Flexion Therapeutics Inc Annual Report 2018

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FY2018 Annual Report · Flexion Therapeutics Inc

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2018 ANNUAL REPORT

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, 2018

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 every Interactive Data File required to be submitted pursuant to Rule 405 of

Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 (§ 229.405 of this chapter) 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:3)

Accelerated filer

(cid:4)

Non-accelerated filer (cid:4)
Emerging growth
company

(cid:4)

Smaller reporting company

(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:4)

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, 2018 was approximately $859,717,982.

The number of outstanding shares of the registrant’s common stock as of February 25, 2019 was 37,992,513 .

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 2019 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, 2018.

DOCUMENTS INCORPORATED BY REFERENCE

FLEXION THERAPEUTICS, INC.
FORM 10-K—ANNUAL REPORT
For the Fiscal Year Ended December 31, 2018

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

111

112

113

116

117

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 discovery, development
and commercialization 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.

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 discovery, 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. We have an approved product, ZILRETTA®, which we market in the United States.
ZILRETTA is the first and only extended-release, intra-articular, or IA (meaning in the joint), injection indicated for
the management of OA knee pain. ZILRETTA is a non-opioid therapy that employs our proprietary microsphere
technology to provide effective pain relief. The pivotal Phase 3 trial, on which the approval of ZILRETTA was
based, showed that ZILRETTA met the primary endpoint of pain reduction at Week 12, with statistically significant
pain relief extending through Week 16.

ZILRETTA was approved by the U.S. Food & Drug Administration, or FDA, on October 6, 2017 and
launched in the United States shortly thereafter. We market ZILRETTA to prescribing physicians through our own
field sales force of approximately 100 Musculoskeletal Business Managers, or MBMs.

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. 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 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 statistically significant pain relief against placebo (saline) as measured by the weekly mean of the

Average Daily Pain, or ADP, score:

(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;

o 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);

o 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;

o 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;

(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, can

address 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. In December 2018, we submitted a
supplemental New Drug Application, or sNDA, with the FDA to revise the product label for ZILRETTA to allow
for repeat administration. The sNDA includes the full data set from a Phase 3b single-arm, open-label clinical trial
which evaluated the safety and tolerability of repeat administration of ZILRETTA. On February 26, 2019, the
Company received a Day 74 letter from the FDA confirming the sNDA was accepted for filing. Under the
Prescription Drug User Fee Act, or PDUFA, the Company anticipates FDA’s decision on the sNDA by or on
October 14, 2019.Also in December 2018, we initiated a Phase 3b pivotal study of ZILRETTA in hip OA which we
anticipate completing in 2020.

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 U.S. and OA is the most
common joint disease, affecting more than 30 million adults in the U.S, 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 thrombotic events,
myocardial infarction, and stroke. Furthermore, this class of drugs can cause serious gastrointestinal 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 2017 approximately 5 million patients in the U.S. received an IA injection treatment

for knee OA with approximately 4.5 million of these patients being treated with immediate-release steroids.
Furthermore, despite guidance from prominent medical societies, including the American Academy of Orthopedic
Surgeons and Osteoarthritis Research Society International that hyaluronic acid, or 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,
according to SmartTRAK, HA sales in the U.S. were approximately $1 billion in 2018, with a cost per course of
treatment ranging from $421 to $1,425. 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 program, FX201, is a gene therapy product 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 a preclinical stage program, and, subject to positive data and
successful completion of our active Good Laboratory Practice, or GLP, toxicology studies, we plan to file an
Investigational New Drug Application, or IND, and initiate clinical trials in the second half of 2019.

We have worldwide commercialization rights for ZILRETTA and our product candidate, 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
FLEXION®, ZILRETTA® and FLEXFORWARD®. 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 discover, 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, or 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.

Establish ZILRETTA as a first-line IA treatment for OA knee pain and maximize its value by
expanding approved indications. Based on ZILRETTA’s clinical profile, we believe that it can be a
first-line IA therapy for OA knee pain, and in 2018 we initiated a comprehensive strategy to build
physician awareness of ZILRETTA through a variety of targeted initiatives. In the second half of 2018,
we initiated a variety of direct-to-patient marketing activities designed to increase patient awareness of
the product. In December 2018, we filed an sNDA with the FDA to revise the product label for
ZILRETTA to allow for repeat administration. While ZILRETTA is currently approved for the
treatment of OA knee pain, we believe that it has the potential for broader use, specifically in large
joints. Therefore, in December 2018 we initiated a Phase 3 pivotal trial of ZILRETTA in OA hip pain
and we intend to start Phase 2 trials of ZILRETTA in OA shoulder pain and adhesive capsulitis in the
second half of 2019.

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 research and development activities. 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 U.S. with our own sales and marketing organization, and thereby retain more of the
commercial value of this product. While we believe that the U.S. represents the most attractive market
for ZILRETTA, we continue to evaluate opportunities and potential partnerships to develop and
commercialize ZILRETTA in territories outside the U.S. where we believe there is the potential for
value-based pricing and reimbursement.

Osteoarthritis

Overview

OA, also referred to as degenerative joint disease, is the most common joint disease in the U.S. according to

the U.S. Centers for Disease Control and Prevention, or CDC, affecting more than 30 million adults. 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 five-fold.

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 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.”

According to the CDC, one of every two people in the U.S. is expected to develop symptomatic knee OA, the

most common form of OA during their lifetime. 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, U.S. adults 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 require repeat TJAs. Because the
decision to have TJA is based in large part on intractable pain and functional impairment, we believe that 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; however, these drugs have serious drawbacks and are generally considered to
be a suboptimal therapy for chronic non-cancer pain, like that associated with OA.

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 U.S. is total knee arthroplasty. Compared to

existing drug therapy, total knee arthroplasty is very expensive, with average costs ranging between $25,000 and
$60,000, and many patients (~20%) 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 2014,
inpatient costs were nearly $12 billion in the U.S. for total knee arthroplasty alone and, based on some estimates, the
number of total knee arthroplasties is expected to reach approximately 3.5 million procedures per year by 2030.

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 therapies, 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 dictates that IA steroid suspensions not be administered more frequently than once every three
months. Based on internal analysis, we believe approximately 50% of patients receiving IA immediate-release
steroids are unsatisfied with the duration of benefit.

Despite estimated U.S. sales of approximately $1 billion in both 2017 and 2018, 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 because physicians have so few effective treatment options. We further 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

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 were 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 meaningful entry barrier.

The Flexion Pipeline

Our pipeline strategy is to continue to study ZILRETTA in other areas and, if feasible, expand ZILRETTA’s

product 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.

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, we believe 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 our active GLP toxicology
studies, we intend to file an IND and initiate a first-in-human clinical trial in the second half 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.

ZILRETTA – FDA Approved Product for the Management of OA Knee Pain

Key Regulatory Developments

On October 6, 2017, ZILRETTA 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. The approval was
based upon data from the pivotal Phase 3 clinical trial, a randomized, double-blind study which evaluated 484
patients at 37 centers worldwide. The pivotal Phase 3 trial showed that ZILRETTA met the primary endpoint of pain
reduction at Week 12, with statistically significant pain relief extending through Week 16. 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.

In December 2018, we submitted a supplemental new drug application, or sNDA, to the U.S. FDA to revise

the product label for ZILRETTA to allow for repeat administration. The sNDA is based on data from a Phase 3b
single-arm, open-label clinical trial, which indicated that repeat administration of ZILRETTA for treatment of OA
knee pain was safe and well tolerated with no deleterious impact on cartilage or joint structure observed through X-
ray analysis conducted at baseline and Week 52. The primary endpoint of the study was the safety and tolerability of
repeat administration of ZILRETTA in patients with symptomatic OA of the knee. The patients enrolled in the study
generally had longstanding and extensive disease, with more than two-thirds of the participants presenting with
Kellgren-Lawrence Grade 3 (37.5%) or Grade 4 (30.3%), the most radiographically severe form of OA.

Participants received an initial intra-articular injection of ZILRETTA followed by evaluation at Weeks 12, 16,

20 and 24 to determine their eligibility for a second injection. A second dose was administered only when patients
reported they were ready for additional treatment (based on pain levels) and their physician agreed it was clinically
indicated. The median time to a second injection was 16.6 weeks, with 25.1%, 33.5%, 20.7% or 20.1% of patients
receiving their second injection at Week 12, 16, 20 or 24, respectively. Among those who received two injections,
the magnitude and duration of clinical benefit after the 1st and 2nd injections were similar with marked
improvements from baseline in pain scores observed when first assessed at four weeks. Clinical benefit was
measured through validated OA-specific instruments including the WOMAC questionnaire that evaluates a patient’s
pain, stiffness and function, and the Knee Injury and Osteoarthritis Outcome Score, or KOOS, Quality of Life scale.
There were no serious adverse events related to ZILRETTA reported during the trial, and the patterns of treatment
emergent adverse events were consistent with those reported in previous clinical studies of ZILRETTA. No
participants discontinued the trial due to drug-related adverse events. The results from this trial were published in
the journal Rheumatology and Therapy in February 2019.

In July 2018, we had discussions with FDA regarding our objections to wording on the ZILRETTA product
label, including a sentence which states the product “is not intended” for repeat administration. We have disagreed
with certain ZILRETTA label language since the time of FDA approval of ZILRETTA as we believe it is
unwarranted and confusing to patients, prescribers and payers. As a result of the July 2018 discussions, the FDA
advised us to make a formal request for changes to the ZILRETTA label, and, in August 2018, we filed a
supplemental label revision with our proposed modifications. In February 2019, the FDA informed us that they will
subsume the August 2018 labeling supplement into the review of the December 2018 sNDA which was accepted for
filing on February 26, 2019. We now have an sNDA PDUFA date of October 14, 2019 at which time we expect
FDA’s decision on any ZILRETTA label changes.

Summary of Active and Key Completed Clinical Trials

Prior to FDA approval, we completed seven clinical trials evaluating ZILRETTA (also known as

FX006) against either immediate release triamcinolone acetonide crystalline suspension, or 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.

Active Clinical Trials

• We believe ZILRETTA’s extended-release profile may also provide effective treatment for OA pain of the hip

and OA pain of the shoulder, and in December 2018, we initiated a double-blind, placebo-controlled Phase 3
registration trial to evaluate the safety and efficacy of ZILRETTA in 440 patients with hip OA. The initiation of

•

this trial was supported by findings from a Phase 2, randomized, open-label, pharmacokinetic, or PK, study in
the shoulder and hip joints, known as the SHIP study. The results from the SHIP study demonstrated that
ZILRETTA was generally safe and well tolerated, and the PK profile of ZILRETTA observed in both joints was
consistent with previous PK studies in the knee. Results also showed that an injection of ZILRETTA into the
hip resulted in 6-fold lower peak plasma levels and reduced systemic exposure compared to TAcs.

The primary endpoint of the Phase 3 hip trial is the magnitude of pain relief versus placebo as measured on the
WOMAC A (pain) subscale at Week 12. Patients will undergo index hip X-rays at screening and again at Week
12. Following initial injection of ZILRETTA or placebo, participants will be evaluated at Weeks 12, 16, 20 and
24 to determine if a second IA injection for hip OA pain is clinically indicated. If eligible for a second injection,
patients will receive open-label ZILRETTA at the time of recurrent symptoms and will be followed for 12
weeks after that injection. Patients who do not receive a second injection will be followed for up to 24 weeks
after their first injection. The trial is expected to be completed in 2020.

With respect to shoulder, in the second half of 2019, we plan to initiate additional Phase 2 studies of
ZILRETTA in both OA and adhesive capsulitis, commonly referred to as “frozen shoulder.”

In May 2018, we initiated an open-label Phase 3b trial assessing the effect of a single administration of
ZILRETTA on synovitis (inflammation of the synovial membrane) in patients with OA of the knee. Patients
will undergo initial ultrasound examination and MRI scans with contrast of the index knee at baseline and then
return to the clinic at Weeks 6 and 24 for MRI scans and other assessments. Topline results are anticipated in
2020.

Additional Key Completed Studies

In April 2018, we announced that the data from our pivotal Phase 3 clinical trial of ZILRETTA in patients with
moderate to severe OA knee pain were published in the Journal of Bone and Joint Surgery. This trial evaluated
484 patients who were randomized 1:1:1 to ZILRETTA 32 mg, immediate release TA 40 mg or placebo (saline)
injection. The trial successfully met its primary endpoint, demonstrating highly statistically significant
(p<0.0001) pain relief against placebo (saline) at Week 12. 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 in pain from baseline). 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.

ZILRETTA also delivered persistent analgesia against placebo in this trial at each of Weeks 1 through 16.
Results showed it 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.

In September 2018, we announced that the data from the double-blind, randomized Phase 2 study evaluating
blood glucose levels in patients with OA knee pain and controlled Type 2 diabetes were published in the peer-
reviewed journal, Rheumatology. The paper shows that the study met its primary endpoint, demonstrating that
the change in blood glucose levels was significantly lower following ZILRETTA injection than immediate-
release TAcs injection in people with OA knee pain and controlled Type 2 diabetes.

Investigators from seven study sites enrolled 33 patients, 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 October 2018, results from the Phase 2 clinical trial evaluating the safety and PK of concurrent
administration of ZILRETTA in bilateral knee OA compared to immediate-release TAcs were presented at
the American College of Rheumatology Annual Meeting. The results show that exposure to triamcinolone
acetonide was significantly lower in patients given ZILRETTA compared to those given TAcs, with maximum
plasma concentrations nearly 10-fold lower (2,577.8 pg/mL compared to 24,289.4 pg/mL). Safety profiles were
similar for the ZILRETTA and TAcs treatment groups.

