Dear Stockholders:
Each year, I look forward to writing this letter as it provides me with an opportunity to reflect on Flexion’s recent
performance and to highlight the opportunities that are ahead of us. As I write today, we are in the midst of an
unprecedented health crisis stemming from the coronavirus global pandemic that causes the COVID-19 disease
(“COVID-19”). With that backdrop, it is difficult to predict what the coming weeks and months will mean for the world,
our nation and for Flexion; however, even as we navigate these uncharted waters, we are proceeding with confidence
that we will emerge from this crisis stronger, both as a country and as a company.
First and foremost, we are building Flexion to be a company that lasts, and thanks to the support of our stockholders,
our customers and our employees, we believe we have a very bright future. Since our founding in 2007, we have made
tremendous progress advancing our vital mission to improve the human condition by developing meaningful
medicines for patients with musculoskeletal conditions, beginning with ZILRETTA®, the first and only extended-
release, intra-articular injection for osteoarthritis knee pain.
2019 was a remarkable year for ZILRETTA, and it was bounded by two important milestones in the product’s brief
history. First, on January 1, 2019, ZILRETTA’s permanent J code (J3304) took effect, providing our customers with
defined and predictable reimbursement. That milestone had a marked impact on our ability to both increase
ZILRETTA’s utilization in existing practices and penetrate new accounts. In fact, by the end of 2019, we had sold more
than 175,000 units of ZILRETTA, and in 2019, we recorded sales of $73 million reflecting growth of more than 220% over
sales in 2018.
Second, on December 26, 2019, we announced that the U.S. FDA had approved a supplemental New Drug Application
for an improved product label. The new label eliminates previous Limitation of Use language regarding repeat
administration that was confusing to prescribers and payors and now includes language that is clearer and that we
believe should reduce barriers to repeat administration.
2019 was also an outstanding year with respect to building Flexion’s future with the addition and advancement of two
high-quality product candidates, FX201 and FX301. FX201 is our investigational intra-articular gene therapy candidate
which, we believe, following a single injection, could provide OA pain relief for at least a year, improve function and
modify disease progression. We were delighted to have initiated our single, ascending dose trial for that product
candidate – even though enrollment had to be suspended this year in the face of the challenges of COVID-19.
In addition, we executed a cost-effective business development deal to acquire XEN402, a novel, selective sodium
channel (NaV1.7) blocker. Leveraging our internal capabilities, we formulated this molecule in a thermosensitive
hydrogel developed by our scientists for administration as a peripheral nerve block for control of post-operative pain.
The new preclinical product candidate, known as FX301, is designed to be liquid at room temperature and, following
peri-neural injection, forms a gel, essentially creating a depot that can pay out drug at therapeutic concentrations
locally for at least three to five days. The vision for FX301 is a product that confers persistent, meaningful post-op pain
relief while sparing motor function. Assuming the GLP toxicology data which we are generating now is supportive, we
expect FX301 to be in the clinic next year.
Sadly, while we all are dealing with the tragic impacts of COVID-19, I take solace in the resilience of our country, the
selfless commitment of front-line health care professionals who are tending to the afflicted and the grit of our
dedicated employees who make Flexion such a remarkable organization. They know there are millions of patients
counting on us, and their resolve is unwavering in delivering on the promise of ZILRETTA and
our pipeline product candidates.
I look forward to writing next year’s letter with the hope and expectation that COVID-19 will
be behind us, our nation will be well on its way to recovery and that Flexion will have made
substantial progress on its journey to realize its potential to deliver medicines that matter to
patients in need.
Be well.
Michael Clayman, MD
President & Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-36287
Flexion Therapeutics, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
10 Mall Road, Suite 301
Burlington, Massachusetts
(Address of principal executive offices)
01803
(Zip Code)
Registrant’s telephone number, including area code: (781) 305-7777
26-1388364
(I.R.S. Employer
Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $0.001 par value per share
Securities registered pursuant to Section 12(g) of the Act: None
Trading
Symbol(s)
FLXN
Name of each exchange on which registered
The Nasdaq Global Market
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
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 ☒ NO ☐
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 ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
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
Accelerated filer
Smaller reporting company
☒
☐
Non-accelerated filer
☐
☐
Emerging growth company ☐
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. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the Registrant’s voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of
the shares of common stock on The Nasdaq Stock Market on June 28, 2019, was $409,302,635.
The number of shares of the Registrant’s common stock outstanding as of February 28, 2020 was 38,551,706.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the
Registrant’s 2020 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, 2019.
FLEXION THERAPEUTICS, INC.
FORM 10-K—ANNUAL REPORT
For the Fiscal Year Ended December 31, 2019
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 .............................................................................................................................................................
4
28
62
62
62
62
63
65
66
82
83
117
117
117
118
118
118
118
118
119
122
123
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 a limited history of commercializing 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.
3
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 110 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
o
o
o
statistically significant pain relief against placebo (saline) as measured by the weekly mean of the
Average Daily Pain, or ADP, score:
(cid:3)
(cid:3)
demonstrated at week 12, the primary endpoint, a p-value of <0.0001, 2-sided, with benefits
extending through week 16; and
at each week beginning at week 1 and continuing through week 12 nearly 60% of patients
reported no pain or mild pain;
statistically significant change from baseline as compared to placebo in weekly ADP intensity score
through week 12 as measured by the area under effect curve (p<0.0001) (demonstrating a 50%
reduction from baseline);
numeric improvement when compared with placebo and immediate-release TA at each time point
through 12 weeks on exploratory measures – WOMAC A (pain), WOMAC B (stiffness) and
WOMAC C (function) and the Knee Injury and Osteoarthritis Outcome Score (KOOS) quality of
life subscale; and
reduced rescue medicine consumption compared with placebo and immediate-release TA
(exploratory endpoint);
an acceptable safety profile with side effects similar to placebo;
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.
(cid:129)
(cid:129)
(cid:129)
4
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 holds the
potential to become the leading IA medicine for OA knee pain.
In December 2018, we submitted a supplemental New Drug Application, or sNDA, to the FDA to revise the
product label for ZILRETTA to allow for repeat administration. The sNDA submission was based on data from a
Phase 3b single-arm, open-label clinical trial which evaluated the safety and tolerability of repeat administration of
ZILRETTA. On December 26, 2019, we announced that the FDA approved the sNDA. The revised product label
removed language which previously stated that ZILRETTA was “not intended for repeat administration” and
replaced it with language stating that “the efficacy and safety of repeat administration of ZILRETTA have not been
demonstrated.” FDA determined that because the data were not from a randomized, placebo-controlled clinical trial,
the Phase 3b results were insufficient to warrant full removal of a Limitation of Use statement, or LOU. The new
label includes a study description and safety data from the Phase 3b repeat administration trial and nonclinical
toxicology data from previously submitted single and repeat administration studies in non-diseased animals. In
addition, the revised label removed a statement that described a single secondary exploratory endpoint in the original
Phase 3 pivotal trial comparing ZILRETTA to immediate release TA crystalline suspension.
We believe ZILRETTA’s extended-release profile may also provide effective treatment for OA pain of the
shoulder and adhesive capsulitis (AC), commonly referred to as “frozen shoulder,” and in December 2019, we
initiated a double-blind, placebo-controlled Phase 2 trial to evaluate the efficacy of ZILRETTA in patients with
either shoulder OA or AC. The data are anticipated in 2021.
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 2018 approximately 5 million patients in the U.S. received an IA injection treatment
for knee OA pain. That population was comprised of approximately 4.5 million patients who were treated with
immediate-release steroids and roughly 900,000 patients who received hyaluronic acid, or HA, with some patients
receiving both treatments in the same year. The HA utilization occurred despite guidance from prominent medical
societies, including the American Academy of Orthopedic Surgeons stating that HA is an ineffective treatment for
knee OA, and a number of major commercial payers no longer reimburse for the entire class of HA products. In
addition, according to SmartTRAK in 2018, HA sales in the U.S. were $1 billion, with a cost per course of treatment
ranging from $245 to $2,000. Our market research indicates that, given the limitations of immediate-release steroids
5
and HAs, physicians are open to new treatment options, like ZILRETTA, which can provide their patients with
enhanced durable pain relief.
We have established a clinical trial program designed to expand ZILRETTA’s product label, and we are
currently enrolling patients in a Phase 2 trial of ZILRETTA in both shoulder OA and adhesive capsulitis. IQVIA
data indicate that, in 2018, healthcare practitioners administered roughly 600,000 immediate release steroid
injections for the treatment of shoulder OA. An additional approximately 200,000 injections were administered to
patients for the treatment of adhesive capsulitis.
We have a growing pipeline with two product candidates focused on the local treatment of musculoskeletal
conditions: FX201 and FX301. 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 and improving function. Based on its mechanism of action, we believe FX201
also holds the potential to arrest disease progression. In October of 2019, the FDA cleared the Investigational New
Drug (IND) application for FX201, allowing for initiation of a Phase 1 dose-escalation study. If data from that study
are supportive, we intend to initiate a Phase 2 proof of concept trial in 2021.
FX301, is a locally administered NaV1.7 inhibitor, known as funapide, formulated for extended release in a
thermosensitive hydrogel. The initial development of FX301 is intended to support administration as a peripheral
nerve block for management of post-operative pain. We believe FX301 has the potential to provide effective, non-
opioid pain relief for 3-5 days, while preserving extremity motor function, which is typically compromised by local
anesthetic peripheral nerve block. We held a pre-IND meeting with FDA in January, and we remain on track to
initiate FX301 clinical trials in 2021.
We have worldwide commercialization rights for ZILRETTA, FX201 and FX301. 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. 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 associated with musculoskeletal conditions, with
a particular interest in OA, post-operative pain and low back pain. The principal elements of our strategy include the
following:
•
Establish ZILRETTA as the leading 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 the
first-line IA therapy for OA knee pain. 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 typically are not injected more frequently than every three months, patients can experience a
recurrence in, or increasing, pain during that time. ZILRETTA is specifically formulated using our
proprietary PLGA-based microsphere technology to slowly and continuously release drug in the joint
for over 12 weeks.
ZILRETTA is currently approved for the treatment of OA knee pain, but we believe that it has the
potential for broader use, specifically in the shoulder. In December 2019, we initiated a Phase 2 trial of
ZILRETTA in OA shoulder pain and adhesive capsulitis.
•
Bolster our robust pipeline of high-quality product candidates to address unmet medical needs. We
seek to progress our product candidates, FX201 and FX301, and further build our product pipeline
6
through a combination of internal research and selective business development activities. In 2017, we
established the Flexion Innovation Lab in Woburn, Massachusetts to support our research and
development activities.
•
•
Leverage our infrastructure to efficiently and cost-effectively develop and commercialize ZILRETTA
and our product candidates. We have built up extensive knowledge, expertise and capabilities in the
development and commercialization of locally delivered medicines for musculoskeletal conditions.
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 we can realize the greatest value for our
shareholders by fully exploiting our know-how and capabilities. The U.S. represents the most attractive
market for ZILRETTA, and potentially for FX201 and FX301, and as a result, we aim to retain the
commercial rights to our product and programs in the U.S. while we look to selectively partner outside
of the United States.
Overview
Osteoarthritis
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 the CDC, affecting more than 30 million adults. These
numbers are expected to grow in the years ahead as a result of aging, obesity and sports injuries.
•
•
•
•
According to the CDC, approximately 40% 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.
According to a study published by the Osteoarthritis Research Society International, U.S. patients 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, typically 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 TA, the
corticosteroid used in ZILRETTA, is amongst the most commonly prescribed IA corticosteroid injections. When
7
immediate-release steroids 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.
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 knee implant will wear out over time and they will require revision
surgery in following years. According to IQVIA, in 2018, there were approximately 1.3 million total knee
arthroplasties performed in the U.S.
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 generally indicates that IA steroid suspensions not be administered more frequently than once every
three months. Based on market research we have recently conducted, approximately 50% of patients surveyed who
received IA immediate-release steroids were unsatisfied with the duration of benefit.
Despite estimated U.S. sales of approximately $1 billion in 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, both the American Academy of Orthopaedic Surgeons (AAOS)
and the American College of Rheumatology (ACR) 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
8
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, advance our other product
candidates, FX201 and FX301, through clinical development and build a robust pipeline of additional locally
administered therapies to address musculoskeletal conditions.
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. Preclinical data suggest that 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. In early October 2019, the FDA cleared the IND application for
FX201, and we subsequently initiated a Phase 1 first-in-human trial. Nonclinical safety and efficacy data submitted
in the IND application indicated that a single administration of FX201 was well-tolerated, had no significant
biodistribution outside the target tissues, and pharmacology studies with the rat, mouse, and horse orthologues in
animal models of OA showed symptomatic improvement and delay in disease progression. Positive data showing
dose-dependent decreases in the severity of cartilage and bone lesions following anterior cruciate ligament
transection in rats were presented at the American College of Rheumatology Annual Meeting in November 2019.
The preclinical data established a potentially safe and efficacious starting dose for the Phase 1 single ascending dose
study. The trial is expected to enroll approximately 15 - 24 patients who will be followed for 104 weeks, with initial
9
readout anticipated in 2021. In March 2020, the first two patients were treated in the Phase 1 dose-escalation trial.
We acquired the global rights to FX201 from 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, or Baylor.
FX301
In September 2019, we acquired global rights to develop and commercialize XEN402, Xenon’s NaV1.7
inhibitor known as funapide, for management of post-operative pain. Our FX301 preclinical product candidate
consists of funapide formulated for extended release within a thermosensitive hydrogel, for administration as a
peripheral nerve block for control of post-operative pain. The proprietary formulation of the thermosensitive
hydrogel was developed in our Innovation Lab. Within minutes following injection, the thermosensitive formulation
has been shown to transition from a liquid to a gel, an effect that we believe can provide local delivery of funapide
near target nerves for up to a week. Unlike typical local anesthetics, the selective pharmacology of funapide has the
potential to provide effective non-opioid pain relief for 3-5 days, while preserving extremity motor function, which
is typically compromised by local anesthetic peripheral nerve block. As such, we believe FX301 could enable
ambulation, rapid discharge, and early rehabilitation following musculoskeletal surgery. We are conducting
preclinical toxicology studies, and if supportive, we anticipate filing an IND application to initiate FX301 clinical
trials in 2021.
