005
Portfolio expansion
Other
Total direct research and development expenses
Personnel and other costs
Total research and development expenses
Year Ended December 31,
2016
2015
Change
% Increase/
(Decrease)
$
— $
— $
—
—
—
41,314
28,466
69,780
(69,780)
—
32,691
13,372
46,063
(46,063)
1,521
(1,748)
(1,887)
(2,114)
(71,894) $
1,246
(571)
(927)
(252)
(46,315) $
—
8,623
15,094
23,717
(23,717)
275
(1,177)
(960)
(1,862)
(25,579)
—
26.4%
112.9%
51.5%
51.5%
22.1%
206.1%
103.6%
738.9%
55.2%
Year Ended December 31,
2016
2015
Change
% Increase/
(Decrease)
24,609 $
349 $
13 $
234 $
620 $
25,825
15,489
41,314 $
22,046 $
669
247
—
—
22,962
9,729
32,691 $
2,563
(320)
(234)
234
620
2,863
5,760
8,623
11.6%
(47.8)%
(94.7)%
100.0%
100.0%
12.5%
59.2%
26.4%
$
$
$
$
$
$
$
Research and development expenses were $41.3 million and $32.7 million for the years ended December 31,
2016 and 2015, respectively. The increase in research and development expenses year over year of $8.6 million was
primarily due to $2.6 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
70
clinical trial and potential commercial supplies. In addition, $6.0 million in personnel and other employee-related
costs for additional headcount, stock compensation expense, and consulting costs contributed to the increase.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $28.5 million and $13.4 million for the years ended
December 31, 2016 and 2015, respectively. The increase in general and administrative expenses of $15.1 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 $1.5 million and $1.2 million for the years ended December 31, 2016 and 2015,
respectively. The increase in interest income was primarily due to a larger average investment balance during 2016.
Interest expense was $1.7 million and $0.6 million for the years ended December 31, 2016 and 2015,
respectively. The increase in interest expense was primarily due to interest incurred on the $30.0 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 $1.9 million and $0.9 million for the years ended December 31, 2016 and 2015,
respectively. Other expense increased due to a net amortization of premiums on larger average marketable securities
and long-term investments balances.
Liquidity and Capital Resources
As of December 31, 2017, we have generated $0.4 million in revenue and have incurred losses since our
inception in 2007. As of December 31, 2017, we had an accumulated deficit of $349.2 million. We anticipate that
we will continue to incur losses for the foreseeable future. We expect that our research and development and selling,
general and administrative expenses will continue to increase and, as a result, we may 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 December 31, 2017, we have funded our operations primarily through the sale of
our common stock and convertible preferred stock, convertible debt, and venture debt financing. From our inception
through December 31, 2017, we had raised approximately $756 million from such transactions, including amounts
from our initial and follow-on public offerings during 2014, 2016 and 2017 as well as our 2024 Convertible Notes
issuance in 2017. As of December 31, 2017, we had cash and cash equivalents of $127.8 million and marketable
securities of $264.6 million, and long-term investments of $31.5 million. Based on our current operating plan we
anticipate that our existing cash, cash equivalents and marketable securities will fund our operations for at least the
next twelve months from the date of issuance of the financial statements included in this report. 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, 2017, 2016
and 2015:
(In thousands)
Cash flows used in operating activities
Cash flows used in investing activities
Cash flows provided by financing activities
Net increase (decrease) in cash and cash
equivalents
2017
Year Ended December 31,
2016
$ (107,831) $ (62,472) $ (38,949)
(13,245)
(118,792) (132,754)
12,040
323,497
163,197
2015
$
96,874
$ (32,029) $ (40,154)
71
Net Cash Used in Operating Activities
Operating activities used $107.8 million of cash in the year ended December 31, 2017. The cash used in
operating activities in the year ended December 31, 2017 resulted primarily from our 2017 net loss of $136.8 million
offset by changes in our operating assets and liabilities of $11.9 million and non-cash charges of $18.0 million.
Changes in our operating assets and liabilities consisted primarily of a $2.2 million increase in accounts receivable
and inventory and $0.4 million increase in prepaid expenses, offset by an increase of $10.2 million in accrued
expenses and other current liabilities and an increase of $3.5 million in accounts payable. The increase in accrued
expenses and other current liabilities was primarily attributable to increased expenses related to payroll and other
employee related expenses, professional services fees and interest expense on loans. Non-cash charges consisted
primarily of $10.8 million of stock-based compensation expense, $2.0 million in depreciation expense, $4.8 million
related to the amortization of the debt discount and debt issuance costs related to the 2024 Convertible Notes, and
$0.3 amortization and accretion related to our investments.
Operating activities used $62.5 million of cash in the year ended December 31, 2016. The cash used in
operating activities in the year ended December 31, 2016 resulted primarily from our 2016 net loss of $71.9 million
offset by changes in our operating assets and liabilities of $1.0 million and non-cash charges of $11.0 million.
Changes in our operating assets and liabilities consisted primarily of a $2.9 million increase in prepaid expenses,
offset by an increase of $2.8 million in accrued expenses and other current liabilities and a decrease of $1.0 million
in accounts payable. The increase in accrued expenses and other current liabilities was primarily attributable to
increased expenses related to clinical research and contract manufacturing services, and the costs associated with the
creation of commercial marketing and sales capabilities. These changes were partially offset by an increase in other
assets of $0.5 million. Non-cash charges consisted primarily of $6.8 million of stock-based compensation expense
$1.2 million in depreciation expense, a $2.3 million loss on disposal of property and equipment and $0.7
amortization and accretion related to our investments.
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.
Net Cash Used in Investing Activities
Net cash used in investing activities was $118.8 million in the year ended December 31, 2017. Net cash used
in investing activities consisted primarily of cash used to purchase marketable securities of $356.7 million, partially
offset by cash received from the redemption and sale of marketable securities of $240.2 million. In addition, $2.1
million of cash was used to purchase property and equipment, primarily computer equipment relating to the creation
of commercial sales capabilities and further developing our manufacturing capabilities at our contract manufacturer,
Patheon U.K. Limited.
Net cash used in investing activities was $132.8 million in the year ended December 31, 2016. Net cash used
in investing activities consisted primarily of cash used to purchase marketable securities of $196.1 million, partially
offset by cash received from the redemption and sale of marketable securities of $72.1 million. In addition, $8.4
million of cash was used to purchase property and equipment, primarily to further develop our manufacturing
capabilities at our contract manufacturer, Patheon U.K. Limited.
72
Net cash used in investing activities was $13.2 million in the year ended December 31, 2015. Net cash used in
investing activities in the year ended December 31, 2015 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 Provided by Financing Activities
Net cash provided by financing activities was $323.4 million, $163.2 million and $12.0 million in the years
ended December 31, 2017, 2016 and 2015, respectively. Net cash provided by financing activities in the year ended
December 31, 2017 consisted primarily of $194.8 million of proceeds received from the issuance of the 2024
Convertible Notes, $132.7 million in proceeds from the follow-on offerings of our common stock, and $4.9 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 $0.6 million in financing costs associated with our follow-on financing in
2017.
Net cash provided by financing activities in the year ended December 31, 2016 consisted of $15.0 million
borrowed under our credit facility with MidCap Financial Funding XIII Trust and Silicon Valley Bank in July 2016,
$147.9 million in proceeds from follow-on offerings of our common stock, as well as, $0.6 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 $0.3 million in financing costs associated with our follow-on financing in 2016.
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 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.
Contractual Obligations
The following table discloses aggregate information about our contractual obligations and the periods in
which payments are due as of December 31, 2017:
Payments Due By Period
Total
Less Than
1 Year
1 – 3
Years
(in thousands)
3 – 5
Years
More
Than 5
Years
Long-term debt obligation (including interest)(1)
Operating lease obligations(2)
Monthly base fee to Patheon(3)
2024 Convertible notes obligations(4)
Supply agreement with Evonik(5)
Total
8,587
63,646
244,832
3,894
$ 25,913 $ 11,082 $ 14,831 $
3,024
16,216
13,584
3,200
—
— $
1,203
3,022
16,216
24,323
13,584 210,872
—
$ 346,872 $ 26,797 $ 50,855 $ 32,822 $ 236,398
1,338
6,891
6,792
694
—
(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, 2017 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 interest payments in accordance with the required payment schedule and
the final principal payment of $201.3 million due on May 1, 2024.
73
(5) Represents contractually required purchases of PLGA for clinical and commercial supply of ZILRETTA. The
required purchases are based upon a binding 24 month rolling forecast of 100% of our total volume
requirements for the PLGA product. Beginning in December, 2020, the required purchases reduce to 50% of
our total volume requirements for the PLGA product. Since the current required 24 month rolling forecast
does not go beyond December 2019, any potential minimum purchases in the year 2020 and beyond are not
fixed or determinable and therefore no amounts are presented in the table above.
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.
On September 21, 2016, we entered into a second amendment to our existing lease for approximately 6,748
additional square feet of rented space located in Burlington, Massachusetts. The lease began October 1, 2016 and
expired on October 31, 2017. During October 2016, the Company lease payment for this additional space was
$18,275.83 in incremental rent. Beginning in November 2016 through October 2017, our lease payments for the
additional space increased to $18,838.17 per month in incremental rental cash outflow.
