FLEXION THERAPEUTICS, INC. The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto for the fiscal year endedDecember 31, 2020 , and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed by us with theSecurities and Exchange Commission , orSEC , onMarch 10, 2021 .
Forward-Looking Statements
This discussion and analysis contains "forward-looking statements"-as defined in
Section 21E of the Exchange Act-which are statements related to future, not
past, events and reflect our current expectations regarding future development
activities, results of operations, financial condition, cash flow, 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 historical
fact. We have tried to identify forward-looking statements by using words such
as "may," "will," "expect," "anticipate," "estimate," "intend," "plan,"
"predict," "potential," "believe," "should," and similar expressions. Although
we believe that the expectations reflected in these forward-looking statements
are reasonable, we cannot guarantee future results, events, levels of activity,
performance, or achievement. We undertake no obligation to update these
forward-looking statements to reflect events or circumstances after the date of
this report or to reflect actual outcomes. The forward-looking statements in
this Quarterly Report on Form 10-Q, other than the statements regarding the
proposed acquisition by Pacira BioSciences, Inc. ("Pacira"), do not assume the
consummation of the proposed acquisition unless specifically stated otherwise.
Forward-looking statements include, without limitation, statements regarding the
anticipated consummation and timing of the acquisition of Flexion by Pacira and
payments that may be made upon the satisfaction of specified milestones, which
are each based
24
-------------------------------------------------------------------------------- on Pacira's and Flexion's current expectations and inherently involve significant risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation, risks related to Pacira's ability to complete the transaction on the proposed terms and schedule or at all; whether the tender offer conditions will be satisfied; whether sufficient stockholders of Flexion tender their shares in the transaction; the outcome of legal proceedings instituted against Flexion and/or others relating to the transaction; the failure (or delay) to receive the required regulatory approvals relating to the transaction; the possibility that competing offers will be made; risks related to future opportunities and plans for Flexion and its products, including uncertainty of the expected financial performance of Flexion and its products, including whether the milestones will ever be achieved; and the occurrence of any event, change, or other circumstance that could give rise to the termination of the acquisition agreement, as well as other risks related to Pacira's and Flexion's businesses detailed from time-to-time under the caption "Risk Factors" and elsewhere in Pacira's and Flexion's respectiveSEC filings and reports, including their respective Annual Reports on Form 10-K for the year endedDecember 31, 2020 , and subsequent quarterly and current reports filed with theSEC .
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, the most common form of arthritis, referred to as OA. OnOctober 6, 2017 , theU.S. Food and Drug Administration ("FDA"), approved our product, ZILRETTA, for marketing inthe 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 pain relief. The pivotal Phase 3 trial, on which the approval of ZILRETTA was based, showed that ZILRETTA met the primary endpoint of pain reduction at Week 12, with statistically significant pain relief extending through Week 16. We also have 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, an investigational NaV1.7 inhibitor product candidate in clinical development as a locally administered peripheral analgesic nerve block for control of post-operative pain. We were incorporated inDelaware inNovember 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 throughSeptember 30, 2021 , we have 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, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, government or third-party funding, and licensing or collaboration arrangements.
Proposed Acquisition by Pacira BioSciences, Inc.
OnOctober 11, 2021 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") withPacira and Oyster Acquisition Company Inc. , aDelaware corporation and wholly owned subsidiary of Pacira ("Purchaser"). Pursuant to the Merger Agreement, onOctober 22, 2021 , Purchaser commenced a tender offer (the "Offer") to purchase each issued and outstanding share of our common stock (the "Shares") at an offer price of (i)$8.50 per Share in cash, net of applicable withholding taxes and without interest, plus (ii) one non-transferable contractual contingent value right per Share, which will represent the right to receive one or more contingent payments up to$8.00 in the aggregate, in cash, net of applicable withholding taxes and without interest, upon the achievement of specified milestones on or prior toDecember 31, 2030 . Promptly following the completion of the Offer, upon the terms and subject to the conditions of the Merger Agreement, Purchaser will merge with and into Flexion (the "Merger"), with Flexion continuing as the surviving corporation and as a wholly owned subsidiary of Pacira. The Merger Agreement contemplates that the Merger will be effected pursuant to Section 251(h) of the Delaware General Corporation Law, which permits completion of the Merger without a vote of the holders of our common stock upon the acquisition by Purchaser of a majority of the aggregate voting power of our common stock. As a result of the Merger, we will cease to be a publicly traded company. The Merger Agreement contains customary representations and warranties. The Merger is expected to close before the end of the calendar year 2021, subject to the satisfaction or waiver of customary closing conditions, including, among others, that the number of Shares tendered in the Offer represent at least one Share more than 50% of the total number of Shares at the time of the expiration of the Offer. The Merger Agreement provides Pacira and Flexion with certain termination rights and, under certain circumstances, may require us to pay Pacira a termination fee of$18.0 million . For additional information related to the Merger Agreement, refer to the Solicitation/Recommendation Statement on Schedule 14D-9 filed by the Company filed with theSEC onOctober 22, 2021 , together with the exhibits and annexes thereto and as amended or supplemented from time to time. Please also see "Item 1A. Risk Factors-Risks Related to Our Pending Acquisition by Pacira. 25 --------------------------------------------------------------------------------
Q3 2021 Commercial Performance
ZILRETTA net sales in the third quarter were
First, in August, we introduced a ZILRETTA price increase coupled with an "off-invoice discount" (OID) program intended to mitigate the impacts of the increase. As part of this program, providers have the ability to earn higher discounts in exchange for purchasing more units in each order. In conjunction with those changes, we revised the discount tiers such that the discounts offered at the lowest purchasing tiers were less than they were prior to the implementation of the OID program. Our goal was to incentivize higher purchasing volumes by healthcare practices; however, some accounts were reluctant to increase order sizes in amounts sufficient to obtain the more favorable cost recovery available in the higher discount tiers. We believe that this program had the unanticipated effect of causing accounts to purchase less product than we had forecast.
