Flexion's Zilretta Is Destined To Transpire As A Commercial Flop

| About: Flexion Therapeutics, (FLXN)

Summary

Zilretta is being developed as a reformulation of TCA-IR, utilizing the sustained-release injection method. Data has demonstrated that Zilretta is marginally better than current treatments.

Management has projected Zilretta to be an “attractive therapeutic alternative” to current standards of care in the osteoarthritis treatment space, despite not possessing a strong competitive advantage.

The company’s shares remain overvalued at current levels. Flexion should be trading at cash value, or 54% below current levels as Zilretta provides little value as a new treatment.

In the ever-evolving area of biotech and pharma, true innovation is what takes the industry to new heights. There is a plethora of companies in hopes of developing the next "blockbuster" drug or simply conducting additional research to further increase the efficacy of an existing treatment that has been a victim of scientific neglect for several years. As investors, it's imperative to conduct research using a wide variety of sources including but not limited to, internal company data, external scientific data, and cross-sectional comparisons with current standard of cares or developmental-stage competition.

Enter Flexion Therapeutics (NASDAQ:FLXN), a small biotech company developing local pain therapies for various indications. It's lead candidate, Zilretta (FX006) is currently pending the filing of an NDA for the treatment of Osteoarthritis (OA). The manner that Zilretta's clinical data has been presented in by the company to date has looked enticing at first glance, but further analysis leads to the belief that Zilretta is not the revolutionary and novel compound that the company claims it to be. Furthermore, Zilretta does not seem to have a place in the commercial landscape for the treatment of osteoarthritis, giving the stock further downside at these levels.

What Makes Zilretta So Special (Supposedly)?

Zilretta is a reformulation of the current standard of care for OA, TCA-IR (triamcinolone acetonide immediate-release). An immediate-release injection involves the liquid concentration rapidly spreading following the injection, which in this case concerns the knee joint. Patients treated with TCA-IR experience a brief period of relief but the immediate release of the concentration causes the pain to gradually arise once again. Flexion's Zilretta is utilizing the FDA's 505(b)(2) pathway, a route used to gain approval for a reformulation of an existing treatment with some altercations. The company's main "claim to fame" on Zilretta involves its ability to control the spread of the liquid in the joint (sustained-release), providing long-lasting pain.

Lackluster Data Proves That Zilretta is Marginally Better Than Current Treatments

The company has tested Zilretta in five clinical trials to date. The table below lists the three trials that are relevant to my analysis below. Flexion didn't provide a name for any of the clinical trials, so I'll be referring to each trial by its patient count.

Trial and Patient Count ("")

Arm 1

Arm 2

Arm 3

Arm 4

Phase 3 -"486"

Zilretta 40mg

TCA-IR

Saline (placebo)

Phase 2b -"310"

Zilretta 40mg

Zilretta 20mg

Saline (placebo)

Phase 2b -"229"

Zilretta 10mg

Zilretta 40mg

Zilretta 60mg

TCA-IR 40mg

Click to enlarge

To find the optimal dose for Zilretta, the company conducted a dose-ranging trial (Trial 229) comparing 10, 40, and 60 milligrams of Zilretta to TCA-IR. The 40mg dose of Zilretta was identified as the optimal dose going forward, but the key finding from the study was the rebound seen in the Zilretta arms by the end of the 12-week trial. The 40mg dose led the pack from the start, showing a sharp decline in pain, but the gap between the control and Zilretta closed by the end of the trial. Granted, statistical significance was achieved in the middle of the trial, but if the gap closes by the end of the intended treatment duration, what's the point of undergoing treatment? As evident from the graph below, the LS (least square) mean change from baseline of the ADP pain scale served as the primary endpoint. Zilretta was never able to break through the -4.5 level, and proceeded to rebound following week 7.

Click to enlarge

(Source: Safety and Efficacy of FX006 in Patients with Osteoarthritis of the Knee, Poster #668, 2013 American College of Rheumatology Annual Scientific Meeting)

Fast-forwarding to September 2015, the company reported data from the first (Trial 310) of two pivotal trials that are going to be the main backbone for the NDA scheduled for filing in the second half in 2016. The company administered either Placebo (saline water), 20mg of Zilretta, or 40mg of Zilretta to patients, and the primary endpoint was pain relief against placebo at week 12. While Zilretta was statistically significant to Placebo at weeks 1-12 and 1-24, the primary endpoint of statistical significance at week 12 was not met. The rebound seen in Zilretta in study 229 was replicated in study 310 as well, with the gap between Placebo and Zilretta closing as the trial neared its end. Therefore, in essence, the rapid relief demonstrated by Zilretta in the early stages of treatment is meaningless then, considering the patient will be feeling nearly the same as when he or she would've gone without treatment. Now although the FDA doesn't require an active comparator in the trials used as evidence for an NDA for analgesics, it's always helpful to have one to measure exactly how much more effective the experimental compound is compared to the current treatments on the market. In contrast however, Flexion decided leave out an active comparator in this trial, leaving the trial as a superficial "pass". Does the company really believe that Zilretta's competitive advantage will be obtained by demonstrating superiority over placebo?