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 sNDA to the FDA to revise the product label for ZILRETTA to allow for
repeat administration. The sNDA submission was based on data from a Phase 3b single-arm, open-label clinical
trial.
On December 26, 2019, we announced that the FDA approved the sNDA. The revised product label removed
language which previously stated that ZILRETTA was “not intended for repeat administration” and replaced it with
language stating that “the efficacy and safety of repeat administration of ZILRETTA have not been demonstrated.”
FDA determined that because the data generated were not from a randomized, placebo-controlled clinical trial, the
Phase 3b results were insufficient to warrant full removal of a LOU statement. The new label includes a study
description and safety data from the Phase 3b repeat administration trial and nonclinical toxicology data from
previously submitted single and repeat administration studies in non-diseased animals. In addition, the revised label
removed a statement that described a single secondary exploratory endpoint in the original Phase 3 pivotal trial
comparing ZILRETTA to immediate release TA crystalline suspension.
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 TA 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
10
• We believe ZILRETTA’s extended-release profile may also provide effective treatment for OA pain of the
shoulder and adhesive capsulitis (AC), commonly referred to as “frozen shoulder”, and in December 2019, we
initiated a double-blind, placebo-controlled Phase 2 trial to evaluate the efficacy of ZILRETTA in patients with
either shoulder OA or AC. The study is expected to enroll up to 250 patients – approximately 135 with shoulder
OA and 115 with shoulder AC.
The Phase 2 trial, known as the RANGE study, separates cohorts of patients by their diagnosis of shoulder OA
or AC into two parallel groups. Patients in each cohort are randomized (1:1) to either a single intra-articular
injection of ZILRETTA or normal saline. The primary endpoint for both cohorts of the trial is the magnitude of
pain relief versus placebo as measured by the overall change in daily shoulder pain with movement score from
baseline to 8 weeks post injection. Patients in each cohort are then stratified by baseline pain scores. Shoulder
AC patients are further stratified by pain duration since onset, and they also utilize a home exercise program
during the study.
Each participant will be evaluated for 24 weeks following injection. The trial is expected to be completed in
2021.
•
•
•
•
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 in
the study 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. We completed a primary
endpoint analysis of our open-label, single-arm, Phase 3b trial assessing the effect of a single administration of
ZILRETTA on synovitis in patients with knee OA. The data indicate that treatment with ZILRETTA resulted in
a significant reduction (>50%) in synovial tissue volume at Week 6 compared to baseline (N=89 patients).
These patients also reported improvements in pain and function scores over this time period. Patients continued
to be followed in the trial to capture additional, longer-term exploratory measures as synovitis, or inflammation
of the synovial membrane, is believed to play an important role in the progression of OA.
Additional Completed Studies
In February 2019, results from an open-label Phase 3b clinical trial evaluating the safety and efficacy of repeat
administration of ZILRETTA in patients with OA of the knee were published in the peer-reviewed
journal, Rheumatology and Therapy. The data 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 (KL) Grade 3 (37.5%) or Grade 4 (30.3%), the most
radiographically severe form of OA. The data also indicate that the magnitude and duration of pain relief
experienced by patients after both the first and second injections was comparable and similar to the clinical
benefit of ZILRETTA in the pivotal Phase 3 trial. These data served as the basis for our aforementioned sNDA
and subsequent label update.
In April 2019, we announced that results from a post-hoc analysis of data from the pivotal Phase 3 trial of
ZILRETTA were published in Advances in Therapy. The findings indicated that patients with unilateral OA
knee pain experienced significant and durable pain relief with a single intra-articular injection of ZILRETTA
compared to TAcs as measured by ADP scores. These results suggest that bilateral knee pain may have been a
confounding factor in the pivotal trial, which assessed the impact of ZILRETTA treatment in only one knee.
At the 2019 Osteoarthritis Research Society International World Congress (OARSI) held in May, we presented
positive results from the Phase 2 pharmacokinetic (PK) study evaluating ZILRETTA in patients with hip OA.
The data showed PK profiles consistent with previous studies in the knee. Additionally, we presented a poster
on the previously published Phase 3b data indicating repeat administration of ZILRETTA resulted in substantial
improvements in OA knee pain and had no deleterious impact on cartilage or joint structure. We also gave an
11
•
•
•
•
encore poster presentation of data from an in vitro study, which suggests that TA can have dose-dependent
chondroprotective effects on inflamed and injured cartilage.
In May 2019, we announced that results from a pooled analysis of data from three Phase 2/3 randomized
clinical trials on the use of rescue medications with ZILRETTA were published in the peer-reviewed journal,
Pain and Therapy. The analysis showed that the overall number of rescue medication tablets used per day
through Week 24 was significantly less for ZILRETTA compared to both saline-placebo (LSM difference,
−0.43) and immediate-release TAcs (–0.24). The safety profile of ZILRETTA in this pooled analysis was
consistent with that of the pivotal Phase 3 trial.
Also in May 2019, we paused enrollment in a Phase 3 trial of ZILRETTA in hip OA pain due to a non-safety
related issue which resulted in the inability to deliver a full dose in a small number of trial participants. In
November, we determined that an exploratory study designed to resolve the issue was unsuccessful, and as a
result, we made the decision to discontinue the Phase 3 trial.
In July 2019, we presented new findings from a post-hoc subgroup analysis based onKL Grade of the open-
label Phase 3b repeat administration trial of ZILRETTA in patients with knee OA at the American Orthopaedic
Society for Sports Medicine (AOSSM). The analysis, which evaluated the efficacy of initial and repeat
administration of ZILRETTA in patients with symptomatic knee OA ranging in radiographic severity from KL
Grades 2 to 4, indicated that ZILRETTA consistently reduced OA knee pain for at least 12 weeks after each
injection, regardless of KL Grade. The incidence of treatment emergent adverse events, or AEs were similar
across all KL Grades and the most commonly reported AEs were consistent with those reported in previous
clinical studies of ZILRETTA.
In October 2019, we announced that results from a Phase 2a study evaluating the safety and systemic exposure
of concurrent injections of ZILRETTA in patients with bilateral knee OA were published in the peer-reviewed
journal, Therapeutic Advances in Musculoskeletal Disease. Findings from the open-label randomized study
showed that concurrent, bilateral administration of ZILRETTA appeared safe and well tolerated, resulting in
reduced systemic exposure and substantially lower plasma concentrations of TA compared to immediate-release
TAcs.
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
12
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
distribute ZILRETTA through a limited network of third-party specialty distributors, a specialty pharmacy, group
purchasing organizations and other third parties. 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 10% 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
13
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 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. The American Academy of Hip and Knee Surgeons (AAHKS) and ACR recently issued guidelines strongly
recommending against use of IA stem cell therapy and PRP for the treatment of OA.
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 3 clinical trial before they can potentially obtain approval for Cingal
in the U.S. Anika announced plans to conduct a pilot study to evaluate the full-scale Phase 3 trial
design. Anika previously indicated they expect to initiate the pilot study in the first half of 2020.
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 U.S. Phase 3 trial. In April 2019, the FDA suspended the U.S.
Phase 3 trial due to a Chemistry, Manufacturing, and Controls (CMC) concern.
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. In 2018, the FDA
provided guidance that Ampio should complete an additional Phase 3 trial of KL4 severe OA of the
knee patients carried out under Special Protocol Assessment to support a Biologics License Application,
or BLA. Ampio previously indicated it expects its Phase 3 trial to be completed in Q1 2020.
Centrexion Therapeutics Corporation’s CNTX-4975, which is a synthetic, ultra-pure injection of trans-
capsaicin. Centrexion previously indicated that it expects results from its Phase 3 VICTORY-1 trial and
VICTORY-3 trial in Q1 2020 and results from its Phase 3 VICTORY-2 trial in Q3 2020.
Samumed’s SM04690 (lorecivivint), a small molecule inhibitor of the Wnt pathway is under
development as a potential disease modifying drug. In May 2019, Samumed commenced its first Phase
3 pivotal trial, STRIDES-XRAY, for lorecivivint. Samumed previously indicated that the estimated trial
completion date is December 2020.
A number of investigational nerve growth factor antibodies are in development. 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, demonstrating statistically significant improvement
in pain and function compared with those receiving placebo. In contrast, 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. In
December 2019, Pfizer filed a U.S. regulatory submission with the FDA for tanezumab 2.5mg SC in
patients with moderate to severe OA. Teva and Regeneron’s fasinumab is in Phase 3 development, with
three trials underway, and key data are expected in 2020.
14
•
•
•
In October 2019, Taiwan Liposome Company announced the initiation of a Phase 3 trial for TLC599,
which is a liposomal formulation of dexamethasone sodium phosphate. The company previously
announced that its estimated primary completion date for the trial is August 2021.
Servier and Galapagos NV’s S201086/GLPG1972, an ADAMTS-5 inhibitor, is currently in Phase 2
clinical development.
In February 2020, UNITY Biotechnology announced the Phase 2 study of UBX0101 in patients with
moderate-to-severe knee OA was fully enrolled with 183 patients. Both 12- and 24-week results are
expected in the second half of 2020.UBX0101 is a senolytic small molecule inhibitor of the MDM2/53
protein interaction, which selectively targets the senescent cells that accumulate in osteoarthritic knee
tissue and aimed at treating an underlying cause of the disease.
Intellectual Property/Patents and Proprietary Rights
Intellectual Property and Exclusivity
We are building a broad, worldwide intellectual property portfolio to protect the proprietary position of
ZILRETTA, 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
We are building a broad, worldwide intellectual property portfolio 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.
We actively apply for, maintain, and plan to defend and enforce, as needed, our internally developed and externally
licensed or acquired patent rights. Furthermore, we continue to search for and evaluate opportunities to in-license
intellectual property relevant to our business.
ZILRETTA
We own three U.S. ZILRETTA patents as well as counterpart foreign patents and patent applications covering
composition of matter, methods of manufacture and methods of use. Our U.S. ZILRETTA patents have expiration
dates in 2031. The ZILRETTA composition of matter invention 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 U.S. patents directed to ZILRETTA’s composition of matter and
methods of use are listed in the FDA Orange Book. We also have pending U.S. applications 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 related claims expiring in 2031.
In 2019, we had a patent granted in South Korea, further expanding our global intellectual property portfolio
including patents in Australia, Canada, China, Indonesia, Japan, Mexico, New Zealand, Saudi Arabia, the Russian
Federation, Singapore, South Africa, Taiwan and Ukraine. These foreign patents cover the composition of matter,
methods of manufacturing and methods of using ZILRETTA and are similar in scope to the protection in the U.S.
described above. In addition, we are continuing to prosecute our patent applications pending in Europe and
additional countries throughout the world directed to ZILRETTA and related inventions.
We have also in-licensed intellectual property, owned by SwRI, which gives us exclusive rights to SwRI
patents covering our proprietary microsphere manufacturing technology used in the production of ZILRETTA.
These patents are scheduled to expire in 2025.
FX201
In December 2017, we acquired the global rights to FX201 from GeneQuine. As part of the transaction with
GeneQuine, we became the direct exclusive licensee of certain foundational patents, patent applications and other
proprietary rights owned by Baylor that are related to FX201 for human applications. These patents generally cover
15
the composition of matter and method of use of FX201 in the treatment of OA. In June 2019, the U.S. PTO issued
patent number 10,301,647, which covers the composition of matter and method of use of FX201 in the treatment of
OA with a term through January of 2033. In addition, the Baylor patents related to FX201 are issued in Europe, with
an expiry date in 2032, and in Australia, Japan, China and Eurasia with expiry dates in 2033. We are continuing to
prosecute the Baylor patent applications related to FX201 which are pending in Canada and India. Further, we have
a pending patent application covering effective dosages of FX201 in the treatment of OA in humans, which is
expected to provide protection until 2039.
FX301
In September 2019, we acquired global rights to develop and commercialize funapide from Xenon, which we
have formulated for extended release with our proprietary thermosensitive hydrogel as FX301. As part of the
transaction with Xenon, we acquired foundational patents and patent applications covering the composition of
matter, methods of use and methods of manufacture related to funapide. We own patents directed to funapide
granted in the U.S. as well as Australia, Canada, China, Europe, Hong Kong, Mexico and New Zealand with expiry
dates in 2030. In addition, we have a pending patent application covering composition of matter, method of use and
method of manufacture for FX301, which is expected to provide protection until 2039.
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 acquired the global rights to develop and commercialize 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. In addition, we paid GeneQuine a
16
$750,000 payment in November 2019 following the FDA acceptance of the IND application for FX201. This
milestone was recognized as research and development expense in the fourth quarter of 2019. The next milestone of
$2.5 million was achieved in March 2020 when the first patient was treated in the Phase 1 clinical trial. We may
also be required to make additional milestone payments during the development of FX201, including up to $4.5
million through the Phase 2 proof of concept, or PoC, clinical trial and, following successful PoC, up to an
additional $51.5 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 patents and other
proprietary rights related to FX201 for human applications. The Baylor license agreement grants us an exclusive,
royalty-bearing, worldwide 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. In addition, we recently entered into a manufacturing agreement that secures clinical trial supply of FX201
through Phase 3 clinical trials.