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 an entry barrier.
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, 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.

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 10,500 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 and deployed in the field as of November 20, 2017, when they began the process of promoting
ZILRETTA to prescribing physicians. 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 approximately 70%

receive IA injections from orthopedic surgeons or their attendant physician extenders (i.e. physician assistants and
nurse practitioners). Approximately 8% of patients receive IA injections from physical medicine and rehabilitation
specialists and rheumatologists, and approximately 7% of patients are treated by sports medicine specialists.
Approximately 11% are treated by primary care physicians. The remaining IA injections are administered by a wider
array of health care providers, including physician 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.

The key competitive factors that could affect the success of ZILRETTA’s commercialization are likely to be

efficacy, safety, price and the availability of reimbursement from government and other third-party payers.
Immediate-release steroids and HAs are currently the two marketed classes of IA products that compete directly
with ZILRETTA.

Also available are stem cell and platelet rich plasma, or PRP, injections, but these require on site preparation

from tissue or blood taken 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 these are minimally
manipulated autologous therapies, they do not require and have not received FDA review or approval. For that
reason, they are generally not reimbursed by payers and patients must pay out of pocket to receive these therapies.
Furthermore, the American Association of Hip & Knee Surgeons recently issued a position statement indicating that

it cannot recommend biologic therapies, including stem cell and PRP injections, for the treatment of advanced hip or
knee arthritis.

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

stages of clinical development. These product candidates include:

•

Anika Therapeutics, Inc.’s Cingal®, which is a mixture of Anika’s Monovisc combined with 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 needed to file this product candidate under an NDA. In June 2018,
Anika announced Cingal did not achieve statistical significance at the primary endpoint of 26 weeks in
an active comparator study. Subsequently, Anika completed an extension study to 39 weeks and
announced an intention to include the data in a package for a meeting with the FDA planned for the first
quarter of 2019. In February 2019, Anika announced that, based on their discussions with the FDA, they
will need to conduct another Phase III clinical trial before they can potentially obtain approval for
Cingal in the U.S.

Kolon TissueGene, Inc.’s Invossa™, which is a combination of human allogeneic chondrocytes and
TGF-β1 transfected allogeneic chondrocytes. In November 2018, Kolon TissueGene announced they
enrolled the first patient in a pivotal US Phase 3 trial. According to clinicaltrials.gov, the estimated
primary completion date for the trial is April 2021.

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 but has not announced a timeline for potentially submitting a
Biologics License Application, or BLA.

Centrexion Therapeutics Corporation’s CNTX-4975, which is a synthetic, ultra-pure injection of trans-
capsaicin. In December 2018, Centrexion announced completion of patient enrollment in its Phase 3
VICTORY-1 trial. Topline results are expected to be reported in the first quarter of 2020.

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. Initial results from Phase 3
clinical trials for each were announced in 2018. In January 2019, Pfizer and Lilly announced results
from a second Phase 3 study showing that the tanezumab 5 mg treatment arm met all three co-primary
endpoints at 24 weeks, however in the 2.5 mg treatment arm, patients’ overall assessment of their OA
was not statistically different than placebo. Rapidly progressive OA was seen in 2.1% of tanezumab-
treated patients and was not observed in the placebo arm.

Servier and Galapagos NV’s S201086/GLPG1972, an ADAMTS-5 inhibitor, is currently in Phase 2
clinical development.

Taiwan Liposome Company’s TLC599, which is a liposomal formulation of dexamethasone sodium
phosphate. TLC599 is currently in Phase 2 clinical 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.

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, 2019, we owned three U.S. issued patents, one pending U.S. application, 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 pending U.S. application directed at compositions of matter
similar to ZILRETTA, as well as methods of making and using the same, if resulting in an issued patent, could
provide additional claims expiring in 2031.

During 2018, we expanded our patent portfolio with additional granted patents related to ZILRETTA outside

the United States. In 2018, we had patents granted in Mexico, the Russian Federation and the Republic of China
(Taiwan), further expanding to the scope of the previously granted patents in Australia, Canada, China, Indonesia,
Japan, New Zealand, Saudi Arabia, Singapore, 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.

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 Europe, with an
expiry date in 2032, and in Australia, Japan and China with expiry dates in 2033, and pending in Canada, Eurasia,
India, and the U.S. We received a notice of allowance for the U.S. patent application covering FX201 on February
11, 2019. 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 been refined and 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.

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 $2.0 million. In
2018, we paid GeneQuine a $750,000 milestone payment for initiating a GLP toxicology study of FX201. We may
also be required to make additional milestone payments during the development of FX201, including up to $7.75
million through the Phase 2 proof of concept, or PoC, clinical trial and, following successful PoC, up to an
additional $54 million in development and global regulatory approval milestone payments. As part of the
transaction with GeneQuine, we became the direct licensee of certain underlying Baylor College of Medicine, or
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
preclinical and initial clinical supplies of FX201.

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.

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, the Public Health Service Act, or PHSA, 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:

•

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 documentation, to the FDA as part of the IND application. The IND
automatically becomes effective 30 days after receipt by the FDA, unless 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 with applicable laws or regulations.

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
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. A supplement to an approved NDA or BLA is also required to be submitted for
review when seeking major changes to manufacturing or labeling, including additional indications for use.
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.

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.

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.

The FDA and other federal and state agencies closely regulate the promotion of drugs. Moreover, the FDA

strictly regulates the promotional claims that may be made about drug and biologic products. In particular, a product
may not be promoted for off label uses that are not approved by the FDA as reflected in the product’s approved
packaging label or are otherwise truthful and not misleading statements. The FDA and other agencies actively
enforce the laws and regulations prohibiting the promotion of off-label uses.

Other types of changes to the approved product, such as adding new indications and additional labeling

changes, 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 product
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 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 scrutiny. 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.

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, or VA, Federal Supply Schedule, or 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, or 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, 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 MMA 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

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

•

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

an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1%
and 13% of the average manufacturer price for branded and generic drugs, respectively;

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

a new Medicare Part D coverage gap discount program, in which manufacturers must now agree to offer
70% 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 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 federal False Claims Act and the federal
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 and other directives designed to
delay the implementation of certain provisions of PPACA or otherwise circumvent some of the requirements for
health insurance mandated by PPACA. Concurrently, Congress has considered legislation that would repeal or
repeal and replace all or part of PPACA. While Congress has not passed comprehensive repeal legislation, two bills
affecting the implementation of certain taxes under PPACA have been signed into law. The Tax Cuts and Jobs Act
of 2017, or Tax Act, signed into law on December 22, 2017, includes a provision repealing, effective January 1,
2019, the tax-based shared responsibility payment imposed by PPACA on certain individuals that fail to maintain
qualifying health coverage for all of part of a year commonly referred to as the “individual mandate.” On January
22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the
implementation of certain PPACA-mandated fees, including the so-called “Cadillac” tax on certain high cost
employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market
share, and the medical device excise tax on non-exempt medical devices. The Bipartisan Budget Act of 2018, or the
BBA, among other things, amended PPACA, effective January 1, 2019, to close the coverage gap in most Medicare
drug plans, commonly referred to as the “donut hole.” In July 2018, the Centers for Medicare and Medicaid
Services, or CMS, published a final rule permitting further collections and payments to and from certain PPACA
qualified health plans and health insurance issuers under PPACA risk adjustment program in response to the
outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On
December 14, 2018, a Texas U.S. District Court Judge ruled that PPACA is unconstitutional in its entirety because
the “individual mandate” was repealed by Congress as part of the Tax Act. While the Texas U.S. District Court
Judge, as well as the Trump administration and CMS, have stated that the ruling will have no immediate effect
pending appeal of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal and
replace PPACA will impact PPACA.

2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to
Congress proposals in spending reductions. The Joint Select Committee on Deficit Reduction did not achieve a
targeted deficit reduction, which triggered the legislation’s automatic reduction to several government programs.
This includes aggregate reductions to Medicare payments to providers of, on average, two percent per fiscal year
through 2027 unless Congress takes additional action. The American Taxpayer Relief Act of 2012, among other
things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers,
and increased the statute of limitations period for the government to recover overpayments to providers from three to
five years.

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 legislation
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. At the federal level, the Trump administration’s budget proposal for
fiscal year 2019 contains further drug price control measures that could be enacted during the 2019 budget process
or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price
of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to
eliminate cost sharing for generic drugs for low-income patients. Further, the Trump administration released a
“Blueprint”, or plan, to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals
to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs,
incentivize manufacturers to lower the list price of their products, and reduce the out of pocket costs of drug
products paid by consumers. HHS has already started the process of soliciting feedback on some of these measures
and, at the same time, is immediately implementing others under its existing authority. For example, in September
2018, CMS announced that it will allow Medicare Advantage Plans the option to use step therapy for Part B drugs
beginning January 1, 2019, and in October 2018, CMS proposed a new rule that would require direct-to-consumer
television advertisements of prescription drugs and biological products, for which payment is available through or
under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, of that
drug or biological product. On January 31, 2019, the HHS Office of Inspector General proposed modifications to
federal Anti-Kickback Statute safe harbors which, among other things, may affect rebates paid by manufacturers to
Medicare Part D plans, the purpose of which is to further reduce the cost of drug products to consumers. Although a
number of these, and other proposed measures will require authorization through additional legislation to become
effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative
and/or administrative measures to control drug costs. 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 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.

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.

Additionally, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina

Right to Try Act of 2017, or the Right to Try Act, was signed into law. The law, among other things, provides a
federal framework for certain patients to access certain investigational new drug products that have completed a
Phase I clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible
patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA
expanded access program. There is no obligation for a pharmaceutical manufacturer to make its drug products
available to eligible patients as a result of the Right to Try Act.

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 clinical trial 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 HHS (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.

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 federal 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 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.

HIPAA, as amended by the Health Information Technology and Clinical Health Act of 2009, and their
respective implementing regulations, impose requirements on certain healthcare providers, health plans, and
healthcare clearinghouses, known as covered entities, 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.

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.

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, 2018, we had 272 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 $53.1 million, $51.2 million, and $41.3 million in research and development in the years ended

December 31, 2018, 2017 and 2016, respectively.

Corporate and Other Information

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

Road, Suite 301, Burlington, Massachusetts 01803, and our telephone number is (781) 305-7777. Our corporate
website address is www.flexiontherapeutics.com. Information contained on or accessible through our website is not
a part of this Annual Report, and the inclusion of our website address in this Annual Report is an inactive textual
reference only. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act are available free of

charge on our website as soon as reasonably practicable after we electronically file such material with, or furnish it
to, the SEC. We also regularly post copies of our press releases as well as copies of presentations and other updates
about our business on our website at www.flexiontherapeutics.com. Information contained in our website does not
constitute a part of this Annual Report or our other filings with the SEC. The SEC maintains an internet site that
contains our public filings with the SEC and other information regarding our company, at www.sec.gov. These
reports and other information concerning our company may also be accessed at the SEC’s Public Reference Room at
100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330.

This Annual Report contains references to our trademarks and to trademarks belonging to other entities.

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

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, and the market price of our common stock would likely decline.

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 over the next few years.

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
$169.7 million, $137.5 million, and $71.9 million for fiscal years 2018, 2017, and 2016, respectively. As of
December 31, 2018, we had an accumulated deficit of $518.8 million. We expect to incur net losses over the next
few years as we continue to 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.

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, FX201 and other future product candidates. As
a result of the foregoing, we expect to continue to incur significant losses and negative cash flows over the next few
years.

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 then
successfully commercialize other product candidates. We may never succeed in these activities and may never
generate revenues that are significant enough to achieve profitability.

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 related to the commercialization 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 increase in connection with our ongoing activities, particularly as we expand our sales and marketing activities,
continue to commercialize ZILRETTA and advance our clinical programs.

As of December 31, 2018, we had cash, cash equivalents and marketable securities of approximately $258.8
million and working capital of $248.4 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 12 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:

•

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;

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, and 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:

•

incur or assume certain debt;

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

•

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

change the nature of our business;

change our organizational structure or type;

amend, modify or waive any of our organizational documents;

license, transfer or dispose of certain assets;

grant certain types of liens on our assets;

• make certain investments;

•

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.

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 prior to ZILRETTA, 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:

•

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 by third-party payers and government
authorities to support ZILRETTA’s pricing;

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 product label indicates that it is not intended for repeat
administration, and we believe this has negatively impacted our commercialization efforts. While we successfully
completed a Phase 3b repeat dose study of ZILRETTA and have submitted an sNDA to the FDA, we cannot predict
whether or when the FDA may agree to modify the ZILRETTA product label with respect to repeat administration.
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 product 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.
If we experience any disruption in the commercial supply of ZILRETTA due to manufacturing or distribution issues,
the disruption would impact ZILRETTA sales and may adversely affect physicians’, patients’ and payers’
assessment of ZILRETTA, negatively impacting uptake and long-term commercialization efforts.

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 trials demonstrate that ZILRETTA represents a clinically meaningful and highly efficacious option for
patients and physicians, it is possible that we will 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 ADP 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 to existing generic steroids, such as immediate-release TA, the FDA or other applicable regulatory

authorities may approve other 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 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 products would materially adversely impact our ability to successfully
commercialize 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 or other systemically administered 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:

•

the efficacy and safety of ZILRETTA and our other 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 ZILRETTA and any of our other product candidates that
receive regulatory approval;

the price of ZILRETTA and any of our future 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 our intellectual property rights;

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

•

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

If our competitors market products that are more effective, safer or less expensive than ZILRETTA, 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, products 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 generate significant revenue from ZILRETTA.

