FLEXION THERAPEUTICS, INC. 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, the most common form of arthritis, referred to as OA. OnOctober 6, 2017 , theU.S. Food and Drug Administration , or 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 extended pain relief. The pivotal Phase 3 trial, on which the approval of ZILRETTA was based, showed that ZILRETTA met the primary endpoint of pain reduction at Week 12, with statistically significant pain relief extending through Week 16. We 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, which is being developed as a locally administered peripheral analgesic nerve block for management 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 throughDecember 31, 2020 , we have raised approximately$913 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, as 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$113.7 million ,$149.8 million , and$169.7 million for the years endedDecember 31, 2020 , 2019, and 2018, respectively. As ofDecember 31, 2020 , we had an accumulated deficit of$782.3 million . Substantially all of our net losses resulted from costs incurred in connection with our development programs and from selling, general and administrative expenses associated with our operations. We anticipate that we will incur losses over the next few years. We expect that our operating expenses will continue to increase in connection with our ongoing activities, as we:
• continue the development and commercialization of ZILRETTA, including our
on-going and future clinical trials;
• continue to scale-up manufacturing activities including the supply of
clinical trial materials and commercial batches;
• maintain a sales and marketing infrastructure for the commercialization of
ZILRETTA;
• expand our development activities and advance FX201 and FX301;
• 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.
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. We received the product-specific J code (J3304) for ZILRETTA from CMS onJanuary 1, 2019 . We believe that the product-specific J 50 -------------------------------------------------------------------------------- code 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 J code for reimbursement of ZILRETTA.
We closely track and provide updates on several uptake metrics to provide
perspective on the progress of the ZILRETTA launch. Since the launch in
• 4,248 accounts had purchased ZILRETTA, reflecting growth of 176 new
purchasing accounts compared to
purchased product.
• 78% of purchasing accounts (3,321) had placed at least one reorder, up from
3,153 accounts that had reordered ZILRETTA as of
• 1,242 accounts had made ZILRETTA purchases of more than 50 units; 1,170
accounts had purchased between 11 and 50 units; and 1,836 accounts had
purchased between 1 and 10 units
• Accounts that had purchased more than 50 ZILRETTA units accounted for
307,988 of the total 345,697 ZILRETTA units purchased.
Impact of the Coronavirus Global Pandemic
OnMarch 11, 2020 , theWorld Health Organization made the assessment that a novel strain of coronavirus, which causes the COVID-19 disease, had become a global pandemic ("COVID-19"). COVID-19 has presented a substantial public health and economic challenge around the world and is affecting our employees, patients, communities and business operations, as well as theU.S. economy and financial markets. COVID-19 continues to rapidly evolve. In mid-March, theU.S. declared a national emergency and states implemented various "social distancing" and "stay at home" measures to mitigate the spread of COVID-19. In turn, we closed our offices inBurlington, MA , and instructed all of our employees to work from home, including all of our field-based personnel. We also undertook prudent and disciplined steps to reduce expenses across the organization, including hiring and travel freezes, elimination of live presence at medical and industry conferences, reductions in in-person physician speaker programs, reductions in select marketing programs and materials, and elimination of non-essential operating expenses. In addition, we paused our Phase 1 trial of FX201, discontinued our Phase 2 trial investigating ZILRETTA in shoulder OA and adhesive capsulitis (AC) due to the small number of patients enrolled at the time and temporarily paused manufacturing activities for ZILRETTA to avoid excess levels of inventory. Due to the significant impacts of COVID-19 on patient flow at healthcare providers, purchases of ZILRETTA by healthcare providers dropped precipitously in the latter part of March and that decline continued into early April. Despite this precipitous decline, our MBMs found most accounts were receptive to "e-detailing," and in the second quarter our MBMs were able to gain access to some healthcare providers who had been previously very difficult to reach due to busy office and surgical schedules. Additionally, by the end of the second quarter, the vast majority of our MBMs were able to return to the field to conduct in-person calls on accessible physician offices. Correspondingly, our Commercial team conducted a series of focus groups with physicians around the country who confirmed that the pandemic had resulted in many patients facing extensive delays for total knee replacement (TKR) surgery and caused other patients to postpone surgery indefinitely. In the second half of 2020, we began to see ZILRETTA sales that were more in line with our pre-COVID-19 expectations, and we believe that our ZILRETTA sales performance in the second half of the year was driven by several key factors: a normalization of office visits despite the presence of COVID-19; the continued tailwind from delays and deferrals in total knee arthroplasties; deeper penetration in existing healthcare provider accounts that purchase ZILRETTA; and the addition of new ZILRETTA purchasing accounts. We believe that as more and more clinicians gain more experience with ZILRETTA, it will come to be recognized as a best-in-class treatment option for patients with knee OA. While we are encouraged by the growth of ZILRETTA purchases by healthcare providers we saw in the second half of 2020, the future impact of COVID-19and access to, utilization of, and efficacy of COVID-19 vaccines on our business remains uncertain and unpredictable. 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 shortly thereafter. We had not generated any revenue prior to the launch of ZILRETTA. 51 --------------------------------------------------------------------------------
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 (other than manufacturing) 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 the 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 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 ofDecember 31, 2020 .