FX301 Related Agreements
In September 2019, we acquired from Xenon, global rights to develop and commercialize funapide formulated
for extended release with our novel, proprietary thermosensitive hydrogel under our preclinical program known as
FX301.. As part of the asset purchase transaction with Xenon, we made an upfront payment to Xenon of $3.0
million. We may also be required to make additional milestone payments during the development of FX301,
including up to $9.0 million through initiation of a Phase 2 proof of concept (PoC) clinical trial and, following
successful PoC, up to $40.8 million in development and global regulatory approval milestone payments and up to an
additional $75.0 million in sales-related 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 September 2019 as the FX301 product
candidate had not been commercially approved and had no alternative future use. Future milestone payments earned
prior to regulatory approval of FX301 will be recognized as research and development expense in the period when
the milestone events become probable of being achieved. Future milestones earned subsequent to regulatory
approval will be recognized as an intangible asset and amortized to expense over the estimated life of FX301. As of
December 31, 2019, no milestones under the arrangement had been achieved. As part of the transaction, we became
the direct licensee of certain underlying Xenon patents and other proprietary rights related to funapide for human
applications. The Xenon agreement grants us an exclusive, royalty-bearing, world-wide right and license (with a
right to sublicense) for human applications under its patents directly related to funapide, with a similar royalty-free
license to other Xenon proprietary rights directly related to funapide. The agreement with Xenon includes a tiered
royalty ranging from mid-single digits to low double digits that is based on aggregate annual net sales of FX301 and
requires us to use reasonable efforts to develop FX301 according to timelines set out in the agreement.
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.
17
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
18
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
19
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
20
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
21
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
22
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, as
defined by such law, 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.
There remain 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, several 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”. In addition, the 2020 federal spending
23
package permanently eliminated, effective January 1, 2020, the PPACA-mandated “Cadillac” tax on high-cost
employer-sponsored health coverage and medical device tax and, effective January 1, 2021, also eliminates the
health insurer tax. 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 December 2018, CMS published a new 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. Additionally, on December 18, 2019, the
U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was
unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of
the PPACA are invalid as well. It is unclear how this decision, future decisions, subsequent appeals, and other
efforts to repeal and replace PPACA will impact PPACA.
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 2029 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 2020 contains further drug price control measures that could be enacted during the 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 solicited feedback on some of these measures and has implemented others under its existing
authority. For example, in May 2019, CMS issued a final rule to allow Medicare Advantage plans the option to use
step therapy for Part B drugs beginning January 1, 2020. This final rule codified CMS’s policy change that was
effective January 1, 2019. Although a number of these, and other measures may require additional authorization 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.
24
Regenerative Medicine Advanced Therapies
As part of the 21st Century Cures Act, Congress amended the FDCA to create the regenerative medicine
advanced therapies, or RMAT, designation. The RMAT designation is intended to facilitate efficient development
and expedite review of regenerative medicine advanced therapies, which are intended to treat, modify, reverse, or
cure a serious or life-threatening disease or condition. RMAT covers cell therapies, gene therapies, therapeutic tissue
engineering products, human cell and tissue products, and combination products using any such therapies or
products. A sponsor may request that the FDA designate a regenerative medicine advanced therapy concurrently
with or at any time after submission of an IND. The FDA has 60 calendar days to determine whether the criteria are
met, including whether there is preliminary clinical evidence indicating the potential to address unmet medical needs
for a serious or life-threatening disease or condition. A BLA for a regenerative medicine 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 medicine 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,
25
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, as defined by such law, 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.
26
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, 2019, we had 288 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 $69.6 million, $53.1 million, and $51.2 million in research and development in the years ended
December 31, 2019, 2018 and 2017, 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
27
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.
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
$149.8 million, $169.7 million, and $137.5 million for fiscal years 2019, 2018, and 2017, respectively. As of
December 31, 2019, we had an accumulated deficit of $668.6 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 and commercialization. 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 a limited history of commercializing ZILRETTA and cannot guarantee that our
commercialization efforts will result in product revenues that meet our peak sales expectations or those of analysts
and investors.
28
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 our pipeline 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.
Our revenues may not be sufficient to cover our future expenses and we 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 revenue from product sales sufficient to cover our operating expenses 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 legal or regulatory action related to the commercialization of ZILRETTA.
If we are unable to generate sufficient 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, 2019, we had cash, cash equivalents and marketable securities of approximately $136.7
million and working capital of $159.5 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 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 ZILRETTA or product candidates that we
otherwise would seek to develop or commercialize ourselves; or
significantly curtail, or cease, operations.
29
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 2, 2019, we entered into the Amended and Restated Credit and Security Agreement with Silicon
Valley Bank, MidCap Financial Trust, and Flexpoint MCLS Holdings, LLC which provides for a term loan of $40.0
million and a revolving credit facility up to $20.0 million. We concurrently drew down the $40.0 million term loan
and used $7.7 million of the proceeds to repay the remaining amount owed on our prior credit facility. In February
2020, we drew down $20.0 million from the revolving credit facility. The Amended and Restated Credit and
Security 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 Amended and Restated Credit and Security Agreement also contains a minimum revenue covenant that
only applies if our liquidity (defined as cash and cash equivalents held with Silicon Valley Bank) falls below $80.0
million. If the revenue covenant becomes applicable to us and we fail to meet it, the commitments under the
Amended and Restated Credit and Security Agreement could be terminated and any outstanding borrowings,
together with accrued interest, under the Amended and Restated Credit and Security Agreement could be declared
immediately due and payable. The restrictive covenants in the Amended and Restated Credit and Security
Agreement could prevent us from pursuing business opportunities that we or our stockholders may consider
beneficial. The revenue covenant is set annually and is based on the greater of a conservative percentage of that
year’s approved forecast and modest growth over the trailing twelve months of actual sales.
A breach of any of these covenants could result in an event of default under the Amended and Restated Credit
and Security 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 Amended and Restated Credit and Security
Agreement occurs. In the case of a continuing event of default under the Amended and Restated Credit and Security
30
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 Amended and Restated Credit and
Security Agreement, or otherwise exercise the rights of a secured creditor. Amounts outstanding under the Amended
and Restated Credit and Security 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 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 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 ability to demonstrate the impact of real world evidence;
the timing and market introduction of 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 and/or value of the product over alternative treatments;
the cost of treatment in relation to alternative treatments, including any similar generic treatments;
31
•
•
•
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 is a buy-and-bill product and 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 the
efficacy and safety of repeat administration have not been demonstrated, and we believe this may impact our
commercialization efforts. While we successfully completed a Phase 3b repeat dose study of ZILRETTA and our
sNDA was approved and the product label was modified the FDA did not agree to remove the limitation of use 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 the second half of 2019, we introduced a volume-based rebate program to
eligible purchasers and healthcare providers of ZILRETTA that positively impacted sales and we intend to continue
to use rebate and discount programs in the future. We are unable to predict how these rebate programs could
potentially affect buying patterns and net sales in future quarters.
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 terms of label updates or 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 clinical data, patient experience, as well as real world evidence, 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
32
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 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;
33
•
•
•
•
•
•
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, less expensive or offer discounts that allow
physicians to receive more net reimbursement 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 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 through a limited network of
third-party specialty distributors, a specialty pharmacy, group purchasing organizations and other third parties.
While we have entered into these agreements to purchase and/or distribute ZILRETTA in the United States, the
counterparties 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 68% and 81% of
our sales for the years ended December 31, 2019 and 2018, respectively. Loss of either specialty distributor through
contract termination or its failure to distribute effectively would adversely affect ZILRETTA’s distribution. While
we have entered into these agreements on commercially reasonable terms, there is no guarantee that we will be able
to continue to do so, if at all.
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.
34
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 customer base, including
specialty distributors, specialty pharmacies, group purchasing organizations and other direct customers, our ability
to effectively commercialize ZILRETTA and generate product revenues would be limited.
Customer buying patterns and other factors may cause our quarterly results to fluctuate, and these
fluctuations may adversely affect our short-term results.
Our results of operations, including, in particular, product revenues, may vary from period to period due to a
variety of factors, including the buying patterns of our specialty distributors, specialty pharmacy, group purchasing
organizations, and other direct purchasers, which vary from quarter to quarter, and may be impacted by seasonality
(such as in the first quarter of the year when patient deductibles tend to be reset). In the event these customers with
whom we do business limit their purchases of ZILRETTA, sales of ZILRETTA could be adversely affected. For
example, in advance of an anticipated price increase or a reduction in expected rebates or discounts, customers may
order ZILRETTA in larger than normal quantities which could cause sales of ZILRETTA to be lower in subsequent
quarters than they would have been otherwise. Further, any changes in purchasing patterns, inventory levels,
increases in returns of ZILRETTA, delays in purchasing products or delays in payment for products by our
customers could also have a negative impact on our revenue and results of operations.
If we are unable to effectively train and equip our sales force, our ability to successfully commercialize
ZILRETTA will be harmed.
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 customers
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 helped reduce
reluctance by physicians to prescribe ZILRETTA based on reimbursement concerns. However, some third-party
payers nevertheless may still 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,
35
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, because they may consider ZILRETTA
reimbursement rates to be lower as compared with other treatments, 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 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.
36
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 ongoing studies
of ZILRETTA in other indications, may result in additional 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 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, among other items, 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 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;
37
•
•
•
•
•
•
•
•
•
•
•
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 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,
as defined by such law, 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;
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.
There remain 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, several bills
affecting the implementation of certain taxes under PPACA have been signed into law. The Tax Cuts and Jobs Act
of 2017, or the 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.” In addition,
the 2020 federal spending package permanently eliminated, effective January 1, 2020, the PPACA-mandated
“Cadillac” tax on high-cost employer-sponsored health coverage and medical device tax and, effective January 1,
2021, also eliminates the health insurer tax. 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 December 2018, CMS published a new 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.
Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling
38
that the individual mandate was unconstitutional and remanded the case back to the District Court to determine
whether the remaining provisions of the PPACA are invalid as well. It is unclear how this decision, future
decisions, 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 2029 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. Any reduction in reimbursement from Medicare, Medicaid or other
government-funded programs may result in a similar reduction in payments from private payers. The Trump
administration’s budget proposal for fiscal year 2020 contains further drug price control measures that could be
enacted during the 2020 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. The Department of Health and Human Services,
or HHS, has solicited feedback on some of these measures and implemented others under its existing authority. For
example, in May 2019, CMS issued a final rule to allow Medicare Advantage plans the option to use step therapy
for Part B drugs beginning January 1, 2020. This final rule codified CMS’s policy change that was effective January
1, 2019 Although a number of these and other measures may require additional authorization 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
originally contained a limitation of use, or LOU, stating that ZILRETTA is not intended for repeat administration.
39
On December 26, 2019, the FDA approved our supplemental new drug application, or sNDA, to revise the product
label for ZILRETTA. The sNDA was 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. While the LOU was updated from stating
ZILRETTA was not intended for repeat administration to stating that the efficacy and safety of repeat administration
of ZILRETTA have not been demonstrated, we were not successful in our efforts to remove the LOU entirely. The
FDA did not find the data submitted in the sNDA sufficient to approve a removal of the LOU. If we are unable to
remove the LOU or expand the label for ZILRETTA, 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 our pipeline
product candidates, FX201 and FX301, are at early stages of development and if we cannot complete development
of these product candidates and obtain regulatory approvals to market them, 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 clinical trials of ZILRETTA in other indications, 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. For example, while FX201 has demonstrated successful results in
numerous animal models, it has not been tested in humans yet and we cannot predict if it will behave similarly in
our planned first-in human trials as it has in the animal studies. 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.
40
If ZILRETTA or any other product candidate is found to be unsafe or lack efficacy or feasibility 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.
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;
41
•
•
•
•
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.
42
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 these 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
43
•
•
•
•
•
•
•
•
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. Beginning in 2022, applicable manufacturers also
will be required to report such information regarding payments and transfers of value provided, as well
as ownership and investment interests held, during the previous year to physician assistants, nurse
practitioners, clinical nurse specialists, certified nurse anesthetists and certified nurse-midwives;
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 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
44
•
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. For example, we participate in the Medicaid Drug Rebate Program, as administered by CMS,
and other federal and state government pricing programs in the United States. These programs generally require us
to pay rebates or otherwise provide discounts to government payers in connection with drugs that are dispensed to
beneficiaries/recipients of these programs. In some cases, such as with the Medicaid Drug Rebate Program, the
rebates are based on pricing that we report on a monthly and quarterly basis to the government agencies that
administer the programs. Pricing requirements and rebate/discount calculations are complex, vary among products
and programs, and are often subject to interpretation by governmental or regulatory agencies and the courts. Thus,
there can be no assurance that we will be able to identify all factors that may cause our discount and rebate payment
obligations, including as a result from recent changes to our commercial contracting and pricing strategies, to vary
from period to period, and our actual results may differ significantly from our estimated allowances for discounts
and rebates. Changes in estimates and assumptions may have a material adverse effect on our business, results of
operations and financial condition. In addition, the HHS Office of Inspector General and other Congressional,
enforcement and administrative bodies have recently increased their focus on pricing requirements for products,
including, but not limited to the methodologies used by manufacturers to calculate average manufacturer price, or
AMP, and best price, or BP, for compliance with reporting requirements under the Medicaid Drug Rebate Program.
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 significant 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 significant 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.
45
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
46
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 capacity. 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
47
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.
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
Our other product candidates also rely on sole sources of supply for the preclinical and clinical supply of materials.
The manufacturing processes for our product candidates are complex, and it may be difficult or impossible to
finalize appropriate processes for the scaled manufacture of the product candidates.
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
48
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 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
49
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
The novel coronavirus global pandemic could adversely impact our business, including our supply chain,
clinical trials and commercialization of ZILRETTA.
In December 2019, a novel strain of coronavirus, which causes the COVID-19 disease, was first reported in
Wuhan, China and has since become a global pandemic (the “Coronavirus”). If the Coronavirus continues to spread,
particularly in the United States and Europe, we may experience disruptions that could severely impact our supply
chain, on-going and future clinical trials and commercialization of ZILRETTA.
For example, the Coronavirus has resulted in increased travel restrictions and the shutdown or delay of
business activities in various regions, including certain activities of one of our suppliers in Italy. To the extent our
suppliers and service providers are unable to comply with their obligations under our agreements with them or they
are otherwise unable to deliver or are delayed in delivering goods and services to us due to the Coronavirus, our
ability to continue meeting commercial demand for ZILRETTA in the United States or advancing development of
our product candidates may become impaired. Travel restrictions and shutdowns in business operations as a result of
the outbreak may also limit our ability to pursue business development activities.