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, ZILRETTA sales are concentrated
with two specialty distributors, which together represented approximately 81% and 94% of our sales for the years
ended December 31, 2018 and 2017, respectively. Loss of either specialty distributor through contract termination 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, 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 to
negotiate new contracts 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 other 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
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
coverage and adequate reimbursement from third-party payers, including governmental healthcare programs, such as
Medicare and Medicaid, managed care organizations and commercial payers, among others. 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. Coverage and adequate reimbursement from third-party payers
are 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.

As of January 1, 2019, we received a product-specific J-Code for ZILRETTA (J-3304), which may reduce
reluctance by physicians to prescribe ZILRETTA based on reimbursement concerns. However, third-party payers
nevertheless 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. Also, third-party payers may require that pre-approval, or prior-authorization, be obtained from the
payer for reimbursement of ZILRETTA, or limit coverage to one injection or a limited number of injections over a
set time period. 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.

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, as well as inclusion of ZILRETTA on the reimbursement policies and
formularies used by large physician practices and hospitals. 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, physician practices and hospitals 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, or when the reimbursement landscape is unclear.

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 and one
payer’s determination to provide coverage for ZILRETTA does not ensure that other payers also will provide
coverage. 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 with
respect to specific products. 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 limitations or inadequacies
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 or adoption of
ZILRETTA or any future products.

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 that served as the basis for the
FDA’s approval of ZILRETTA will be consistent with commercial results as a large number of patients and broader
populations are exposed to ZILRETTA and are exposed over longer periods of time, including results related to
safety and efficacy. New data relating to ZILRETTA, including from adverse event reports or our on-going studies
of ZILRETTA related to hip OA or synovitis in 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:

•

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, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education

Reconciliation Act, or 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:

•

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;

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

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 require 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 the Centers for Medicare & Medicaid Services,
or CMS, information related to “payments or other transfers of value” made or distributed to physicians
and teaching hospitals, and that applicable manufacturers and applicable group purchasing organizations
report annually to CMS ownership and investment interests held by physicians and their immediate
family members;

•

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

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

Some of the provisions of PPACA have yet to be implemented, and there have been legal and political
challenges to certain aspects of PPACA. Since January 2017, President Trump has signed two Executive Orders and
other directives designed to delay, circumvent, or loosen certain requirements mandated by PPACA. Concurrently,
Congress has considered legislation that would repeal or repeal and replace all or part of PPACA. While Congress
has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under
PPACA have been signed into law. The Tax Cuts and Jobs Act of 2017, signed into law on December 22, 2017,
includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by
PPACA on certain individuals that fail to maintain qualifying health coverage for all of part of a year commonly
referred to as the “individual mandate.” On January 22, 2018, President Trump signed a continuing resolution on
appropriation for fiscal year 2018 that delayed the implementation of certain PPACA-mandated fees, including the
so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans and the annual fee imposed on
certain health insurance providers based on market share. The Bipartisan Budget Act of 2018, among other things,
amended PPACA, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly
referred to as the “donut hole.” In July 2018, CMS announced published a final rule permitting further collections
and payments to and from certain PPACA qualified health plans and health insurance issuers under PPACA risk
adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to
determine this risk adjustment. On December 14, 2018, a Texas U.S. District Court Judge ruled that PPACA is
unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Act.
While the Texas U.S. District Court Judge, as well as the Trump administration and CMS, have stated that the ruling
will have no immediate effect pending appeal of the decision, it is unclear how this decision, subsequent appeals,
and other efforts to repeal and replace PPACA will impact PPACA and our business.

In addition, since the PPACA was enacted, other legislative changes have been proposed and adopted that
may impact the extent to which we are able to successfully commercialize any of our product candidates that receive
regulatory approval. For example, in August 2011, then-President Obama signed into law the Budget Control Act of
2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to
Congress proposals in spending reductions. The Joint Select Committee on Deficit Reduction did not achieve a
targeted deficit reduction, which triggered the legislation’s automatic reduction to several government programs.
This includes aggregate reductions to Medicare payments to providers of, on average, two percent per fiscal year
through 2027 unless Congress takes additional action. The American Taxpayer Relief Act of 2012, among other
things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers,
and increased the statute of limitations period for the government to recover overpayments to providers from three to
five years.

There has been increasing legislative and enforcement interest in the United States with respect to specialty

negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients.
Further, the Trump administration released a “Blueprint”, or plan, to lower drug prices and reduce out of pocket
costs of drugs that contains additional proposals to increase drug manufacturer competition, increase the negotiating
power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products, and
reduce the out of pocket costs of drug products paid by consumers. The Department of Health and Human Services,
or HHS, has already started the process of soliciting feedback on some of these measures and, at the same time, is
immediately implementing others under its existing authority. For example, in September 2018, CMS announced
that it will allow Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1,
2019, and in October 2018, CMS proposed a new rule that would require direct-to-consumer television
advertisements of prescription drugs and biological products, for which payment is available through or under
Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, of that drug or
biological product. On January 31, 2019, the HHS Office of Inspector General proposed modifications to federal
Anti-Kickback Statute safe harbors which, among other things, may affect rebates paid by manufacturers to
Medicare Part D plans, the purpose of which is to further reduce the cost of drug products to consumers. Although a
number of these, and other proposed measures will require authorization through additional legislation to become
effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative
and/or administrative measures to control drug costs. 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
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.

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.

Risks Related to Product Development and Regulatory Compliance

We may never obtain regulatory approval of ZILRETTA for repeat administration or additional
indications, 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 for the management of OA pain of the knee, the approved product label
contains a limitation of use, or LOU, stating that ZILRETTA is not intended for repeat administration. On December
17, 2018, we submitted a supplemental new drug application, or sNDA, to the FDA to revise the product label for
ZILRETTA. The sNDA is based on data from an open-label Phase 3b clinical trial, which indicated that repeat
administration of ZILRETTA for treatment of OA knee pain was safe and well tolerated with no deleterious impact
on cartilage or joint structure observed through X-ray analysis. We may not be successful in our efforts to modify or
remove the LOU. It is possible that the FDA will disagree with our analysis or will find the data submitted in the
sNDA insufficient to approve a label revision. If we are unable to revise or expand the label for ZILRETTA to
allow for repeat dosing, our ability to fully market ZILRETTA may be limited.

While ZILRETTA has been approved by the FDA for the treatment of patients with OA of the knee in the
United States, 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, FX201 is
at an early stage of development and may never reach IND submission or human clinical trials, in which case we
may never recover our investment.

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 and planned clinical trials of ZILRETTA in hip OA and synovitis in
knee OA, will be successful or consistent with the results generated in the Phase 3 trial.

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:

•

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.

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 OA knee pain, 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:

•

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 such product candidates or indications 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.

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.

Changes in funding for the FDA and other government agencies could hinder their ability to hire and
retain key leadership and other personnel, prevent new products from being developed or commercialized
in a timely manner or otherwise prevent those agencies from performing normal functions on which the
operation of our business may rely, which could negatively impact our business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including
government budget and funding levels, ability to hire and retain key personnel and accept payment of user fees, and
statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a
result. In addition, government funding of other government agencies on which our operations may rely, including
those that fund research and development activities is subject to the political process, which is inherently fluid and
unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed

and/or approved by necessary government agencies or for labeling supplements and other regulatory requests to be
acted upon, which would adversely affect our business. For example, over the last several years, including beginning
on December 22, 2018 and ending on January 25, 2019, the U.S. government has shut down several times and
certain regulatory agencies, such as the FDA, have had to furlough critical government employees and stop critical
activities. If repeated or prolonged government shutdowns occur, it could significantly impact the ability of the FDA
to timely review and process our regulatory submissions, and negatively impact other government operations on
which we rely, which could have a material adverse effect on our business.

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 employees, including sales representatives,
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 HHS, 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.

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, imprisonment, exclusion, contractual damages, reputational harm, diminished
profits and future earnings, additional reporting requirements and/or oversight, 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 sales, marketing,
promotion, manufacturing, distribution, pricing, discounting, customer incentive programs, physician speaker
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:

•

the federal Anti-Kickback Statute, which prohibits, among other things, individuals and entities from
knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in
cash or in kind, to induce or reward, or in return for, either the referral of an individual, or the purchase,
lease, order or arranging for the purchase, lease, or order of any good, 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 federal 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 for Economic and Clinical Health Act of
2009, and their respective implementing regulations, which impose requirements on certain healthcare
providers, health plans, and healthcare clearinghouses, known as covered entities, 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, local, 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 healthcare providers and entities, or marketing expenditures;
state and local laws requiring the registration of pharmaceutical sales and medical representatives; 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, or FCPA, 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;

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); and

the European Union’s General Data Protection Regulation ((EU) 2016/679), or GDPR, which went into
effect in May 2018, and which introduces strict requirements for processing personal data of individuals
within the EU.

•

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,
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.

ZILRETTA is still subject to substantial, ongoing regulatory requirements, and our other product
candidates may face future development and regulatory difficulties.

The FDA approved ZILRETTA only for the treatment of OA knee pain. 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 is, 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 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 discover 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:

•

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.

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 finished drug 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.

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. From time to time, commercial batches of ZILRETTA may fail
to meet required specifications and be unavailable for commercial sale. If we experience multiple successive batch
failures, or if supply from Patheon is otherwise 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.

Our other product candidates, including FX201, also rely on sole sources of supply for the preclinical 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 candidates 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 ZILRETTA and other 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 for 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 may be conducted
outside of the United States, which will make it more difficult for us to monitor CROs and perform visits of our
clinical trial sites and will force us to rely heavily on CROs to ensure the proper and timely conduct of our clinical
trials and compliance with applicable regulations, including GCP. Failure to comply with applicable regulations in
the conduct of the clinical trials for our product candidates may require us to repeat clinical trials, which would
delay the regulatory approval process.

Some of our CROs have an ability to terminate their respective agreements with us if, among other reasons, it

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

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:

•

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 and other technically qualified personnel in our industry, particularly in the greater Boston,
Massachusetts area where our headquarters is located, 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 biotechnology and 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 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:

•

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;

decreased demand for our products approved for commercial sale; and

reputational harm.

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 or mass tort 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 collaborate with third parties to develop and commercialize products outside of the United States, a
variety of risks associated with international operations could materially and adversely affect our business.

If we enter into agreements with third parties to market ZILRETTA, and if approved, our other product

candidates, outside of the United States, we expect to be subject to additional risks related to entering into
international business relationships, including:

•

different regulatory requirements for drug approvals in foreign countries;

reduced protection for intellectual property rights;

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;

different government payer systems, multiple payer-reimbursement regimes or patient self-pay systems,
and price controls;

potential noncompliance with the FCPA, the U.K. Bribery Act 2010, or similar antibribery and
anticorruption laws in other jurisdictions as well as various regulations pertaining to data privacy, such
as the GDPR;

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.

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.

If we fail to comply with applicable U.S. and foreign privacy and data protection laws and regulation, we
may be subject to liabilities that adversely affect our business, operations and financial performance.

We are subject to laws and regulations requiring that we take measures to protect the privacy and security of

certain information we gather and use in our business. For example, HIPAA, and its implementing regulations
impose, among other requirements, certain regulatory and contractual requirements regarding the privacy and
security of personal health information on covered entities, such as health plans, healthcare clearinghouses and
certain healthcare providers, as well as their business associates that perform certain services involving the use or
disclosure of personal health information. In addition to HIPAA, numerous other federal and state laws, including,
without limitation, state security breach notification laws, state health information privacy laws and federal and state
consumer protection laws, govern the collection, use, and storage of personal information.

We may also be subject to or affected by foreign laws and regulation, including regulatory guidance,

governing the collection, use, disclosure, security, transfer and storage of personal data, such as information that we
collect about patients and healthcare providers in connection with clinical trials and our other operations in the U.S.
and abroad. The global legislative and regulatory landscape for privacy and data protection continues to evolve, and
implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. This
evolution may create uncertainty in our business, result in liability or impose additional costs on us. The cost of
compliance with these laws, regulations and standards is high and is likely to increase in the future. For example, the
EU has adopted the GDPR, which introduces strict requirements for processing personal data. The GDPR is likely to
increase compliance burdens on us, including by mandating potentially burdensome documentation requirements
and granting certain rights to individuals to control how we collect, use, disclose, retain and leverage information
about them. In addition, the GDPR provides for breach reporting requirements, more robust regulatory enforcement
and fines of up to 20 million euros or up to 4% of the annual global revenue. While companies are afforded some
flexibility in determining how to comply with the GDPR’s various requirements, it has and will continue to require
significant effort and expense to ensure continuing compliance with the GDPR. Moreover, the requirements under

the GDPR may change periodically or may be modified by European Union, or EU, national law, and could have an
effect on our business operations if compliance becomes substantially costlier than under current requirements. It is
possible that each of these privacy laws may be interpreted and applied in a manner that is inconsistent with our
practices. Any failure or perceived failure by us to comply with federal, state or foreign laws or self-regulatory
standards could result in negative publicity, diversion of management time and effort and proceedings against us by
governmental entities or others. In many jurisdictions, enforcement actions and consequences for noncompliance are
rising. As we continue to expand into other foreign countries and jurisdictions, we may be subject to additional laws
and regulations that may affect how we conduct business.