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 majority of product sold during the year endedDecember 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 ofDecember 31, 2018 , all of the finished goods inventory that was previously expensed had been sold to customers. From April toNovember 2020 , as a result of COVID-19, we voluntarily, temporarily suspended manufacturing at Patheon. During this time, we continued to incur certain fixed overhead costs related to the operation of the manufacturing facility at Patheon while production activities were suspended. These fixed overhead costs would typically be capitalized to ZILRETTA inventory but were recorded to cost of sales over the period in which production was suspended.
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 a
product candidate is recorded as research and development expense as incurred.
Our research and development expenses decreased in 2020 relative to the prior
year. As part of our expense reduction steps taken in response to the COVID-19
pandemic, we terminated the Phase 2 clinical trial investigating ZILRETTA in
shoulder OA and AC and temporarily suspended the FX201 single ascending dose
trial which resulted in a deferral of spending related to clinical trials, and
eliminated other non-essential operating expenses. 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
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in an increase in future research and development expenses. Specifically, our
costs will increase as we conduct additional clinical trials for ZILRETTA and
conduct further developmental activities for our pipeline programs, including
our on-going Phase 1 trial of FX201 and our planned Phase 1b trial of 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 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.
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. Our selling, general and administrative expenses decreased in 2020 as compared to the prior year. As a result of the adverse effect of COVID-19 on our revenues, we took steps to reduce our operating expenses, including by reducing certain sales and marketing expenses through the elimination of live presence at medical and industry conferences, reductions in in-person physician speaker programs and reductions in select marketing programs and materials. We cannot determine with certainty the duration and timing of COVID-19, but we expect that a return to normal operations will likely result in an increase in future selling, general, and administrative expenses. In particular, we expect to incur ongoing increases in selling, general and administrative expenses related to the continued development and commercialization of ZILRETTA or any other product candidates, including external marketing expenses and the operation of our field sales force. 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, 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 1.50%, or 6.50% 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 ) or 5.50% 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.
Other income (expense).
Other income (expense) consists of the net amortization or 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 ofDecember 31, 2020 , we had$448.2 million and$340.1 million of federal and state net operating loss carryforwards, respectively, and$12.2 million and$5.2 million of federal and state research and development tax credit carryforwards, respectively, available to offset our future taxable income, if any. These federal net operating loss carryforwards and research and development tax credit carryforwards expire at various dates beginning in 2029, if not utilized and are subject to review and possible adjustment by the Internal Revenue Service. Approximately$258.7 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. AtDecember 31, 2020 , a full valuation allowance was recorded against our net operating loss carryforwards and our research and development tax credit carryforwards. 53 --------------------------------------------------------------------------------
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.
As of
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. 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
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.