In addition, our commercialization of ZILRETTA may be adversely impacted by the Coronavirus, which
could result in patients postponing visits to healthcare provider facilities, healthcare providers closing temporarily
closing their offices or restricting patient visits, healthcare provider employees being unavailable and general
disruptions in the operations of payors, distributors, logistics providers and other third parties that are necessary for
ZILRETTA to be prescribed, reimbursed and administered to patients.
The Coronavirus continues to rapidly evolve. The extent to which the Coronavirus may impact our business,
including our supply chain, clinical trials and commercialization of ZILRETTA, will depend on future
developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic
spread of the pandemic, the duration of the pandemic, travel restrictions and social distancing in the United States
50
and other countries, business closures or business disruptions and the effectiveness of actions taken in the United
States and other countries to contain and treat the pandemic.
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, or others 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.
51
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
52
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 employees, 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 introduced 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. Further, our operations, and those of our contractors, consultants and collaborators, could be subject to
earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires,
extreme weather conditions, medical epidemics and other natural or man-made disasters or business interruptions,
for which we are predominantly self-insured. To the extent our suppliers and service providers are unable to comply
with their obligations under our agreements with them or they are otherwise unable to deliver or are delayed in
delivering goods and services to us, our ability to continue meeting commercial demand for ZILRETTA in the
United States or advancing development of our product candidates may become impaired.
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.
53
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.
54
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
55
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
56
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.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to
protect our products.
Our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing
patents in the biotechnology industry involve both technological and legal complexity and is therefore costly, time-
consuming and inherently uncertain. In addition, the United States has recently enacted and is currently
implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope
of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations.
In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of
events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the
U.S. Congress, the federal courts, and the U.S. PTO, the laws and regulations governing patents could change in
unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and
patents that we might obtain in the future.
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 and FX301. 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.
We may need to obtain licenses from third parties to advance our research or allow commercialization of our
product candidates, and we have done so from time to time. We may fail to obtain any of these licenses at a
reasonable cost or on reasonable terms, if at all. In that event, we may be required to expend significant time and
resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or
commercialize our affected 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 current product candidates or
future 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 such third parties.
In many cases, patent prosecution of our licensed technology is controlled solely by the licensor. If our
licensors fail to obtain and maintain patent or other protection for the proprietary intellectual property we license
from them, we could lose our rights to the intellectual property or our exclusivity with respect to those rights, and
our competitors could market competing products using the intellectual property. In certain cases, we control the
prosecution of patents resulting from licensed technology. In the event we breach any of our obligations related to
such prosecution, we may incur significant liability to our licensing partners. Licensing of intellectual property is of
critical importance to our business and involves complex legal, business and scientific issues and is complicated by
the rapid pace of scientific discovery in our industry. Disputes may arise regarding intellectual property subject to a
licensing agreement, including:
57
•
•
•
•
•
•
the scope of rights granted under the license agreement and other interpretation-related issues;
the extent to which our technology and processes infringe on intellectual property of the licensor that is not
subject to the licensing agreement;
the sublicensing of patent and other rights under our collaborative development relationships;
our diligence obligations under the license agreement and what activities satisfy those diligence
obligations;
the ownership of inventions and know-how resulting from the joint creation or use of intellectual property
by our licensors and us and our partners; and
the priority of invention of patented technology.
If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our
current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize
the affected product candidates.
If our trademarks and trade names are not adequately protected, then we may not be able to build name
recognition in our markets of interest and our business may be adversely affected.
If our trademarks and trade names are not adequately protected, then we may not be able to build name
recognition in our markets of interest and our business may be adversely affected. Our unregistered trademarks or
trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other
marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name
recognition among potential partners or future, potential customers in our markets of interest. At times, competitors
may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and
possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement
claims brought by owners of other registered trademarks or trademarks that incorporate variations of our
unregistered trademarks or trade names. If we are unable to successfully register our trademarks and trade names
and establish name recognition based on our trademarks and trade names, then we may not be able to compete
effectively, and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights
related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and
could result in substantial costs and diversion of resources and could adversely impact our financial condition or
results of operations.
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;
inability to obtain approval for additional indications for ZILRETTA;
failure to successfully develop and commercialize additional product candidates;
changes in the structure of healthcare payment systems;
58
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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.
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
59
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.
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.
If the estimates we make, or the assumptions on which we rely, in preparing our consolidated financial
statements prove inaccurate, our actual results may vary from those reflected in our projections and
accruals.
Our consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the
amounts of charges accrued by us, and the related disclosure of contingent assets and liabilities. On an ongoing
basis, our management evaluates our critical and other significant estimates and judgments, including among others,
those associated with revenue recognition and the sales allowances and accruals, valuation of inventory, accrued
research and development expenses, and stock-based compensation expense. We base our estimates on historical
experience, known trends and events, contractual milestones, and various other factors that we believe to be
reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or
conditions. Any significant differences between our actual results and our estimates could materially affect our
financial position, results of operations and cash flows.
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
60
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 currently 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 Amended and Restated Credit and
Security Agreement with Silicon Valley Bank, MidCap Financial Trust, and Flexpoint MCLS Holdings, LLC
contains covenants that restrict our ability to pay dividends. Any return to stockholders will therefore be limited to
the appreciation of their stock.
61
Provisions in our amended and restated certificate of incorporation and amended and restated 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 2019, we amended the lease to expand the facility to
approximately 42,000 square feet. The lease for the office space expires in April 2025. 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.
62
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 December 31, 2014 through December 31, 2019 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 December 31, 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 28, 2020, 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.
Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities by us during the year ended December 31, 2019.
63
Issuer Repurchases of Equity Securities
None.
64
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, 2019, 2018
and 2017 and the consolidated balance sheet data as of December 31, 2019 and December 31, 2018 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, 2016 and 2015 and the selected consolidated
balance sheet data as of December 31, 2017, 2016 and 2015 are derived from our audited consolidated financial
statements not included in this document.
Consolidated Statement of Operations Data:
Revenues:
Product revenue, net
Operating expenses:
Cost of sales
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Other (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)
$
$
2019
Year Ended December 31,
2017
(in thousands, except per share amounts)
2016
2018
2015
$
72,957 $
22,524 $
355 $
— $
—
9,960
69,559
129,709
209,228
(136,271)
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)
3,212
(17,066)
352
(13,502)
(149,773) $
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) $
—
32,691
13,372
46,063
(46,063)
1,246
(571)
(927)
(252)
(46,315)
(3.93) $
(4.49) $
(4.16) $
(2.84) $
(2.15)
38,086
37,751
33,027
25,297
21,497
Consolidated Balance Sheet Data:
Cash, cash equivalents, marketable securities, and long-
term investments
Working capital(2)
Total assets
Total debt(3)
Total stockholders’ (deficit) equity
2019
2018
As of December 31,
2017
(in thousands)
2016
2015
$
136,660 $
159,456
217,560
193,589
(20,108)
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
(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.
65
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in
conjunction with “Item 6. Selected Financial Data” and our consolidated financial statements and related notes
appearing elsewhere in this Annual Report. This discussion and analysis and other parts of this Annual Report
contain forward-looking statements based upon current beliefs, plans and expectations that involve risks,
uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and
projections. Our actual results and the timing of selected events could differ materially from those anticipated in
these forward-looking statements as a result of several factors, including those set forth under “Item 1A. Risk
Factors”. You should carefully read the “Risk Factors” section of this Annual Report to gain an understanding of
the important factors that could cause actual results to differ materially from our forward-looking statements.
Please also see the section entitled “Special Note Regarding Forward-Looking Statements.”
Overview
We are a biopharmaceutical company focused on the discovery, development and commercialization of novel,
local therapies for the treatment of patients with musculoskeletal conditions, beginning with osteoarthritis, a type of
degenerative arthritis referred to as OA.
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. On December 26, 2019, we announced that
the FDA approved a revised product label for ZILRETTA. The new label removed language that previously stated
ZILRETTA was “not intended for repeat administration” and replaced it with language stating that “the efficacy and
safety of repeat administration of ZILRETTA have not been demonstrated.”
We have two pipeline programs focused on the local treatment of musculoskeletal conditions: FX201, which
is an investigational IA gene therapy product candidate in clinical development for the treatment of OA, and FX301,
a preclinical product candidate, which is being developed as a locally administered peripheral nerve block for
management of post-operative pain.
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, 2019, we
have raised approximately $796 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 sufficient 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 $149.8 million,
$169.7 million, and $137.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of
December 31, 2019, we had an accumulated deficit of $668.6 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;
66
• 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.
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. CMS announced in November 2018, that
ZILRETTA had been recommended for a product-specific J code (J3304), which took effect on January 1, 2019. We
believe that the product-specific J code, J3304, provides 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 have increased since launch, as our field sales representatives,
known as Musculoskeletal Business Managers, or MBMs, have expanded prescriber awareness and utilization of
ZILRETTA. Furthermore, our Field Access Managers have been working with physician practices to navigate any
reimbursement challenges and to support their awareness of the product-specific Healthcare Common Procedures
Coding System (HCPCS) reimbursement code for ZILRETTA (J3304), which became effective on January 1, 2019.
We closely track and provide updates on several uptake metrics to provide perspective on the progress of the
ZILRETTA launch. Since the launch in November 2017 through December 31, 2019:
(cid:129)
(cid:129)
(cid:129)
3,488 of our approximately 4,972 target accounts had purchased ZILRETTA. This compares to the
3,130 purchasing accounts over the period from launch through September 30, 2019
76% of purchasing accounts (2,642) had placed at least one reorder
794 accounts had made ZILRETTA purchases of more than 50 units; 1,028 accounts had purchased
11-50 units; and 1,666 accounts had purchased between 1-10 units
(cid:129) Accounts purchasing more than 50 ZILRETTA units have been responsible for 81% of the total
ZILRETTA units purchased (142,789 units)
On August 2, 2019, we entered into the Amended and Restated Credit and Security Agreement with Silicon
Valley Bank as agent, MidCap Financial Trust, Flexpoint MCLS Holdings, LLC, and the other lenders from time to
time party thereto (collectively, the Lenders), providing for a term loan of $40.0 million and a revolving credit
facility of up to $20.0 million, both of which mature on January 1, 2024. We concurrently drew down the $40.0
million term loan and used $7.7 million of the proceeds to repay the remaining amount owed on our existing term
loan with Silicon Valley Bank and MidCap Funding XIII Trust. The revolving credit facility became available to us
beginning January 1, 2020, and in February 2020, we drew down the $20.0 million available. The Amended and
Restated Credit and Security Agreement also contains a minimum revenue covenant that will be in effect at any time
our liquidity (defined as cash and cash equivalents held with Silicon Valley Bank) is below $80.0 million. If the
revenue covenant becomes applicable and we fail to comply with it, the amounts due under the Amended and
Restated Credit and Security Agreement could be declared immediately due and payable. The revenue covenant is
set annually and is based on the greater of a conservative percentage of that year’s approved forecast and modest
growth over the trailing twelve months of actual sales.
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 sufficient 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
67
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 had 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 pipeline programs.
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
68
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.
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
expenses 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, our former term loan facility, which accrued
interest at a fixed rate of 6.25% per annum and our new term loan facility, which accrues interest at a floating
interest rate equal to the greater of the Prime Rate (as reported in the Wall Street Journal) plus 1.50%, or 6.50% 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, 2019, we had $404.3 million and $300.0 million of federal and state net operating loss
carryforwards, respectively, and $8.6 million and $4.3 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,
69
if not utilized and are subject to review and possible adjustment by the Internal Revenue Service. Approximately
$214.8 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, 2019, 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, U.S. Food and Drug Administration, of 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. We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606 -
Revenue from Contracts with Customers (“Topic 606”). 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).
70
Product Revenue, Net— We primarily sell ZILRETTA to specialty distributors and a specialty pharmacy,
who then subsequently resell ZILRETTA to physicians, clinics and certain medical centers or hospitals. We also
contract directly with healthcare providers and intermediaries such as Group Purchasing Organizations (“GPOs”). In
addition, 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.
Service Fees and Allowances—We compensate our customers and GPOs 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, 2019, 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.
Chargebacks— 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
71
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.
Purchaser/Provider Discounts and Rebates—Beginning in the third quarter of 2019, we began offering
rebates to eligible purchasers and healthcare providers that are variable based on volume of product purchased.
Rebates are based on actual purchase levels during the rebate purchase period. We estimate these rebates and record
such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and
the establishment of a current liability.
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.
72
The following table summarizes activity in each of the product revenue allowance and reserve categories for
the years ended December 31, 2019, 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
Provision related to sales in the current year
Credit or payments made during the period
Adjustments related to prior period sales
Balance as of December 31, 2019
Service Fees,
Allowances and
Chargebacks
Government
Rebates and Other
Incentives
Product
Returns
Purchaser/Provider
Discounts and
Rebates
Total
$
$
— $
100
(40)
60
1,688
(1,147)
601
5,527
(4,281)
—
1,847 $
— $
15
—
15
502
(26)
491
261
(375)
(129)
248 $
— $
2
—
2
124
(1)
125
334
(57)
—
402 $
— $
—
—
—
—
—
—
2,685
(1,029)
—
1,656 $
—
117
(40)
77
2,314
(1,174)
1,217
8,807
(5,742)
(129)
4,153
Research and Development Expenses
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.