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.

Exposure to U.K. political developments, including the outcome of the referendum on membership in the
European Union, could impact our suppliers and harm our business.

The U.K.’s referendum to leave the EU, or “Brexit,” has caused and may continue to cause disruptions to
capital and currency markets worldwide. The full impact of the Brexit decision, however, remains uncertain. A
process of negotiation will determine the future terms of the U.K.’s relationship with the EU. During this period of
negotiation, our results of operations and access to capital may be negatively affected by interest rate, exchange rate
and other market and economic volatility, as well as regulatory and political uncertainty. The tax consequences of
the U.K.’s withdrawal from the EU are uncertain as well. Brexit may also have a detrimental effect on our suppliers,
which could, in turn, adversely affect our revenues and financial condition.

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, including through the inter-partes review process, 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.

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
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.

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 preclinical 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:

•

the success or perceived success of the commercialization of ZILRETTA;

failure to successfully develop and commercialize additional product candidates;

changes in the structure of healthcare payment systems;

adverse results or delays in clinical trials;

inability to obtain additional funding;

changes in laws or regulations applicable to our products or product candidates;

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 companies like ours. Broad market and industry factors may continue to 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, 2018, our executive officers, directors and stockholders affiliated with our officers and

directors beneficially owned approximately 15.4% 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.

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
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. We have experienced multiple ownership changes since our inception, however, based on the annual
limitations calculated at each ownership change date, we expect that substantially all net operating loss
carryforwards will be available to offset future taxable income. Approximately $0.3 million of NOLs are expected
to expire unused. Future 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 and could be subject to future
limitations under Section 382.

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

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

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

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

•

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

limiting the removal of directors by the stockholders;

creating a staggered board of directors;

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

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

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

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current

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

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2.

Properties

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

Due to increased headcount and future growth plans, during 2018, we amended the lease to expand the facility to
approximately 36,500 square feet. The lease for the office space expires in October 2023. In addition, we lease
approximately 5,300 square feet of laboratory space in Woburn, Massachusetts under a lease that 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.

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”.

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, 2018 of the cumulative total return for our
common stock, the Russell 2000 Growth and Biotech index and the NASDAQ Composite Index. 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.

Holders of Record

As of February 25, 2019, 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.

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.

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, 2018, 2017

and 2016 and the consolidated balance sheet data as of December 31, 2018 and December 31, 2017 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, 2015 and 2014 and the selected consolidated
balance sheet data as of December 31, 2016, 2015 and 2014 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.

Consolidated Statement of Operations Data:
Revenues:

2018

2017

Year Ended December 31,
2016
(in thousands)

2015

2014

Product revenue, net ..................................................... $

22,524 $

355 $

— $

—

Operating expenses:

Cost of sales..................................................................
Research and development ...........................................
Selling, general and administrative...............................
Total operating expenses ........................................
Loss from operations ..........................................................
Other (expense) income

Interest income..............................................................
Interest expense ............................................................
Other income (expense)................................................
Total other (expense) income .................................
Net loss ............................................................................... $
Net loss per share attributable to common stockholders,
basic and diluted(1) .............................................................. $
Weighted average common shares outstanding, basic and
diluted(1) ..............................................................................

7,336
53,079
121,311
181,726
(159,202)

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)

4,567
(15,712)
688
(10,457)
(169,659) $

3,718
(11,268)
(250)
(7,800)
(137,481) $

1,521
(1,748)
(1,887)
(2,114)
(71,894) $

1,246
(571)
(927)
(252)
(46,315) $

—
17,923
9,064
26,987
(26,987)

479
(401)
(404)
(326)
(27,313)

(4.49) $

(4.16) $

(2.84) $

(2.15) $

(1.97)

37,751

33,027

25,297

21,497

13,894

2018

2017

As of December 31,
2016

2015

2014

Consolidated Balance Sheet Data:
Cash, cash equivalents, marketable securities, and long-
term investments ................................................................. $
Working capital(2) ...............................................................
Total assets..........................................................................
Total debt(3) .........................................................................
Total stockholders’ equity ..................................................

258,784 $
248,425
295,752
158,486
110,079

423,916 $
367,418
441,317
160,010
260,274

210,329 $
191,853
226,262
30,533
187,032

118,604 $
104,044
127,139
15,002
103,986

151,625
145,328
153,348
3,564
144,942

(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.

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

On October 6, 2017, the U.S. Food and Drug Administration, or FDA, approved our product, ZILRETTA, for
marketing in the United States. ZILRETTA is 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 our proprietary microsphere technology to provide extended pain relief. The pivotal Phase 3 trial, on which
the approval of ZILRETTA was based, showed that ZILRETTA met the primary endpoint of pain reduction at Week
12, with statistically significant pain relief extending through Week 16. We also have a product candidate (FX201)
in development for OA.

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 and undertaking the commercialization of ZILRETTA, providing general and administrative support
for these operations and protecting our intellectual property. From our inception through December 31, 2018, we
have raised approximately $756 million and funded our operations primarily through the sale of our common stock,
convertible preferred stock, and convertible debt, as well as debt financing. Until such time, if ever, that we can
generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings,
debt 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 $169.7 million,

$137.5 million, and $71.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. As of
December 31, 2018, we had an accumulated deficit of $518.8 million. Substantially all of our net losses resulted
from costs incurred in connection with our development programs and from selling, general and administrative
expenses associated with our operations.

We anticipate that we will incur losses over the next few years. We expect that our operating expenses will

continue to increase in connection with our ongoing activities, as we:

•

continue the development and commercialization of ZILRETTA, including our on-going and future
clinical trials;

continue to scale-up manufacturing activities including the supply of clinical trial materials 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.

We considered 2018 to be a foundational year for the commercialization of ZILRETTA, as we managed

reimbursement dynamics and ramped up our promotional and marketing efforts.

ZILRETTA is a physician-administered product, and therefore physicians are required to purchase and

manage the inventory of ZILRETTA, prior to administering the product to patients. Physicians obtain
reimbursement for ZILRETTA from the applicable third-party payer, such as Medicare or a health insurance
company, only after it has been administered to patients. This is called a “buy and bill” process. Because
physicians are at financial risk for the cost of a “buy and bill” product until they have been reimbursed, concerns
about reimbursement can impact a physician’s decision to use the product. Shortly after the FDA approved
ZILRETTA in October 2017, we applied to the CMS for a product-specific reimbursement code, known as a J code,
under the Healthcare Common Procedure Coding System, or HCPCS. Product-specific J codes provide
reimbursement at a predetermined amount, in a timely and consistent manner, and are recognized by Medicare and
the overwhelming majority of commercial insurers. Following their standard process, CMS announced, in
November 2018, that ZILRETTA had been recommended for a product-specific J code (J3304), which took effect
on January 1, 2019.

For the first half of 2018, ZILRETTA was reimbursed under a miscellaneous J code, which was not product-

specific and had the potential to result in inconsistent and delayed reimbursement for prescribers. As a result,
physician practices may have been reluctant to place large orders and, in some cases, refused to purchase
ZILRETTA at all until a product-specific J code was in place. On March 30, 2018, CMS issued a quarterly update
to the HCPCS that included a product-specific Q code for ZILRETTA (Q9993), which became effective July 1,
2018. Q codes are temporary codes which CMS issues at its discretion when it identifies a programmatic need to
differentiate a single source drug from other products available in the marketplace until a product-specific J code is
established. Although Q codes simplify the reimbursement process in a manner that is consistent with product-
specific J codes, they are issued infrequently and the ZILRETTA prescriber base was largely unfamiliar with these.
This lack of familiarity may have muted the favorable impact of the Q code on the adoption of ZILRETTA was
muted. We believe that the product-specific J code, J3304, will provide prescribers with confidence in the
reimbursement of ZILRETTA, as product-specific J codes are universally recognized by Medicare, as well as by
commercial payers.

Our promotional and marketing activities increased over the course of 2018, as our Musculoskeletal Business

Managers, or MBMs, built and strengthened their relationships with prescribers, and informed and educated them
about ZILRETTA. Furthermore, our Field Access Managers worked with physician practices to navigate any
reimbursement challenges. We continue to closely track and report on a number of quantitative adoption metrics.
Since the commercial launch of ZILRETTA in the fourth quarter of 2017, our MBMs have made calls on
approximately 17,000 physician prescribers. In addition, our MBMs conducted in-depth product discussions at
3,255, or approximately 88%, of our 3,700 target accounts, and 3,321 target accounts, or approximately 90%, have
purchased or received samples of ZILRETTA. Of the accounts that have purchased ZILRETTA, 69% have placed a
reorder for additional product. With respect to commercial payers, we have engaged with 48 key insurers that
represent approximately 225 million, or 75%, of the commercially covered lives in the U.S. Commercial insurance
coverage for ZILRETTA continues to be broad with more than 95% of the medical benefits verifications processed
through FlexForward, our reimbursement hub service provider, indicating 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 product
revenue, we expect to finance our cash needs through a combination of equity offerings, debt 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 shortly thereafter. We had not generated any revenue prior to the launch of
ZILRETTA.

Cost of Sales

Cost of sales consists of third-party manufacturing costs, freight and indirect overhead costs associated with
sales of ZILRETTA. Cost of sales also includes period costs related to certain inventory manufacturing services,
inventory adjustment charges, and unabsorbed manufacturing and overhead costs, as well as any write-offs of
inventory that fails to meet specification or is otherwise no longer suitable for commercial manufacture. Based on
our policy to expense costs associated with the manufacture of our products prior to regulatory approval, the vast
majority of the costs to manufacture ZILRETTA that was 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. In addition, the majority of product sold during the year ended December 31, 2018 was
manufactured and previously charged to research and development expense prior to FDA approval of ZILRETTA
and therefore is not included in cost of sales during the period. As of December 31, 2018, all of the finished goods
inventory that was previously expensed has been sold to customers.

Research and Development Expenses

Our research and development activities include: preclinical studies, clinical trials and chemistry
manufacturing and controls, or CMC activities. Our research and 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 certain regulatory requirements;

expenses related to the in-license of certain technologies; 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 potential future commercial supplies, and are tracked
on a program-by-program basis. We do not allocate personnel costs, facilities or other indirect expenses to specific
research and development programs. These indirect expenses are included within the amounts designated as
“Personnel and other costs” in the Results of Operations section 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.

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

costs will increase as we conduct additional clinical trials for ZILRETTA and conduct further developmental
activities for our portfolio.

We cannot determine with certainty the duration of and completion costs associated with ongoing and future

clinical trials or the associated regulatory approval process, 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.

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 selling, 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 selling, 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 commercialization
of ZILRETTA or any other product candidates. In particular, we expect to incur ongoing increases in selling,
general and administrative expenses related to the commercialization of ZILRETTA, including external marketing
spend and the operation of our field sales force. 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 SEC 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 and cash equivalents balances and our

marketable securities. The primary objective of our investment policy is capital preservation.

Interest expense. Interest expense consists of contractual interest on our 2024 Convertible Notes, which
accrue interest at a rate of 3.375% per annum, payable semi-annually, and our term loan facility, which accrues
interest at a fixed rate of 6.25% per annum. Also included in interest expense is the amortization of the final
payment on the term loan and the debt discount related to the convertible notes, which is being amortized to interest
expense using the effective interest method over the expected life of the debt.

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 income (expense). Other income (expense) consists of the net 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 record either income or expense related to accretion of discounts or amortization of premiums on
marketable securities for as long as we hold these investments. Also included in other income (expense) is the
amortization of debt issuance costs on our term loan facility and the 2024 Convertible Notes, which are being
amortized over the respective terms of the loans.

Income Taxes

As of December 31, 2018, we had $298.9 million and $219.4 million of federal and state net operating loss
carryforwards, respectively, and $7.1 million and $3.5 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. Approximately
$109.4 million of the federal net operating losses have an indefinite carryforward. The state net operating loss
carryforwards and research and development tax credit carryforwards expire at various dates beginning in 2030 and
2025, respectively, if not utilized and are subject to review and possible adjustment by the state tax authorities. At
December 31, 2018, 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

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, determine those
that are performance obligations, and 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).

Product Revenue, Net— We sell ZILRETTA to our customers who then 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. 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 customer and, therefore, these payments have been recorded as
a reduction of revenue within the statement of operations and comprehensive loss through December 31, 2018, as
well as a reduction to trade receivables, net on the consolidated balance sheets.

Product Returns— Consistent with industry practice, we generally offer 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 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
received an immaterial amount of returns to date and we believe that returns of ZILRETTA will be minimal.

Our limited right of return allows for eligible returns of ZILRETTA in the following circumstances:

Shipment errors that were the result of an error by us;

(cid:129)
(cid:129) Quantity delivered that is greater or less than the quantity ordered;
(cid:129)
(cid:129)

Product distributed by us that is damaged in transit prior to receipt by the customer;
Expired product, previously purchased directly from us, that is returned during the period beginning
three months prior to the product’s expiration date and ending three months after the product’s
expiration date;
Product subject to a recall; and
Product that we, at our sole discretion, have specified to be returned.

(cid:129)
(cid:129)

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 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 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 years ended December 31, 2018 and 2017:

(In thousands)
Balance as of January 1, 2017........................... $
Provision related to sales in the current
year.................................................................
Credit or payments made during the
period .............................................................
Balance as of December 31, 2017.....................
Provision related to sales in the current
year.................................................................
Credit or payments made during the
period .............................................................
Balance as of December 31, 2018..................... $

Trade Discounts,
Allowances and
Government Chargebacks
—

Government
Rebates and Other
Incentives

Returns

Total

—

100

(40)
60

1,688

(1,147)
$
601

0
15

502

(26)
$
491

0
2

124

(1)
$

125

—

117

(40)
77

2,314

(1,174)
1,217

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 sales. 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 sales in the consolidated statements of operations and comprehensive loss.