On April 7, 2017, we further amended the Lease to extend the term to October 31, 2023 on the then-existing
office space, including the temporary space, consisting of approximately 28,600 square feet of office space in
Burlington, Massachusetts. From November 2016 through October 2017, our lease payment for this space was
approximately $80,000 per month. Also, as part of this amendment to the Lease, we leased an additional 1,471
square feet of office space beginning in 2018. The lease payment for the 1,471 square feet of office space is
approximately $4,100 per month.
On October 6, 2017, we exercised our option for an additional 6,450 square feet of space, with the term
expected to commence on or about April 1, 2018. After April 2018, we will have approximately 36,500 square feet
of office space in Burlington, Massachusetts under a lease term expiring on October 31, 2023. In addition to the base
rent for the office space, which increases over the term of the amended Lease, we are responsible for its share of
operating expenses and real estate taxes.
In February 2017, we entered into a five-year lease for laboratory space located in Woburn, Massachusetts
with a monthly lease payment of approximately $15,000, which increases over the term of the lease, plus a share of
operating expenses. The total cash obligations for the term of the lease are approximately $0.9 million.
Also in July 2015, we and Patheon U.K. Limited, or Patheon, entered into a Manufacturing and Supply
Agreement, or 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.
74
Under the terms of the Manufacturing 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 December 2017, we entered into a definitive agreement with GeneQuine to acquire the global rights to
FX201. As part of the asset purchase transaction with GeneQuine, we made an upfront payment of $2 million. We
may also be required to make additional milestone payments during the development of FX201, including up to $8.7
million through Phase 2 proof of concept (PoC) and, following successful PoC, up to an additional $54 million in
development and global regulatory approval milestone payments. The transaction was accounted for as an asset
acquisition, as it did not qualify as a business combination. The upfront fee was attributed to the intellectual
property acquired, and recognized as research and development expense in December 2017 as the FX201 rights had
not been commercially approved, and have no alternative future use. Future milestone payments earned prior to
regulatory approval of FX201 would be recognized as research and development expense in the period when the
milestone events become probable of being achieved. Future milestones earned upon regulatory approval would be
recognized as an intangible asset and amortized to expense over its estimated life. As of December 31, 2017 none of
the future milestone payments owed under the arrangement was probable of being achieved. As part of the
transaction, we became the direct licensee of certain underlying Baylor College of Medicine (Baylor) patents and
other proprietary rights related to FX201 for human applications. The Baylor license agreement grants us an
exclusive, royalty-bearing, world-wide right and license (with a right to sublicense) for human applications under its
patent and other proprietary rights directly related to FX201, with a similar non-exclusive license to certain Baylor
intellectual property rights that are not specific to FX201. The license agreement with Baylor includes a low single-
digit royalty on net sales of FX201 and requires us to use reasonable efforts to develop FX201 according to
timelines set out in the license agreement. In December 2017, we also entered into a Master Production Services
Agreement with SAFC Carlsbad, Inc., a part of MilliporeSigma, for the manufacturing of pre-clinical and initial
clinical supplies of FX201.
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
A discussion of recent accounting pronouncements is included in Note 3 to the consolidated financial
statements in this Annual Report on Form 10-K.
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.
75
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 $1.07 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. As of December 31, 2017 we had not met any of
these criteria.
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% 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 $30.0 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, 2017, the carrying value of
the term loan was $22.9 million.
•
Our 2024 Convertible Notes carry a fixed interest rate and, thus we are not subject to interest rate risk.
• We have borrowed $201.3 million under the 2024 Convertible Notes. Amounts outstanding bear
interest at a fixed rate of 3.375% per annum. As of December 31, 2017, the carrying value of the 2024
Convertible Notes, net of the portion of the proceeds allocated to the conversion option and net of debt
issuance costs was $137.1 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, 2017 we had approximately $0.3 million in payables to vendors denominated in British pounds. As
of December, 2017, we also had approximately $1.4 million in cash denominated in British pounds. A hypothetical
10% change in foreign exchange rates would result in either a $0.1 million increase, in the event the U.S. dollar
strengthens relative to the British pound, or a $0.1 million decrease, in the event the U.S. dollar weakens relative to
the British pound, of cash denominated in British pounds.
76
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 Stockholders’ Equity.............................................................................
Consolidated Statements of Cash Flows...............................................................................................................
Notes to Consolidated Financial Statements ........................................................................................................
Page
78
79
80
81
82
83
77
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Flexion Therapeutics, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Flexion Therapeutics, Inc. and its
subsidiary as of December 31, 2017 and 2016, and the related consolidated statements of operations and
comprehensive loss, of changes in stockholders’ equity and of cash flows for each of the three years in the period
ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting
principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As
part of our audits we are required to obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 8, 2018
We have served as the Company's auditor since 2010.
78
Flexion Therapeutics, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Long-term investments
Restricted cash
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Current portion of long-term debt
Total current liabilities
Long-term debt, net
2024 convertible notes, net
Other long-term liabilities
Total liabilities
Commitments and contingencies
Preferred Stock, $0.001 par value; 10,000,000 shares authorized at
December 31, 2017 and December 31, 2016 and 0 shares issued and
outstanding at December 31, 2017 and December 31, 2016
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 37,610,897
and 31,667,469 shares issued and outstanding, at December 31, 2017 and
December 31, 2016, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31, 2017
December 31, 2016
$
$
$
$
$
$
$
127,789
264,589
410
1,799
3,403
397,990
11,189
31,538
600
441,317
6,222
14,383
9,967
30,572
12,936
137,107
428
181,043
30,915
174,688
—
—
3,790
209,393
11,664
4,725
480
226,262
2,161
6,245
9,134
17,540
21,399
—
291
39,230
—
—
38
609,810
(407)
(349,167)
260,274
441,317
$
32
398,757
(71)
(211,686)
187,032
226,262
The accompanying notes are an integral part of these consolidated financial statements.
79
Flexion Therapeutics, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share amounts)
Revenues:
Product revenue, net
Operating expenses:
Cost of sales
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other expense
Total other income (expense)
Net loss
Net loss per common share, basic and diluted
Weighted average common shares outstanding, basic and diluted
Other comprehensive income (loss) :
Unrealized gains (losses) from available-for-sale securities,
net of tax of $0
Total other comprehensive income (loss)
Comprehensive loss
$
$
$
Year Ended December 31,
2016
2015
2017
$
355
$
—
$
—
4
51,231
78,801
130,036
(129,681)
3,718
(11,268)
(250)
(7,800)
(137,481) $
(4.16) $
—
41,314
28,466
69,780
(69,780)
1,521
(1,748)
(1,887)
(2,114)
(71,894) $
(2.84) $
33,027
25,297
—
32,691
13,372
46,063
(46,063)
1,246
(571)
(927)
(252)
(46,315)
(2.15)
21,497
(336)
(336)
(137,817) $
26
26
(71,868) $
(92)
(92)
(46,407)
The accompanying notes are an integral part of these consolidated financial statements.
80
Flexion Therapeutics, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands)
Common Stock
Shares
Par Value
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
(Deficit)
21,440 $
21 $
238,402 $
(5) $
(93,477) $
144,941
109
21
—
—
—
1
—
—
—
—
592
276
4,583
—
—
—
—
—
—
(92)
—
(46,315)
—
593
276
4,583
(46,315)
(92)
21,570 $
22 $
243,853 $
(97) $
(139,792) $
103,986
10,040
30
27
—
—
10
—
—
—
—
147,491
167
476
6,770
—
—
147,501
167
476
6,770
(71,894)
26
(71,894)
—
26
31,667 $
32 $
398,757 $
(71) $
(211,686) $
187,032
5,520
334
90
—
—
—
6
—
—
—
—
—
132,171
3,858
1,016
11,542
62,466
—
—
(137,481)
—
(336)
132,177
3,858
1,016
11,542
62,466
(137,481)
(336)
37,611 $
38 $
609,810 $
(407) $
(349,167) $
260,274
Balance at December 31,
2014
Issuance of common stock
for equity awards
Employee Stock Purchase
Plan
Stock-based compensation
expense
Net loss
Other comprehensive loss
Balance at December 31,
2015
Issuance of common stock
net of issuance costs
Issuance of common stock
for equity awards
Employee Stock Purchase
Plan
Stock-based compensation
expense
Net loss
Other comprehensive
income
Balance at December 31,
2016
Issuance of common stock
net of issuance costs
Issuance of common stock
for equity awards
Employee Stock Purchase
Plan
Stock-based compensation
expense
Portion of convertible
debt proceeds allocated to
equity component
Net loss
Other comprehensive
loss
Balance at December 31,
2017
The accompanying notes are an integral part of these consolidated financial statements.