Second, COVID-19 and the emergence of the Delta variant resulted in reduced patient flows and restricted our Musculoskeletal Business Managers' (MBMs) ability to access key office personnel. These restrictions were particularly acute in August and September as COVID cases spiked in a number of key regions.
Third, net sales in the quarter were reduced due to several unanticipated manufacturing batch failures in late 2020 and in the first half of 2021 that contributed to short-dated ZILRETTA inventory in the distribution channel, resulting in smaller order sizes by physician practices and product returns from specialty distributors. The product returns were a consequence of the drop in demand during the quarter. If demand had been in line with our forecast, significantly more inventory would have been consumed, and we anticipate that we would have avoided having short-dated product in the channel. We adjusted our manufacturing process to address the batch failures, and subsequent batches have fully met our product specifications and have been entered into the supply chain. These new batches have greater than 12 months of expiry remaining, which is consistent with the product dating that we were selling prior to the pause in manufacturing due to COVID-19.
Pipeline Updates
ZILRETTA/FX006 (triamcinolone acetonide extended-release injectable suspension) - IA treatment for OA
ZILRETTA is the first and only extended-release IA therapy for patients confronting OA-related knee pain. InSeptember 2021 , we announced the inclusion of ZILRETTA in theAmerican Academy of Orthopaedic Surgeons (AAOS) updated evidence-based clinical practice guidelines for the management of OA of the knee. The AAOS guidelines reflect a moderate recommendation for the use of intra-articular (IA) corticosteroids for patients with symptomatic OA of the knee. The recommendation follows a review of data from 25 studies assessing IA corticosteroids. Included in its rationale is a differential analysis of extended-release intra-articular steroid, of which ZILRETTA is the only available product, versus immediate-release IA corticosteroids, where AAOS analyses demonstrated that it can, "be used over immediate-release corticosteroids to improve patient outcomes." In addition to knee OA, we believe that ZILRETTA's extended-release profile may also provide effective treatment for OA pain in other large joints, including the shoulder and in August results from the Phase 2 pharmacokinetic ("PK") trial assessing the safety and general tolerability of ZILRETTA in OA of the shoulder were published in Drugs in R&D. PK and safety profiles of ZILRETTA were similar to those reported in Phase 3 studies of patients with knee OA. Plasma PK findings from this study were also consistent with the extended release of triamcinolone acetonide ("TA") within the synovial fluid following an IA injection of ZILRETTA in the knee. Plasma PK data indicate the total and maximal exposure to TA was approximately two-thirds lower in patients treated with ZILRETTA compared to triamcinolone acetonide in crystalline suspension. With respect to our plans to initiate a registration study in shoulder OA by end of year, based on recent interactions with FDA, we are currently reassessing the proposed study design and determining the best path forward givenFDA's feedback. At theAmerican College of Rheumatology (ACR) annual meeting in November we presented data from our open-label Phase 3b trial assessing the effect of a single administration of ZILRETTA on synovitis in 129 patients with knee OA. In patients with knee OA and baseline synovitis (n=102), ZILRETTA significantly reduced synovial tissue volume at Week 6 (primary endpoint). These patients also reported improvements in WOMAC-A (pain), B (stiffness), and C (function) and KOOS-QoL scores through Week 24. ZILRETTA was well tolerated and there were no new or unexpected adverse events.
FX201 (humantakinogene hadenovec) - Locally Administered Gene Therapy for the Treatment of OA
FX201 is our novel, clinical stage, investigational IA gene therapy product
candidate, which is designed to induce the 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 that FX201 has the potential to both reduce
pain and possibly modify disease progression. We acquired the rights to FX201
via a definitive agreement with GeneQuine Biotherapeutics GmbH , or GeneQuine,
and have an exclusive license to the underlying intellectual property rights for
human use of FX201 from Baylor College of Medicine in Houston, Texas . In May
2019 , the U.S. Patent and Trademark Office 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 2033 .
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In March 2020 , we initiated a Phase 1 single ascending dose ("SAD") study to
evaluate the safety and tolerability of FX201 in patients with painful OA of the
knee. The multicenter, open-label study is evaluating three doses (low, mid and
high dose) of FX201 in cohorts of five to eight patients. In addition, in the
first quarter of 2021, we expanded the trial to include up to 20 additional
patients in both the low and mid dose treatment groups.
