Flexion Therapeutics (FLXN) has navigated the commercial landscape for Zilretta well since launch. The company has achieved its sales goal for 2019 by delivering $73 million in net sales, which was slightly above the mid-point of its tightened guidance range of $70-75 million and at the mid-point of the initially provided range of $65-80 million. The stock dropped in early January when the company provided 2020 net sales guidance of $120-135 million, which was below the Street consensus at mid-point at the time. The market was disappointed, but that’s still robust growth compared to 2019. The stock is not Long-Term Growth Portfolio material at the moment, but I see Flexion as having moderate-to-significant upside in the following years based on commercial execution and pipeline value creation. Cash burn is still a problem, and I think the company may need to raise cash in the following quarters despite the anticipated strong growth of Zilretta.
Solid end to a successful 2019
It’s not as if Flexion is significantly beating expectations, but the company is executing in line with the goals it set in early 2019, delivering $73 million in net sales and slightly exceeding the mid-point of the initial guidance range of $65-80 million and the updated range of $70-75 million. Many development-stage biotech companies becoming commercial entities have problems even meeting expectations.
As mentioned, the stock declined in early January when Flexion reported the preliminary 2019 net sales and guided for 2020 sales in the $120-135 million range. The mid-point of the range was below the Street consensus of $130.7 million, and if we are to judge the company by its execution in 2019, we are unlikely to see it report sales above the high end of the guidance range.
But $127.5 million (the mid-point of the guidance range) still translates to significant growth over $73 million in 2019, and I see Zilretta as well-positioned to grow in the following quarters and years.
The label expansion in late 2019 will certainly help the company’s promotional efforts – Zilretta’s label is now not limited to a single administration. The updated label changes are:
- Language stating Zilretta was “not intended for repeat administration” was removed.
- The label now includes description and safety data from the open-label phase 3 repeat administration trial.
- A misleading statement describing a single secondary exploratory endpoint in the original phase 3 trial was removed – one that compares Zilretta to immediate-release triamcinolone.
I think many physicians haven’t really adhered to the “not intended for repeat administration” limitation, but the removal frees up Flexion’s hands to promote repeat use, which should have a positive impact on Zilretta’s uptake in the following quarters. And some physicians (those not among the many I mentioned above) have probably been hesitant to use Zilretta more than one time in a single patient, so I think this will help the uptake in the following quarters.
Phase 3 study of Zilretta in hip OA discontinued, early-stage pipeline expands
The company decided to discontinue the phase 3 study of Zilretta in hip osteoarthritis, as it was unable to solve the full dose delivery issue. This could have been a nice addition to Zilretta’s label with approximately 500,000 injections per year.
But label expansion efforts are still there – the company recently initiated a phase 2 study of Zilretta in shoulder OA and adhesive capsulitis (frozen shoulder). This is a one-million injection per year market for Zilretta and would represent a nice add-on indication. Zilretta’s reported advantage in hyperglycemic patients makes it a potential go-to drug for 20% of OA patients with diabetes, and management noted on the Q3 earnings call that the prevalence of diabetic patients with adhesive capsulitis is almost 40%. Data from this study are expected in 1H 2021.
Flexion is making efforts to expand the early-stage pipeline. The IND for FX201 was cleared in Q3 2019, and the company expected to treat the first patient in a clinical study by late 2019 (it’s not yet clear whether this was accomplished). The trial is expected to enroll 15-24 patients, and the initial data are expected in 2021. As a reminder, FX201 is a locally administered gene therapy designed to stimulate the production of an anti-inflammatory protein IL-1Ra, and based on preclinical data, Flexion believes a single injection could enable expression of IL-1Ra for at least a year.
In September 2019, Flexion added FX301 to its pipeline through collaboration with Xenon Pharmaceuticals (XENE). FX-301 is a “locally administered NaV1.7 inhibitor formulated for extended-release in a thermosensitive gel.” Initial development is aimed at the administration as a peripheral nerve block for postoperative pain control. The company believes FX301 can deliver effective pain relief while preserving motor function, which should enable ambulation and rapid discharge following surgery. However, I don’t expect this candidate to create any value in the next two years, as it will only enter the clinic in 2021 and probably won’t report data until 2022.
Flexion ended Q3 2019 with $176 million in cash and equivalents, and the company is still burning a lot of cash. Zilretta’s growth will help offset the cash burn going forward, but based on the 2020 revenue guidance and expenses in the last few quarters, I would expect the company to burn between $80 million and $100 million in 2020. Management said on the Q3 earnings call that the current cash balance with expected future Zilretta sales and management of expenses will bring Flexion to profitability, but I wouldn’t be surprised and would actually expect the company to do an offering at some point in 2020 to not risk cutting it too close on the cash balance side.
Flexion has set a good foundation for growth in 2020 with Zilretta on the commercial side, and the company is making efforts to expand the commercial opportunity for Zilretta in the following years and to diversify its pipeline. In the near term, investors and traders will likely focus on Zilretta’s revenue growth and the quarterly cash burn with an eye on a potential equity offering, and these are, at the same time, the main risks for the stock in the next few quarters. A combination of Zilretta missing estimates and cash burn being higher than expected would likely depress the share price and push the company to do a secondary offering at lower levels, thus increasing the dilutive effects.
As covered in my previous article, I think the stock would be fairly valued in the low $20s and that it could be worth up to $30 per share based on $400-500 million in Zilretta sales in 2024 (analyst consensus for 2024 is currently at $462 million). And I think the company’s revenue growth guidance for 2020 makes the estimated range attainable. The pipeline assets would add to the long-term upside potential.
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