81
Flexion Therapeutics, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation
Stock-based compensation expense
Other non-cash charges
Amortization of premium (discount) on marketable
Loss on disposal of fixed assets
Amortization of convertible debt discount and debt issuance
costs
Premium paid on securities purchased
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses, other current and long-term assets
Accounts payable
Accrued expenses and other current and long-term
liabilities
Net cash used in operating activities
Cash flows from investing activities
Purchases of property and equipment
Change in restricted cash
Purchases of marketable securities
Sale and redemption of marketable securities
Net cash used in investing activities
Cash flows from financing activities
Proceeds from the issuance of 2024 convertible notes
Payment of debt issuance costs
Proceeds from the offering of common stock
Payments on notes payable
Proceeds from issuance of notes payable
Payments of public offering costs
Proceeds from the exercise of stock options
Proceeds from Employee Stock Purchase Plan
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Cash paid for interest
Supplemental disclosures of non-cash financing activities:
Public offering costs included in accounts payable or accrued
Portion of debt proceeds allocated to equity component
Purchases of property and equipment in accounts payable and
accrued expenses
2017
Year Ended December 31,
2016
2015
$
(137,481) $
(71,894) $
(46,315)
2,008
11,542
—
333
—
4,826
(857)
(410)
(1,799)
387
4,188
1,151
6,770
37
729
2,283
238
4,583
40
871
150
(543)
—
95
—
(2,873)
(993)
—
—
(526)
1,581
9,432
(107,831)
2,766
(62,472)
429
(38,949)
(2,146)
(120)
(356,754)
240,228
(118,792)
(8,440)
(400)
(196,061)
72,147
(132,754)
201,250
(6,470)
132,666
(8,333)
—
(490)
3,858
1,016
323,497
96,874
30,915
127,789
$
—
(42)
147,889
—
15,000
(293)
167
476
163,197
(32,029)
62,944
30,915
$
5,080
$
1,297
$
—
62,466
$
$
95
—
$
$
(5,197)
48
(145,798)
137,702
(13,245)
-
(108)
—
(3,500)
15,004
(225)
593
276
12,040
(40,154)
103,098
62,944
572
—
—
9
$
622
$
1,576
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
82
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 biopharmaceutical company focused on the development and
commercialization of novel, local therapies for the treatment of patients with musculoskeletal conditions, beginning
with osteoarthritis (“OA”), a type of degenerative arthritis. On October 6, 2017, the U.S. Food and Drug
Administration, or FDA, approved ZILRETTA®, as the first and only extended-release, intra-articular, or IA
(meaning in the joint), injection indicated for the management of OA related knee pain. ZILRETTA is a non-opioid
therapy that employs Flexion’s proprietary microsphere technology to provide pain relief over 12 weeks.
The Company is subject to risks and uncertainties common to 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 the ability to secure additional capital to fund operations.
Successfully commercializing ZILRETTA will require significant sales and marketing efforts and the Company’s
pipeline programs may require significant additional research and development efforts, including extensive
preclinical and clinical testing. These activities will in turn require significant amounts of capital, adequate
personnel infrastructure and extensive compliance reporting capabilities. There can be no assurance when, if ever,
the Company will realize significant revenue from the sales of ZILRETTA or if the development efforts supporting
the Company’s pipeline, including future clinical trials, will be successful.
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, 2017, the Company had cash, cash equivalents,
marketable securities, and long-term investments of $423.9 million. Management believes that current cash, cash
equivalents and marketable securities on hand at December 31, 2017 should be sufficient to fund operations for at
least the next twelve months beyond the date of issuance of these financial statements. 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. This
capital is necessary for the Company to support the commercialization of ZILRETTA and to perform the research
and development activities required to develop the Company’s product candidates in order to generate future
revenue streams. The Company may not be able to obtain financing on acceptable terms, or at all. If the Company is
unable to obtain funding on a timely basis the Company may need to curtail its operations including research and
development which could adversely affect its prospects.
2.
Financing Transactions
On June 8, 2016, the Company completed a follow-on public offering of its common stock, which resulted in
the sale of 5,900,000 shares of the Company’s common stock at a price to the public of $14.00 per share including
shares sold pursuant to the partial exercise of the underwriters’ option to purchase additional shares. The Company
received net proceeds from the follow-on financing of $77.4 million after deducting underwriting discounts,
commissions, and offering costs paid by the Company.
On November 15, 2016, the Company completed a follow-on public offering of its common stock, which
resulted in the sale of 4,140,000 shares of the Company’s common stock at a price to the public of $18.00 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 $70.1 million after deducting underwriting
discounts, commissions, and offering costs paid by the Company.
83
On May 2, 2017 the Company issued an aggregate of $201.3 million principal amount of the 2024 Convertible
Notes. The 2024 Convertible Notes have a maturity date of May 1, 2024 are unsecured and accrue interest at a rate
of 3.375% per annum, payable semi-annually on May 1 and November 1 of each year, beginning November 1, 2017.
The Company received $194.8 million for the sale of the 2024 Convertible Notes, after deducting fees and expenses
of $6.5 million.
On October 16, 2017, the Company completed a follow-on public offering of its common stock, which
resulted in the sale of 5,520,000 shares of the Company’s common stock at a price to the public of $25.50 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 $132.2 million after deducting underwriting
discounts, commissions, and offering costs paid by the Company.
The Company’s total issued common stock as of December 31, 2017 was 37,610,897 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.
Revenue Recognition
On October 6, 2017, the FDA approved ZILRETTA. The Company entered into a limited number of
arrangements with specialty distributors and a specialty pharmacy in the U.S. (collectively, its “Customers”) to
distribute ZILRETTA. These arrangements are the Company’s initial contracts with customers and, as a result the
Company adopted Accounting Standards Codification (“ASC”) Topic 606 - Revenue from Contracts with
Customers (“Topic 606”) as of January 1, 2017. There is no impact for the transition to Topic 606 because the
Company had no historical revenue prior to the launch of ZILRETTA. This standard applies to all contracts with
customers, except for contracts that are within the scope of other standards, such as leases, insurance and financial
instruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or
services, in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those
goods or services.
To determine revenue recognition for arrangements that an entity determines are within the scope of Topic
606, the entity performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the
performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the
performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance
obligation. The Company only applies the five-step model to arrangements that meet the definition of a contract
with a customer under Topic 606, including when it is probable that the entity will collect the consideration it is
84
entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract
is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each
contract and determines those that are performance obligations, and assesses whether each promised good or service
is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the
respective performance obligation when (or as) the performance obligation is satisfied. For a complete discussion of
accounting for product revenue, see Product Revenue, Net (below).
Product Revenue, Net— The Company sells ZILRETTA to its customers who then subsequently resell the
Company’s products to physicians, clinics and certain medical centers or hospitals. In addition to distribution
agreements with customers, the Company enters into arrangements with government payers that provide for
government mandated rebates and chargebacks with respect to the purchase of the Company’s products.
The Company recognizes revenue on product sales when the customer obtains control of the Company's
product, which occurs at a point in time (upon delivery to the customer). We have determined that the delivery of
ZILRETTA to our customers constitutes a single performance obligation. There are no other promises to deliver
goods or services beyond what is specified in each accepted customer order. Management has assessed the
existence of a significant financing component in the agreements with our customers. The trade payment terms with
our customers do not exceed one year and therefore management has elected to apply the practical expedient and no
amount of consideration has been allocated as a financing component. Product revenues are recorded net of
applicable reserves for variable consideration, including discounts and allowances.
Transaction Price, including Variable Consideration— Revenues from product sales are recorded at the net
sales price (transaction price), which includes estimates of variable consideration for which reserves are established.
Components of variable consideration include trade discounts and allowances, product returns, government
chargebacks, discounts and rebates, and other incentives, such as voluntary patient assistance, and other fee for
service amounts that are detailed within contracts between the Company and its customers relating to the
Company’s sale of its products. These reserves, as detailed below, are based on the amounts earned, or to be claimed
on the related sales, and are classified as reductions of accounts receivable (if the amount is payable to the customer)
or a current liability (if the amount is payable to a party other than a customer). These estimates take into
consideration a range of possible outcomes which are probability-weighted in accordance with the expected value
method in Topic 606 for relevant factors such as current contractual and statutory requirements, specific known
market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these
reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the
terms of the respective underlying contracts.
The amount of variable consideration which is included in the transaction price may be constrained, and is
included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the
cumulative revenue recognized under the contract will not occur in a future period. The Company’s analyses also
contemplated application of the constraint in accordance with the guidance, under which it determined a material
reversal of revenue would not occur in a future period for the estimates detailed below as of December 31, 2017 and,
therefore, the transaction price was not reduced further during the year ended December 31, 2017. Actual amounts
of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary
from the Company’s original estimates, the Company will adjust these estimates, which would affect net product
revenue and earnings in the period such variances become known.
Trade Discounts and Allowances—The Company compensates (through trade discounts and allowances) its
customers for sales order management, data, and distribution services. However, the Company has determined such
services received to date are not distinct from the Company’s sale of products to the customer and, therefore, these
payments have been recorded as a reduction of revenue within the statement of operations and comprehensive loss
through December 31, 2017, as well as a reduction to trade receivables, net on the condensed consolidated balance
sheets.
85
Product Returns— Consistent with industry practice, the Company generally offers customers a limited right
of return for product that has been purchased from the Company based on the product’s expiration date. The
Company estimates the amount of its product sales that may be returned by its customers and records this estimate
as a reduction of revenue in the period the related product revenue is recognized, as well as within accrued expenses
and other current liabilities, net on the condensed consolidated balance sheets. The Company currently estimates
product return liabilities using available industry data and its own sales information, including its visibility into the
inventory remaining in the distribution channel. The Company has not received any returns to date and believes that
returns of its products will be minimal.