We capitalize inventory costs associated with our 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.

Research and Development Costs

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses.

This process involves reviewing open contracts and purchase orders, communicating with applicable internal and
vendor personnel to identify services that have been performed on our behalf and estimating the level of service
performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified
of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or
when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in
our financial statements based on facts and circumstances known to us at that time. We periodically confirm the
accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated
accrued research and development expenses include fees paid to:

(cid:129)
(cid:129)
(cid:129)
(cid:129)

CROs in connection with clinical studies;
investigative sites in connection with clinical studies;
vendors related to product manufacturing, development and distribution of clinical supplies; and
vendors in connection with preclinical development activities.

We record expenses related to clinical studies and manufacturing development activities based on our

estimates of the services received and efforts expended pursuant to contracts with multiple CROs and manufacturing
vendors that conduct and manage these activities on our behalf. The financial terms of these agreements are subject
to negotiation, vary from contract to contract, and may result in uneven payment flows.

We make estimates of our accrued 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 over the requisite service period, which is
generally the vesting period of the respective award, using the straight-line method. We account for forfeitures as
they occur and do not estimate future forfeitures. As such, previously recognized compensation expense for an
award is reversed in the period that the award is forfeited. For stock awards that have a performance condition, we
recognize compensation expense based on our assessment of the probability that the performance condition will be
achieved, using an accelerated attribution model, over the explicit or implicit service period. We measure stock-
based awards granted to non-employees for services received based on the fair value of the equity instrument issued.
The measurement date of the fair value of the equity instrument issued to non-employees is the earlier of the date on
which the counterparty’s performance is complete or the date on which there is a commitment to perform. Effective
January 1, 2019, we will adopt ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). As a result of our adoption of this standard,
stock-based awards granted to non-employees will be accounted for the same way as awards granted to employees,
and such awards will not be re-measured at fair value each reporting period. We will adopt this standard
prospectively and no impact on this year’s financial statements is expected.

Prior to February 2014, we were a privately-held company with a limited operating history and accordingly

we utilized data from representative peer companies to estimate expected stock price volatility from our inception to
our initial public offering. We selected peer companies from the biopharmaceutical industry with similar
characteristics as us, including stage of product development, market capitalization and therapeutic focus. Since our
initial public offering in February 2014, we have continued to use volatility data from a representative peer group to
estimate expected stock price volatility and expect to continue to do so until such time as we have adequate
historical data regarding the volatility of our own traded stock price for a period of time that is commensurate with
the expected term (in years) of our stock options. 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 rates...................................................................
Expected dividend yield ................................................................
Expected term (in years)................................................................
Expected volatility.........................................................................

2018

2.67% - 3.06%
0.00%
6.0
69.8% - 75.3%

December 31,
2017

1.97% - 2.29%
0.00%
6.0
69.9% - 72.8%

2016

0.74% - 1.75%
0.00%
5.6
67.3% - 99.9%

RESULTS OF OPERATIONS

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

The following table summarizes our results of operations for the years ended December 31, 2018 and 2017:

(In thousands)
Revenues

2018

Year Ended December 31,
$ Change

2017

% Change

Product revenue, net................................................................. $

22,524

355

22,169

Operating expenses

Cost of sales .............................................................................
Research and development.......................................................
Selling, general and administrative ..........................................
Total operating expenses....................................................
Loss from operations ......................................................................
Other (expense) income

Interest income .........................................................................
Interest expense ........................................................................
Other income (expense) ...........................................................
Total other (expense) income.............................................
Net loss ........................................................................................... $

7,336
53,079
121,311
181,726
(159,202)

4,567
(15,712)
688
(10,457)
(169,659) $

4
51,231
78,801
130,036
(129,681)

3,718
(11,268)
(250)
(7,800)
(137,481) $

7,332
1,848
42,510
51,690
(29,521)

849
(4,444)
938
(2,657)
(32,178)

NM
3.6%
53.9%
39.8%
22.8%

22.8%
39.4%
375.2%
34.1%
23.4%

Product Revenue

We began commercially selling ZILRETTA within the United States in October 2017, following FDA

approval on October 6, 2017. For the years ended December 31, 2018 and 2017, we recorded $22.5 million and
$0.4 million, respectively, 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 $7.3 million and $4 thousand for the years ended December 31, 2018 and 2017,

respectively, of which $5.0 million relates to unabsorbed manufacturing and overhead costs related to the operation
of the facility at Patheon for the year ended December 31, 2018. Based on our policy to expense costs associated
with the manufacture of our products prior to regulatory approval, the vast majority of the costs to manufacture
ZILRETTA that was 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. In addition, the
majority of product sold during the year ended December 31, 2018 was manufactured and previously charged to
research and development expense prior to FDA approval of ZILRETTA and therefore is not included in cost of
sales during the period. As of December 31, 2018, all of the finished goods inventory that was previously expensed
has been sold to customers.

Research and Development Expenses

(In thousands)
Direct research and development expenses by program:

ZILRETTA............................................................................... $
Portfolio expansion ..................................................................
Other.........................................................................................
Total direct research and development expenses ...........................
Personnel and other costs ...............................................................
Total research and development expenses ..................................... $

2018

Year Ended December 31,
$ Change

2017

% Change

16,244
6,713
2,345
25,302
27,777
53,079

20,040
5,043
1,080
26,163
25,068
51,231

(3,796)
1,670
1,265
(861)
2,709
1,848

(18.9)%
33.1%
117.1%
(3.3)%
10.8%
3.6%

Research and development expenses were $53.1 million and $51.2 million for the years ended December 31,

2018 and 2017, respectively. The increase in research and development expenses year-over-year of $1.8 million was
primarily due to an increase of $2.7 million in salary and other employee-related costs for additional headcount and
stock-based compensation expense, as well as a $2.9 million increase in expenses related to our pipeline program
and other program costs, offset by a decrease of $3.8 million in ZILRETTA clinical development expenses primarily
due to the marketing approval of ZILRETTA in the fourth quarter of 2017 and timing of clinical trial costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $121.3 million and $78.8 million for the years ended

December 31, 2018 and 2017, respectively. Selling expenses were $87.3 million and $45.9 million for the years
ended December 31, 2018 and 2017. The year-over-year increase in selling expenses of $41.4 million was primarily
due to salary and other employee-related costs associated with additional headcount and costs related to the
establishment of commercial marketing and sales capabilities. General and administrative expenses were $34.0
million and $32.9 million for the years ended December 31, 2018 and 2017, respectively, which represents an
increase of $1.1 million year over year.

Other Income (Expense)

Interest income was $4.6 million and $3.7 million for the years ended December 31, 2018 and 2017,

respectively. The increase in interest income was primarily due to increasing interest rates throughout 2018.

Interest expense was $15.7 million and $11.3 million for the years ended December 31, 2018 and 2017,
respectively. The increase in interest expense was primarily due to interest incurred on the 2024 Convertible Notes.

We recorded other income of $0.7 million for the year ended December 31, 2018, compared to other expense
of $0.3 million for the year ended December 31, 2017. Other income, net increased primarily due to the accretion of
discounts on marketable securities; whereas in 2017, more securities were purchased at a premium.

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

2017

Year Ended December 31,
$ Change

2016

% Change

Product revenues, net ............................................................... $

355

—

355

Operating expenses

Interest income .........................................................................
Interest expense ........................................................................
Other expense...........................................................................
Total other (expense) income.............................................
Net loss ........................................................................................... $

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)

NM
24.0%
176.8%
86.4%
85.8%

144.4%
544.6%
(86.8)%
269.0%
91.2%

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.

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 to manufacture ZILRETTA that was recognized as revenue during the year ended December 31, 2017 were
expensed 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:

2017

Year Ended December 31,
$ Change

2016

% Change

20,040
5,043
1,080
26,163
25,068
51,231

24,609
596
620
25,825
15,489
41,314

(4,569)
4,447
460
338
9,579
9,917

(18.6)%
746.1%
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 in 2017 is due to the
December 2017 acquisition of the global rights to FX201 from GeneQuine which required an upfront payment of
$2.0 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, respectively. 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, respectively. 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.

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 during the year ended
December 31, 2017 versus foreign currency losses incurred during the year ended December 31, 2016.

Liquidity and Capital Resources

During the year ended December 31, 2018, we generated $22.5 million in net product revenue. We have
incurred significant net losses in each year since our inception in 2007, including net losses of $169.7 million,
$137.5 million, and $71.9 million for fiscal years 2018, 2017, and 2016, respectively. As of December 31, 2018, we
had an accumulated deficit of $518.8 million. We anticipate that we will continue to incur losses over the next few
years. 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, 2018, we have funded our operations primarily through the sale of
our common stock and convertible preferred stock and convertible debt, and through venture debt financing. From
our inception through December 31, 2018, we had raised approximately $756.0 million from such transactions,
including amounts from our initial and follow-on public offerings during 2014, 2016 and 2017 as well as our term
loan facility entered into in 2015 and our 2024 Convertible Notes issuance in 2017. As of December 31, 2018, we
had cash, cash equivalents and marketable securities of $258.8 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, 2018, 2017

and 2016:

(In thousands)
Cash flows used in operating activities ................................. $
Cash flows provided by (used in) investing activities...........
Cash flows (used in) provided by financing activities ..........

Net (decrease) increase in cash and cash
equivalents.................................................................... $

2018
(160,419) $
125,584

Year Ended December 31,
2017
(107,831) $
(118,672)
323,497

(6,325)

2016

(62,472)
(132,354)
163,197

(41,160) $

96,994

(31,629)

Net Cash Used in Operating Activities

Operating activities used $160.4 million of cash in the year ended December 31, 2018. Cash used in operating
activities resulted primarily from our net loss of $169.7 million and changes in our operating assets and liabilities of
$14.2 million, partially offset by non-cash charges of $23.4 million. Changes in our operating assets and liabilities
consisted primarily of a $12.7 million increase in accounts receivable, a $5.2 million increase in inventory, and a
$2.1 million increase in prepaid expenses and other current assets, partially offset by an increase of $5.8 million in
accounts payable and accrued expenses. Non-cash charges consisted primarily of $15.5 million of stock-based
compensation expense, $7.8 million related to the amortization of the debt discount and debt issuance costs related
to the 2024 Convertible Notes, and $1.7 million of depreciation, partially offset by $1.3 of net accretion of discounts
related to our investments.

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 $137.5 million
offset by changes in our operating assets and liabilities of $11.8 million and non-cash charges of $17.9 million.
Changes in our operating assets and liabilities consisted primarily of a $2.2 million increase in accounts receivable
and inventory, offset by a $0.4 million decrease in prepaid expenses, an increase of $9.4 million in accrued expenses
and other current liabilities and an increase of $4.1 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 service fees and interest expense on loans. Non-cash charges consisted primarily of
$11.5 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, offset by $0.9 million of premiums paid on securities
purchased.

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
and changes in our operating assets and liabilities of $1.0 million, partially offset by non-cash charges of $10.4
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. 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 million amortization and accretion related to our investments, offset by
$0.5 million of premiums paid on securities purchased.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities was $125.6 million in the year ended December 31, 2018. Net cash

provided by investing activities consisted primarily of cash received for the redemption and sale of marketable
securities of $348.9 million, partially offset by cash used to purchase marketable securities of $222.5 million. In
addition, $0.8 million of cash was used for capital expenditures, including $0.2 million for manufacturing
equipment, $0.2 million for lab equipment and $0.4 million for leasehold improvements related to an expansion of
our Burlington, Massachusetts headquarters.

Net cash used in investing activities was $118.7 million in the year ended December 31, 2017. Net cash used
in investing activities consisted primarily of cash used to purchase marketable securities of $356.8 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 $132.4 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.

Net Cash (Used in) Provided by Financing Activities

Net cash used in financing activities was $6.3 million for the year ended December 31, 2018. Net cash used in
financing activities in the year ended December 31, 2018 consisted primarily of $10.0 million related to the payment
of principal on our 2015 term loan, partially offset by $3.7 million received from the exercise of stock options and
employee stock purchases through our employee stock purchase plan.

Net cash provided by financing activities was $323.5 million for the year ended December 31, 2017. 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 $8.3 million of principal
payments on our 2015 term loan and $0.5 million in financing costs associated with our follow-on financing in
2017.

Net cash provided by financing activities was $163.2 million for the year ended December 31, 2016. 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.

Contractual Obligations

The following table discloses aggregate information about our contractual obligations and the periods in

which payments are due as of December 31, 2018:

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 .................................................................................... $

14,831 $
7,250
70,237
238,040
1,067
331,425 $

10,448 $
1,491
8,027
6,792
1,067
27,825 $

4,383 $
3,109
16,054
13,584
—
37,130 $

— $
2,650
16,054
13,584
—
32,288 $

—
—
30,102
204,080
—
234,182

(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, 2018 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.