In June 2021 , the SAD phase of the study was fully enrolled, and, as of November
1, 2021 , 65 patients had been treated across all cohorts including the expansion
groups. The most commonly observed treatment-related adverse events ("AEs")
observed in the trial have been pain, swelling, and effusion, and, in the second
quarter, we made the strategic decision to investigate pretreatment with an
intra-articularly administered immediate-release steroid prior to FX201
administration as a means to mitigate potential AEs. We expect to treat up to 38
patients with a pretreatment regimen. In October 2021 , we presented initial data
from the mid-dose cohort of the open-label FX201 Phase 1 single ascending dose
phase of the trial in patients with knee OA via a poster at the 2021 European
Society of Gene & Cell Therapy (ESGCT) annual meeting. Preliminary results
indicate that seven of eight patients treated with the mid dose of FX201
experienced a reduction of pain and functional improvement from baseline out to
Week 24. The mid dose of FX201 was generally well-tolerated in all eight
patients with moderate-to-severe knee OA.
FX301 (funapide in a proprietary thermosensitive hydrogel) - Locally Administered NaV1.7 Inhibitor for the Treatment of Post-Operative Pain
InSeptember 2019 , we entered into a definitive agreement with Xenon Pharmaceuticals that provides us with the global rights to develop and commercialize XEN402, a NaV1.7 inhibitor, for control of post-operative pain. Our investigational product candidate, known as FX301, consists of funapide formulated for extended release from a Flexion proprietary thermosensitive hydrogel for administration as a peripheral nerve block for control of post-operative pain. 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 pain relief while preserving motor function. As such, we believe FX301 could enable ambulation, rapid discharge, and early rehabilitation following musculoskeletal surgery. In a validated post-operative pain model in pigs, a single injection of FX301 provided both greater analgesic effect from 12 through 72 hours and a longer duration of effect through 72 hours compared to liposomal bupivacaine or placebo. In addition, treatment with FX301 did not significantly affect total walking distance in animals at 2 and 24 hours post-injection, whereas animals treated with liposomal bupivacaine experienced a significant reduction in total walking distance compared with baseline at 2 and 24 hours post-injection. These data formed the basis of our IND application for FX301, which the FDA cleared inFebruary 2021 . InMarch 2021 , we announced the treatment of the first patient in a Phase 1b proof-of-concept trial evaluating the safety and tolerability of FX301 administered as a single-dose, popliteal fossa block (a commonly used nerve block in foot and ankle-related surgeries) in patients undergoing bunionectomy. The Phase 1b randomized, double-blind, placebo-controlled study is being conducted in two parts, the SAD portion investigated FX301 at low and high doses of funapide administered at two volumes in four cohorts of patients undergoing bunionectomy. A total of 48 patients (12 patients per cohort), were randomized to receive either FX301 or placebo. A Safety Monitoring Committee reviewed data from each dose cohort before the study escalated into higher doses. InJuly 2021 , we fully enrolled the SAD portion of the trial, and following an assessment of safety, systemic exposure and efficacy data by an internal review committee, we made the decision to expand the study. In the expansion cohort, an additional 36 patients will be randomized (1:1) to receive either FX301 at the selected dose (130 mg/low volume) or placebo to further assess the safety, tolerability, systemic exposure, and efficacy of FX301 as a single-injection analgesic nerve block adjacent to the sciatic nerve of the popliteal fossa. Based on the current pace of enrollment in the expansion cohort, we anticipate having data available in the first quarter of 2022. Financial Overview Revenue Product Revenue Net product sales consist of sales of ZILRETTA, which was approved by the FDA onOctober 6, 2017 , and launched inthe United States inOctober 2017 . We had not generated any revenue prior to the launch of ZILRETTA.
License Revenue
OnMarch 30, 2020 , we entered into an exclusive license agreement with HK Tainuo and Jiangsu Tainuo, a subsidiary ofChina Shijiazhuang Pharmaceutical Co, Ltd. , for the development and commercialization of ZILRETTA inGreater China (consisting of mainlandChina ,Hong Kong andMacau , andTaiwan ). Under the terms of the agreement, HK Tainuo paid us an upfront payment of$10.0 million , of which$5.0 million was received as ofJune 30, 2020 , and the remaining$5.0 million was received as ofSeptember 30, 2020 . We are also eligible to receive up to$32.5 million in aggregate development, regulatory, and commercial sales milestone payments. All payments received from HK Tainuo are subject to applicableHong Kong withholding taxes. HK Tainuo is responsible for the clinical development, product registration, and commercialization of ZILRETTA inGreater China , and Jiangsu Tainuo serves as the guarantor of HK Tainuo's obligations and responsibilities under the agreement. We are solely responsible for the 27
-------------------------------------------------------------------------------- manufacture and supply of ZILRETTA to HK Tainuo for all clinical and commercial activities. The terms related to product manufacturing and supply, including pricing and minimum purchase requirements agreed to in the license agreement, will be covered by a separate supply agreement. All amounts owed to us are nonrefundable and non-creditable once paid. We concluded that the license and supply obligations were not distinct performance obligations, and therefore the transaction price will be recognized as revenue as our supply obligation is fulfilled over the term of the supply agreement, which has not yet commenced. No revenue was recognized associated with this contract as ofSeptember 30, 2021 .
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 specifications or is otherwise no longer suitable for commercial manufacture.