Government Chargebacks, Discounts and Rebates— Chargebacks for fees and discounts to qualified
government healthcare providers represent the estimated obligations resulting from contractual commitments to sell
products to qualified VA hospitals and 340b entities at prices lower than the list prices charged to customers who
directly purchase the product from the Company. The 340b Drug Discount Program is a US federal government
program created in 1992 that requires drug manufacturers to provide outpatient drugs to eligible health care
organizations and covered entities at significantly reduced prices. Customers charge the Company for the difference
between what they pay for the product and the statutory selling price to the qualified government entity. These
reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product
revenue and trade receivables, net. Chargeback amounts are generally determined at the time of resale to the
qualified government healthcare provider by customers, and the Company generally issues credits for such amounts
within a few weeks of the Customer’s notification to the Company of the resale. Reserves for chargebacks consist of
credits that the Company expects to issue for units that remain in the distribution channel inventories at each
reporting period-end that the Company expects will be sold to qualified healthcare providers, and chargebacks that
customers have claimed, but for which the Company has not yet issued a credit.
Government Rebates— The Company is subject to discount obligations under state Medicaid programs and
Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction
of product revenue and the establishment of a current liability which is included in accrued expenses and other
current liabilities on the condensed consolidated balance sheets. For Medicare, the Company also estimates the
number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability
under the Medicare Part D program. We anticipate the Company’s exposure to utilization from the Medicare Part D
coverage gap discount program to be immaterial. For Medicaid programs, the Company estimates the portion of
sales attributed to Medicaid patients and records a liability for the rebates to be paid to the respective state Medicaid
programs. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that
have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and
estimated future claims that will be made for product that has been recognized as revenue, but which remains in the
distribution channel inventories at the end of each reporting period.
Other Incentives— Other incentives which the Company offers include voluntary patient assistance programs,
such as the co-pay assistance program, which are intended to provide financial assistance to qualified commercially-
insured patients with prescription drug co-payments required by payers. The calculation of the accrual for co-pay
assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated
with product that has been recognized as revenue, but remains in the distribution channel inventories at the end of
each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting
in a reduction of product revenue and the establishment of a current liability which is included as a component of
accrued expenses and other current liabilities on the condensed consolidated balance sheets.
To date, the Company’s only source of product revenue has been from the U.S. sales of ZILRETTA, which it
began shipping to customers in October 2017.
86
The following table summarizes activity in each of the product revenue allowance and reserve categories for
the year ended December 31, 2017:
(In thousands)
Beginning Balance
Provision related to sales in the
current year
Credit and payments made
Ending Balance
Trade Discounts,
Allowances and
Government chargebacks
Government rebates
and other incentives
Returns
Total
$
$
— $
100
(40)
60 $
— $
15
0
15 $
— $
2
0
2 $
—
117
(40)
77
Product Revenue Reserves and Allowances – Chargebacks and fees are recorded as reductions of trade
receivables, net on the condensed consolidated balance sheets. Government and other rebates and returns are
recorded as a component of accrued expenses and other current liabilities on the condensed consolidated balance
sheets.
Inventory—The Company values its inventories at the lower of cost or estimated net realizable value. The
Company determines the cost of its inventories, which includes amounts related to materials and manufacturing
overhead, on a first-in, first-out basis. The Company performs an assessment of the recoverability of capitalized
inventory during each reporting period, and it writes down any excess and obsolete inventories to their estimated
realizable value in the period in which the impairment is first identified. Such impairment charges, should they
occur, are recorded within cost of product revenues. The determination of whether inventory costs will be realizable
requires estimates by management. If actual market conditions are less favorable than projected by management,
additional write-downs of inventory may be required, which would be recorded as a cost of product sales in the
consolidated statements of operations and comprehensive loss.
The Company capitalizes inventory costs associated with the Company’s products after regulatory approval
when, based on management’s judgment, future commercialization is considered probable and the future economic
benefit is expected to be realized. Inventory acquired prior to receipt of marketing approval of a product candidate is
expensed as research and development expense as incurred. Inventory that can be used in either the production of
clinical or commercial product is expensed as research and development expense when selected for use in a clinical
manufacturing campaign. Inventory produced that will be used in promotional marketing campaigns is expensed to
selling, general and administrative expense when it is selected for use in a marketing program.
Shipping and handling costs for product shipments are recorded as incurred in cost of product revenues along
with costs associated with manufacturing the product, and any inventory write-downs.
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
In 2015, the Company performed 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. Reimbursements were recorded as an offset to
R&D expense when invoices for allowable costs were prepared and submitted to the Department of Defense. Due to
challenges of enrolling military personnel with post-traumatic knee OA, we discontinued the Phase 2 trial and
terminated the grant as of July 31, 2016. 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.
87
Accounts Receivable
Accounts receivable are recorded net of customer allowances for distribution fees and chargebacks, and
doubtful accounts. Allowances for distribution fees and chargebacks are based on contractual terms. The Company
estimates the allowance for doubtful accounts based on existing contractual payment terms, actual payment patterns
of its customers and individual customer circumstances. At December 31, 2017, the Company determined that an
allowance for doubtful accounts was not required. No accounts were written off during the year ended December 31,
2017.
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 balance at December 31, 2017 consists of $600,000 in an account at a commercial bank to collateralize a
credit card account, which is classified as long-term restricted cash.
The balance at December 31, 2016 consists of a $30,000 certificate of deposit to collateralize a credit card
account with a commercial bank with an additional $400,000 to further collateralize the credit card account, and
classified as long-term restricted cash. In addition, the Company held a letter of credit to the lessor of the
Company’s Burlington facility of $50,000 as a security deposit pursuant to the lease agreement and classified as
long-term restricted cash. In 2017, the certificate of deposit and the letter of credit were closed and reclassified out
of restricted cash.
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, office equipment, and minor computer
software
Computer software
Manufacturing equipment
Furniture and fixtures
Estimated
Useful Life
(Years)
3
7
7-10
5
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.
88
Foreign Currencies
The Company maintains a bank account designated in British Pounds. All foreign currency payables and cash
balances are measured at the applicable exchange rate at the end of the reporting period. All associated gains and
losses from foreign currency transactions are reflected in the consolidated statements of operations within other
income and expenses.
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
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
As of December 31, 2017 and 2016, the carrying value of debt issuance costs was $4,111,729 and $100,760,
respectively, presented as a direct deduction from the carrying amounts of long-term debt. In addition, $356,852,
$36,607 and $41,103 respectively, of debt issuance costs were amortized and recognized as interest expense in the
statement of operations for the years ended December 31, 2017, 2016 and 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 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.
89
The Company recognizes compensation expense only for the portion of awards that are expected to vest. The
Company accounts for forfeitures as they occur and does not estimate future forfeitures. As such, previously
recognized compensation expense for an award shall be reversed in the period that the award is forfeited.
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
commercial activities. In particular, the Company relies 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 for commercial supply. These programs would be adversely affected by a significant interruption in the supply
of active pharmaceutical ingredients.
For the year-ended December 31, 2017, two individual customers accounted for 94% of the Company’s total
revenue and accounts receivable. No other customer accounted for more than 10% of net product revenue or
accounts receivable for the year-ended December 31, 2017.
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 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
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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, its term loan and 2024 Convertible Notes (Note 10). The estimated fair
value of the Company’s financial instruments, with the exception of the 2024 Convertible Notes, approximates their
carrying values.
The fair value of the 2024 Convertible Notes, which differs from their carrying value, is influenced by interest
rates, stock price and stock price volatility and is determined by prices for the 2024 Convertible Notes observed in
market trading. The market for trading of the 2024 Convertible Notes is not considered to be an active market and
therefore the estimate of fair value is based on Level 2 inputs. The estimated fair value of the 2024 Convertible
Notes, face value of $201.3 million, was $248.9 million at December 31, 2017.
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.
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 the
assumed conversion of our 2024 Convertible Notes, outstanding stock options and unvested restricted common
stock, except where the result would be anti-dilutive. 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 the conversion of the 2024 Convertible Notes, the exercise of outstanding stock options and the vesting unvested
restricted common stock. In the diluted net loss per share calculation, net loss would also be adjusted for the
elimination of interest expense on the 2024 Convertible Notes, if the impact was not anti-dilutive. 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, 2017, 2016
and 2015.
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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 biopharmaceutical company focused on the development and
commercialization of novel, local therapies. All revenues for the year ended December 31, 2017 were generated in
the United States.
Recently Issued and Adopted Accounting Pronouncements
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. 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. Since the
Company has not generated revenue to date, this guidance will only impact future periods, if any, when revenue is
earned. 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 adopted
this guidance as of January 1, 2017. As the Company had not recognized any revenue under the prior revenue
recognition guidance, there was no impact from the adoption of the new revenue recognition guidance.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of
Inventory (“ASU 2015-11”). The new standard applies only to inventory for which cost is determined by methods
other than last-in, first-out and the retail inventory method, which includes inventory that is measured using first-in,
first-out or average cost. Inventory within the scope of ASU 2015-11 is required to be measured at the lower of cost
and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 was effective for us on
January 1, 2017. The adoption of ASU 2015-11 did not have a material impact on our results of operations, cash
flows or financial position.
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 became effective for the Company on January 1, 2017.