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
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-------------------------------------------------------------------------------- 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 throughDecember 31, 2020 , 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 qualifiedVA 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 aU.S. federal government program created in 1992 that requires drug manufacturers to provide outpatient drugs to eligible healthcare 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 55 --------------------------------------------------------------------------------
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
The following table summarizes activity in each of the product revenue allowance and reserve categories for the years endedDecember 31, 2020 , 2019, and 2018: Service Fees, Government Allowances and Rebates and Other Purchaser/Provider (In thousands) Chargebacks Incentives Product Returns Discounts and Rebates Total Balance as of December 31, 2017 $ 60 $ 15 $ 2 -$ 77 Provision related to sales in the current year 1,688 502 124 - 2,314 Credit or payments made during the period (1,147 ) (26 ) (1 ) - (1,174 ) Balance as of December 31, 2018 601 491 125 - 1,217 Provision related to sales in the current year 5,527 261 334 2,685 8,807 Credit or payments made during the period (4,281 ) (375 ) (57 ) (1,029 ) (5,742 ) Adjustments related to prior period sales - (129 ) - - (129 ) Balance as of December 31, 2019 1,847 248 402 1,656 4,153 Provision related to sales in the current year 7,660 1,090 499 4,633 13,882 Credit or payments made during the period (7,774 ) (903 ) (139 ) (4,457 ) (13,273 ) Adjustments related to prior period sales - 95 (134 ) - (39 ) Balance as of December 31, 2020 $ 1,733 $ 530 $ 628 $ 1,832$ 4,723
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: • 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.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Year Ended
The following table summarizes our results of operations for the years endedDecember 31, 2020 and 2019. For a discussion of our results of operations for the year endedDecember 31, 2019 , compared to the year endedDecember 31, 2018 , see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Year Ended December 31, (In thousands) 2020 2019 $ Change % Change Revenues Product revenue, net$ 85,552 $ 72,957 $ 12,595 17.3 % Operating expenses Cost of sales 19,249 9,960 9,289 93.3 % Research and development 54,326 69,559 (15,233 ) (21.9 )% Selling, general and administrative 104,996 129,709 (24,713 ) (19.1 )% Total operating expenses 178,571 209,228 (30,657 ) (14.7 )% Loss from operations (93,019 ) (136,271 ) 43,252 (31.7 )% Other (expense) income Interest income 876 3,212 (2,336 ) (72.7 )% Interest expense (20,027 ) (17,066 ) (2,961 ) 17.4 % Other (expense) income (1,041 ) 352 (1,393 ) 395.7 % Total other (expense) income (20,192 ) (13,502 ) (6,690 ) 49.5 % Loss before income taxes (113,211 ) (149,773 ) 36,562 (24.4 )% Income tax expense 495 - 495 NM Net loss$ (113,706 ) $ (149,773 ) $ 36,067 (24.1 )% Product Revenue For the years endedDecember 31, 2020 and 2019, we recorded$85.6 million and$73.0 million , respectively, of net product revenue. The year-over-year increase was due to an increase in the number of ZILRETTA units sold, which resulted in an increase in net revenue of$15.3 million , offset in part by a decrease of$3.3 million which was attributable to a decrease in the net price per unit primarily due to provider rebate offerings and other discounts. Included in net product revenue for the year endedDecember 31, 2020 , were buy-ins by two of our specialty distributors for which the distributors received a modest discount. Those buy-ins accounted for approximately 4% of our total ZILRETTA units sold in 2020. We are unable to predict the long-term impact of COVID-19 and the pace of recovery and how this may impact purchases of ZILRETTA by healthcare providers, as individual providers and their patients have had different responses to the pandemic. 