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 ("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 expenses 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 a
product candidate is recorded as research and development expense as incurred.
Our research and development expenses are expected to increase for the
foreseeable future. While the duration of COVID-19 and its impact on our ability
to conduct clinical development are highly uncertain, we expect that a return to
normal operations will likely result in an increase in future research and
development expenses. Specifically, our costs will increase as we conduct
additional clinical trials for ZILRETTA, including our planned registration
trial in shoulder OA, and conduct further development activities for our
pipeline programs, including our on-going clinical trials of FX201 and FX301.
We cannot determine with certainty the duration of and completion costs
associated with ongoing and future clinical trials or the associated regulatory
approval process, post-marketing development of ZILRETTA, or development of any
product candidates in our pipeline. The duration, costs, and timing associated
with the further development of ZILRETTA or the development of other product
candidates will depend on a variety of factors, including uncertainties
associated with the results of our clinical trials, as well as the status and
timing of the Merger. 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 the product candidates in our
pipeline.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel
costs, including salaries, sales commissions, 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 selling, general, and administrative expenses will increase
as compared to the prior year, including external marketing expenses and the
operation of our field sales force.
28
--------------------------------------------------------------------------------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 term loan facility, which, accrues interest at a floating interest rate equal to the greater of the prime rate as reported in theWall Street Journal plus 2.75% or 6.0% per annum, and our revolving credit facility, which accrues interest at a floating interest rate equal to the greater of the prime rate as reported in theWall Street Journal plus 1.75% or 5.0% per annum. Also included in interest expense is the amortization of the final payment on the 2021 term loan, the loss on debt extinguishment related to the 2019 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.
Other income (expense)
Other income (expense) consists of the amortization of premiums or accretion of discounts related to our marketable securities, realized gains (losses) on redemptions of our marketable securities, gains (losses) from foreign currency transactions, and the amortization of debt issuance costs on the 2024 Convertible Notes, which are being amortized over the term of the loan.
Provision for income taxes
The provision for income taxes consists of foreign withholding taxes related to our license agreement with HK Tainuo.
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 inthe 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.
We believe that the estimates, assumptions, and judgments involved in the
accounting policies described in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 of our Annual Report on
Form 10-K for the year ended
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Comparison of the Three and Nine Months Ended
The following tables summarize our results of operations for the three and nine
months ended
Three Months Ended September 30,
% Increase/
(In thousands) 2021 2020 Change (Decrease)
Revenues:
Product revenue, net $ 21,326 $ 23,664 $ (2,338 ) (9.9 )%
Operating expenses:
Cost of sales 3,727 5,130 (1,403 ) (27.3 )%
Research and development 14,771 10,092 4,679 46.4 %
Selling, general and administrative 26,986 27,312 (326 ) (1.2 )%
Total operating expenses 45,484 42,534 2,950 6.9 %
Loss from operations (24,158 ) (18,870 ) (5,288 ) 28.0 %
Other (expense) income:
Interest income 54 62 (8 ) (12.9 )%
Interest expense (5,787 ) (5,125 ) (662 ) 12.9 %
Other expense (421 ) (457 ) 36 (7.9 )%
Total other (expense) income (6,154 ) (5,520 ) (634 ) 11.5 %
Loss before income taxes (30,312 ) (24,390 ) (5,922 ) 24.3 %
Income tax expense - 248 (248 ) NM
Net loss $ (30,312 ) $ (24,638 ) (5,674 ) 23.0 %
Nine Months Ended September 30,
% Increase/
(In thousands) 2021 2020 Change (Decrease)
Revenues:
Product revenue, net $ 74,090 $ 59,242 $ 14,848 25.1 %
Operating expenses:
Cost of sales 14,791 12,887 1,904 14.8 %
Research and development 41,487 43,733 (2,246 ) (5.1 )%
Selling, general and administrative 81,993 81,341 652 0.8 %
Total operating expenses 138,271 137,961 310 0.2 %
Loss from operations (64,181 ) (78,719 ) 14,538 (18.5 )%
Other (expense) income:
Interest income 531 584 (53 ) (9.1 )%
Interest expense (16,156 ) (14,848 ) (1,308 ) 8.8 %
Other expense (1,270 ) (581 ) (689 ) 118.6 %
Total other (expense) income (16,895 ) (14,845 ) (2,050 ) 13.8 %
Loss before income taxes (81,076 ) (93,564 ) 12,488 (13.3 )%
Income tax expense - 495 (495 ) NM
Net loss $ (81,076 ) $ (94,059 ) 12,983 (13.8 )%
Product Revenue
The following table presents the adjustments deducted from gross product revenue
to arrive at net product revenue for sales of ZILRETTA during the three and nine
months ended September 30, 2021 and 2020:
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except
for % of sales) 2021 % of Sales 2020 % of Sales 2021 % of Sales 2020 % of Sales
Product revenue, gross $ 30,825 100.0% $ 27,704 100.0% $ 95,283 100.0% $ 68,498 100.0%
Adjustments to product
revenue, gross
Provider discounts and
rebates (3,245 ) (10.5)% (1,329 ) (4.8)% (9,048 ) (9.5)% (2,757 ) (4.0)%
Estimate of product
returns (3,421 ) (11.1)% (136 ) (0.5)% (3,640 ) (3.8)% (345 ) (0.5)%
All other (2,833 ) (9.2)% (2,575 ) (9.3)%
(8,505 ) (8.9)% (6,154 ) (9.0)%
Product revenue, net
Net product revenue for the three months endedSeptember 30, 2021 and 2020, was$21.3 million and$23.7 million , respectively. The number of ZILRETTA units sold period-over-period increased, which resulted in an increase in net revenue of$1.6 million , offset by 30