Given the Company has a full valuation against its deferred tax assets and liabilities, adopting this guidance did not
have a material impact to the Company’s financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This new standard
amends certain aspects of accounting and disclosure requirements of financial instruments, including the
requirement that equity investments with readily determinable fair values be measured at fair value with changes in
fair value recognized in our results of operations. This new standard does not apply to investments accounted for
under the equity method of accounting or those that result in consolidation of the investee. Equity investments that
do not have readily determinable fair values may be measured at fair value or at cost minus impairment adjusted for
changes in observable prices. A financial liability that is measured at fair value in accordance with the fair value
option is required to be presented separately in other comprehensive income for the portion of the total change in the
fair value resulting from change in the instrument-specific credit risk. In addition, a valuation allowance should be
evaluated on deferred tax assets related to available-for-sale debt securities in combination with other deferred tax
assets. ASU 2016-01 will be effective for us on January 1, 2018. The adoption of ASU 2016-01 is not expected to
have a material impact on our financial position or results of operations.
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. We
currently expect that most of our operating lease commitments will be subject to the new standard and recognized as
operating lease liabilities and right-of-use assets upon our adoption of ASU 2016-02.
92
In March 2016, the FASB released ASU 2016-09, which amends ASC Topic 718, Compensation-Stock
Compensation, to require changes to several areas of employee share-based payment accounting in an effort to
simplify share-based reporting. The update revises requirements in the following areas: minimum statutory
withholding, accounting for income taxes, forfeitures, and intrinsic value accounting for private entities. ASU 2016-
09 became effective for the Company on January 1, 2017. Upon adoption, the Company no longer records stock
compensation expense net of forfeitures and the impact of adopting the guidance was not material to the
consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The new standard requires entities to
measure all expected credit losses for financial assets held at the reporting date based on historical experience,
current conditions and reasonable and supportable forecasts. ASU 2016-13 will be effective for us for fiscal years
beginning on or after January 1, 2020, including interim periods within those annual reporting periods and early
adoption is permitted. We are currently evaluating the impact of our adoption of ASU 2016-13 in our consolidated
financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of cash flows (Topic 230), to increase the
consistency of presentation in how certain cash receipts and cash payments are presented and classified in the
statement of cash flows. ASU 2016-15 will become effective for fiscal years, and the interim periods within those
years, beginning after December 15, 2017. The Company is currently evaluating the potential impact that the
adoption of this guidance may have on the Company’s financial statements.
In November, 2016, the FASB issued ASU 2016-18, Statement of cash flows (Topic 230): Restricted Cash, to
provide specific guidance on the cash flow classification and presentation of changes in restricted cash and restricted
cash equivalents. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be
included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts
shown on the statement of cash flows. ASU 2016-18 will become effective for fiscal years, and the interim periods
within those years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim
period. The Company is currently evaluating the impact of this accounting standard on its condensed consolidated
financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the
Definition of a Business (“ASU 2017-01”). This new standard clarifies the definition of a business and provides a
screen to determine when an integrated set of assets and activities is not a business. The screen requires that when
substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable
asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 will be effective for us on
January 1, 2018. However, we have adopted ASU 2017-01 as of January 1, 2017, with prospective application to
any business development transaction.
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, 2017 and 2016 and indicate the level of the fair value hierarchy
utilized to determine such fair value:
(In thousands)
Assets:
Cash equivalents
Marketable securities
Fair Value Measurements as of December 31, 2017 Units:
Level 1
Level 3
Level 2
Total
$
$
— $ 109,196 $
— 296,127
— $ 405,323 $
— $ 109,196
— 296,127
— $ 405,323
93
(In thousands)
Assets:
Cash equivalents
Marketable securities
Fair Value Measurements as of December 31, 2016 Units:
Level 1
Level 2
Level 3
Total
$
$
9,830 $
— $
— 179,414
— $ 189,244 $
9,830
— $
— 179,414
— $ 189,244
As of December 31, 2017 and 2016, 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, 2017 and 2016, there were no transfers between Level 1, Level 2 and Level 3. Amortization
and accretion of discounts and premiums are recorded in other income.
The Company has a term loan outstanding under its 2015 credit facility with MidCap Financial Funding XIII
Trust and Silicon Valley Bank (the “2015 term loan”). The amount outstanding on its 2015 term loan is reported at
its carrying value in the accompanying balance sheet. The Company determined the fair value of the 2015 term loan
using an income approach that 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 2015 term loan was valued
using Level 2 inputs as of December 31, 2017 and December 31, 2016. The result of the calculation yielded a fair
value that approximates its carrying value.
On May 2, 2017 the Company issued 3.375% convertible senior notes due 2024 (the “2024 Convertible
Notes”) with embedded conversion features. The Company estimated the fair value of the 2024 Convertible Notes
using a discounted cash flow approach to derive the value of a debt instrument using the expected cash flows and the
estimated yield related to the convertible notes. The significant assumptions used in estimating the expected cash
flows were: the estimated market yield based on an implied yield and credit quality analysis of a term loan with
similar attributes, and the average implied volatility of the Company’s traded and quoted options available as of
May 2, 2017. The Company recorded approximately $136.7 million as the fair value of the liability on May 2, 2017,
with a corresponding amount recorded as a discount on the initial issuance of the 2024 Convertible Notes of
approximately $64.5 million. The debt discount was recorded to equity and is being amortized to the debt liability
over the life of the 2024 Convertible Notes using the effective interest method.
The fair value of the 2024 Convertible Notes, which differs from their carrying value, is influenced by interest
rates, stock price and stock price volatility and is determined by prices for the 2024 Convertible Notes observed in
market trading. The market for trading of the 2024 Convertible Notes is not considered to be an active market and
therefore the estimate of fair value is based on Level 2 inputs. The estimated fair value of the 2024 Convertible
Notes, face value of $201.3 million, was $248.9 million at December 31, 2017.
5. Marketable Securities
As of December 31, 2017 and 2016, the fair value of available-for-sale marketable securities by type of
security was as follows:
December 31, 2017
(In thousands)
Commercial Paper
U.S.Government obligations
Corporate Bonds
Amortized Cost
22,436
$
121,470 $
$
152,630 $
$
296,536 $
$
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
$
— $
— $
— $
— $
(136) $
(273) $
(409) $
22,436
121,334
152,357
296,127
94
(In thousands)
Commercial Paper
U.S.Government obligations
Corporate Bonds
Amortized Cost
$
$
$
$
7,769 $
75,524 $
96,193 $
179,486 $
December 31, 2016
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
— $
5 $
1 $
6 $
— $
(12) $
(66) $
(78) $
7,769
75,517
96,128
179,414
At December 31, 2017, marketable securities consisted of $264.6 million of investments that mature within
twelve months and $31.5 million of investments that mature within fifteen months. At December 31, 2016,
marketable securities consisted of $174.7 million of investments that mature within twelve months and $4.7 million
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, 2017
and 2016:
(in thousands)
Prepaid expenses
Deposits
Interest receivable on marketable securities
$
Total prepaid expenses and other current assets
$
December 31,
2017
2016
2,359 $
66
978
3,403 $
1,086
2,099
605
3,790
On December 1, 2016, Flexion paid a refundable NDA fee in the amount of $2.0 million to the FDA. The
Company evaluated each of the published criteria to qualify for a waiver and concluded all criteria were met and
thus, obtaining a refund of the fee was probable. As of December 31, 2016 the NDA fee was classified as a deposit
in other current assets. On May 16, 2017, Flexion received the full refund of this NDA fee.
7.
Inventory
Inventory consisted of the following as of December 31, 2017:
(In thousands)
Raw Materials
Work in process
Finished goods
Total inventories
December 31,
2017
2016
$
$
928 $
746
125
1,799 $
-
-
-
-
Inventory acquired prior to receipt of the marketing approval for ZILRETTA was expensed as research and
development expense as incurred. The Company began to capitalize the costs associated with the production of
ZILRETTA upon receipt of FDA approval of ZILRETTA on October 6, 2017. The Company reduces its inventory
to net realizable value for potentially excess, dated or obsolete inventory based on an analysis of forecasted demand
compared to quantities on hand and any firm purchase orders, as well as product shelf life. At December 31, 2017,
the Company determined that no write-downs to inventory for potentially excess, dated or obsolete inventory were
required.
95
8.
Property and Equipment, Net
Property and equipment, net, as of December 31, 2017 and 2016 consisted of the following:
(In thousands)
Computer and office equipment
Manufacturing equipment
Furniture and fixtures
Software
Leasehold improvements
Construction—in progress
Less: Accumulated depreciation
Total property and equipment, net
December 31,
2017
2016
$
$
1,124 $
11,780
456
434
474
305
14,573
(3,384)
11,189 $
573
10,099
402
434
278
1,254
13,040
(1,376)
11,664
Depreciation expense for the years ended December 31, 2017, 2016 and 2015, was $2.0 million , $1.2 million,
and $0.2 million, respectively. During the years ended December 31, 2017, 2016, and 2015, $0, $2.7 million, and
$0.2 million of property and equipment was disposed of, resulting in a loss of $0, $2.3 million, and $0.1 million,
respectively.