(5) Represents contractually required purchases of PLGA for clinical and commercial supply of ZILRETTA. The

required purchases are based upon a 24-month rolling forecast of 100% of our total volume requirements for
the PLGA product. Only the first 12 months of the 24-month rolling forecast are binding. Beginning in July
2019, the required purchases reduce to 50% of our total volume requirements for the PLGA product. Since
the current required binding 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 to add approximately 4,700 square feet of

additional office space, with the option to lease an additional 5,400 square feet in the same building in Burlington,
Massachusetts. In addition, at the time, we leased approximately 6,700 square feet of temporary space for use prior
to delivery of the additional space. This amendment extended the lease term through October 31, 2019. On
September 30, 2015, we exercised our option for the additional 5,400 square feet of office space. On September 21,
2016, we entered into a second amendment to extend the lease for the 6,700 square feet of temporary space until
October 31, 2017.

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, and the term for the

space commenced in April 2018. We have approximately 36,500 square feet of office space in Burlington,
Massachusetts under a lease term expiring on October 31, 2023. Starting in December 2017, our minimum monthly
lease payment is approximately $87,000 and it increases over the life of the amended Lease. In addition to the base
rent for the office space, which increases over the term of the amended Lease, we are responsible for our 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.

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.

Patheon agreed in the Technical Transfer Agreement to undertake certain technical transfer activities and

construction services needed to prepare Patheon’s United Kingdom facility for the manufacture of ZILRETTA in
dedicated manufacturing suites. We provided Patheon with certain equipment and materials necessary to
manufacture ZILRETTA and pay Patheon a monthly fee for such activities and reimburse Patheon for certain
material, equipment, and miscellaneous expenses and additional services.

The initial term of the Manufacturing Agreement is 10 years from approval by the FDA of the Patheon
manufacturing suites for ZILRETTA, or until October 6, 2027. We pay a monthly base fee to Patheon for the
operation of the manufacturing suites and a per product fee for each vial based upon a forecast of commercial
demand. We also reimburse 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 unless and until it is
terminated. Upon termination of the Manufacturing 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 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.

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 to GeneQuine of
$2.0 million. In 2018, we paid GeneQuine $750,000 for the milestone of initiating a GLP toxicology study of
FX201. We may also be required to make additional milestone payments during the development of FX201,
including up to $7.75 million through Phase 2 proof of concept (PoC) and, following successful PoC, up to an
additional $54.0 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. The milestone payment for
the GLP toxicology study was also recorded to research and development expense in the fourth quarter of 2018.
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, 2018, no milestone payments owed under the arrangement were probable
of being achieved. As part of the transaction with GeneQuine, 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.

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, 2018, the carrying value of
the term loan was $13.6 million.

•

Our 2024 Convertible Notes carry a fixed interest rate and, thus we are not subject to interest rate risk in
connection with the 2024 Convertible Notes.

• 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, 2018, 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 $144.9 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, 2018, we had approximately $2.0 million in payables to vendors denominated in British pounds. As
of December 31, 2018, we also had approximately $0.8 million in cash denominated in British pounds. A
hypothetical 10% change in foreign exchange rates would result a $0.1 million change in the amount of cash
denominated in British Pounds.

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
79

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
of Flexion Therapeutics, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Flexion Therapeutics, Inc. and its

subsidiaries (the “Company”) as of December 31, 2018 and 2017, 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, 2018, including the related notes (collectively referred to as the “consolidated
financial statements”). We also have audited the Company's internal control over financial reporting as of December
31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,

the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the
Company's internal control over financial reporting 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 in accordance with the standards of the PCAOB. Those standards require that we

plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud, and whether effective internal control over financial
reporting was maintained in all material respects.

Our audits of the consolidated financial statements 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. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable

assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect

misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 28, 2019

We have served as the Company’s auditor since 2010.

Flexion Therapeutics, Inc.

Consolidated Balance Sheets

(In thousands, except share amounts)

December 31,
2018

December 31,
2017

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, 2018 and December 31, 2017 and 0 shares issued and
outstanding at December 31, 2018 and December 31, 2017 .......................................

Stockholders’ equity
Common stock, $0.001 par value; 100,000,000 shares authorized;
37,946,341 and 37,610,897 shares issued and outstanding, at
December 31, 2018 and December 31, 2017, respectively............................................
Additional paid-in capital ...........................................................................................
Accumulated other comprehensive loss......................................................................
Accumulated deficit ....................................................................................................
Total stockholders’ equity ....................................................................................
Total liabilities and stockholders’ equity .......................................................................... $

87,229
171,555
13,121
7,637
5,500
285,042
10,710
—
—
295,752

12,340
14,310
9,967
36,617
3,640
144,879
537
185,673

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

—

38
628,944
(77)
(518,826)
110,079

295,752

38
609,810
(407)
(349,167)
260,274

441,317

The accompanying notes are an integral part of these consolidated financial statements.

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 (expense) income

Interest income ........................................................................................
Interest expense .......................................................................................
Other income (expense)...........................................................................
Total other (expense) income ............................................................
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,
2017

2016

2018

22,524

355

—

7,336
53,079
121,311
181,726
(159,202)

4,567
(15,712)
688
(10,457)
(169,659)

(4.49)

37,751

330
330
(169,329)

4
51,231
78,801
130,036
(129,681)

3,718
(11,268)
(250)
(7,800)
(137,481)

(4.16)

33,027

(336)
(336)
(137,817)

—
41,314
28,466
69,780
(69,780)

1,521
(1,748)
(1,887)
(2,114)
(71,894)

(2.84)

25,297

26
26
(71,868)

The accompanying notes are an integral part of these consolidated financial statements.

Flexion Therapeutics, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands)

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income (Loss)

Accumulated
Deficit

Total
Stockholders’
Equity

Common Stock

Par
Value

Balance at December 31, 2015............................... 21,570 $
Issuance of common stock net of issuance
costs ....................................................................... 10,040
30
Issuance of common stock for equity awards ..........
Employee stock purchase plan .................................
27
Stock-based compensation expense .........................
Net loss .....................................................................
Other comprehensive income ...................................
Balance at December 31, 2016............................... 31,667 $
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............................... 37,611 $
Issuance of common stock for equity awards, net
of shares withheld for taxes...................................
Employee stock purchase plan .................................
Stock-based compensation expense .........................
Net loss .....................................................................
Other comprehensive income ...................................
Balance at December 31, 2018............................... 37,946 $

5,520
334
90

197
138

22 $

243,853 $

(97) $

(139,792) $

103,986

147,491
167
476
6,770

32 $

398,757 $

132,171
3,858
1,016
11,542

62,466

38 $

609,810 $

1,653
2,022
15,459

38 $

628,944 $

147,501
167
476
6,770
(71,894)
26
187,032

132,177
3,858
1,016
11,542

62,466
(137,481)
(336)
260,274

1,653
2,022
15,459
(169,659)
330
110,079

26
(71) $

(71,894)

(211,686) $

(336)
(407) $

(137,481)

(349,167) $

330
(77) $

(169,659)

(518,826) $

The accompanying notes are an integral part of these consolidated financial statements.

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 .....................................................................
(Accretion) Amortization of (discount) premium on marketable
securities............................................................................................
Loss on disposal of fixed assets ........................................................
Amortization of 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 .....................................................
Purchases of marketable securities..........................................................
Sale and redemption of marketable securities.........................................
Net cash provided by (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 (used in) provided by financing activities ................................

Net (decrease) increase in cash, cash equivalents, and restricted
cash ............................................................................................................
Cash, cash equivalents, and restricted cash at beginning of period...............
Cash, cash equivalents, and restricted cash at end of period......................... $
Supplemental disclosures of cash flow information:

Year Ended December 31,
2017

2016

2018

(169,659) $

(137,481) $

(71,894)

1,714
15,459
—

(1,320)
—
7,805
(214)

(12,711)
(5,244)
(2,097)
5,141

2,008
11,542
—

333
—
4,826
(857)

(410)
(1,799)
387
4,188

707
(160,419)

9,432
(107,831)

(852)
(222,482)
348,918
125,584

—
—
—
(10,000)
—
—
1,653
2,022
(6,325)

(2,146)
(356,754)
240,228
(118,672)

201,250

(6,470)

132,666

(8,333)
—
(490)
3,858
1,016
323,497

(41,160)
128,389
87,229

96,994
31,395
128,389

1,151
6,770
37

729
2,283
—
(543)

95
—
(2,873)
(993)

2,766
(62,472)

(8,440)
(196,061)
72,147
(132,354)

—
(42)
147,889
—
15,000
(293)
167
476
163,197

(31,629)
63,024
31,395

Cash paid for interest............................................................................... $

7,874

5,080

1,297

Supplemental disclosures of non-cash financing activities:

Public offering costs included in accounts payable or accrued
expenses................................................................................................... $
Portion of debt proceeds allocated to equity component ........................ $
Purchases of property and equipment in accounts payable and accrued
expenses................................................................................................... $

—
—

$
$

—
62,466

$
$

986

95
—

622

The accompanying notes are an integral part of these consolidated financial statements.

Flexion Therapeutics, Inc.

Notes to Consolidated Financial Statements

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 discovery, development
and commercialization of novel, local therapies for the treatment of patients with musculoskeletal conditions,
beginning with osteoarthritis, (“OA”), a type of degenerative arthritis. The Company has an approved product,
ZILRETTA®, which it markets in the United States. ZILRETTA is the first and only extended-release, intra-
articular, or IA (meaning in the joint), injection indicated for the management of OA knee pain. ZILRETTA is a
non-opioid therapy that employs Flexion’s proprietary microsphere technology to provide effective pain relief. The
pivotal Phase 3 trial, on which the approval of ZILRETTA was based, showed that ZILRETTA met the primary
endpoint of pain reduction at Week 12, with statistically significant pain relief extending through Week 16. The
Company also has an additional product candidate (FX201) in development for OA knee pain.

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 requires 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, qualified
personnel and adequate infrastructure. 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, 2018, the Company had cash, cash equivalents, and
marketable securities of approximately $258.8 million. Management believes that current cash, cash equivalents and
marketable securities on hand at December 31, 2018 should be sufficient to fund operations for at least the next 12
months beyond the date of issuance of these financial statements. The future viability of the Company is dependent
on its ability to fund its operations through sales of ZILRETTA, and/or raise additional capital, such as debt or
equity offerings, as needed. This funding 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 other
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 the commercialization of ZILRETTA and its research and development activities,
which could adversely affect its prospects.

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.

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, 2018 was 37,946,341 shares.

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 estimates related to revenue, 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 preclinical
and clinical development 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. 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 was 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 arrangements 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

is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each
contract, 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

ZILRETTA 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 ZILRETTA.

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). The Company has determined that the
delivery of ZILRETTA to its 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. The Company has assessed the
existence of a significant financing component in the agreements with its customers. The trade payment terms with
our customers do not exceed one year and therefore the Company 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. 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, 2018, as well as a reduction to trade receivables, net on the consolidated balance sheets.

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 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 received an immaterial amount of returns to date and
believes that returns of ZILRETTA will be minimal.

The Company’s limited right of return allows for eligible returns of ZILRETTA in the following

circumstances:

(cid:129)
Shipment errors that were the result of an error by the Company;
(cid:129) Quantity delivered that is greater or less than the quantity ordered;
(cid:129)
(cid:129)

Product distributed by the Company that is damaged in transit prior to receipt by the customer;
Expired product, previously purchased directly from the Company, that is returned during the period
beginning three months prior to the product’s expiration date and ending three months after the
product’s expiration date;
Product subject to a recall; and
Product that the Company, at its sole discretion, have specified to be returned.

(cid:129)
(cid:129)

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 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. The Company anticipates its 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 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.

The following table summarizes activity in each of the product revenue allowance and reserve categories for

the years ended December 31, 2018 and 2017:

Trade Discounts,
Allowances and
Government Chargebacks
—

Government
Rebates and Other
Incentives

Returns

Total

—

100

(40)
60

1,688

(1,147)
$
601

0
15

502

(26)
$
491

0
2

124

(1)
$

125

—

117

(40)
77

2,314

(1,174)
1,217

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 sales. 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 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.

Consolidation

The accompanying consolidated financial statements include the Company and its wholly-owned subsidiary,

Flexion Therapeutics Securities Corporation. The Company has eliminated all intercompany transactions for the
years ended December 31, 2018, 2017 and 2016. In addition, Flexion Therapeutics, Inc. is registered to do business
in the United Kingdom through its branch office located in Swindon, United Kingdom.

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, 2018, the Company determined that an
allowance for doubtful accounts was not required. No accounts were written off during the year ended December 31,
2018.

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, which consist solely of debt securities, as available-for-sale.
Accordingly, these investments are recorded at fair value, which is based on quoted market prices. Unrealized gains
and losses are recorded as a component of other comprehensive income (loss). 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 restriction was released during 2018 and
therefore the balance has been reclassified within Cash and Cash Equivalents.

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

3
7
7-10
5

Estimated
Useful Life
(Years)

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the

related asset. Costs of major additions and betterments are capitalized and depreciated on a straight-line basis over
their useful lives. Repairs and maintenance costs are expensed as incurred. Upon retirement or sale, the cost of assets
disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is
credited or charged to income. Property and equipment includes construction-in-progress, that is not yet in service.

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.

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, 2018 and 2017, the carrying value of debt issuance costs was $3.5 million and $4.1
million, respectively, and was presented as a direct deduction from the carrying amounts of long-term debt. In
addition, $0.6 million, $0.4 million, and $37,000, respectively, of debt issuance costs were amortized and recognized
as other expense in the statement of operations for the years ended December 31, 2018, 2017 and 2016.

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.