73
RESULTS OF OPERATIONS
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table summarizes our results of operations for the years ended December 31, 2019 and 2018:
(In thousands)
Revenues
Product revenue, net
Operating expenses
Cost of sales
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Other (expense) income
Interest income
Interest expense
Other income (expense)
Total other (expense) income
Net loss
Product Revenue
2019
Year Ended December 31,
$ Change
2018
% Change
$
72,957
$
22,524
$
50,433
223.9%
9,960
69,559
129,709
209,228
(136,271)
3,212
(17,066)
352
(13,502)
(149,773) $
7,336
53,079
121,311
181,726
(159,202)
4,567
(15,712)
688
(10,457)
(169,659) $
$
2,624
16,480
8,398
27,502
22,931
(1,355)
(1,354)
(336)
(3,045)
19,886
35.8%
31.0%
6.9%
15.1%
(14.4)%
(29.7)%
8.6%
48.8%
29.1%
(11.7)%
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, 2019 and 2018, we recorded $73.0 million and
$22.5 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 Annual Report.
Cost of Sales
Cost of sales was $10.0 million and $7.3 million for the years ended December 31, 2019 and 2018,
respectively. For the years ended December 31, 2019 and 2018, cost of sales consisted of $8.4 million and $2.3
million, respectively, related to the actual cost of units sold and $0.9 million and $5.0 million, respectively, as a
result of unabsorbed manufacturing and overhead costs related to the operation of the facility at Patheon. Cost of
sales for the year ended December 31, 2019 also included $0.7 million of period costs and other adjustments. 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 were recognized as revenue during the year ended
December 31, 2018 were expensed prior to the October 2017 FDA approval and, therefore, are not included in cost
of sales during the period. As of December 31, 2018, all of the finished goods inventory that was previously
expensed had 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
2019
Year Ended December 31,
$ Change
2018
% Change
$
$
22,847
11,384
3,120
37,351
32,208
69,559
$
$
16,244
6,713
2,345
25,302
27,777
53,079
$
$
6,603
4,671
775
12,049
4,431
16,480
40.6%
69.6%
33.0%
47.6%
16.0%
31.0%
74
Research and development expenses were $69.6 million and $53.1 million for the years ended December 31,
2019 and 2018, respectively. The increase in research and development expenses year-over-year of $16.5 million
was primarily due to an increase of $4.4 million in salary and other employee-related costs for additional headcount
and stock-based compensation expense, an increase of $5.5 million in preclinical expenses related to our portfolio
expansion and other programs costs, primarily related to the completion of toxicology studies and ongoing
manufacturing of GMP batches to start clinical testing for our gene therapy product candidate, FX201, as well as the
upfront payment of $3.0 million to Xenon Pharmaceuticals for the acquisition of the global rights to funapide, and
an increase of $6.6 million in development expenses for ZILRETTA, including CMC and clinical trial costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $129.7 million and $121.3 million for the years ended
December 31, 2019 and 2018, respectively. Selling expenses were $96.3 million and $87.3 million for the years
ended December 31, 2019 and 2018. The year-over-year increase in selling expenses of $9.0 million was primarily
due to salary and other employee-related costs and external costs related to marketing and reimbursement support
activities. General and administrative expenses were $33.4 million and $34.0 million for the years ended
December 31, 2019 and 2018, respectively, which represents a decrease of $0.6 million year over year.
Other Income (Expense)
Interest income was $3.2 million and $4.6 million for the years ended December 31, 2019 and 2018,
respectively. The decrease in interest income was primarily due to a decrease in the average investment balance.
Interest expense was $17.1 million and $15.7 million for the years ended December 31, 2019 and 2018,
respectively. The increase in interest expense is primarily due to the write-off of unamortized costs associated with
the 2015 term loan facility which was extinguished in the third quarter of 2019 and the establishment of the new
term loan facility in August 2019 related to the increased outstanding balance.
We recorded other income of $0.4 million for the year ended December 31, 2019, compared to other income
of $0.7 million for the year ended December 31, 2018. The decrease in other income, was primarily due to the debt
issuance costs related to the term loan facility that was extinguished in the third quarter of 2019 and an increase in
losses related to foreign currency exchange rates, partially offset by an increase in accretion related to our
investments
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
Product revenues, 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
2018
Year Ended December 31,
$ Change
2017
% Change
$
22,524
$
355
$
22,169
NM
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%
$
75
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, respectfully, of net product revenue. For further discussion regarding our revenue recognition policy,
see Note 3 to our consolidated financial statements appearing elsewhere in this Form 10-K.
Cost of Sales
Cost of sales was approximately $7.3 million and $4 thousand for the years ended December 31, 2018 and
2017, of which $5.0 million relates to unabsorbed manufacturing and overhead 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, 2018 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:
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, for a year-over-year increase of $42.5 million. Selling expenses were
$87.3 million and $45.9 million for the years ended December 31, 2018 and 2017, respectively. The increase in
selling expenses year over year of $41.4 million was primarily due to salary and related costs associated with
additional headcount and costs related to the creation 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.
76
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.
Liquidity and Capital Resources
During the year ended December 31, 2019, we generated $73.0 million in net product revenue. We have
incurred significant net losses in each year since our inception in 2007, including net losses of $149.8 million,
$169.7 million, and $137.5 million for fiscal years 2019, 2018, and 2017, respectively. As of December 31, 2019,
we had an accumulated deficit of $668.6 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, 2019, 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, 2019, we had raised approximately $796.0 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 2019 and our 2024 Convertible Notes issuance in 2017. As of December 31,
2019, we had cash, cash equivalents and marketable securities of $136.7 million. Based on our current operating
plan we anticipate that our existing cash, cash equivalents and marketable securities will fund our operations and
debt obligations 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.
In connection with the Term Loan described in Note 10 of our accompanying consolidated financial
statements, if our future cash balance decreases below $80 million, we will need to remain in compliance with a
minimum monthly net revenue covenant (determined in accordance with U.S. GAAP), measured on a trailing twelve
month basis. The lender also has the ability to call debt based on a material adverse change clause, which is
subjectively defined. If we are not in compliance with the monthly net revenue covenants or the subjective
acceleration clauses are triggered under the agreement, then the lender may call our debt obligation resulting in the
us immediately needing additional funds. As of December 31, 2019, we are in compliance with all covenants.
The following table shows a summary of our cash flows for each of the years ended December 31, 2019, 2018
and 2017:
(In thousands)
Cash flows used in operating activities
Cash flows provided by (used in) investing activities
Cash flows provided by (used in) financing activities
Net (decrease) increase in cash and cash
equivalents
$
Year Ended December 31,
2018
(160,419) $
125,584
2019
(148,758) $
114,764
29,018
(6,325)
2017
(107,831)
(118,672)
323,497
$
(4,976) $
(41,160) $
96,994
Net Cash Used in Operating Activities
Operating activities used $148.8 million of cash in the year ended December 31, 2019. Cash used in operating
activities resulted primarily from our net loss of $149.8 million and changes in our operating assets and liabilities of
$25.6 million, partially offset by non-cash charges of $26.6 million. Changes in our operating assets and liabilities
consisted primarily of a $24.0 million increase in accounts receivable, a $7.7 million increase in inventory, partially
offset by a $0.1 million decrease in prepaid expenses and other current assets, an increase of $7.0 million in
accounts payable and accrued expenses and a $1.0 million decrease in lease liabilities and other long-term liabilities.
Non-cash charges consisted primarily of $15.9 million of stock-based compensation expense, $8.7 million related to
the amortization of the debt discount and debt issuance costs related to the 2024 Convertible Notes, $1.3 million
77
related to the amortization of right-of-use assets -$1.1 million of depreciation and $0.9 million related to non-cash
interest expense and loss from debt extinguishment related to our 2015 term loan, partially offset by $1.3 of net
accretion of discounts related to our investments.
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 offset by changes in our operating assets and
liabilities of $14.2 million and 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 million 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 issuance costs related to the 2024 Convertible Notes, and $0.3 million
amortization and accretion related to our investments, offset by $0.9 million of premiums paid on securities
purchased.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was $114.7 million in the year ended December 31, 2019. Net cash
provided by investing activities consisted primarily of cash received for the redemption and sale of marketable
securities of $234.1 million, partially offset by cash used to purchase marketable securities of $115.5 million. In
addition, $3.9 million of cash was used for capital expenditures, including $3.4 million for manufacturing
equipment, $0.2 million for lab equipment and $0.3 million for leasehold improvements related to an expansion of
our Burlington, Massachusetts headquarters.
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 Provided by (Used in) Financing Activities
Net cash provided by financing activities was $29.0 million for the year ended December 31, 2019. Net cash
provided by financing activities in the year ended December 31, 2019 consisted primarily $40.0 million of gross
proceeds received from the 2019 term loan facility and $3.5 million received from the exercise of stock options and
78
employee stock purchases through our employee stock purchase plan, partially offset by $14.4 million related to the
payment of principal on our 2015 term loan and $0.1 million of debt issuance costs related to the 2019 term loan
facility.
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 related to the payment of our
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 of $194.8 million of proceeds
received from the issuance of the 2024 Convertible Notes, $132.7 million in proceeds from the follow-on offering 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.
Contractual Obligations
The following table discloses aggregate information about our contractual obligations and the periods in
which payments are due as of December 31, 2019:
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
Payments Due By Period
Total
Less Than
1 Year
1 – 3
Years
(in thousands)
3 – 5
Years
More
Than 5
Years
$
$
49,084 $
8,408
66,011
231,248
847
355,598 $
2,736 $
1,987
8,518
6,792
847
20,880 $
29,427 $
3,914
17,036
13,584
—
63,961 $
16,921
2,507
17,036
210,872
—
247,336 $
—
—
23,421
—
—
23,421
(1) Represents the contractually required principal and interest payments on our credit facility in accordance with
the required payment schedule and the 4.75% final payment to the lender on January 1, 2024. Amounts
associated with future interest payments to be made were calculated using a floating interest rate equal to the
greater of the prime rate plus 1.5% or 6.5% per annum.
(2) Represents the contractually required payments under our operating lease obligations in existence as of
December 31, 2019 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 require purchases reduce to 50% of our total volume requirements for the PLGA product. Since the
current required binding forecast does not go beyond December 2020, any potential minimum purchase in the
year 2021 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
79
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 June 2019, we amended the Lease to add approximately 5,330 square feet of additional office space and
extend the term of the Lease through April 30, 2025 (“the Amended Lease”). As a result of the Amended Lease, the
total rentable floor area is 41,873 square feet. Starting in August 2019, our minimum monthly lease payment is
approximately $108,000, which increases over the term of the Amended Lease. In addition to the base rent for the
office space, we are responsible for our share of operating expenses and real estate taxes. The lease commencement
date for the additional space, which represents the date we first had access to the space, was July 1, 2019.
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.
80
In June 2019, we and Patheon amended the Manufacturing Agreement and Technical Transfer Agreement.
The amendment primarily modifies the compensation structure, which is comprised of base fees and per product
fees we pay to Patheon.
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. In addition, we paid GeneQuine a $750,000 payment in November 2019 following the FDA acceptance of
the IND application for FX201. This milestone was recognized as research and development expense in the fourth
quarter of 2019. The next milestone of $2.5 million was achieved in March 2020 when the first patient was treated
in the Phase 1 clinical trial. We may also be required to make additional milestone payments during the
development of FX201, including up to $4.5 million through the Phase 2 PoC, clinical trial and, following
successful PoC, up to an additional $51.5 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 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 preclinical and initial clinical supplies of FX201.
In September 2019, we acquired the global rights to develop and commercialize Xenon’s NaV1.7 inhibitor,
funapide,formulated for extended release using our novel, proprietary thermosensitive hydrogel. The preclinical
program is known as FX301. As part of the asset purchase transaction with Xenon, we made an upfront payment to
Xenon of $3.0 million. We may also be required to make additional milestone payments during the development of
FX301, including up to $9.0 million through initiation of a Phase 2 proof of concept (PoC) clinical trial and,
following successful PoC, up to $40.8 million in development and global regulatory approval milestone payments
and up to an additional $75.0 million in sales-related milestone payments. As of December 31, 2019, no milestones
under the arrangement had been achieved. As part of the transaction, we became the direct licensee of certain
underlying Xenon patents and other proprietary rights related to funapide for human applications. The Xenon
agreement grants us an exclusive, royalty-bearing, world-wide right and license (with a right to sublicense) for
human applications under its patents directly related to funapide, with a similar royalty-free license to other Xenon
proprietary rights directly related to funapide. The agreement with Xenon includes a tiered royalty ranging from
mid-single digits to low double digits that is based on aggregate annual net sales of FX301 and requires us to use
reasonable efforts to develop FX301 according to timelines set out in the agreement.
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.
81
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.
• We have borrowed $40.0 million under our credit facility. Amounts outstanding under the credit facility
bear interest at a floating interest rate equal to the greater of the prime rate plus 1.5% or 6.5% per
annum.
•
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.
• 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, 2019, we had approximately $4.3 million in payables to vendors denominated in British pounds. A
hypothetical 10% change in foreign exchange rates would result in a $0.4 million change in the value of our
liabilities. No other payables to vendors were denominated in currencies other than in U.S. dollars. As of
December 31, 2019, we also had approximately $0.7 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.
82
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’ (Deficit) Equity ..............................................................
Consolidated Statements of Cash Flows...............................................................................................................
Notes to Consolidated Financial Statements ........................................................................................................
Page
84
86
87
88
89
90
83
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
subsidiary (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of
operations and comprehensive loss, of changes in stockholders’ (deficit) equity and of cash flows for each of the
three years in the period ended December 31, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2019 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, 2019, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it
accounts for leases in 2019.
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,
84
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.
Emphasis of Matter
As discussed in Note 1 to the consolidated financial statements, the Company will require additional financing
to fund future operations if the Company cannot generate sufficient cash flows from operations in the future. Also
as discussed in Note 1 to the consolidated financial statements, the Company’s debt facility includes financial and
nonfinancial covenants. If the Company cannot generate sufficient revenues in the future, the Company may not be
in compliance with these covenants and the debt may be called by the lender. Management’s plans in regard to these
matters are described in Note 1.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 12, 2020
We have served as the Company’s auditor since 2010.