9.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities at December 31, 2017 and 2016 consisted of the following:
(In thousands)
Research and Development
Payroll and other employee-related expenses
Professional services fees
Interest expense
Other
$
Total accrued expenses and other current liabilities $
December 31,
2017
2016
1,023 $
9,309
2,591
1,249
211
14,383 $
1,605
3,393
927
161
159
6,245
10. Debt
Term Loan
On August 4, 2015, the Company entered into a credit and security agreement with MidCap Financial Trust,
as agent, and MidCap Financial Funding XIII Trust and Silicon Valley Bank, as lenders, (the “Lenders”), to borrow
up to $30,000,000 in term loans. The Company concurrently borrowed an initial term loan of $15,000,000 under the
facility. 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 agreed not to encumber any of its intellectual property without the Lenders’ prior written consent. The
Company also agreed to maintain a balance in cash or cash equivalents at Silicon Valley Bank equal to the principal
balance of the loan plus 5% for so long as the Company maintains any cash or cash equivalents in non-secured bank
accounts.
On July 22, 2016, the Company borrowed the remaining $15,000,000 under the credit and security agreement,
in the form of a second term loan. The second term loan is subject to the same credit terms as the initial term loan
under the facility.
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, 2017, the Company was compliant with
financial covenants.
96
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 straight line method, which
approximates the effective interest method. As of December 31, 2017, the carrying value of the term loan was
approximately $22.9 million, of which $10.0 million was due within 12 months and $12.9 million was due in greater
than 12 months.
In connection with the credit and security agreement, the Company incurred debt issuance costs totaling
approximately $150,000. These costs are being amortized over the estimated term of the debt using the straight-line
method which approximates the effective interest method. The Company deducted the debt issuance costs from the
carrying amount of the debt as of December 31, 2017 and December 31, 2016.
As of December 31, 2017, annual principal and interest payments due under the 2015 term loan are as
follows:
Year
2018
2019
2020
Total
Less interest
Less final payment
Total
Aggregate
Minimum
Payments
11,082
10,449
4,383
25,914
(311)
(2,700)
22,903
$
$
2024 Convertible Notes
On May 2, 2017 the Company issued an aggregate of $201.3 million principal amount of the 2024 Convertible
Notes. The 2024 Convertible Notes have a maturity date of May 1, 2024 are unsecured and accrue interest at a rate
of 3.375% per annum, payable semi-annually on May 1 and November 1 of each year, beginning November 1, 2017.
The Company received $194.8 million in proceeds for the sale of the 2024 Convertible Notes, after deducting fees
and expenses of $6.5 million.
Upon conversion of the 2024 Convertible Notes, at the election of each holder of a 2024 Convertible Note (the
Holder), the note will be convertible into cash, shares of the Company’s common stock, or a combination thereof, at
the Company’s election (subject to certain limitations in the 2015 term loan), at a conversion rate of
approximately 37.3413 shares of common stock per $1,000 principal amount of the 2024 Convertible Notes, which
corresponds to an initial conversion price of approximately $26.78 per share of the Company’s common stock.
The conversion rate is subject to adjustment from time to time upon the occurrence of certain events,
including, but not limited to, fundamental change events and certain corporate events that occur prior to the maturity
date of the notes. In addition, if the Company delivers a notice of redemption, the Company will increase, in certain
circumstances, the conversion rate for a holder who elects to convert its notes in connection with such a corporate
event or notice of redemption, as the case may be. At any time prior to the close of business on the business day
immediately preceding February 1, 2024, Holders may convert all, or any portion, of the 2024 Convertible Notes at
their option only under the following circumstances:
(1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2017 (and only
during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20
trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last
trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the
conversion price on each applicable trading day;
97
(2) during the five business day period after any ten consecutive trading day period (the “measurement
period”) in which the trading price per $1,000 principal amount of notes for each trading day of the
measurement period was less than 98% of the product of the last reported sale price of the Company’s
common stock and the conversion rate on each such trading day;
(3) if the Company calls any or all of the notes for redemption, at any time prior to the close of business on the
business day immediately preceding the redemption date; and
(4) upon the occurrence of specified corporate events.
On or after February 1, 2024, until the close of business on the business day immediately preceding the
maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. The Company
may redeem, for cash, all or any portion of the 2024 Convertible Notes, at its option, on or after May 6, 2020 if the
last reported sale price of the Company’s common stock has been at least 130% of the conversion price for at least
20 trading days during any 30 consecutive day trading period, at a redemption price equal to 100% of the principal
amount of the 2024 Convertible Notes to be redeemed, plus accrued and unpaid interest.
The 2024 Convertible Notes are considered convertible debt with a cash conversion feature. Per ASC
470-20, Debt with Conversion and Other Options, the Company has separated the convertible debt into
liability and equity components based on the fair value of a similar debt instrument excluding the embedded
conversion option. The carrying amount of the liability component was calculated by measuring the fair value of a
similar liability that does not have an associated convertible feature. The allocation was performed in a manner that
reflected our non-convertible debt borrowing rate for similar debt. The equity component of the 2024 Convertible
Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the
2024 Convertible Notes and the fair value of the liability of the 2024 Convertible Notes on their respective dates of
issuance. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is
amortized to interest expense using the effective interest method over seven years. The equity component is not re-
measured as long as it continues to meet the conditions for equity classification. The liability component of
$136.7 million was recorded as long-term debt at May 2, 2017 with the remaining equity component of $64.5
million recorded as additional paid-in capital.
In connection with the issuance of the 2024 Convertible Notes, the Company incurred approximately $6.5
million of debt issuance costs, which primarily consisted of underwriting, legal and other professional fees, and
allocated these costs to the liability and equity components based on the allocation of the proceeds. Of the total debt
issuance costs, $4.4 million were allocated to the liability component and are recorded as a reduction of the 2024
Convertible Notes in our consolidated balance sheets. The remaining $2.1 million was allocated to the equity
component and is recorded as a reduction to additional paid-in capital.
Debt discount and issuance costs of $68.9 million are being amortized to interest expense over the life of
the 2024 Convertible Notes using the effective interest rate method. As of December 31, 2017, the stated interest
rate was 3.375%, and the effective interest rate was 9.71%. Interest expense related to the 2024 Convertible
Notes for the year ended December 31, 2017 was $9.0 million, including $4.4 million related to amortization of
the debt discount.
98
The table below summarizes the carrying value of the 2024 Convertible Notes as of December 31, 2017:
Gross proceeds
Portion of proceeds allocated to
equity component (additional
paid-in capital)
Debt issuance costs
Portion of issuance costs allocated to
equity component (additional
paid-in capital)
Amortization of debt discount and debt issuance
costs
Carrying value 2024 Convertible Notes
(in thousands)
$
201,250
(64,541)
(6,470)
2,075
4,793
137,107
$
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, 2017,
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
On June 7, 2016, the Company completed a follow-on public offering of its common stock, which resulted in
the sale of 5,900,000 shares of the Company’s common stock at a price to the public of $14.00 per share including
shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares.
On November 15, 2016, the Company completed a follow-on public offering of its common stock, which
resulted in the sale of 4,140,000 shares of the Company’s common stock at a price to the public of $18.00 per share
including shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares.
On October 16, 2017, the Company completed a follow-on public offering of its common stock, which
resulted in the sale of 5,520,000 shares of the Company’s common stock at a price to the public of $25.50 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,
2017, no dividends have been declared.
13. Commitments and Contingencies
Operating Leases
Burlington Lease
In May 2013, the Company entered into a lease for office space in Burlington, Massachusetts (the “Lease”).
The term of the Lease was for 42-months with minimum monthly lease payments beginning at $17,588 per month
and escalating over the lease term. In July 2015, the Company amended the Lease to add approximately 4,700
square feet of additional office space, with the option to lease and additional 5,400 square feet in the same building
in Burlington, Massachusetts. In addition, at the time, the Company leased approximately 6,700 square feet of
temporary space for use prior to delivery of the additional space. This amendment also extended the term of the
Lease through October 31, 2019. On September 30, 2015, the Company exercised its option for the additional 5,400
square feet of office space. On September 21, 2016, the Company entered into another amendment to extend the
Lease for the 6,700 square feet of temporary space until October 31, 2017.
99
On April 7, 2017, the Company further amended the Lease to extend the term to October 31, 2023 on the then-
existing office space, including the temporary space, consisting of approximately 28,600 square feet of office space
in Burlington, Massachusetts. From November 2016 through October 2017, the Company’s lease payment for this
space was approximately $80,000 per month. Also, as part of this amendment to the Lease, the Company leased an
additional 1,471 square feet of office space beginning in 2018. The lease payment for the 1,471 square feet of office
space is approximately $4,100 per month
On October 6, 2017, the Company exercised its option for an additional 6,450 square feet of space, with the
term expected to commence on or about April 1, 2018. After April 2018, the Company will have approximately
36,500 square feet of office space in Burlington, Massachusetts under a lease term expiring on October 31, 2023. In
addition to the base rent for the office space, which increases over the term of the amended Lease, the Company is
responsible for its share of operating expenses and real estate taxes.
Woburn Lease
In February 2017, the Company entered into a five-year lease for laboratory space located in Woburn,
Massachusetts with a monthly lease payment of approximately $15,000, which increases over the term of the lease,
plus a share of operating expenses. The total cash obligations for the term of the lease are approximately $0.9
million.