-------------------------------------------------------------------------------- a decrease of$3.9 million , which was attributable to a decrease in the net price per unit. The decrease in net price was due to an increase in returns of short-dated product, which resulted in a reduction of revenue of$3.4 million for the three months endedSeptember 30, 2021 . The decrease in net price was also attributed to the increase in rebates and discounts offered to healthcare providers, partially offset by an increase in our gross sales price in the third quarter of 2021. Net product revenue for the nine months endedSeptember 30, 2021 and 2020, was$74.1 million and$59.2 million , respectively. The period-over-period increase was due to an increase in the number of ZILRETTA units sold, which resulted in an increase in net revenue of$20.3 million , offset by a decrease of$5.5 million , which was attributable to a decrease in the net price per unit primarily due to provider rebate offerings and other discounts and the aforementioned charge relating to product returns, partially offset by an increase in our gross sales price in the third quarter of 2021. Net revenue for the nine months endedSeptember 30, 2020 , included the adverse impact of COVID-19 on the operations of healthcare providers, which resulted in a material decline in net revenue as compared to our prior expectations. For further discussion regarding our revenue recognition policy, see Note 2, "Summary of Significant Accounting Policies," in the Notes to Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q. Cost of Sales Cost of sales was$3.7 million and$5.1 million for the three months endedSeptember 30, 2021 and 2020, respectively. For the three months endedSeptember 30, 2021 , cost of sales was comprised of$1.8 million related to the actual cost of units sold and$0.7 million of period costs and other adjustments. In addition, cost of sales for the three months endedSeptember 30, 2021 included a charge of$1.2 million related to the write-down of short-dated inventory that will not be sold prior to expiry. For the three months endedSeptember 30, 2020 , cost of sales was comprised of$2.0 million related to the actual cost of units sold and$3.1 million of unabsorbed overhead associated with the voluntary, temporary suspension of manufacturing activities at Patheon due to COVID-19 impacts on sales of ZILRETTA. Cost of sales was$14.8 and$12.9 million for the nine months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 , costs of sales consisted of$7.1 million related to the actual cost of units sold,$5.2 million of unabsorbed manufacturing and overhead costs related to the operation of the facility at Patheon,$1.8 million related to the write-down of short-dated inventory that will not be sold prior to expiry, and$0.7 million of period costs and other adjustments For the nine months endedSeptember 30, 2020 , cost of sales consisted of$5.6 million related to the actual cost of units sold,$6.5 million of unabsorbed manufacturing overhead, and$0.8 million of period costs and adjustments.
Research and Development Expenses
Three Months Ended September 30,
% Increase/
(In thousands) 2021 2020 Change (Decrease)
Direct research and development expenses
by program:
ZILRETTA $ 1,675 $ 1,043 $ 632 60.6 %
FX201 3,358 831 2,527 304.1 %
FX301 1,839 1,160 679 58.5 %
Portfolio expansion 226 72 154 213.9 %
Other 630 386 244 63.2 %
Total direct research and development
expenses 7,728 3,492 4,236 121.3 %
Personnel and other costs 7,043 6,600 443 6.7 %
Total research and development expenses $ 14,771 $ 10,092 $ 4,679 46.4 %
Nine Months Ended September 30,
% Increase/
(In thousands) 2021 2020 Change (Decrease)
Direct research and development
expenses by program:
ZILRETTA $ 4,319 $ 8,188 $ (3,869 ) (47.3 )%
FX201 6,715 5,789 $ 926 16.0 %
FX301 7,878 4,362 $ 3,516 80.6 %
Portfolio expansion 691 279 412 147.7 %
Other 1,593 1,284 309 24.1 %
Total direct research and development
expenses 21,196 19,902 1,294 6.5 %
Personnel and other costs 20,291 23,831 (3,540
) (14.9 )%
Total research and development expenses
Research and development expenses were$14.8 million and$10.1 million for the three months endedSeptember 30, 2021 and 2020, respectively. For the three months endedSeptember 30, 2021 , development expenses for ZILRETTA increased by$0.6 million due to an increase in ZILRETTA life cycle management activities. Program expenses related to FX201 and FX301 increased by$2.5 million 31 -------------------------------------------------------------------------------- and$0.7 million , respectively, due to an increase in clinical trial activity, and portfolio expansion-related expenses increased by$0.4 million . Personnel and other costs also increased by$0.4 million due to an increase in salary and other employee-related costs and stock-based compensation expense. Research and development expenses were$41.5 million and$43.7 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The decrease in research and development expense of$2.2 million was primarily due to a decrease of$3.9 million in development expense for ZILRETTA due to a reduction in ZILRETTA life cycle management activities, and a decrease of$3.5 million in salary and other employee-related costs and stock-based compensation expense related to lower headcount. Decreases were partially offset by an increase of$0.9 million related to FX201 due to increased clinical trial activity in 2021, offset by the$2.5 million milestone payment related to dosing the first human patient in the Phase 1 clinical trial that occurred in the first quarter of 2020 and an increase of$3.5 million related to FX301, which is attributed to the achievement of certain development milestones, including the clearing of the IND by FDA and the initiation of the Phase 1b clinical trial, both of which occurred in the first quarter of 2021, and a$0.7 million increase in costs related to our portfolio expansion.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$27.0 million and$27.3 million for the three months endedSeptember 30, 2021 and 2020, respectively. Selling expenses were$17.8 million and$19.3 million for the three months endedSeptember 30, 2021 and 2020, respectively. The year-over-year decrease in selling expenses of$1.5 million was primarily due to lower headcount, partially offset by the resumption of industry conferences and physician speaker programs and increase in business travel. General and administrative expenses were$9.2 million and$8.0 million for the three months endedSeptember 30, 2021 and 2020, respectively, which represents an increase of$1.2 million . The increase was largely attributable to acquisition costs related to the merger agreement with Pacira. Selling, general and administrative expenses were$82.0 million and$81.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Selling expenses were$55.7 million and$56.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The year-over-year decrease in selling expenses of$0.8 million was primarily due to lower headcount and a reduction in operating expenses, partially offset by the partial resumption of industry conferences and physician speaker programs and increases in business travel. General and administrative expenses were$26.3 million and$24.8 million for the nine months endedSeptember 30, 2021 and 2020, respectively, which represents an increase of$1.5 million . The year-over-year increase was largely attributable to acquisition costs related to the merger agreement with Pacira.