85
Flexion Therapeutics, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
Assets
Current assets
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Right-of-use assets
Total assets
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities
Accounts payable
Accrued expenses and other current liabilities
Operating lease liabilities
Current portion of long-term debt
Total current liabilities
Long-term operating lease liability, net
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, 2019 and December 31, 2018 and 0 shares issued and
outstanding at December 31, 2019 and December 31, 2018
Stockholders’ (deficit) equity
Common stock, $0.001 par value; 100,000,000 shares authorized;
38,361,476 and 37,946,341 shares issued and outstanding, at
December 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ (deficit) equity
Total liabilities and stockholders’ (deficit) equity
December 31,
2019
December 31,
2018
$
$
$
$
$
$
82,253
54,407
37,115
16,529
5,371
195,675
13,662
8,223
217,560
15,258
19,610
1,351
—
36,219
7,609
40,176
153,413
251
237,668
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
—
—
38
648,391
62
(668,599)
(20,108)
$
217,560
$
38
628,944
(77)
(518,826)
110,079
295,752
The accompanying notes are an integral part of these consolidated financial statements.
86
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,
2018
2017
2019
$
72,957
$
22,524
$
355
9,960
69,559
129,709
209,228
(136,271)
3,212
(17,066)
352
(13,502)
(149,773)
(3.93)
38,086
139
139
(149,634)
$
$
$
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)
The accompanying notes are an integral part of these consolidated financial statements.
87
Flexion Therapeutics, Inc.
Consolidated Statements of Changes in Stockholders’ (Deficit) Equity
(In thousands)
Common Stock
Shares
Par Value
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
(Deficit)
Equity
31,667 $
32 $
398,757 $
(71) $
(211,686) $
187,032
5,520
6
132,171
334
90
3,858
1,016
11,542
62,466
132,177
3,858
1,016
11,542
62,466
(137,481)
(336)
(336)
(137,481)
37,611 $
38 $
609,810 $
(407) $
(349,167) $
260,274
197
138
1,653
2,022
15,459
1,653
2,022
15,459
(169,659)
330
(169,659)
330
37,946 $
38 $
628,944 $
(77) $
(518,826) $
110,079
230
185
1,726
1,820
15,901
1,726
1,820
15,901
(149,773)
139
(149,773)
139
38,361 $
38 $
648,391 $
62 $
(668,599) $
(20,108)
Balance at December 31,
2016
Issuance of common stock net
of issuance costs
Issuance of common stock for
equity awards
Employee stock purchase plan
Stock-based compensation
expense
Portion of convertible debt
proceeds allocated
to equity component
Net loss
Other comprehensive loss
Balance at December 31,
2017
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
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,
2019
The accompanying notes are an integral part of these consolidated financial statements.
88
Flexion Therapeutics, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2018
2017
2019
$
(149,773) $
(169,659) $
(137,481)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation
Amortization of right-of-use assets
Stock-based compensation expense
Non-cash interest expense
(Accretion) Amortization of (discount) premium on marketable
securities
Loss from debt extinguishment
Amortization of debt discount and debt issuance costs
Premium paid on securities purchased
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other current liabilities
Lease 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
Proceeds from borrowings under term loan
Payment of debt issuance costs
Proceeds from the offering of common stock
Payments on notes payable
Payments of public offering costs
Proceeds from the exercise of stock options
Proceeds from employee stock purchase plan
Net cash provided by (used in) 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
Cash paid for interest
Non-cash investing and financing activities
$
$
1,059
1,337
15,901
564
(1,337)
352
8,714
(34)
(23,994)
(7,674)
126
1,702
5,326
(1,027)
(148,758)
(3,894)
(115,466)
234,124
114,764
—
40,000
(161)
—
(14,367)
—
1,726
1,820
29,018
(4,976)
87,229
82,253
$
1,714
—
15,459
—
(1,320)
—
7,805
(214)
(12,711)
(5,244)
(2,097)
5,141
707
—
(160,419)
(852)
(222,482)
348,918
125,584
—
—
—
—
(10,000)
—
1,653
2,022
(6,325)
(41,160)
128,389
87,229
$
2,008
—
11,542
—
333
—
4,826
(857)
(410)
(1,799)
387
4,188
9,432
—
(107,831)
(2,146)
(356,754)
240,228
(118,672)
201,250
—
(6,470)
132,666
(8,333)
(490)
3,858
1,016
323,497
96,994
31,395
128,389
8,049
$
7,874
$
5,080
Right-of-use asset obtained in exchange for operating lease obligation $
Portion of debt proceeds allocated to equity component
$
Purchases of property and equipment in accounts payable and accrued
expenses
$
9,560
—
$
$
—
—
$
$
—
62,466
2,202
$
986
$
9
The accompanying notes are an integral part of these consolidated financial statements.
89
Flexion Therapeutics, Inc.
Notes to Consolidated Financial Statements
1.
Nature of the Business
Flexion Therapeutics, Inc. (“Flexion” or the “Company”) was incorporated under the laws of the state of
Delaware on November 5, 2007. Flexion is a 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 two pipeline programs focused on the local treatment of musculoskeletal conditions: FX201,
which is an investigational IA gene therapy product candidate in clinical development for the treatment of OA, and
FX301, a preclinical product candidate, which is being developed as a locally administered peripheral nerve block
for control of post-operative 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, 2019, the Company had cash, cash equivalents, and
marketable securities of approximately $136.7 million. Management believes that current cash, cash equivalents and
marketable securities on hand at December 31, 2019 should be sufficient to fund operations and debt obligations 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, or the Company will need to
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.
In connection with the Term Loan described in Note 10, if the Company’s cash balance in the future decreases
below $80 million, the Company will need to remain in compliance with a minimum monthly net revenue covenant
(determined in accordance with U.S. GAAP), measured on a trailing twelve month basis. The lender also has the
ability to call debt based on a material adverse change clause, which is subjectively defined. If the Company is not
in compliance with the monthly net revenue covenants or the subjective acceleration clauses are triggered under the
agreement, then the lender may call the debt resulting in the Company immediately needing additional funds. As of
December 31, 2019, the Company was in compliance with all covenants.
90
2.
Financing Transactions
On August 2, 2019, the Company entered into an amended and restated credit and security agreement (the
“amended and restated credit and security agreement”) with Silicon Valley Bank as agent, MidCap Financial Trust,
Flexpoint MCLS Holdings, LLC, and the other lenders from time to time party thereto (collectively, the “Lenders”),
providing for a term loan of $40.0 million and a revolving credit facility of up to $20.0 million, both of which
mature on January 1, 2024 (the “Maturity Date”). The Company concurrently borrowed the $40.0 million term loan
and used $7.7 million of the proceeds to repay the remaining amount owed on the 2015 term loan.
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
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.
The Company’s total issued common stock as of December 31, 2019 was 38,361,476 shares.
3.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (the “SEC”) and Generally Accepted Accounting Principles
(“GAAP”) for financial information, including the accounts of the Company and its wholly owned subsidiary after
elimination of all significant intercompany accounts and transactions.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
judgments that may affect the reported amounts of assets and liabilities, revenues and 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 and accrued expenses related to 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, U.S. Food and Drug Administration, (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. The Company recognizes revenue in accordance with Accounting Standards Codification
(“ASC”) Topic 606 - Revenue from Contracts with Customers (“Topic 606”). 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
91
performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance
obligation. The Company only applies the five-step model to arrangements that meet the definition of a contract
with a customer under Topic 606, including when it is probable that the entity will collect the consideration it is
entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract
is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each
contract, 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.
Product Revenue, Net— The Company primarily sells ZILRETTA to specialty distributors and a specialty
pharmacy, who then subsequently resell ZILRETTA to physicians, clinics and certain medical centers or hospitals.
The Company also contracts directly with healthcare providers and intermediaries such as Group Purchasing
Organizations (“GPOs”). In addition, 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.
Service Fees and Allowances—The Company compensates its customers and GPOs 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,
2019, 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
92
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.
Chargebacks— 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.
Purchaser/Provider Discounts and Rebates—Beginning in the third quarter of 2019, the Company began
offering rebates to eligible purchasers and healthcare providers that are variable based on the volume of product
purchased. Rebates are based on actual purchase levels during the rebate purchase period. The Company estimates
these rebates and records such estimate in the same period the related revenue is recognized, resulting in a reduction
of product revenue and the establishment of a current liability.
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.
93
The following table summarizes activity in each of the product revenue allowance and reserve categories for
the years ended December 31, 2019, 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
Provision related to sales in the current year
Credit or payments made during the period
Adjustments related to prior period sales
Balance as of December 31, 2019
Service Fees,
Allowances and
Chargebacks
Government
Rebates and Other
Incentives
Product
Returns
Purchaser/Provider
Discounts and
Rebates
Total
$
$
— $
100
(40)
60
1,688
(1,147)
601
5,527
(4,281)
—
1,847 $
— $
15
—
15
502
(26)
491
261
(375)
(129)
248 $
— $
2
—
2
124
(1)
125
334
(57)
—
402 $
— $
—
—
—
—
—
—
2,685
(1,029)
—
1,656 $
—
117
(40)
77
2,314
(1,174)
1,217
8,807
(5,742)
(129)
4,153
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, 2019, 2018 and 2017. 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, 2019 and 2018, respectively, the
Company determined that an allowance for doubtful accounts was not required. No accounts were written off during
the years ended December 31, 2019 and 2018, respectively.
94
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.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization
expense is recognized using the straight-line method over the following estimated useful lives:
Computers, office equipment, and minor computer
software
Computer software
Manufacturing equipment
Furniture and fixtures
Estimated
Useful Life
(Years)
3
7
7-10
5
Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the
related asset. Costs of major additions and betterments are capitalized and depreciated on a straight-line basis over
their useful lives. Repairs and maintenance costs are expensed as incurred. Upon retirement or sale, the cost of assets
disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is
credited or charged to income. Property and equipment includes construction-in-progress, 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.
95
Debt Issuance Costs, net
As of December 31, 2019 and 2018, the carrying value of debt issuance costs was $2.9 million and $3.5
million, respectively, and was presented as a direct deduction from the carrying amounts of long-term debt. In
addition, $0.6 million, $0.6 million, and $0.4 million, respectively, of debt issuance costs were amortized and
recognized as other expense in the statement of operations for the years ended December 31, 2019, 2018 and 2017.
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)
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.
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
96
performance condition will be achieved, using an accelerated attribution model, over the explicit or implicit service
period.
As a result of our adoption of “ASU 2018-07”, stock-based awards granted to non-employees are 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 adopted this standard prospectively and there was no impact on previously issued financial
statements.
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.
Three individual customers accounted for 44%, 25% and 15% for a total 84% of product revenues for the year
ended 2019, and two individual customers accounted for 49% and 32% for a total of 81% for the year ended
December 31, 2018. Four individual customers accounted for 42%, 11%, 20%, and 20% for a total of 93% of
accounts receivable from product sales for the year ended December 31, 2019, and two individual customers
accounted for 52% and 30% for a total of 82% for the year ended December 31, 2018. No other customers
accounted for more than 10% of product revenue or accounts receivable for the years ended December 31, 2019 and
2018, respectively.
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
97
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, 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 $215.7 million at December 31, 2019.
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
98
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, 2019, 2018
and 2017.
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, 2019, 2018 and 2017
were generated in the United States.
Recent Accounting Pronouncements
Accounting Standards Recently Adopted
In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-02, Leases (“ASU
2016-02”), to increase transparency and comparability among organizations by recognizing lease assets and
liabilities, including operating leases, on the balance sheet and disclosing key information about leasing
arrangements. The Company adopted ASU 2016-02 on January 1, 2019 using the “Comparatives under 840”
approach, which was approved by the FASB in July 2018 as part of ASU 2018-11. Under this method, the
consolidated financial statements as of the year ended December 31, 2019 are presented applying the new
requirements under ASC 842, while the consolidated financial statements as of the year ended December 31, 2018
are presented under ASC 840.
As part of its adoption of ASU 2016-02, the Company elected the package of practical expedients which
allows it 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. Consequently, on adoption, the Company
recognized lease liabilities of $7.0 million and corresponding right-of-use (“ROU”) assets of $6.6 million based on
the present value of the remaining minimum rental payments under current leasing standards for existing operating
leases. These lease liabilities and ROU assets relate to operating leases only, as the Company concluded that it does
not have any finance leases. The difference between the lease liability and the ROU assets upon adoption relates to
the deferred rent balance that had been recorded prior to adoption. The Company determined that no cumulative
adjustment to retained earnings was required.
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. The Company adopted ASU
2018-07 prospectively and there was no impact on previously issued financial statements.
Accounting Standards Recently Issued
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.
99
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.
4.
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, 2019 and 2018 and indicate the level of the fair value hierarchy utilized to
determine such fair value:
(In thousands)
Assets:
Cash equivalents
Marketable securities
(In thousands)
Assets:
Cash equivalents
Marketable securities
Fair Value Measurements as of December 31, 2019
Total
Level 3
Level 2
Level 1
$
$
$
$
—
—
—
$
$
69,733
54,407
124,140
$
$
—
—
—
$
$
69,733
54,407
124,140
Fair Value Measurements as of December 31, 2018
Total
Level 3
Level 2
Level 1
—
—
—
$
$
57,739
171,555
229,294
$
$
—
—
—
$
$
57,739
171,555
229,294
As of December 31, 2019 and 2018, 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 had a term loan outstanding under its 2015 credit facility with MidCap Financial Funding XIII
Trust and Silicon Valley Bank (the “2015 term loan”). On August 2, 2019, the Company entered into an amended
and restated credit and security agreement with Silicon Valley Bank as agent, MidCap Financial Trust, and
Flexpoint MCLS Holdings, LLC (collectively, the “Lenders”), providing for a term loan of $40.0 million (the “2019
term loan”). The Company concurrently borrowed the $40.0 million term loan and used $7.7 million of the proceeds
to repay the remaining amount owed on the 2015 term loan. The amount outstanding on the 2019 term loan is
reported at its carrying value in the accompanying balance sheet as of December 31, 2019. The Company
determined the fair value of the 2019 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 2019 term loan was valued using Level 2 inputs as of December 31, 2019.