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$19.2 million and$10.0 million for the years endedDecember 31, 2020 and 2019, respectively. For the years endedDecember 31, 2020 and 2019, cost of sales consisted of$7.7 million and$8.4 million , respectively, related to the actual cost of units sold,$8.1 million and$0.9 million , respectively, as a result of unabsorbed manufacturing and overhead costs related to the operation of the facility at Patheon, and$1.0 million and$0.7 million , respectively, of period costs and other adjustments. Additionally, for the year endedDecember 31, 2020 , cost of product sales included a charge resulting from the write-down of short-dated inventory of$2.5 million . There was no such charge for the year endedDecember 31, 2019 . Throughout much of 2020, while manufacturing was paused due to the impact of COVID-19, we continued to incur certain fixed overhead costs related to the operation of the manufacturing facility at Patheon which were recognized in our cost of sales. As a result, our cost of sales for the year endedDecember 31, 2020 , was greater than what we have reported in periods prior to those impacted by COVID-19. We believe our cost of sales will become more normalized once ZILRETTA manufacturing has returned to pre-COVID-19 levels, and although manufacturing restarted in the fourth quarter of 2020, the full effects on our cost of sales will not be realized until 2021. 57 --------------------------------------------------------------------------------
Research and Development Expenses
Year Ended December 31,
(In thousands) 2020 2019 $ Change % Change
Direct research and development expenses
by program:
ZILRETTA $ 9,635 $ 22,847 $ (13,212 ) (57.8 )%
FX201 7,082 $ 5,608 $ 1,474 26.3 %
Portfolio expansion 5,580 5,776 (196 ) (3.4 )%
Other 1,821 3,120 (1,299 ) (41.6 )%
Total direct research and development
expenses 24,118 37,351 (13,233 ) (35.4 )%
Personnel and other costs 30,208 32,208
(2,000 ) (6.2 )%
Total research and development expenses
Research and development expenses were$54.3 million and$69.6 million for the years endedDecember 31, 2020 and 2019, respectively. The decrease in research and development expenses of$15.2 million was primarily due to expense reduction measures taken in response to COVID-19; in particular, a decrease of$13.2 million in development expenses for ZILRETTA due to a reduction in ZILRETTA life cycle management activities, a decrease of$1.5 million related to our portfolio expansion (including FX301) and other programs costs, and a decrease of$2.0 million in salary and other employee-related costs related to lower headcount. Those decreases were partially offset by an increase of$1.5 million in expenses related to FX201 clinical trial and related manufacturing activities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$105.0 million and$129.7 million for the years endedDecember 31, 2020 and 2019, respectively. Selling expenses were$72.3 million and$96.3 million for the years endedDecember 31, 2020 and 2019. The year-over-year decrease in selling expenses of$24.0 million was primarily due to the expense reduction measures taken in response to COVID-19; in particular, the elimination of live presence at industry conferences, reductions in in-person physician speaker programs and reductions in select marketing programs and materials, as well as a reduction in travel expenses due to physician office limitations and travel guidelines and restrictions at the state and local level. General and administrative expenses were$32.7 million and$33.4 million for the years endedDecember 31, 2020 and 2019, respectively, which represents a decrease of$0.7 million .
Other Income (Expense)
Interest income was
Interest expense was$20.0 million and$17.1 million for the years endedDecember 31, 2020 and 2019, respectively. The increase in interest expense was due to the additional interest incurred associated with the term loan that we entered into inAugust 2019 under the amended credit and security agreement, as well as the revolving credit facility, which we drew down inFebruary 2020 . We recorded other expense of$1.0 million for the year endedDecember 31, 2020 , compared to other income of$0.4 million for the year endedDecember 31, 2019 . The increase in other expense was primarily due to changes in the price of debt securities resulting in amortization of premiums rather than accretion of discounts as well as the loss from the disposal of equipment as noted in Note 8, partially offset by an increase in gains related to foreign currency exchange rates. Income Taxes
The provision for income taxes for the year ended
Liquidity and Capital Resources
During the year endedDecember 31, 2020 , we generated$85.6 million in net product revenue. We have incurred significant net losses in each year since our inception in 2007, including net losses of$113.7 million ,$149.8 million , and$169.7 million for fiscal years 2020, 2019, and 2018, respectively. As ofDecember 31, 2020 , we had an accumulated deficit of$782.3 million . We anticipate that we will continue to incur losses over the next few years. Since our inception throughDecember 31, 2020 , 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 throughDecember 31, 2020 , we had raised approximately$913 million from such transactions, including amounts from our initial and follow-on public offerings during 2014, 2016, 2017, and most recently in May of 2020, as well as our term loan facility 58