Other Income (Expense)
Interest income was$0.1 million for each of the three months endedSeptember 30, 2021 and 2020, respectively. Interest income was$0.5 million and$0.6 million for the nine months endedSeptember 30, 2021 and 2020.The decrease in interest income was primarily due to a decrease in the average investment balance as well as a decrease in interest rates over the period Interest expense was$5.8 million and$5.1 million for the three months endedSeptember 30, 2021 and 2020, respectively. Interest expense was$16.2 million and$14.8 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase in interest expense was attributed to the loss on debt extinguishment of$0.5 million recorded in connection with the 2021 Amended Credit Agreement, which resulted in the partial repayment of the final payment owed on the prior term loan agreement, as well as an increase in the amortization of the debt discount on the 2024 Convertible Notes. We recorded other expense of$0.4 million for the three months endedSeptember 30, 2021 , compared to$0.5 million for the three months endedSeptember 30, 2020 . Other expense was$1.3 million and$0.6 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase in other expense was primarily due to changes in the price of debt securities, resulting in increased amortization of premiums, as well as an increase in foreign currency losses due to exchange rate fluctuations.
Liquidity and Capital Resources
For the nine months endedSeptember 30, 2021 , we generated$74.1 million in net product revenue. We have incurred significant net losses in each year since our inception, including net losses of$113.7 million ,$149.8 million , and$169.7 million , for fiscal years 2020, 2019, and 2018, respectively, and$81.1 million for the nine months endedSeptember 30, 2021 . As ofSeptember 30, 2021 , we had an accumulated deficit of$863.4 million . We anticipate that we will continue to incur losses over the next few years. Since our inception throughSeptember 30, 2021 , 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, including amounts from our initial and follow-on public offerings, as well as our term loan and revolving credit facility and our 2024 Convertible Notes issuance. This funding is necessary to support the commercialization of ZILRETTA and to perform the research and development activities required to develop our other product candidates in order to generate potential future revenue streams. We may not be able to obtain financing on acceptable terms, or at all. In particular, as a result of the COVID19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility and disruptions, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. If the equity and credit markets deteriorate, it may make any additional debt or equity financing more difficult, more costly, and more dilutive. 32 -------------------------------------------------------------------------------- We expect that our research and development expenses will increase in 2021 and beyond 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. If the recent decrease in revenue as compared to our expectations continues, we anticipate that absent raising additional capital through financing or other transactions, our cash balance is likely to decrease below$100.0 million within the next twelve months. If this occurs, under the terms of the 2021 Amended Credit Agreement, we would become subject to a minimum revenue covenant and we believe there is substantial risk that we would fail to meet the minimum revenue covenant at that time or shortly thereafter. If we become subject to the minimum revenue covenant and fail to comply with it, the lenders could elect to declare all amounts outstanding to be immediately due and payable. While we would expect to request a waiver from the lenders, there can be no assurances that such a request would be granted or would not be conditioned on additional terms or concessions, or that we would be able to raise additional capital to avoid application of the minimum revenue covenant. These conditions raise substantial doubt about our ability to continue as a going concern for a period of one year after the date that the financial statements are issued. As ofSeptember 30, 2021 , we had cash, cash equivalents, and marketable securities of$142.1 million . Management believes that current cash, cash equivalents, and marketable securities on hand atSeptember 30, 2021 , and taking into account our plans to reduce operating expenses, request a waiver of the minimum revenue covenant from the lenders, and remain opportunistic with respect to raising additional capital through financing or other transactions, should be sufficient to fund operations for at least the next twelve months from the issuance date of these financial statements. However, as we are expecting to close the planned merger with Pacira prior to the end of 2021, none of the above actions have been taken or have been approved to be taken and therefore cannot be considered in Management's going concern evaluation as a mitigating action. We have concluded that without taking into consideration the planned merger with Pacira, Management's plans do not alleviate the substantial doubt about our ability to continue as a going concern. As the planned merger transaction with Pacira has not occurred as of the issuance of these financial statements, it also cannot be considered within Management's plans to alleviate the conditions raised around substantial doubt. As a result, in accordance with the requirements of ASC 205-40, management has concluded that it is required to disclose that substantial doubt exists about our ability to continue as a going concern for one year from the date the financial statements included in this report are issued.
Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with an objective of capital preservation.
OnJuly 30, 2021 , we entered into a second amendment (the "2021 Amended Credit Agreement") to our Amended and Restated Credit and Security Agreement (the "Existing Credit Agreement") withSilicon Valley Bank , as agent and lender,MidCap Financial Trust ,MidCap Funding XIII Trust , and the other lenders from time to time party thereto (collectively, the "Lenders"), providing for a term loan facility of up to$75.0 million , with$55.0 million available at closing and an additional$20.0 million (the "second tranche") available upon positive Phase 1 clinical trial data in either of our two pipeline programs, FX201 and FX301, sufficient to initiate a Phase 2 clinical study, and a revolving credit facility of up to$25.0 million , both of which mature onFebruary 1, 2024 , which may be extended toJuly 1, 2026 , upon satisfaction of certain specified conditions set forth in the 2021 Amended Credit Agreement (the "Maturity Date"). We concurrently borrowed the$55.0 million term loan (the "2021 term loan"), simultaneously used$48.1 million of the proceeds to repay the outstanding term loan under the Existing Credit Agreement, and drew down$20.0 million from the revolving credit facility, bringing the total revolver balance to$25.0 million . The 2021 Amended Credit Agreement contains certain representations, warranties, and covenants, including a minimum revenue covenant that will be in effect at any time our liquidity (defined as cash, cash equivalents and marketable securities held withSilicon Valley Bank and certain accounts receivable as deemed eligible under the 2021 Amended Credit Agreement) is below$100.0 million (if the second tranche is undrawn) or$120.0 million (if the second tranche is drawn). Additionally, if our liquidity is below$100.0 million , all amounts received from customer collections will be applied immediately to reduce the revolving credit facility. The minimum revenue covenant, if it applies in the future, is applied to the trailing six-months of net revenue and is determined based on our approved forecast, as determined by the Lenders. If the revenue covenant becomes applicable and we fail to comply with it, the amounts due under the 2021 Amended Credit Agreement could be declared immediately due and payable. Term loan borrowings under the 2021 Amended Credit Agreement accrue interest monthly at a floating interest rate equal to the greater of (i) the Prime Rate plus 2.75% or (ii) 6.00% per annum. Under the term loan credit facility, following an interest-only period ending onAugust 1, 2023 (if the second tranche is undrawn) orAugust 1, 2024 (if the second tranche is drawn), principal is due in equal monthly installments through the Maturity Date. We may prepay the term loan at any time by paying the outstanding principal 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 borrowings under the 2021 Amended Credit Agreement accrue interest monthly at a floating interest rate equal to the greater of (i) the Prime Rate plus 1.75% or (ii) 5.00% per annum. The revolving credit facility is co-terminus with the term loan credit facility. If the interest payment on the revolving credit facility is less than the amount of interest that would have been payable had we borrowed 25% of the total commitments under the revolving credit facility, or the Revolving Commitment Amount, then we will be required to pay the difference. We are also required to pay a facility fee in respect of the revolving credit facility equal to 0.5% of the 33 -------------------------------------------------------------------------------- Revolving Commitment Amount payable at closing and 0.5% of the Revolving Commitment Amount payable on the first anniversary of closing. We 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. To the extent any portion of the Revolving Commitment Amount is undrawn, we will be required to pay an "unused line fee" equal to 0.25% per annum of the average unused portion of the Revolving Commitment Amount, calculated on a calendar year basis as an amount equal to the difference between (i) the Revolving Commitment Amount and (ii) the greater of (A) 25.0% of the Revolving Commitment Amount, and (B) the average for the period of the daily closing balance of the Revolving Commitment Amount outstanding. OnNovember 4, 2020 , we entered into a Distribution Agreement withGoldman Sachs & Co. LLC andCredit Suisse Securities (USA) LLC (collectively, the "Managers") relating to the issuance and sale from time to time of up to$100,000,000 of shares of our common stock. Under the terms of the Distribution Agreement, we will pay the Managers a commission of up to 3% of the gross sales price of any shares sold. As ofSeptember 30, 2021 , 134,048 shares had been sold under the Distribution Agreement, for total net proceeds of$1.7 million . We are subject to a variety of specified liquidity and capitalization restrictions under the Merger Agreement. Unless we obtain Pacira's prior written consent (which consent may not be unreasonably withheld, conditioned or delayed) and except (i) as required or expressly contemplated by the Merger Agreement, (ii) as required by applicable law or (iii) as set forth in the confidential disclosure schedule we delivered to Pacira, we may not, among other things and subject to certain exceptions and aggregate limitations, incur additional indebtedness, issue additional shares of our common stock outside of our equity incentive plans, repurchase our common stock, pay dividends, acquire assets, securities or property, dispose of businesses or assets, enter into material contracts or make certain additional capital expenditures. The following table shows a summary of our cash flows for the nine months endedSeptember 30, 2021 and 2020: Nine Months Ended September 30, (In thousands) 2021 2020 Cash flows used in operating activities$ (51,441 ) $ (60,819 ) Cash flows provided by (used in) investing activities 60,234 (10,665 ) Cash flows provided by financing activities 20,327