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,
100
with a corresponding amount recorded as a discount on the initial issuance of the 2024 Convertible Notes of
approximately $64.5 million. The debt discount was recorded to equity and is being amortized to the debt liability
over the life of the 2024 Convertible Notes using the effective interest method.
The fair value of the 2024 Convertible Notes, which differs from their carrying value, is influenced by interest
rates, stock price and stock price volatility and is determined by prices for the 2024 Convertible Notes observed in
market trading. The market for trading of the 2024 Convertible Notes is not considered to be an active market and
therefore the estimate of fair value is based on Level 2 inputs. The estimated fair value of the 2024 Convertible
Notes, face value of $201.3 million, was $215.7 million at December 31, 2019.
5. Marketable Securities
As of December 31, 2019 and 2018, 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
(In thousands)
Commercial paper
U.S. government obligations
Corporate bonds
Amortized Cost
$
6,189 $
29,950
18,206
54,345 $
$
$
Amortized Cost
$
36,723 $
39,910
94,999
171,632 $
December 31, 2019
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
— $
24
38
62 $
— $
—
—
— $
6,189
29,974
18,244
54,407
December 31, 2018
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
— $
—
20
20 $
— $
(12)
(85)
(97) $
36,723
39,898
94,934
171,555
As of December 31, 2019 and 2018, marketable securities consisted of approximately $54.4 million and
$171.6 million, respectively, of investments that mature within 12 months. There were no investments with
maturities greater than 12 months as of December 31, 2019 and December 31, 2018
6.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following as of December 31, 2019 and 2018:
(in thousands)
Prepaid expenses
Deposits
Interest receivable on marketable securities
Total prepaid expenses and other current assets
December 31,
2019
2018
$
$
5,072 $
61
238
5,371 $
4,717
66
717
5,500
101
7.
Inventory
Inventory consisted of the following as of December 31, 2019 and 2018 :
(In thousands)
Raw materials
Work in process
Finished goods
Total inventories
December 31,
2019
2018
$
$
2,846 $
7,575
6,108
16,529 $
2,367
3,553
1,717
7,637
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, 2019, the Company expensed $0.9 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, 2019, the Company determined that no write-downs to inventory for
potentially excess, dated or obsolete inventory were required.
8.
Property and Equipment, Net
Property and equipment, net, as of December 31, 2019 and 2018 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,
2019
2018
$
$
1,184 $
12,147
609
455
1,157
6,077
21,629
(7,967)
13,662 $
1,133
12,000
604
434
815
1,416
16,402
(5,692)
10,710
Depreciation expense for the years ended December 31, 2019, 2018 and 2017 was $1.1 million, $1.7 million,
and $2.0 million, respectively. No property or equipment was disposed of during the years ended December 31,
2019 and 2018. As of December 31, 2019, construction in progress consists primarily of equipment purchases
related to the expansion of the Company’s manufacturing capabilities at its contract manufacturer, Patheon U.K.
Limited.
102
9.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following as of December 31, 2019 and 2018:
(In thousands)
Research and development
Payroll and other employee-related expenses
Professional services fees
Accrued interest
Product revenue reserves
Accrual for employee stock purchase plan
Other
$
Total accrued expenses and other current liabilities
$
December 31,
2019
2018
1,924 $
8,748
4,888
1,356
2,306
183
205
19,610 $
1,216
8,207
2,544
1,195
616
251
281
14,310
10. Debt
Amended and Restated Credit and Security Agreement
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, to borrow up to $30.0
million in term loans. In August 2019 the Company terminated the credit and security agreement and paid off the
remaining outstanding balance of principal and accrued and unpaid interest on the 2015 term loan, as well as the
$2.7 million final payment. As a result, the Company recorded a debt extinguishment loss of $0.4 million primarily
related to the write-off of the unamortized portion of the final payment and unamortized debt issuance costs, which
have been recorded as a component of interest expense and other expense, respectively, on the statement of
operations for the year ended December 31, 2019.
On August 2, 2019, the Company entered into an amended and restated credit and security agreement (the
“amended and restated credit and security agreement”) with Silicon Valley Bank as agent, MidCap Financial Trust,
Flexpoint MCLS Holdings, LLC, and the other lenders from time to time party thereto (collectively, the “Lenders”),
providing for a term loan of $40.0 million and a revolving credit facility of up to $20.0 million, both of which
mature on January 1, 2024 (the “Maturity Date”). The Company concurrently borrowed the $40.0 million term loan
and used $7.7 million of the proceeds to repay the remaining amount owed on the 2015 term loan. The revolving
credit facility became available to us beginning January 1, 2020, and in February 2020, we drew down the $20.0
million available.
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 amended and restated
credit and security agreement. The Company agreed not to encumber any of its intellectual property without the
Lender’s prior written consent.
The amended and restated credit and security agreement contains certain representations, warranties, and
covenants of the Company, including a minimum revenue covenant that will be in effect at any time the Company’s
liquidity (defined as cash and cash equivalents held with Silicon Valley Bank) is below $80.0 million. The revenue
covenant is set annually and is based on the greater of a conservative percentage of that year’s approved forecast and
modest growth over the trailing twelve months of actual . The amended and restated credit and security agreement
also has a material adverse event clause. If the revenue covenant becomes applicable and the Company fails to
comply with it, or a material adverse change as defined in the agreement occurs, the amounts due under the amended
and restated credit and security agreement could be declared immediately due and payable. As of December 31,
2019, the Company was compliant with all covenants.
Borrowings under the 2019 term loan accrue interest monthly at a floating interest rate equal to the greater of
the prime rate plus 1.5% or 6.5% per annum. Following an interest-only period of 18 months, principal is due in 36
equal monthly installments commencing February 1, 2021 and ending on the Maturity Date. Upon the Maturity
103
Date, the Company will be obligated to pay a final payment equal to 4.75% 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, 2019, the carrying value of the
term loan was approximately $40.2 million, all of which is presented as long-term debt in the Company’s condensed
consolidated balance sheet as of December 31, 2019.
The Company may prepay the term loan at any time by paying the outstanding principle balance, a final
payment equal to 4.75% of the term loan amount, all accrued interest and a prepayment fee of 3% of the outstanding
term loan amount if repaid in the first year, 2% of the outstanding term loan amount if repaid in the second year, and
1% of the outstanding term loan amount if repaid in the third year of the loan; no prepayment fee is required
thereafter.
Revolving Credit Facility
Borrowings under the revolving credit facility accrue interest monthly at a floating interest rate equal to the
greater of the prime rate or 5.50% per annum. In addition to paying interest on any amounts borrowed under the
revolving credit facility, the Company owes an unused revolving line facility fee equal to 0.25% per annum of the
average unused portion of the revolving line. multiplied by the difference between the total amount available to be
borrowed (the “Revolver Commitment Amount”) of $20.0 million and the greater of the average outstanding
revolver balance and 25% of the Commitment Amount. The revolving credit facility and any related fees or interest
payments was made available to the Company beginning January 1, 2020, after certain conditions imposed by the
Lenders, were met, including an initial borrowing limitation of up to $10.0 million until the Lenders completed an
audit of certain collateral accounts.
Beginning on January 1, 2020, if the interest payment on the revolving credit facility is less than the amount
of interest that would have been payable had the Company borrowed 25% of the Revolver Commitment Amount,
then the Company will be required to pay the difference.
The Company may retire the revolving credit facility early, at any time, by paying the outstanding principal
balance, all accrued interest and a termination fee equal to 2% of the Revolving Commitment Amount if repaid in
the first year, and 1% of the Revolving Commitment Amount if repaid in the second year; with no termination fee
thereafter.
As of December 31, 2019, annual principal and interest payments due under the 2019 term loan are as
follows:
Year
2020
2021
2022
2023
2024
Total
Less interest
Less unamortized portion of final payment
Total
Aggregate
Minimum
Payments
(in thousands)
2,736
14,611
14,816
13,903
3,018
49,084
(7,182)
(1,726)
40,176
$
$
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.
104
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
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
105
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, 2019, 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, 2019 was $14.7 million, including $8.0 million related to amortization of the
debt discount.
The table below summarizes the carrying value of the 2024 Convertible Notes as of December 31, 2019:
$
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
21,099
153,413
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, 2019,
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.
On November 15, 2016, the Company completed a follow-on public offering of its common stock, which
resulted in the sale of 4,140,000 shares of the Company’s common stock at a price to the public of $18.00 per share
including shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares.
On October 16, 2017, the Company completed a follow-on public offering of its common stock, which
resulted in the sale of 5,520,000 shares of the Company’s common stock at a price to the public of $25.50 per share
including shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares.
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the
Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board
of directors, if any, subject to the preferential dividend rights of any holders of Preferred Stock. As of December 31,
2019, 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,
106
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, 2019, 3,073,933 shares were available for future issuance under the 2013 Plan. As of
December 31, 2019, there were 236,187 options outstanding under the 2009 Plan and 4,531,754 options outstanding
under the 2013 Plan, including 839,560 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, 2019 and
2018, 184,860 and 138,405 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
Stock Options
During the years ended December 31, 2019, 2018 and 2017, the Company granted stock options for the
purchase of 1,099,450, 1,127,263, and 1,448,100 shares of common stock, respectively, to certain employees, two
non-employees and directors. The vesting conditions for most of these awards are time-based, and the awards 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. Starting in 2020, we will
107
use our own volatility as it will have been six years since our IPO. 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, 2019, 2018 and 2017 is as follows:
Risk-free interest rates
Expected dividend yield
Expected term (in years)
Expected volatility
2019
1.42% - 2.67%
0.00%
6.0
66.2% - 69.5%
December 31,
2018
2.67% - 3.06%
0.00%
6.0
69.8% - 75.3%
2017
1.97% - 2.29%
0.00%
6.0
69.9% - 72.8%
The following table summarizes stock option activity for the year ended December 31, 2019:
(In thousands, except per share amounts)
Outstanding as of December 31, 2018
Granted
Exercised
Cancelled
Outstanding as of December 31, 2019
Options vested and expected to vest at December 31, 2019
Options exercisable at December 31, 2019
Shares Issuable
Under Options
$
4,435
1,099
$
(154) $
(605) $
$
4,775
4,775
$
2,973
$
Weighted Average
Exercise Price
19.21
13.53
12.09
20.31
17.99
17.99
18.34
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 153,754, 165,684, and 308,011 options were exercised during the years
ended December 31, 2019, 2018 and 2017, respectively. The aggregate intrinsic value of stock options exercised was
$0.9 million, $2.3 million, and $2.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
At December 31, 2019, 2018 and 2017, the Company had options for the purchase of 4,774,691, 4,435,056,
and 3,799,965 shares of common stock outstanding, with a weighted average remaining contractual term of 6.9, 7.6,
and 8.0 years, respectively, and with a weighted average exercise price of $17.99, $19.21, and $17.75 per share,
respectively. At December 31, 2019, 2018 and 2017 there were options for the purchase of 2,973,000, 2,368,955,
and 1,688,652 shares of common stock exercisable under these stock option awards, with a weighted average
remaining contractual life of 6.1, 6.6, and 6.8 years, respectively, and an aggregate intrinsic value of $9.8 million,
$2.6 million, and $17.0 million, respectively.
The weighted average grant date fair value of options granted during the years ended December 31, 2019,
2018 and 2017 was $8.55, $15.12, and $14.33, 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.
108
During the year ended December 31, 2019, the Company awarded 873,481 RSUs to employees at an average
grant date fair value of $14.51 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, 2019:
(In thousands, except per share amounts)
Nonvested balance as of December 31, 2018
Granted
Cancelled
Vested/Released
Nonvested balance as of December 31, 2019
Stock-based Compensation
Number of Shares
252
873
(186)
(86)
853
Weighted Average
Grant Date Fair
Value Per Share
22.25
14.51
21.07
15.86
15.84
$
$
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, 2019, 2018 and 2017 as
follows:
(In thousands)
Research and development
Selling, general and administrative
Total
Year Ended December 31,
2018
2017
2019
$
$
5,211
10,690
15,901
$
$
4,728
10,731
15,459
$
$
3,979
7,563
11,542
As of December 31, 2019, unrecognized stock-based compensation expense for stock options outstanding was
$18.4 million which is expected to be recognized over a weighted average period of 2.2 years. As of December 31,
2019, unrecognized stock-based compensation expense for RSUs outstanding was $10.5 million which is expected
to be recognized over a period of 2.9 years.
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.
109
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 had 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.
In June 2019, the Company amended the Lease to add approximately 5,330 square feet of additional office
space and extend the term of the Lease through April 30, 2025 (the “Amended Lease”). As a result of the Amended
Lease, the total rentable floor area is 41,873 square feet. Starting in August 2019, the Company’s minimum monthly
lease payment is approximately $108,000. which increases over the term of the Amended Lease. In addition to the
base rent for the office space, the Company is responsible for its share of operating expenses and real estate taxes.
The lease commencement date for the additional space, which represents the date the Company first had access to
the space, was July 1, 2019. The Company accounted for the Amended Lease as a lease modification that is a
separate contract from the original lease and recorded an incremental right-of-use asset and lease liability of $2.5
million, which represents the present value of the lease payments relating to the new space, as well as the lease
payments relating to the 18-month extension of the existing space, as of the modification date, discounted at 6.8%.
The straight-line lease cost for the Amended Lease (including the expense relating to the original Lease)
amounted to $1.6 million for the year ended December 31, 2019, respectively, and was included in operating
expenses. As of December 31, 2019, the remaining lease term on the Amended Lease was 5.3 years, which includes
the 18-month extension resulting from the amendment signed in June 2019.
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.