Investors shouldn't fret the miss of the primary endpoint though, since management found a clever way to deliver Zilretta's efficacy in an extra rosy fashion. Pain trials can often be tricky because many patients drop out, primarily out of the placebo group due to a lack of efficacy. The FDA urges sponsors to filter out dropouts from the final analysis in order to get a more accurate view of the results because of the treatment arms now changing from baseline collection to the end of the trial. For this reason, the FDA claims that a "comparison of completers only is not useful as a primary analysis" (FDA Guidance for Industry: Analgesic Indications, 26). As a result, the FDA asks sponsors to use a commonly used sensitivity analysis known as "Baseline Observation Carried Forward/Last Observation Carried Forward" (BOCF/LOCF), which fills the void of missing data due to patient dropouts in the trial. Lo and behold, management explained that the primary endpoint was met when using the BOCF/LOCF sensitivity analysis, with the p-value reaching 0.042 at week 12. So everything is fine, right?

Not exactly. The use of the LOCF strategy can often result in good pain scores being carried forward for patients that dropped out due to toxicity, which therefore assigns misleading outcomes to such patients. If a patient dropped out to a lack of efficacy as well, utilizing the LOCF strategy would imply that he or she experienced a better pain score than what was actually reported, which could consequently "lead to inaccurate references", according to the FDA (Page 27). Moreover, the FDA states "Therefore, we do not recommend their [BOCF/LOCF] use in multiple-dose, chronic pain trials." In stark contrast however, Flexion relied on the LOCF analysis to promote the otherwise muggy efficacy of Zilretta in its Phase 2b trial (study 310), a classic example of diverting the attention to a modified analysis.

The 486-patient Phase 3 trial (Trial 486) did include an arm treating patients with an active comparator (TCA-IR) this time around. Data demonstrated that Zilretta was statistically significant against placebo through week 16, and patients treated with Zilretta experienced a 50% reduction in pain from baseline through week 12, on average. Once again however, there is no mention of Zilretta demonstrating statistical significance against TCA-IR, the active comparator in the trial. Sure, the sustained-release method looks appealing and all, but if it's only marginally better, why bother?

Click to enlarge

(Source: Average Change from Baseline in the Weekly Mean of Average Daily Pain Intensity MMRM vs. BOCF/LOCF, Study 310)

The main point of the bear thesis is not to claim that Zilretta has a slim chance of approval, but to mop up the fantasy claiming that Zilretta will make huge strides as an "attractive therapeutic alternative [in the OA treatment space]." As described earlier, the company designed the trials in an approvable manner suitable for the FDA, but also in a way to disguise the lack of potency of Zilretta. After all, setting the primary endpoint at "assess[ing] the magnitude of pain relief of Zilretta at 12 weeks against placebo" is considered setting the bar extremely low for an experimental compound. Given that the market for OA treatments is fairly saturated, I don't see a fit for Zilretta, even in the event that it is approved.

Aside from Zilretta, the company's pipeline does include FX007 which is being developed for the treatment of post-operative pain, and FX005 for the treatment of end-stage OA. FX007 is currently in preclinical stages and the company does not intend to internally develop FX005, according to the most recent 10-K (Page 3). As a result, I believe Flexion's current valuation is derived entirely from Zilretta (FX006). With the NDA filing due sometime in the second half of 2016, I project the cash burn to be close to $30 million for Q1 2016 , bringing the cash balance to approximately $88.6 million by the end of Q1 2016. I understand that by using the 505(b)(2) pathway for approval, Flexion is relying on data from previously approved therapies like TCA-IR, therefore diminishing the need for relatively strong trial data. However, there's no guarantee that an approval is in the books. The company itself admits this on page 37 of its most recent 10-K, stating that

Based upon negative or inconclusive results, we or our collaborators may decide, or regulators may require us, to conduct additional clinical trials or preclinical studies. For example, although our Zilretta pivotal Phase 2b clinical trial showed statistical significant pain relief with the 40 mg dose compared to placebo at weeks 1-11 and week 13, the result was not statistically significant at week 12 and therefore the primary efficacy endpoint of the trial was not achieved.

Furthermore, the company admits that premium pricing may be a problem if Zilretta is unable to differentiate itself from current standards of care. On page 51, the company states

If we are unable to demonstrate significant differentiation for Zilretta from immediate-release TCA and other injectable immediate-release steroids, our opportunity for Zilretta to achieve premium pricing and be commercialized successfully, if approved, would be adversely affected.

As mentioned above, the lack of differentiation between Zilretta and TCA-IR (besides the release) is detrimental to Zilretta's potential commercial success. Moreover, beating placebo in a numerous clinical trials is not impressive by any means.

Given the pitiful characteristics and potency of Zilretta demonstrated in several trials, I firmly believe that Zilretta won't last long on the market (if it's approved). Utilizing the 505(b)(2) pathway does mitigate some of the approval risk, but it doesn't rule out the part about lacking a competitive advantage on the market. Flexion is still overvalued at its current valuation of around $190 million, and I believe it should be trading at cash value, which should come to around $4.11 per share by the end of Q1, providing further downside of around 53% from current levels.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in FLXN over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.