117,868
Net increase in cash and cash equivalents $ 29,120 $
46,384
Operating activities used$51.4 million of cash in the nine months endedSeptember 30, 2021 . Cash used in operating activities resulted primarily from our net loss for the period of$81.1 million , partially offset by changes in our operating assets and liabilities of$2.9 million and non-cash charges of$26.7 million . Changes in our operating assets and liabilities consisted primarily of a$0.7 million decrease in accounts receivable and an increase of$6.0 million in accounts payable and accrued expense, partially offset by a$1.5 million increase in prepaid expenses and other current assets, a$1.0 million increase in inventory, and a$1.1 million decrease in lease liabilities primarily due to principal lease payments. Our non-cash charges consisted primarily of$12.8 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,$1.3 million related to the amortization of right-of-use assets,$1.6 million of depreciation,$0.5 million of non-cash interest expense related to amortization of the final payment due on the 2021 term loan,$0.4 million of amortization of premiums paid for the purchase of marketable securities,$0.5 million related to the loss of debt extinguishment, and$1.8 million related to the provision for inventory for the write-down of short-dated ZILRETTA inventory that is not expected to be sold prior to expiry. Operating activities used$60.8 million of cash in the nine months endedSeptember 30, 2020 . The cash flow used in operating activities resulted primarily from our net loss for the period of$94.1 million , partially offset by changes in our operating assets and liabilities of$10.1 million and non-cash charges of$23.1 million . Changes in our operating assets and liabilities consisted primarily of a$9.2 million decrease in accounts receivable, and a$10.0 million increase in deferred revenue related to the license agreement with HK Tainuo, partially offset by a$1.1 million increase in inventory, a$0.5 million increase in prepaid expenses and other current assets, a decrease of$6.5 million in accounts payable and accrued expenses and a$1.0 million decrease in lease liabilities and other long-term liabilities primarily due to principal lease payments. Our non-cash charges consisted primarily of$13.4 million of stock-based compensation expense,$6.9 million related to the amortization of the debt discount and debt issuance costs related to the 2024 Convertible Notes,$1.2 million related to the amortization of right-of-use assets,$1.3 million of depreciation,$0.5 million of non-cash interest expense related to amortization of the final payment due on the 2019 term loan and$0.3 million related to the loss on disposal of fixed assets, partially offset by$0.5 million of premiums paid for the purchase of marketable securities.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was$60.2 million in the nine months endedSeptember 30, 2021 . Net cash provided by investing activities consisted primarily of cash received for the redemption and sale of marketable securities of$67.1 million , partially offset by cash used to purchase marketable securities of$5.2 million and capital expenditures of$1.7 million , primarily relating to the purchase of equipment associated with the expansion of our manufacturing facilities at Patheon. 34 -------------------------------------------------------------------------------- Net cash used in investing activities was$10.7 million in the nine months endedSeptember 30, 2020 . Net cash used in investing activities consisted primarily of purchases of marketable securities of$56.2 million and capital expenditures of$8.9 million , primarily relating to the purchase of equipment associated with the expansion of our manufacturing facilities at Patheon. These expenses were partially offset by cash received for the redemption and sale of marketable securities of$54.4 million .
Net Cash Provided by Financing Activities
Net cash provided by financing activities was$20.3 million for the nine months endedSeptember 30, 2021 , which consisted of$55.0 million and$20.0 million of additional term loan and revolving credit facility borrowings, respectively, under the 2021 Amended Credit Agreement,$0.9 million related to employee stock purchases through our employee stock purchase plan, and$1.7 million related to the net proceeds received from the sale of common stock under our Distribution Agreement. Increases were partially offset by a decrease of$56.9 million of principal payments and partial repayment of the final payment under the 2019 term loan,$0.2 million related the payment of debt issuance costs related to the 2021 Amended Credit Agreement, and$0.1 million of public offering costs paid during the period. Net cash provided by financing activities was$117.9 million for the nine months endedSeptember 30, 2020 , of which$97.2 million related to the net proceeds received from the offering of our common stock, partially offset by public offering costs paid during the period of$0.4 million ,$0.1 million received from the exercise of stock options and$0.9 million relating to employee stock purchases through our employee stock purchase plan, as well as$20.0 million borrowed under the revolving credit facility associated with our 2019 term loan.
Contractual Obligations
For a discussion of our contractual obligations, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report on Form 10-K. There have not been any material changes to such contractual obligations or potential milestone payments sinceDecember 31, 2020 , other than as described in Notes 9, 12, and 13 to our unaudited consolidated financial statements included elsewhere in this report.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements.
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