-------------------------------------------------------------------------------- entered into in 2015 and 2019 and our 2024 Convertible Notes issuance in 2017. 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 future revenue streams. We may not be able to obtain financing on acceptable terms, or at all. In particular, as a result of the COVID-19 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. In response to the economic and business disruption caused by COVID-19, in the second quarter of 2020, we undertook prudent and disciplined steps to reduce expenses across our organization, including hiring and travel freezes, suspension or termination of active clinical trials and deferral of select preclinical activities, reductions in in-person physician speaker programs, market research and select marketing programs, and elimination of non-essential operating expenses. As a result of these actions, our research and development and selling, general and administrative expenses were lower in 2020 as compared to the prior year. However, we expect that our research and development and selling, general and administrative 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. As ofDecember 31, 2020 , we had cash, cash equivalents and marketable securities of$175.3 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. OnAugust 2, 2019 , we entered into an amended and restated credit and security agreement (the "amended and restated credit and security agreement") withSilicon 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 onJanuary 1, 2024 . We concurrently borrowed 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 withSilicon Valley Bank andMidCap Funding XIII Trust . InFebruary 2020 , we borrowed the full$20.0 million available under the revolving credit facility. OnMay 18, 2020 , we entered into an amendment to the amended and restated credit and security agreement (the "amendment"). Pursuant to the amendment, we borrowed$15.0 million under a new term loan advance and immediately used the proceeds to repay an equal amount under the revolving credit facility, and the maximum principal amount of the revolving credit facility was reduced from$20.0 million to$5.0 million . The new term loan is subject to substantially the same terms, including interest rate, amortization and maturity date, as the existing term loan under the credit facility. Additionally, if our liquidity (as defined in Note 10 of our accompanying consolidated financial statements) should decrease below$80.0 million , under the terms of the amended and restated credit and security agreement, we would become subject to a minimum revenue covenant. 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. Additionally, if our liquidity is below$80.0 million , all amounts received from customer collections will be applied immediately to reduce the revolving credit facility. Term loan borrowings under the credit facility accrue interest monthly at a floating interest rate equal to the greater of the Prime Rate (as reported in theWall Street Journal ) plus 1.50% or 6.50% per annum. Under the term loan credit facility, following an 18-month interest-only period, principal will be due in 36 equal monthly installments commencingFebruary 1, 2021 , and ending on the Maturity Date. We may prepay the term loan at any time by paying the outstanding principal balance, a final payment equal to 6.75% 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. Borrowings under the revolving credit facility accrue interest monthly at a floating interest rate equal to the greater of the Prime Rate (as reported in theWall Street Journal ) or 5.50% per annum. The revolving credit facility is co-terminus with the term loan. 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 commitment 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 1% of the Revolving Commitment Amount. 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 59 -------------------------------------------------------------------------------- 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. OnMay 26, 2020 , we completed an equity offering of our common stock, which resulted in the sale of 10,615,385 shares of our common stock at a price to the public of$9.75 per share including shares sold pursuant to the exercise in full of the underwriters' option to purchase additional shares. We received net proceeds from the equity offering of$96.8 million after deducting underwriting discounts, commissions, and offering costs. OnNovember 4, 2020 , we entered into an Equity Distribution Agreement (the "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. No shares were sold under the Distribution Agreement as ofDecember 31, 2020 .