The Company incurred rent expense of $998,108, $668,350, and $373,202 for the years ended December 31,
2017, 2016 and 2015, respectively.
Future minimum lease payments under the Company’s lease obligations are as follows:
Year
2018
2019
2020
2021
2022
2023
Total
Aggregate
Minimum
Payments
(in thousands)
1,338
1,491
1,533
1,576
1,447
1,203
8,588
$
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), extended-release steroid for the treatment of osteoarthritis.
Patheon 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 provided Patheon with certain equipment and materials necessary to
manufacture ZILRETTA and pays 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 pays 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 also reimburses Patheon for purchases of materials and equipment made on
its behalf, certain nominal expenses and additional services. The Manufacturing Agreement will remain in full effect
100
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,
2018
2019
2020
2021
2022
2023 and thereafter
Total
6,891
8,108
8,108
8,108
8,108
24,323
63,646
$
Evonik Supply Agreement
In November 2016, the Company entered into a Supply Agreement with Evonik Corporation (“Evonik”) for
the purchase of PLGA which is used in the manufacturing of potential clinical and commercial supply of
ZILRETTA. Pursuant to the Supply Agreement, Flexion is obligated to submit rolling monthly forecasts to Evonik
for PLGA supply, a portion of which will constitute binding orders. In addition, Flexion agreed to certain minimum
purchase requirements, which decrease over time, and which do not apply (i) during periods in which Evonik is in
material breach of the Supply Agreement or is unable to perform its obligations due to a force majeure event, (ii)
with respect to orders that Evonik is unable to supply in excess of binding orders, (iii) for orders Evonik is unable to
timely deliver or does not deliver conforming product and provides a credit for such order, or (iv) during an uncured
material quality failure by Evonik. Flexion agreed to purchase PLGA batches at a specified price per gram in U.S.
dollars, subject to adjustment from time to time, including due to changes in price indices and in the event the initial
term of the Supply Agreement is extended. The total term of the agreement is five years. Upon termination of the
Supply Agreement (other than termination due to the bankruptcy of either Evonik or Flexion) Flexion is obligated to
pay the costs associated with the binding supply forecast provided to Evonik. The Supply Agreement will renew for
two successive two year terms upon mutual written consent by both parties.
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, the Company paid an
upfront fee of $120,000 to SwRI. In February 2017, Flexion executed an agreement with SwRI to transfer
manufacturing equipment to SwRI in consideration for SwRI deeming the additional milestone payment to have
been fully paid by Flexion.
FX201 Related Agreement
In December 2017, we entered into a definitive agreement with GeneQuine Biotherapeutics GmbH
(“GeneQuine”) to acquire the global rights to FX201. As part of the asset purchase transaction with GeneQuine, we
made an upfront payment to GeneQuine of $2 million. We may also be required to make additional milestone
payments during the development of FX201, including up to $8.7 million through Phase 2 proof of concept (PoC)
and, following successful PoC, up to an additional $54 million in development and global regulatory approval
milestone payments. The transaction was accounted for as an asset acquisition, as it did not qualify as a business
combination. The upfront fee was attributed to the intellectual property acquired, and recognized as research and
development expense in December 2017 as the FX201 rights had not been commercially approved, and have no
alternative future use. Future milestone payments earned prior to regulatory approval of FX201 would be recognized
as research and development expense in the period when the milestone events become probable of being achieved.
Future milestones earned upon regulatory approval would be recognized as an intangible asset and amortized to
101
expense over its estimated life. As of December 31, 2017 none of the future milestone payments owed under the
arrangement was probable of being achieved. As part of the transaction, we became the direct licensee of certain
underlying Baylor College of Medicine (Baylor) patents and other proprietary rights related to FX201 for human
applications. The Baylor license agreement grants us an exclusive, royalty-bearing, world-wide right and license
(with a right to sublicense) for human applications under its patent and other proprietary rights directly related to
FX201, with a similar non-exclusive license to certain Baylor intellectual property rights that are not specific to
FX201. The license agreement with Baylor includes a low single-digit royalty on net sales of FX201 and requires us
to use reasonable efforts to develop FX201 according to timelines set out in the license agreement. In December
2017, we also entered into a Master Production Services Agreement with SAFC Carlsbad, Inc., a part of
MilliporeSigma, for the manufacturing of pre-clinical and initial clinical supplies of FX201.
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 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,
2017, there were 344,296 options outstanding under the 2009 Plan.
On September 11, 2017, the Company’s compensation committee approved an amendment to the 2013 Plan to
reserve an additional 1,500,000 of the Company’s common stock to be used exclusively for grants of inducement
awards to individuals who were not previously employees or non-employee directors of the Company (or following
a bona fide period of non-employment with the Company).
The Company currently grants stock-based awards pursuant to the 2013 Plan. As of December 31, 2017,
2,313,178 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, 2017, there were 3,455,669 options outstanding under the
2013 Plan.
Stock Options
During the years ended December 31, 2017, 2016 and 2015, the Company granted stock options for the
purchase of 1,448,100, 1,816,575, and 657,250 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.
102
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 was a private company prior to 2014, and lacks company-specific historical
information for a sufficient period of time or implied volatility information. Therefore, it estimates its expected
stock volatility based on the historical volatility of the Company’s common stock since the Company’s initial public
offering together with 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 for a sufficient
period of time. 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, 2017, 2016 and 2015 is as follows:
Risk-free interest rates
Expected dividend yield
Expected term (in years)
Expected volatility
2017
1.97%-2.29%
0.00%
6.0
69.9%-72.8%
December 31,
2016
0.74-1.75%
0.00%
5.6
67.3-99.9%
2015
1.49-1.92%
0.00%
6.0
76.4-83.9%
The following table summarizes stock option activity for the year ended December 31, 2017:
(In thousands, except per share amounts)
Outstanding as of December 31, 2016
Granted
Exercised
Cancelled
Outstanding as of December 31, 2017
Options vested and expected to vest at December 31, 2017
Options exercisable at December 31, 2017
Shares Issuable
Under Options
Weighted Average
Exercise Price
3,079 $
1,448
(308)
(419)
3,800 $
3,800 $
1,689 $
14.84
22.29
12.25
22.78
17.75
17.75
14.99
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 308,011, 30,195, and, 109,441 options were exercised during the years
ended December 31, 2017, 2016 and 2015, respectively. The aggregate intrinsic value of stock options exercised was
$2,947,768, $236,889, and $1,584,657 for the years ended December 31, 2017, 2016 and 2015, respectively.
At December 31, 2017, 2016 and 2015 the Company had options for the purchase of 3,799,965, 3,079,175,
and 1,657,225 shares of common stock outstanding, with a weighted average remaining contractual term of 8.0, 7.8,
and 7.9 years, respectively, and with a weighted average exercise price of $17.75, $14.84, and $14.28 per share,
respectively. At December 31, 2017, 2016 and 2015 there were options for the purchase of 1,688,652, 1,173,671,
and 728,621 shares of common stock exercisable under these stock option awards, with a weighted average
remaining contractual life of 6.8, 6.7, 6.9 years , respectively, and an aggregate intrinsic value of $16,985,787,
$8,745,505, and 7,714,057, respectively.
The weighted average grant date fair value of options granted during the years ended December 31, 2017,
2016 and 2015 was $14.33, $11.50, and $15.08, respectively.
103
Restricted Stock Units
On January 4, 2016, the Company granted 189,300 RSUs with performance and time-based vesting conditions
to certain executives. These RSUs vest, and the underlying shares of common stock become deliverable, beginning
when ZILRETTA is approved (the “Milestone”). The number of shares that vest varies based on the timing of
achieving the Milestone. As a result of the Milestone being achieved on October 6, 2017, the number of shares of
the Company’s common stock earned under these awards is 122,800, subject to ongoing employment with the
Company for a period of 2 years. The 122,800 shares had an approximate value of $2.2 million as of the original
grant date of which $1.6 million was recognized in the fourth quarter of 2017 upon achieving the milestone and the
remaining $0.6 million will be recognized over a period of two years.
The following table summarizes the RSU activity for the year ended December 31, 2017:
(In thousands, except per share amounts)
Nonvested as of December 31, 2016
Granted
Cancelled
Vested/Released
Nonvested as of December 31, 2017
Stock-based Compensation
Number of
Shares
Weighted Average
Grant Date Fair
Value
189 $
—
(66)
(41)
82 $
15.77
—
—
16.43
16.43
The Company recorded stock-based compensation expense related to stock options, restricted stock and shares
purchased under the employee stock purchase plan for the years ended December 31, 2017, 2016 and 2015 as
follows:
(In thousands)
Research and development
Selling, general and administrative
Year Ended December 31,
2016
2015
2017
$
$
3,979
7,563
11,542
$
$
2,341
4,429
6,770
$
$
1,412
3,171
4,583
As of December 31, 2017, unrecognized stock-based compensation expense for stock options outstanding was
$25.5 million which is expected to be recognized over a weighted average period of 2.8 years. As of December 31,
2017, unrecognized stock-based compensation expense for restricted stock units outstanding was $0.6 million which
is expected to be recognized over a period of 2 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, 2017 and
2016, 89,704 and 20,896 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.
