Company Overview
Flexion Therapeutics, Inc. (NASDAQ: FLXN) is a specialty pharmaceutical company that develops treatments for musculoskeletal conditions. Specifically, the company is investigating therapies for osteoarthritis (OA), a type of degenerative arthritis. The company’s lead investigational product candidate is Zilretta, an injectable, extended-release, intra-articular (IA), steroid that is being developed for the treatment of moderate to severe OA pain in the knee. Flexion was formed in 2007, and is headquartered in Burlington, Massachusetts.
Pipeline and Products
Zilretta is designed to provide extended-release of triamcinolone acetonide (TA), a commonly administered steroid, from poly(latic-co-glycolic) acid (PLGA) for at least three months. PLGA is a proven extended-release delivery vehicle that is metabolized to carbon dioxide and water as it releases drug in the IA space. Flexion maintains that the injection takes about one minute to complete, and can be performed by physician’s assistants without the need for imaging.
Source: Company Presentation
There is no cure for OA, and therefore controlling pain and delaying surgery are the primary goal of treatment regimens. Early-stage treatments include non-pharmacologic therapy including exercise and weight control. Physicians may also prescribe acetaminophen and oral NSAIDs. As the condition progresses, physicians typically transition patients to IA injections consisting of steroids and hyaluronic acid (HA). As a medicine of last resort, doctors may also prescribe opioids for pain relief. In severe cases, a total joint arthroplasty (TJA) may be the only solution.
The current treatments for OA have several limitations. Oral therapies, including NSAIDs, may provide adequate analgesia for early-stage OA, but become less effective as the disease progresses. Furthermore, long-term use is associated with side effects such as gastrointestinal bleeding and cardiovascular events. Prevailing IA therapies are well-tolerated, but do not provide pain relief for a sufficient period of time and may not be administered more than once every three months. Opioids can provide sufficient analgesia, but are associated with serious risks such as dependency, depression, hypotension, and accidental overdose.
Zilretta was designed to address the shortcomings of current OA therapies. Specifically, to provide local and lasting analgesia over an extended period while minimizing systemic exposure and avoiding serious side effects. The completed clinical trials of Zilretta provide direct evidence that the drug can provide durable pain relief and functional improvement with an attractive patient safety profile. In Phase III clinical trials, Zilretta also showed clinically meaningful improvements in validated OA secondary outcome measures such as blood glucose levels in Type 2 diabetic patients with OA.
Market Opportunity
The company estimates that by 2020, 23.5 million of the 45 million OA patients will have knee OA. Furthermore, it is expected to be the fourth leading cause of disability by 2020. As shown below, the onset age of knee OA has shifted dramatically since the 1990s:
Source: Company Presentation
The company anticipates that nearly 6.5 million Americans between 35 and 84 will be diagnosed with knee OA this decade.
Flexion also notes that specialty medical societies (such as the American Academy of Orthopedic Surgeons) have recently given negative guidance related to HA injections, and select payor groups have limited reimbursement for HA treatments. Zilretta, if approved, could provide a therapeutic alternative in this market which was estimated at $950 million in 2015.
FDA Approval
In September 2015, the FDA granted Fast Track Designation for Zilretta for OA of the knee. Flexion then submitted a NDA in December 2016, and in February 2017, the FDA accepted the filing with a PDUFA date of October 6, 2017.
RBC analyst Randall Stanicky noted recently that all communications with the FDA have been normal, with no concerns flagged. He also reported that Flexion expects a 50 percent likelihood of a diabetes differentiation on labeling. To prepare for the launch, the company has hired more than 100 sales representatives (contingent on Zilretta approval).
The company is expected to pursue label extension studies for other joints such as the hip and shoulder before year-end, with data expected in the first half of 2018.
Second Quarter Earnings Review
In the quarter ended June 30, 2017, the company reported did not report any revenue, which is consistent with the same period one year ago. Operating expenses increased 90 percent year-over-year to $26.9 million. This was driven by general and administrative expenses that were nearly three times higher than the second quarter of 2016 due to preparations for the potential launch of Zilretta. Research and development costs also increased to due personnel expenses.
Accordingly, Flexion’s net loss increased to increased from $14.2 million ($0.63 per share) to $28.9 million ($0.91 per share). At June 30, 2017, the company listed cash, equivalents, and marketable securities of approximately $360 million and debt of approximately $160 million. Management expects the current cash reserves to support the company until late 2019.
Stock Influences
- Developments related to the approval of Zilretta;
- Developments related to Zilretta’s diabetes label expansion;
- Additional indications for Zilretta including use in the hip and shoulder joints; and
- International collaboration and licensing agreements.
Risk Factors
- Flexion is substantially dependent on the approval of Zilretta, and any delays could have a significant impact on the company’s results;
- The company may not be able to obtain marketing authorization for Zilretta outside the United States;
- Marketing and commercialization of Zilretta could take longer than anticipated; and
- The company may not be able to develop, acquire, or in-license additional product candidates.
Stock Performance
As of October 2, 2017, shares of Flexion closed at $26.24 after gaining more than eight percent on the day, yielding a market capitalization of approximately $850 million. The stock has experienced some volatility in the past year, hitting a high of $29.41 in March before falling as low as $16.51 in June. This selloff was largely due to the issue of $175 million in convertible senior notes. Since then the stock has recovered well as investors await the FDA’s decision. Year-to-date, the stock is up more than 40 percent.
Following are selected analyst ratings and price targets:
| Analyst | Firm | Rating | Price Target | Date |
| Francois Brisebois | Laidlaw | Buy | $35.00 | 9/25/2017 |
| Randall Stanicky | RBC | Outperform | $44.00 | 9/20/2017 |
| Ken Trbovich | Janney | Buy | $35.00 | 9/6/2017 |
Summary
Zilretta represents a potentially significant upgrade for the treatment of knee OA. In addition to improved local analgesia, it appears to avoid many of the side effects associated with other therapies. The market for treatment is likely significant, and pharmaceutical products that avoid costly surgeries are likely to be well supported by payors. The consensus is that the prospects for FDA approval are good.
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