The following table shows a summary of our cash flows for each of the years
ended
Year Ended December 31,
(In thousands) 2020 2019
2018
Cash flows used in operating activities
$ (160,419 ) Cash flows (used in) provided by investing activities (22,763 ) 114,764
125,584
Cash flows provided by (used in) financing activities 118,775 29,018 (6,325 ) Net increase (decrease) in cash, cash equivalents, and restricted cash$ 25,451 $ (4,976 )
Operating activities used$70.6 million of cash in the year endedDecember 31, 2020 . Cash used in operating activities resulted primarily from our net loss of$113.7 million , partially offset by changes in our operating assets and liabilities of$8.9 million and non-cash charges of$34.2 million . Changes in our operating assets and liabilities consisted primarily of a$7.1 million decrease in accounts receivable, a$0.3 million decrease in prepaid expenses and other current assets, and a$10.0 million increase in deferred revenue related to the license agreement with HK Tainuo, partially offset by a$0.8 million increase in inventory, a$6.3 million decrease in accounts payable and accrued expenses and a$1.3 million decrease in lease liabilities and other long-term liabilities primarily due to principal lease payments. Our non-cash charges consisted primarily of$18.6 million of stock-based compensation expense,$9.4 million related to the amortization of the debt discount and debt issuance costs related to the 2024 Convertible Notes,$2.5 million related to the provision for inventory,$1.6 million related to the amortization of right-of-use assets,$1.7 million of depreciation,$0.7 million related to non-cash interest expense related to amortization of the final payment due on the 2019 term loan,$0.2 of net amortization of premiums related to our investments, and$0.3 million related to the loss on disposal of fixed assets, partially offset by$0.7 million of premiums paid for the purchase of marketable securities. Operating activities used$148.8 million of cash in the year endedDecember 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 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 million of net accretion of discounts related to our investments. Operating activities used$160.4 million of cash in the year endedDecember 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. 60
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Net cash used in investing activities was$22.8 million in the year endedDecember 31, 2020 . Net cash used in investing activities consisted primarily of purchases of marketable securities of$79.6 million and capital expenditures of$10.1 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$66.9 million . Net cash provided by investing activities was$114.7 million in the year endedDecember 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 ourBurlington, Massachusetts headquarters. Net cash provided by investing activities was$125.6 million in the year endedDecember 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 ourBurlington, Massachusetts headquarters.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was$118.8 million for the year endedDecember 31, 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 . We also received$1.9 million from the exercise of stock options and 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. Net cash provided by financing activities was$29.0 million for the year endedDecember 31, 2019 . Net cash provided by financing activities in the year endedDecember 31, 2019 , consisted primarily of$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 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 endedDecember 31, 2018 . Net cash used in financing activities in the year endedDecember 31, 2018 , consisted primarily of$10.0 million related to the payment of our principal on our 2015 term loan, partially offset by$3.7 million received from the exercise of stock options and employee stock purchases through our employee stock purchase plan.
Contractual Obligations
The following table discloses aggregate information about our contractual obligations and the periods in which payments are due as ofDecember 31, 2020 : Payments Due By Period More Less Than 1 - 3 3 - 5 Than 5 Total 1 Year Years Years Years (in thousands) Long-term debt obligation (including interest)(1)$ 70,461 $ 20,247 $ 39,941 $ 10,273 - Operating lease obligations(2) 9,000 2,043 3,780 2,749 428 Monthly base fee to Patheon(3) 62,086 10,273 18,022 18,022 15,769 2024 Convertible notes obligations(4) 224,456 6,792 13,584 204,080 - Supply Agreement with Evonik(5) 764 764 - - - Total$ 366,767 $ 40,119 $ 75,327 $ 235,124 $ 16,197
(1) Represents the contractually required principal and interest payments on our
credit facility in accordance with the required payment schedule and the
6.75% final payment to the lender on
future interest payments to be made under the term loan were calculated using
a floating interest rate equal to the greater of the prime rate plus 1.5% or
6.5% per annum and amounts associated with future interest payments to be
made under the revolving credit facility were calculated using a floating
interest rate equal to the greater of the prime rate or 5.50% per annum.
(2) Represents the contractually required payments under our operating lease
obligations in existence as of
required payment schedule. No assumptions were made with respect to renewing
the lease terms at the expiration date of their initial terms. Refer to Note
14 - Commitments and Contingencies.
(3) Represents the contractually required monthly base fee to Patheon for the
operation of the manufacturing suite.
61
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(4) Represents the contractually required interest payments in accordance with
the required payment schedule and the final principal payment of
(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. The required purchases are 50% of our total volume requirements for
the PLGA product. Since the current required binding forecast does not go
beyond
beyond are not fixed or determinable and therefore no amounts are presented
in the table above.
The table above reflects only payment obligations that are fixed or determinable. We enter into contracts in the normal course of business with CROs for clinical trials, with contract manufacturers for clinical and commercial supply manufacturing, and with vendors for preclinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.
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.
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