Upon adoption of ASU 2016-02, the Company recorded a right-of-use asset and corresponding lease liability
for the Lease on January 1, 2019, by calculating the present value of lease payments, discounted at 8.4%, the
Company’s estimated incremental borrowing rate, over the 3.2-year remaining term. The Woburn lease includes an
option to extend the term of the lease for two years. Since the Company adopted ASU 2016-02 using the
Comparatives under 840 approach, it did not reassess the determination of its operating leases as leases, and
therefore no options to extend the lease were included in the calculation of the lease liability as of December 31,
2019. The straight-line lease cost for the Woburn lease amounted to $0.2 million for the year ended December 31,
2019, respectively, and was included in operating expenses. As of December 31, 2019, the remaining lease term on
the Woburn lease was 2.2 years.
The Company incurred operating lease costs of $2.0 million, $1.1 million, and $1.0 million for the years
ended December 31, 2019, 2018 and 2017, respectively.
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.
110
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.
The Manufacturing Agreement with Patheon contains an operating lease for the use of dedicated
manufacturing suites. With the adoption of ASU 2016-02, the Company recorded a right-of-use asset and
corresponding lease liability for the operating lease.
In June 2019, the Company and Patheon amended the Manufacturing Agreement and the Technical
Transfer Agreement. The amendment primarily modifies the compensation structure, which is comprised of base
fees and per product fees the Company pays to Patheon and does not result in any additional rights of use. The
Company accounted for the amendment as a lease modification that is not a separate contract from the original lease.
As part of the modification, the Company reassessed whether the contract is or contains a lease and determined that
there is an operating lease component for the use of dedicated manufacturing suites. The remainder of the
consideration is allocated to the service component. The Company also reassessed the lease liability by calculating
the present value of the remaining lease payments as of the modification date, discounted at 6.1%. The modification
resulted in an increase to each of the lease liability and right of use asset of $0.5 million.
As of December 31, 2019, the remaining lease term on the Patheon lease was 7.8 years. The straight-line
lease cost amounted to $204 thousand for the year ended December 31, 2019, respectively, and is included in
inventory as part of manufacturing overhead.
The components of lease expense and related cash flows were as follows:
(In thousands)
Operating lease cost
Operating lease cost included in operating expenses
Operating lease cost included in inventory
Total operating lease cost
Operating cash flows from operating leases
Year ended December 31, 2019
$
1,765
204
1,969
2,363
111
Maturities of lease liability due under these lease agreements as of December 31, 2019 were as follows:
Year
2020
2021
2022
2023
2024
Thereafter
Present value imputed interest
Present value of lease payments
Aggregate
Minimum
Payments
(in thousands)
1,987
2,035
1,879
1,888
1,929
1,221
(2,531)
8,408
$
As of December 31, 2018, future minimum lease payments under the Company’s lease obligations under ASC 840
were 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
$
As of December 31, 2018, future minimum payments under the Company’s agreed obligations under the
Manufacturing Agreement with Patheon are as follows:
Aggregate
Minimum
Payments
(in thousands)
8,027
8,027
8,027
8,027
8,027
30,102
70,237
$
Year
2019
2020
2021
2022
2023
2024 and thereafter
Total
112
Other Commitments and Contingencies
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.
Southwest Research Institute License Agreement
On July 25, 2014, the Company entered into an exclusive worldwide license agreement with Southwest
Research Institute (“SwRI”) with respect to the use of SwRI’s proprietary microsphere manufacturing technologies
for certain steroids formulated with PLGA, including ZILRETTA. Under the agreement, the Company paid an
upfront fee of $120,000 to SwRI. In February 2017, Flexion executed an agreement with SwRI to transfer
manufacturing equipment to SwRI in consideration for SwRI deeming the additional milestone payment to have
been fully paid by Flexion.
FX201 Related Agreement
In December 2017, we entered into a definitive agreement with GeneQuine 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. In addition, we paid GeneQuine a $750,000 payment in November 2019 following the FDA acceptance of
the IND application for FX201. This milestone was recognized as research and development expense in the fourth
quarter of 2019. The next milestone of $2.5 million was achieved in March 2020 when the first patient was treated
in the Phase 1 clinical trial. We may also be required to make additional milestone payments during the
development of FX201, including up to $4.5 million through the Phase 2 PoC, clinical trial and, following
successful PoC, up to an additional $51.5 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 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
113
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.
FX301 Related Agreements
In September 2019, the Company acquired from Xenon, the global rights to develop and commercialize
Xenon’s NaV1.7 inhibitor, funapide,formulated for extended release with a novel, Flexion proprietary
thermosensitive hydrogel under the Company’s preclinical program known as FX301. As part of the asset purchase
transaction with Xenon, the Company made an upfront payment to Xenon of $3.0 million. The Company may also
be required to make additional milestone payments during the development of FX301, including up to $9.0 million
through initiation of a Phase 2 proof of concept (PoC) clinical trial and, following successful PoC, up to
$40.8 million in development and global regulatory approval milestone payments and up to an additional
$75.0 million in sales-related 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 September 2019 as the FX301 product candidate had not been
commercially approved and had no alternative future use. Future milestone payments earned prior to regulatory
approval of FX301 will be recognized as research and development expense in the period when the milestone events
become probable of being achieved. Future milestones earned subsequent to regulatory approval will be recognized
as an intangible asset and amortized to expense over the estimated life of FX301. As of December 31,
2019, no milestones under the arrangement had been achieved. As part of the transaction, the Company became the
direct licensee of certain underlying Xenon patents and other proprietary rights related to funapide for human
applications. The Xenon agreement grants the Company an exclusive, royalty-bearing, world-wide right and license
(with a right to sublicense) for human applications under its patents directly related to funapide, with a similar
royalty-free license to other Xenon proprietary rights directly related to funapide. The agreement with Xenon
includes a tiered royalty ranging from mid-single digits to low double digits that is based on aggregate annual net
sales of FX301 and requires the Company to use reasonable efforts to develop FX301 according to timelines set out
in the agreement.
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, 2019, 2018 and 2017:
(In thousands)
Numerator:
Net loss
Net loss:
Denominator:
Year ended December 31,
2018
2017
2019
$
$
(149,773) $
(149,773) $
(169,659) $
(169,659) $
(137,481)
(137,481)
Weighted average common shares outstanding, basic
and diluted
Net loss per share, basic and diluted
38,086
37,751
$
(3.93) $
(4.49) $
33,027
(4.16)
The following common stock equivalents were excluded from the calculation of diluted net loss per share as
including them would have an anti-dilutive effect:
Shares issuable upon conversion of the 2024 convertible notes
Stock Options
Restricted Stock Units
Year ended December 31,
2018
2017
2019
7,515
4,988
802
13,305
7,515
4,498
266
12,279
5,017
3,602
147
8,766
114
16.
Income Taxes
The Company has generated losses since inception. Accordingly, there is no US tax provision or benefit for
the years ended December 31, 2019, 2018 and 2017, 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,
2018
2017
2019
21.0%
(0.2)
1.0
(22.2)
1.7
(1.3)
—%
21.0%
8.0
1.0
(27.4)
(1.9)
(0.7)
—%
34.0%
3.0
0.9
(11.6)
(25.1)
(1.2)
—%
Net operating loss carryforwards
Research and development tax credit carryforwards
Accruals and other temporary differences
Debt discount
Right of use asset
Capitalized research and development expenses, net
Total deferred tax assets
Valuation allowance
Net deferred tax asset
December 31,
2019
2018
$
$
101,356 $
12,096
10,873
(11,156)
(2,042)
43,442
154,569
(154,569)
— $
76,723
9,965
7,808
(14,165)
—
41,048
121,379
(121,379)
—
As of December 31, 2019, the Company had federal and state net operating loss (“NOL”) carryforwards of
approximately $404.3 million and $300.0 million, respectively, which begin to expire in 2029 for federal purposes
and in 2030 for state purposes. Approximately $214.8 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 $8.6 million and $4.3 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 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, 2019, 2018 and 2017.
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.
115
Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2019, 2018
and 2017 were as follows:
Valuation allowance as of beginning of year
Decreases recorded as benefit to income tax provision
Decreases recorded as benefit to equity
Increases recorded to income tax provision
Valuation allowance as of end of year
Year Ended December 31,
2018
2017
2019
$
$
(121,379) $
2,046
0
(35,236)
(154,569) $
(74,842) $
1,913
0
(48,450)
(121,379) $
(83,434)
36,606
24,537
(52,551)
(74,842)
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 as of December 31, 2019 and 2018.
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.
(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
(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
Three Months Ended
March 31,
June 30,
September 30, December 31,
2019
2019
2019
2019
$
$
10,564 $
8,802
(41,538)
(1.09) $
37,992
16,953 $
15,555
(36,487)
(0.96) $
38,010
21,786 $
18,914
(38,232)
(1.00) $
38,125
23,653
19,725
(33,516)
(0.88)
38,176
Three Months Ended
March 31,
2018
June 30,
2018
September 30, December 31,
2018
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
116
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, 2019, 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, 2019, 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, 2019, 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, 2019 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,
2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
117
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 2020 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, 2019,
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.
Section 16(a) Compliance
The information concerning Section 16(a) beneficial ownership reporting compliance will be set forth in the
section headed “Delinquent Section 16(a) Reports” in our Proxy Statement and is incorporated herein by reference.
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.
118
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report.
1.
Financial Statements
The financial statements of Flexion Therapeutics, Inc. listed below are set forth in Item 8 of this report for the
year ended December 31, 2019:
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’ (Deficit) Equity .........
Consolidated Statements of Cash Flows ..............................................................................................................
Notes to Consolidated Financial Statements ........................................................................................................
Page
84
86
87
88
89
90
2.
Financial Statement Schedules
These schedules have been omitted because the required information is included in the consolidated financial
statements or notes thereto or because they are not applicable or not required.
3.
Exhibits
119
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
3.1
3.2
4.1
4.2
4.3
4.4
Description
Amended and Restated Certificate of Incorporation of Flexion (Exhibit 3.1, Current Report on
Form 8-K filed on February 19, 2014)
Amended and Restated Bylaws of Flexion (Exhibit 3.2, Current Report on Form 8-K filed on
February 19, 2014)
Form of Common Stock Certificate of Flexion (Exhibit 4.1, Registration Statement on Form S-1 (File
No. 333-193233), as amended, filed on January 29, 2014)
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)
4.5
Description of Common Stock
Management Contracts and Compensatory Plans
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Form of Indemnity Agreement between Flexion and its directors and officers (Exhibit 10.1,
Registration Statement on Form S-1 (File No. 333-193233) filed on January 8, 2014)
Flexion Therapeutics, Inc. 2009 Equity Incentive Plan and Forms of Stock Option Agreement, Notice
of Exercise and Stock Option Grant Notice thereunder (Exhibit 10.2, Registration Statement on
Form S-1 (File No. 333-193233) filed on January 8, 2014)
Flexion Therapeutics, Inc. 2013 Equity Incentive Plan, as amended, and Forms of Stock Option
Agreement, Notice of Exercise and Stock Option Grant Notice thereunder (Exhibit 99.1, Current
Report on Form 8-K, filed September 14, 2017)
Form of Restricted Stock Unit Award Agreement and Restricted Stock Unit Grant Notice under the
Flexion Therapeutics, Inc. 2013 Equity Incentive Plan (Exhibit 99.1, Current Report on Form 8-K
filed on December 22, 2015)
Flexion Therapeutics, Inc. 2013 Employee Stock Purchase Plan (Exhibit 10.4, Registration Statement
on Form S-1 (File No. 333-193233), as amended, filed on January 29, 2014)
Flexion Therapeutics, Inc. Non-Employee Director Compensation Policy, as revised
Amended and Restated Offer Letter between Flexion and Michael D. Clayman, M.D. (Exhibit 10.6,
Registration Statement on Form S-1 (File No. 333-193233) filed on January 8, 2014)
Amendment to Amended and Restated Offer Letter between Flexion and Michael D. Clayman, M.D.
(Exhibit 10.7, Annual Report on Form 10-K filed on March 28, 2014)
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)
120
Exhibit
Number
10.10
10.11
10.12
10.13
10.14
Description
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 (Exhibit 10.15, Annual
Report on Form 10-K filed on February 28, 2019)
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)
10.15
Separation and Consulting Agreement between Flexion and Neil Bodick, dated December 9, 2019
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
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)
121
Exhibit
Number
10.30
10.31
10.32
10.33
10.34
10.35
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)
First Amendment to the Technical Transfer and Service Agreement, dated May 12, 2019, between
Flexion and Patheon UK Limited (Exhibit 10.1, Quarterly Report on Form 10-Q filed on August 6,
2019)
First Amendment to the Manufacturing and Supply Agreement, dated May 12, 2019, between Flexion
and Patheon UK Limited (Exhibit 10.2, Quarterly Report on Form 10-Q filed on August 6, 2019)
Second Amendment to the Manufacturing and Supply Agreement, dated June 21, 2019, between
Flexion and Patheon UK Limited (Exhibit 10.3, Quarterly Report on Form 10-Q filed on August 6,
2019)
Eighth Amendment of Lease, dated June 21, 2019, between Flexion and CIP II/RJK 10-20 BMR
Owner LLC (Exhibit 10.4, Quarterly Report on Form 10Q filed on August 6, 2019)
Amended and Restated Credit and Security Agreement, dated August 2, 2019, by and among Flexion,
Silicon Valley Bank as agent, MidCap Financial Trust, Flexpoint MCLS Holdings, LLC and the other
lenders from time to time party thereto (Exhibit 99.3, Current Report on Form 8-K filed on August 6,
2019)
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 and Accounting 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 and Accounting Officer pursuant to Rule 13a-14(b) or 15d-14(b)
of the Exchange Act and 18 U.S.C. Section 1350
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File
because XBRL tags are embedded within the Inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL 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.
122
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 12th day of
March, 2020.
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)
March 12, 2020
March 12, 2020
Chairman of the Board of Directors
March 12, 2020
Member of the Board of Directors
March 12, 2020
Member of the Board of Directors
March 12, 2020
Member of the Board of Directors
March 12, 2020
Member of the Board of Directors
March 12, 2020
Member of the Board of Directors
March 12, 2020
Member of the Board of Directors
March 12, 2020
Member of the Board of Directors
March 12, 2020
123