As part of the process of preparing its financial statements, the Company is required to estimate its accrued

expenses. This process involves reviewing open contracts and purchase orders, communicating with applicable
internal and vendor personnel to identify services that have been performed on the Company’s behalf and estimating
the level of service performed and the associated cost incurred for the service when the Company has not yet been
invoiced or otherwise notified of the actual cost. The majority of the Company’s service providers invoice it
monthly in arrears for services performed or when contractual milestones are met. The Company makes estimates
of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances
known to it at that time. The Company periodically confirms the accuracy of its estimates with the service providers
and makes adjustments if necessary. Examples of estimated accrued research and development expenses include
fees paid to:

(cid:129)
(cid:129)
(cid:129)
(cid:129)

The Company records expenses related to clinical studies and manufacturing development activities based

on its estimates of the services received and efforts expended pursuant to contracts with multiple CROs and
manufacturing vendors that conduct and manage these activities on the Company’s behalf. The financial terms of
these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows.

The Company makes estimates of its accrued expenses as of each balance sheet date in its financial
statements based on facts and circumstances known to it. If timelines or contracts are modified based upon changes
in the clinical trial protocol or scope of work to be performed, the Company modifies its estimates of accrued
expenses accordingly on a prospective basis. If the Company does not identify costs that it has begun to incur, or if it
underestimates or overestimates the level of services performed or the costs of these services, the Company’s actual
expenses could differ from its estimates. To date, the Company has not adjusted its estimates at any particular
balance sheet date in any material amount.

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 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. The Company accounts for
forfeitures as they occur and does not estimate future forfeitures. As such, previously recognized compensation
expense for an award is reversed in the period that the award is forfeited. For stock awards that have a performance
condition, the Company recognizes compensation expense based on its assessment of the probability that the
performance condition will be achieved, using an accelerated attribution model, over the explicit or implicit service
period.

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. Effective
January 1, 2019, the Company will adopt ASU No. 2018-07, Compensation – Stock Compensation (Topic 718):
Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). As a result of the Company’s
adoption of this standard, stock-based awards granted to non-employees will be accounted for the same way as
awards granted to employees, and such awards will not be re-measured at fair value each reporting period. The
Company will adopt this standard prospectively and no impact on this year’s financial statements is expected.

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.

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 years ended December 31, 2018 and 2017, two individual customers accounted for 81% and 94%,

respectively, of the Company’s total revenue and 82% and 94%, respectively, of the Company’s total accounts
receivable. No other customer accounted for more than 10% of net product revenue or accounts receivable for the
year ended December 31, 2018.

Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders’ equity 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
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 $173.1 million at December 31, 2018.

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, 2018, 2017
and 2016.

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 years ended December 31, 2018 and 2017 were
generated in the United States.

Recent Accounting Pronouncements

Accounting Standards Recently Adopted

In January 2016, the Financial Accounting Standards Board, (“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 the statement 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. The Company adopted ASU 2016-01 on January 1, 2018.
The adoption of ASU 2016-01 did not have a material impact on the Company’s financial position or results of
operations.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”), to
increase the consistency of presentation in how certain cash receipts and cash payments are presented and classified
in the statement of cash flows. The Company adopted ASU 2016-15 on January 1, 2018. The adoption of ASU
2016-15 did not have a material impact on the Company’s financial position or results of operations.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash

(“ASU 2016-18”), 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. The Company adopted ASU 2016-18 on January
1, 2018. As a result of the adoption of ASU 2016-18, $0.6 million, $0.5 million, and $0.1 million of restricted cash
was included in the beginning-of-period cash, cash equivalents, and restricted cash amount shown on the statement

of cash flows for the years ended December 31, 2018, 2017 and 2016, respectively, and no restricted cash, $0.6
million, and $0.5 million of restricted cash was included in the end-of-period cash, cash equivalents, and restricted
cash amount shown on the statement of cash flows for the years ended December 31, 2018, 2017 and 2016,
respectively.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) (“ASU 2017-

09”) Scope of Modification Accounting. ASU 2017-09 provides clarification on when modification accounting
should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change
the accounting for modifications but clarifies that modification accounting guidance should only be applied if there
is a change to the value, vesting conditions, or award classification and would not be required if the changes are
considered non-substantive. The Company adopted ASU 2017-09 on January 1, 2018 and it was applied
prospectively to an award modified on or after the adoption date.

Accounting Standards Recently Issued

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 adopted ASU
2016-02 on January 1, 2019 using the transition approach approved by the FASB in July 2018 as part of ASU 2018-
11. Under this method, the Company will initially apply the new lease requirements at the effective date (i.e.,
January 1, 2019), report comparative periods presented in the financial statements in the period of adoption under
current GAAP (i.e., ASC 840, Leases), and provide the required disclosures under ASC 842 for the current year and
ASC 840 for all periods presented under ASC 840.

We have substantially completed our assessment of the new lease standard. We expect that this standard will

have a material effect on our financial statements due to the recognition of new right-of-use, or ROU, assets and
lease liabilities on our consolidated balance sheet for real estate and equipment leases. We continue to finalize our
calculations related to the new standard, including the calculation of lease versus nonlease components in an
embedded lease within our supply agreement with Patheon. As part of our implementation process, we have
assessed our lease arrangements and evaluated practical expedient and accounting policy elections to meet the
reporting requirements of this standard. We are also continuing to evaluate the changes in controls and processes
that are necessary to implement the new standard, but do not expect material changes. We expect to elect the
package of practical expedients which allows us to not reassess (1) whether existing contracts contain leases, (2) the
lease classification for existing leases, and (3) whether existing initial direct costs meet the new definition. We do
not plan to elect the hindsight practical expedient which permits entities to use hindsight in determining the lease
term. Consequently, on adoption, we expect to recognize additional operating liabilities with corresponding ROU
assets of approximately the same amount based on the present value of the remaining minimum rental payments
under current leasing standards for existing operating leases.

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 is effective for fiscal years, and the
interim periods within those years, beginning after December 15, 2019, and early adoption is permitted. The
Company is currently evaluating the impact of ASU 2016-13 on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718):
Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The new standard expands the
scope of Topic 718 to include share-based payment transactions for acquiring goods and services from
nonemployees. Equity-based payments to nonemployees were previously covered under ASC 505-50 and required
companies to measure the awards based on the fair value of the consideration received or the fair value of the equity
instruments issued and remeasure the fair value of such awards at each reporting date. ASU 2018-07 is effective for

fiscal years, and the interim periods within those years, beginning after December 15, 2018, and early adoption is
permitted. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated
financial statements.

In July 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure
Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The new
standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, as
part of the FASB’s disclosure framework project. ASU 2018-13 is effective for fiscal years, and the interim periods
within those years, beginning after December 15, 2019, and early adoption is permitted. Additionally, the new
standard permits an entity to early adopt any removed or modified disclosures upon issuance of the ASU and delay
adoption of the additional disclosures until their effective date. ASU 2018-13 removes the requirement to disclose
the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The Company early
adopted this portion of the standard as of the quarter ended September 30, 2018. The Company does not expect the
adoption of the remainder of ASU 2018-13 to have any impact on its consolidated financial statements, as the
changes to the disclosures are primarily relevant for companies with Level 3 assets and liabilities, which the
Company does not have.

Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s assets that are measured at fair value on a

recurring basis as of December 31, 2018 and 2017 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, 2018 Units:
Level 1

Level 3

Level 2

Total

— $
57,739 $
— 171,555
— $ 229,294 $

— $
57,739
— 171,555
— $ 229,294

(In thousands)
Assets:
Cash equivalents......................................................... $
Marketable securities..................................................
$

Level 1

Level 2

Level 3

Total

— $ 109,196 $
— 296,127
— $ 405,323 $

— $ 109,196
— 296,127
— $ 405,323

Fair Value Measurements as of December 31, 2017 Units:

As of December 31, 2018 and 2017, the Company’s cash equivalents that are invested in money market funds

and overnight repurchase contracts 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. 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, 2018 and 2017. 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

5. Marketable Securities

As of December 31, 2018 and 2017, the fair value of available-for-sale marketable securities by type of

security was as follows:

(In thousands)
Commercial paper ......................................... $
U.S. government obligations......................... $
Corporate bonds ............................................ $
$

Amortized Cost

December 31, 2018

Gross Unrealized
Gains

Gross Unrealized
Losses

Fair Value

36,723 $
39,910 $
94,999 $
171,632 $

— $
— $
20 $
20 $

— $
(12) $
(85) $
(97) $

36,723
39,898
94,934
171,555

December 31, 2017

Gross Unrealized
Gains

Gross Unrealized
Losses

Fair Value

(In thousands)
Commercial paper ......................................... $
U.S. government obligations......................... $
Corporate bonds ............................................ $
$

Amortized Cost
22,436
121,470 $
152,630 $
296,536 $

$
— $
— $
— $

— $
(136) $
(273) $
(409) $

22,436
121,334
152,357
296,127

As of December 31, 2018 and 2017, marketable securities consisted of approximately $171.6 million and
$264.6 million, respectively, of investments that mature within 12 months. As of December 31, 2017, long-term
investments consisted of approximately $31.5 million of investments that mature after one year but within two years
or less from the balance sheet date. There were no investments with maturities greater than 12 months as of
December 31, 2018.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of December 31, 2018 and 2017:

(in thousands)
Prepaid expenses ..................................................................... $
Deposits...................................................................................
Interest receivable on marketable securities............................
Total prepaid expenses and other current assets ............... $

December 31,

2018

2017

4,717 $
66
717
5,500 $

2,359
66
978
3,403

Inventory

Inventory consisted of the following as of December 31, 2018 and 2017:

(In thousands)..........................................................................
Raw materials.......................................................................... $
Work in process.......................................................................
Finished goods ........................................................................
Total inventories................................................................ $

December 31,

2018

2017

2,367 $
3,553
1,717
7,637 $

928
746
125
1,799

Inventory acquired prior to receipt of the marketing approval for ZILRETTA, totaling approximately $3.7
million, 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. As
of December 31, 2018, all of the finished goods inventory that was previously expensed had been sold to customers.

Finished goods manufactured by the Company have a shelf life of approximately 24 months from the date of

manufacture.

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. During the year ended December 31, 2018, the Company expensed $5.0 million to cost
of sales for unabsorbed manufacturing and overhead costs related to the operation of the United Kingdom facility at
Patheon UK Limited. At December 31, 2018, the Company determined that no write-downs to inventory for
potentially excess, dated or obsolete inventory were required.

Property and Equipment, Net

Property and equipment, net, as of December 31, 2018 and 2017 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,

2018

2017

1,133 $
12,000
604
434
815
1,416
16,402
(5,692)
10,710 $

1,124
11,780
456
434
474
305
14,573
(3,384)
11,189

Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $1.7 million, $2.0 million,

and $1.2 million, respectively. No property or equipment was disposed of during the years ended December 31,
2018 and 2017. During the year ended December 31, 2016, $2.7 million of property and equipment was disposed of,
resulting in a loss of $2.3 million. Construction in progress consists of equipment purchases related to the expansion
of the Company’s manufacturing capabilities at its contract manufacturer, Patheon U.K. Limited, as well as
equipment related to the Company’s portfolio expansion efforts that have not yet been placed into service.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following as of December 31, 2018 and 2017:

(In thousands)
Research and development...................................................... $
Payroll and other employee-related expenses .........................
Professional services fees........................................................
Interest expense .......................................................................
Product revenue reserves.........................................................
Accrual for employee stock purchase plan .............................
Other........................................................................................
Total accrued expenses and other current liabilities ......... $

December 31,

2018

2017

1,216 $
8,207
2,544
1,195
616
251
281
14,310 $

1,023
9,309
2,591
1,249
15
141
55
14,383

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 $30.0 million in term loans. The Company concurrently borrowed an initial term loan of $15.0 million 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. In addition, pursuant to the credit and security agreement, the Company is prohibited from paying cash
dividends without prior consent of the Lenders.

On July 22, 2016, the Company borrowed the remaining $15.0 million 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, 2018, the Company was compliant with all
covenants.

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, 2018, the carrying value of the term loan was
approximately $13.6 million, of which $10.0 million was due within 12 months and $3.6 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, 2018 and 2017.

As of December 31, 2018, annual principal and interest payments due under the 2015 term loan are as

follows:

Year
2019...........................................................................................................
2020...........................................................................................................
Total .................................................................................................... $
Less interest ........................................................................................
Less unamortized portion of final payment ........................................
Total .................................................................................................... $

Aggregate
Minimum
Payments
(in thousands)
10,448
4,383
14,831
(497)
(727)
13,607

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;

(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

100

principal amount of the 2024 Convertible Notes to be redeemed, plus accrued and unpaid interest, subject to the
Holders’ right to convert as described above.

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, 2018, 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, 2018 was $14.0 million, including $7.2 million related to amortization of the
debt discount.

The table below summarizes the carrying value of the 2024 Convertible Notes as of December 31, 2018:

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

12,565
144,879

11.

Stockholders’ Equity

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, 2018,
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.

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.

101

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,
2018, no dividends have been declared.

12.

Stock Plans

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 automatically
increases 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.

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).

As of December 31, 2018, 2,800,276 shares were available for future issuance under the 2013 Plan. As of
December 31, 2018, there were 282,011 options outstanding under the 2009 Plan and 4,153,045 options outstanding
under the 2013 Plan, including 630,209 shares underlying outstanding stock options granted as inducement awards
under the 2013 Plan.

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 years ended December 31, 2018 and
2017, 138,405 and 89,704 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 automatically
increases 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.

13.