104
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, 2017, 2016 and 2015:
(In thousands)
Numerator:
Net loss
Net loss:
Denominator:
Year ended December 31,
2016
2015
2017
$
$
(137,481) $
(137,481) $
(71,894) $
(71,894) $
(46,315)
(46,315)
Weighted average common shares outstanding, basic
and diluted
Net loss per share, basic and diluted
33,027
(4.16) $
25,297
(2.84) $
21,497
(2.15)
$
The following common stock equivalents were excluded from the calculation of diluted net loss per share as
including them would have an anti-dilutive effect:
Shares issuable upon conversion of the 2024
convertible notes
Stock Options
Restricted Stock Units
Year ended December 31,
2016
2017
5,017
3,602
147
8,766
—
2,345
188
2,533
16.
Income Taxes
The Company has generated losses since inception. Accordingly, there is no tax provision or benefit for the
years ended December 31, 2017, 2016, and 2015, respectively .
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as
follows:
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
Tax law change
Other
Effective income tax rate
Year Ended December 31,
2016
2015
2017
34.0%
3.0
0.9
(11.6)
(25.1)
(1.2)
—%
34.0%
5.0
2.7
(40.0)
(1.7)
—%
34.0%
4.9
4.7
(45.4)
1.8
—%
105
The Company’s net deferred tax assets consisted of the following:
Net operating loss carryforwards
Research and development tax credit carryforwards
Accruals and other temporary differences
Debt discount
Capitalized research and development expenses, net
Total deferred tax assets
Valuation allowance
Net deferred tax asset
December 31,
2017
2016
48,496 $
7,725
3,578
(14,630)
29,673
74,842
(74,842)
— $
36,880
7,078
4,897
0
34,579
83,434
(83,434)
—
$
$
As of December 31, 2017, the Company had federal and state net operating loss carryforwards of
approximately $190.1 million and $147.8 million, 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 $5.4 million and $2.9, 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, 2017 and 2016.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform
bill which, among other items, reduces the current corporate federal tax rate to 21% from 35%. The rate reduction is
effective January 1, 2018. The Company concluded that the Act will cause our deferred tax assets to be revalued.
As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax
expense in the period of enactment. During the fourth quarter, we estimated the reduction in the value of our
deferred tax assets to be $34.5 million as a result of the Act, which was offset by a corresponding change in the
valuation allowance.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) on
December 23, 2017. SAB 118 provides a one-year measurement period from a registrant’s reporting period that
includes the Act’s enactment date to allow the registrant sufficient time to obtain, prepare and analyze information
to complete the accounting required under ASC 740.
The ultimate impact of the Act on our reported results in 2018 and beyond may differ from the estimates
provided herein, possibly materially, due to, among other things, changes in interpretations and assumptions we
have made, guidance that may be issued, and other actions we may take as a result of the Act, different from that
presently contemplated.
During year ended December 31, 2017, the Company recorded to equity a deferred tax liability relating to the
discount on its 2024 Convertible Notes (see Note 10) with an equal and offsetting adjustment to the valuation
allowance.
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.
106
Through the quarter ending December 31, 2017, the Company has completed periodic updates to its Section
382 study through October 31, 2017, which have indicated ownership changes within the meaning of Section 382
have occurred in December 2014 and June 2016, however, it is not anticipated that a portion of the Company’s
NOLs will expire unutilized as a result of the Section 382 limitations arising from these ownership changes.
Subsequent ownership changes defined by Section 382 may further limit the amount of NOL carryforwards that
could be utilized annually to offset future taxable income.
Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2017 and
2016 were as follows:
Valuation allowance as of beginning of year
Decreases recorded as benefit to income tax provision
Decreases recorded as benefit to equity
Increases recorded to income tax provision
Valuation allowance as of end of year
Year Ended December 31,
2016
(54,773) $
4,771
—
(33,432)
(83,434) $
2017
(83,434) $
36,606
24,537
(52,551)
(74,842) $
$
$
2015
(33,826)
2,858
—
(23,805)
(54,773)
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, 2017 and 2016.
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 2013 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
(in thousands, except per share amounts)
Revenues
Operating expenses
Net loss
Net loss per common share—basic and diluted
Weighted average common shares—basic and diluted
September 30, December 31,
March 31,
2017
June 30,
2017
$
$
0 $
23,782
(23,879)
(0.75) $
31,704
0 $
26,902
(28,880)
(0.91) $
31,826
2017
0 $
31,221
(34,188)
(1.07) $
31,931
2017
355
48,132
(50,534)
(1.38)
36,644
(in thousands, except per share amounts)
Operating expenses
Net loss
Net loss per common share—basic and diluted
Weighted average common shares—basic and diluted
March 31,
$
$
2016
16,673 $
(16,815)
(0.78) $
21,570
107
Three Months Ended
September 30, December 31,
June 30,
2016
14,120 $
(14,185)
(0.63) $
22,666
2016
17,435 $
(17,782)
(0.65) $
27,524
2016
21,552
(23,112)
(0.79)
29,347
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, 2017, 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, 2017, 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, 2017, 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,
2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
108
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 2018 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, 2017,
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.
109
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, 2017:
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
78
79
80
81
82
83
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
110
Unless otherwise indicated, all references to previously filed Exhibits refer to Flexion’s filings with the SEC
under File No. 001-36287. The following exhibits are filed as part of, or incorporated by reference, into this report.
Each management contract or compensatory plan or arrangement required to be identified by this item is so
designated in such list.
Exhibit
Number
Description
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
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)
Indenture, dated as of May 2, 2017, by and between Flexion and Wells Fargo Bank, National
Association, as trustee (Exhibit 4.1, Current Report on Form 8-K filed on May 2, 2017)
Form of Note representing Flexion’s 3.375% Convertible Senior Notes due 2024 (included as Exhibit
A to the Indenture filed as Exhibit 4.1, Current Report on Form 8-K filed on May 2, 2017)
Consent and Second Amendment to Credit and Security Agreement, dated April 24, 2017, between
Flexion and MidCap Financial Trust, as administrative agent (Exhibit 4.3, Current Report on Form 8-
K filed on May 2, 2017)
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, as amended, and Forms of Stock Option
Agreement, Notice of Exercise and Stock Option Grant Notice thereunder (Exhibit 99.1, Current
Report on Form 8-K, filed September 14, 2017)
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)
111
Exhibit
Number
10.9
10.10
10.11
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
10.25
10.26
10.27
10.28
Description
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 Scott Kelley
Amended and Restated Offer Letter between Flexion and Mark Levine
Amended and Restated Offer Letter between Flexion and Kerry Wentworth
Flexion Therapeutics, Inc. Change in Control Severance Benefit Plan and Form of Participation
Agreement (Exhibit 99.1, Current Report on Form 8-K filed on June 23, 2017)
Other Agreements
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 (Exhibit 10.20, Annual Report on Form 10-K filed on March 11, 2016)
Exclusive License Agreement, dated July 25, 2014, between Flexion and Southwest Research Institute
(Exhibit 10.21, Annual Report on Form 10-K filed on March 11, 2016)
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)
Third Amendment of Lease, dated May 8, 2016, between Flexion and CIP II/RJK 10-20 BMR Owner,
LLC (Exhibit 10.1, Quarterly Report on Form 10-Q filed on August 3, 2016)
Fourth Amendment of Lease, dated June 29, 2016, between Flexion and CIP II/RJK 10-20 BMR
Owner, LLC (Exhibit 10.2, Quarterly Report on Form 10-Q filed August 3, 2016)
Fifth Amendment of Lease, dated July 21, 2016, between Flexion and CIP II/RJK 10-20 BMR Owner,
LLC (Exhibit 10.3, Quarterly Report on Form 10-Q filed August 3, 2016
Sixth Amendment of Lease, dated September 21, 2016, between Flexion and CIP II/RJK 10-20 BMR
Owner, LLC (Exhibit 10.1, Quarterly Report on Form 10-Q filed on November 7, 2016)
Seventh Amendment of Lease, dated September 21, 2016, between Flexion and CIP II/RJK 10-20
BMR Owner, LLC (Exhibit 10.1, Quarterly Report on Form 10-Q filed on August 8, 2017)
Supply Agreement, dated November 10, 2016, between Flexion and Evonik Corporation (Exhibit
10.29, Annual Report on Form 10-K filed on March 10, 2017)
Amendment to Exclusive License Agreement, dated February 7, 2017, between Flexion and
Southwest Research Institute (Exhibit 10.30, Annual Report on Form 10-K filed on March 10, 2017)
21.1
Subsidiaries of Flexion Therapeutics, Inc.
112
Exhibit
Number
23.1
24.1
31.1
32.1
Description
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 and 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 and 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
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.
Item 16. 10-K Summary
None.
113
SIGNATURES
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 8th day of
March, 2018.
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 Mark S. Levine, 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.
/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
/s/Mark Stejbach
Mark Stejbach
President, Chief Executive Officer and
Member of the Board of Directors
(Principal Executive Officer and Principal
Financial and Accounting Officer)
March 8, 2018
Chairman of the Board of Directors
March 8, 2018
Member of the Board of Directors
March 8, 2018
Member of the Board of Directors
March 8, 2018
Member of the Board of Directors
March 8, 2018
Member of the Board of Directors
March 8, 2018
Member of the Board of Directors
March 8, 2018
Member of the Board of Directors
March 8, 2018
Member of the Board of Directors
March 8, 2018
114