Stock-Based Compensation

102

Stock Options

During the years ended December 31, 2018, 2017 and 2016, the Company granted stock options for the
purchase of 1,127,263, 1,448,100, and 1,816,575 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. Options granted have a maximum term of
up to 10 years.

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. Prior to February 2014, the Company was privately held with a limited operating history and
accordingly it utilized data from representative peer companies to estimate expected stock price volatility from its
inception to its initial public offering. The Company selected peer companies from the biopharmaceutical industry
with similar characteristics as the Company, including stage of product development, market capitalization and
therapeutic focus. Since its initial public offering in February 2014, the Company has continued to use volatility data
from a representative peer group to estimate expected stock price volatility 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 period of time
that is commensurate with the expected term (in years) of the Company’s stock options. 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, 2018, 2017 and 2016 is as follows:

Risk-free interest rates ........................................................
Expected dividend yield......................................................
Expected term (in years) .....................................................
Expected volatility ..............................................................

2018

2.67% - 3.06%
0.00%
6.0
69.8% - 75.3%

December 31,
2017

1.97% - 2.29%
0.00%
6.0
69.9% - 72.8%

2016

0.74% - 1.75%
0.00%
5.6
67.3% - 99.9%

The following table summarizes stock option activity for the year ended December 31, 2018:

(In thousands, except per share amounts)
Outstanding as of December 31, 2017.............................................................
Granted................................................................................................................
Exercised.............................................................................................................
Cancelled ............................................................................................................
Outstanding as of December 31, 2018.............................................................
Options vested and expected to vest at December 31, 2018 ..........................
Options exercisable at December 31, 2018 .....................................................

Shares Issuable
Under Options
$
3,800
1,127
$
(166) $
(326) $
$
4,435

4,435

2,369

Weighted Average
Exercise Price

17.75
23.33
11.88
20.21
19.21

19.21

17.13

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 165,684, 308,011, and 30,195 options were exercised during the years
ended December 31, 2018, 2017 and 2016, respectively. The aggregate intrinsic value of stock options exercised was
$2.3 million, $2.9 million, and $0.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.

103

At December 31, 2018, 2017 and 2016, the Company had options for the purchase of 4,435,056, 3,799,965,

and 3,079,175 shares of common stock outstanding, with a weighted average remaining contractual term of 7.6, 8.0,
and 7.8 years, respectively, and with a weighted average exercise price of $19.21, $17.75, and $14.84 per share,
respectively. At December 31, 2018, 2017 and 2016 there were options for the purchase of 2,368,955, 1,688,652,
and 1,173,671 shares of common stock exercisable under these stock option awards, with a weighted average
remaining contractual life of 6.6, 6.8, and 6.7 years, respectively, and an aggregate intrinsic value of $2.6 million,
$17.0 million, and $8.7 million, respectively.

The weighted average grant date fair value of options granted during the years ended December 31, 2018,

2017 and 2016 was $15.12, $14.33, and $11.50, respectively.

Restricted Stock Units

On January 4, 2016, the Company granted 189,300 restricted stock units, (“RSUs”), with performance and

time-based vesting conditions to certain executives. These RSUs began vesting, and the underlying shares of
common stock became deliverable, beginning when ZILRETTA was approved (the “Milestone”). The number of
shares eligible for vesting varied 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 was
122,800, subject to ongoing employment with the Company for a period of two 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.

During the year ended December 31, 2018, the Company awarded 239,366 RSUs to employees at an average
grant date fair value of $22.90 per share. The RSUs vest in four substantially equal installments on each of the first
four anniversaries of the vesting commencement date, subject to the employee’s continued employment with, or
services to, the Company on each vesting date. Compensation expense is recognized on a straight-line basis.

The following table summarizes the RSU activity for the year ended December 31, 2018:

(In thousands, except per share amounts)
Nonvested balance as of December 31, 2017.................................................................
Granted..............................................................................................................................
Cancelled...........................................................................................................................
Vested/Released ................................................................................................................
Nonvested balance as of December 31, 2018.................................................................

82
239
(23)
(47)
252

Number of Shares

Weighted Average
Grant Date Fair
Value Per Share
16.43
22.90
22.31
17.97
22.25

Stock-based Compensation

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, 2018, 2017 and 2016 as
follows:

(In thousands)
Research and development ................................................................ $
Selling, general and administrative ...................................................
Total................................................................................................... $

Year Ended December 31,
2017

2016

2018

4,728
10,731
15,459

3,979
7,563
11,542

2,341
4,429
6,770

As of December 31, 2018, unrecognized stock-based compensation expense for stock options outstanding was

$25.7 million which is expected to be recognized over a weighted average period of 2.6 years. As of December 31,
2018, unrecognized stock-based compensation expense for RSUs outstanding was $4.0 million which is expected to
be recognized over a period of 3.0 years.

104

14. 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 term of the Lease. In July 2015, the Company amended the Lease to add approximately
4,700 square feet of additional office space, with the option to lease an 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.

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, and the

term for the space commenced in April 2018. The Company has approximately 36,500 square feet of office space in
Burlington, Massachusetts under a lease term expiring on October 31, 2023. Starting in December 2017, the
Company’s minimum monthly lease payment is approximately $87,000 and it increases over the life of the amended
Lease. 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 $1.1 million, $1.0 million, and $0.7 million for the years ended

December 31, 2018, 2017 and 2016, respectively.

Future minimum lease payments under the Company’s lease obligations are as follows:

Year
2019 ............................................................................................................
2020 ............................................................................................................
2021 ............................................................................................................
2022 ............................................................................................................
2023 ............................................................................................................
Total............................................................................................................ $

Aggregate
Minimum
Payments
(in thousands)
1,491
1,533
1,576
1,447
1,203
7,250

105

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.

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 reimburses 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 FDA of the Patheon
manufacturing suites for ZILRETTA, or until October 6, 2027. 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 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 under the Manufacturing Agreement with

Patheon are as follows:

Year
2019 ............................................................................................................
2020 ............................................................................................................
2021 ............................................................................................................
2022 ............................................................................................................
2023 ............................................................................................................
2024 and thereafter.....................................................................................
Total............................................................................................................ $

Aggregate
Minimum
Payments
(in thousands)
8,027
8,027
8,027
8,027
8,027
30,102
70,237

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 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 expiration of the term of the agreement or due to 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.

106

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, the Company 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, the
Company made an upfront payment to GeneQuine of $2.0 million. In 2018, the Company paid GeneQuine a
$750,000 milestone payment for initiating a GLP toxicology study of FX201. The Company may also be required to
make additional milestone payments during the development of FX201, including up to $7.75 million through Phase
2 proof of concept (“PoC”) clinical trial and, following successful PoC, up to an additional $54.0 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 product
candidate had not been commercially approved, and had 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 the estimated life of FX201. The first milestone
of $750,000 was achieved on October 24, 2018 when the GLP toxicology study was initiated upon the dosing of the
first animals. This milestone was recognized as research and development expense. As of December 31, 2018, no
other milestones under the arrangement have been achieved. As part of the transaction, the Company 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 the Company 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 the Company to use reasonable efforts to develop FX201 according to timelines
set out in the license agreement. In December 2017, the Company 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.

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, 2018, 2017 and 2016:

(In thousands)
Numerator:

Year ended December 31,
2017

2016

2018

Net loss .................................................................................................... $
Net loss:............................................................................................. $

(169,659) $
(169,659) $

(137,481) $
(137,481) $

(71,894)
(71,894)

Denominator:

Weighted average common shares outstanding, basic
and diluted ............................................................................................
Net loss per share, basic and diluted ............................................................. $

37,751

33,027

(4.49) $

(4.16) $

25,297

(2.84)

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:

107

Shares issuable upon conversion of the 2024 convertible notes .............
Stock Options ..........................................................................................
Restricted Stock Units .............................................................................

Year ended December 31,
2017

2016

2018

7,515
4,498
266
12,279

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, 2018, 2017 and 2016, 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 rate change.......................................................................................
Other .......................................................................................................
Effective income tax rate..............................................................................

The Company’s net deferred tax assets consisted of the following:

Year Ended December 31,
2017

2016

2018

21.0%
8.0
1.0
(27.4)
(1.9)
(0.7)
—%

34.0%
3.0
0.9
(11.6)
(25.1)
(1.2)
—%

34.0%
5.0
2.7
(40.0)
—
(1.7)
—%

December 31,

2018

2017

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...................................................................... $

76,723 $
9,965
7,808
(14,165)
41,048
121,379
(121,379)
— $

48,496
7,725
3,578
(14,630)
29,673
74,842
(74,842)
—

As of December 31, 2018, the Company had federal and state net operating loss (“NOL”) carryforwards of

approximately $298.9 million and $219.4 million, respectively, which begin to expire in 2029 for federal purposes
and in 2030 for state purposes. Approximately $109.4 million of the federal NOLs have an indefinite carryforward.
In addition, the Company had federal and state research and development tax credit carryforwards of approximately
$7.1 million and $3.5 million, 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 NOL
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, 2018, 2017 and 2016.

During 2017, we recorded tax charges for the impact of the Tax Act effects using the current available
information and technical guidance on the interpretations of the Tax Act. As permitted by SEC Staff Accounting
Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, we recorded provisional estimates
and have subsequently finalized our accounting analysis based on the guidance, interpretations, and data available as

108

of December 31, 2018. Adjustments made in the fourth quarter of 2018 upon finalization of our accounting analysis
were not material to our consolidated financial statements.

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 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. The
Company has experienced multiple ownership changes since its inception, however, based on the annual limitations
calculated at each ownership change date, substantially all NOL carryforwards will be available to offset future
taxable income. Approximately $0.3 million of NOLs will expire unused. Future 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.

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2018, 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 .......................................................... $

(74,842) $
1,913
0
(48,450)
(121,379) $

(83,434) $
36,606
24,537
(52,551)
(74,842) $

(54,773)
4,771
—
(33,432)
(83,434)

Year Ended December 31,
2017

2016

2018

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, 2018 and 2017.

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 NOL 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.

March 31,

June 30,

September 30, December 31,

Three Months Ended

(in thousands, except per share amounts)
Revenues ........................................................................................ $
Gross profit.....................................................................................
Net loss ...........................................................................................
Net loss per common share—basic and diluted ............................. $
Weighted average common shares—basic and diluted..................

2018

2,194 $
(504)
(41,569)
(1.10) $
37,620

3,797 $
2,851
(43,875)
(1.16) $
37,697

6,990 $
5,371
(43,640)
(1.15) $
37,818

9,543
7,470
(40,575)
(1.07)
37,867

109

2017

0 $
0
(23,879)
(0.75) $
31,704

March 31,

Three Months Ended

June 30,
2017

September 30, December 31,

2017

0 $
0
(28,880)
(0.91) $
31,826

0 $
0
(34,188)
(1.07) $
31,931

355
351
(50,534)
(1.38)
36,644

110

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 defined by Rule 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, 2018, 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) and Exchange Act Rule 15d-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 generally accepted accounting principles.

As of December 31, 2018, 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, 2018, our internal control over financial reporting was effective based on those criteria.

The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by

PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is
included in Item 8 in this report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 31,

2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.

Item 9B. Other Information

None.

111

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 2019 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, 2018,
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.

112

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) Documents filed as part of this report.

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, 2018:

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
79

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.

Exhibits

113

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

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

10.9

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)

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 (Exhibit 10.6,
Annual Report on Form 10-K filed on March 8, 2018)

Amended and Restated Offer Letter between Flexion and Michael D. Clayman, M.D. (Exhibit 10.6,
Registration Statement on Form S-1 (File No. 333-193233) filed on January 8, 2014)

Amendment to Amended and Restated Offer Letter between Flexion and Michael D. Clayman, M.D.
(Exhibit 10.7, Annual Report on Form 10-K filed on March 28, 2014)

Amended and Restated Offer Letter between Flexion and Neil Bodick, M.D., Ph.D. (Exhibit 10.7,
Registration Statement on Form S-1 (File No. 333-193233) filed on January 8, 2014)

114

Exhibit
Number
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

10.29

Description

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, M.D. (Exhibit 10.11, Annual
Report on Form 10-K filed on March 8, 2018)

Amended and Restated Offer Letter between Flexion and Mark Levine (Exhibit 10.12, Annual Report
on Form 10-K filed on March 8, 2018)

Amended and Restated Offer Letter between Flexion and Kerry Wentworth (Exhibit 10.13, Annual
Report on Form 10-K filed on March 8, 2018)

Offer Letter between Flexion and David Arkowitz (Exhibit 10.1, Quarterly Report on Form 10-Q filed
on May 8, 2018)

Amended and Restated Offer Letter between Flexion and Christina Willwerth

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)

115

Exhibit
Number

10.30

21.1

23.1

24.1

31.1

31.2

32.1

32.2

Description

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)

Subsidiaries of Flexion Therapeutics, Inc.

Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm

Power of Attorney (reference is made to the signature page thereto)

Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934

Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934

Certification of Principal Executive Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the Exchange
Act and 18 U.S.C. Section 1350

Certification of Principal Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the Exchange
Act and 18 U.S.C. Section 1350

101.INS

XBRL Instance Document

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 granted with respect to certain portions of this exhibit. Omitted portions have
been filed separately with the SEC.

Item 16. 10-K Summary
None.

116

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 28th day of
February, 2019.

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/ David Arkowitz
David Arkowitz

/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)

Chief Financial Officer
(Principal Financial and Accounting Officer)

February 28, 2019

Chairman of the Board of Directors

February 28, 2019