Woburn Mar 16, 2020 (Thomson StreetEvents) -- Edited Transcript of Flexion Therapeutics Inc earnings conference call or presentation Thursday, March 12, 2020 at 8:30:00pm GMT

* David A. Arkowitz

Flexion Therapeutics, Inc. - CFO

* Michael D. Clayman

Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director

Flexion Therapeutics, Inc. - VP of Corporate Communications & IR

The Benchmark Company, LLC, Research Division - Senior Healthcare Technology Research Analyst

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Serge D. Belanger

Good afternoon, ladies and gentlemen. And welcome to the Flexion Therapeutics Fourth Quarter and Full Year 2019 Financial Results Conference Call. My name is Daniel, and I will be your coordinator for today. (Operator Instructions)

I'll now turn the call over to the company.

Scott Young, Flexion Therapeutics, Inc. - VP of Corporate Communications & IR [2]

Thank you, Dan. Good afternoon. This is Scott Young, Vice President for Corporate Communications and Investor Relations. Before we begin, I would call your attention to the metrics slide that we will discuss in today's presentation. Those slides can be viewed directly via the webcast, in the 8-K we issued this afternoon or under the Investors tab on flexiontherapeutics.com.

In addition, our Q4 earnings press release and an archive of this conference call, can also be found there. Today's call will be led by Flexion's Chief Executive Officer, Dr. Michael Clayman; and he is joined by David Arkowitz, Flexion's Chief Financial Officer; and Melissa Layman, Flexion's newly appointed Chief Commercial Officer.

On today's call, we will be making forward-looking statements that include commercial, financial, clinical and regulatory projections. Statements relating to future financial or business performance, conditions or strategies

matters, including expectations regarding net sales, operating expenses, cash utilization, clinical, regulatory and commercial developments and anticipated milestones are forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

Flexion cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties, which change over time. Additional information on the factors and risks that could affect Flexion's business, financial conditions and results of operations are contained in Flexion's Form 10-K for the year ended December 31, 2019, which was filed with the SEC and other filings, which are available at http://www.sec.gov as well as Flexion's website.

These forward-looking statements speak only as of the date of this call, and Flexion assumes no duty to update such statements. I will now turn the call over to Flexion's CEO, Mike Clayman.

Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [3]

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Thanks, Scott, and thank you all for joining. Today, I'll recap our commercial progress in 2019, review our life cycle management activities, provide an update on our pipeline and discuss our priorities for this year. After that, I'll turn it over to David for a deeper review of our commercial metrics and a summary of our financial performance, and then we will open the line and take questions.

To begin, as we reported today, we recorded full year ZILRETTA net sales of $73 million for 2019, which is fully in line with the preliminary unaudited revenue estimate we provided in early January. We are very pleased with our sales performance in 2019, which represents growth of more than 220%, compared to our 2018 full year net sales of $22.5 million. Those numbers tell a very compelling story, and they speak to the outstanding work of our field-based teams, the excellent coverage we have for ZILRETTA, the impact from our judicious use of volume-based rebates, but most importantly, our sales performance speaks to the remarkable experience that patients and clinicians are having with ZILRETTA. As you will see in the commercial metrics that David will review, by the end of 2019, our customers had purchased 175,000 units of ZILRETTA. While our data are limited to the account level, that number provides a reasonable surrogate for the number of patients who have been treated with ZILRETTA since it was introduced to the market in late 2017. And we know that many of those patients have received unprecedented pain relief from ZILRETTA. I say this based on real-world feedback from the countless conversations I've had with grateful ZILRETTA patients and their physicians, feedback that is wholly consistent with our compelling clinical trial data.

In fact, last year, we became aware of several professional athletes who received ZILRETTA, namely Rod Woodson, the NFL Hall of Fame Defensive back named as one of the top 100 players of all time. Michael Eruzione, the captain of the 1980 Gold medal winning U.S. Olympic Hockey team and the player who scored the game winning goal against the Russians during the Miracle On Ice; and Chris Dickerson, a former outfielder who played from the New York Yankees and other major league baseball teams. From snow blowing a driveway to playing with their children and grandchildren, to jogging for the first time in years, they all have profoundly moving stories about how ZILRETTA has helped each of them manage their knee OA pain, and thereby, improve their ability to participate in regular everyday activities. As part of our ongoing physician marketing initiatives, we brought all 3 athletes together at a major orthopedic conference last December, where they and their treating physicians, spoke to a standing room crowd of some of the country's leading sports medicine experts. They shared their stories of how ZILRETTA has helped them, and the best words I can use to describe that session are inspiring and humbling.

While all are elite athletes, their ZILRETTA stories echo the scores of e-mails and letters I've received from patients who are so grateful to reengage in things they love doing with less pain. From gardening, playing a round of golf, walking on the beach, hiking, each of these stories serves as a reminder to all of us that while we have impacted more than 175,000 patients, there are 15 million people who see their doctor every year for OA knee pain. And 5 million of them receive an intra-articular injection. The opportunity for ZILRETTA and Flexion is truly massive, which brings me back to our performance in 2019 and our goals for 2020.

Throughout the course of 2019, we saw existing practices increase their use of ZILRETTA and more than 1,600 new accounts start using the product. Today, with the benefit of 2 years in the market, we have actual claims [data that show some slight] (added by company after the call) changes in the payer mix versus our assumptions prior to launch. We now see that the actual payer mix is skewed slightly more toward Medicare, which accounts for roughly 55% of the market versus previous estimates of 50%. 40% is still commercial, but Medicaid, VA and 340B plans are making up roughly 5% of the mix. We view this modest increase in Medicare patients to be incrementally positive as Medicare patients can be injected the same-day they visit without any need for prior authorization. In addition, it is important to point out that commercial coverage for ZILRETTA remains excellent. As we discussed in December, the recent approval of our sNDA resulted in a significantly improved label, which most importantly, removed the onerous not intended for repeat administration wording in the limitation of use statement. Within days of the approval, we developed materials to help our MBMs communicate the label update and we have anecdotal feedback from the field that tells us that the changes have been very well received. While we clearly view the label update as a tailwind. We have always said that we continue to believe that the meaningful impact will be seen over the following quarters and years. From a commercial perspective, our progress in 2019 strengthens our belief that ZILRETTA can become the new standard of care for the intra-articular treatment for OA knee pain in the years ahead. While under normal circumstances, these factors would give us confidence that our 2020 ZILRETTA net sales guidance of $120 million to $135 million is both credible and achievable. Like all businesses, we are acutely attuned to the potential impacts of the coronavirus global pandemic, and we are monitoring this dynamic situation very closely. To date, we have not seen any material impacts on ZILRETTA sales, our ability to access customers or to initiate our clinical trials. However, it is impossible to predict how the outbreak could evolve in the months ahead or what impacts more aggressive social distancing or other containment efforts might have on patients or practices. Regarding our supply chain, we believe we are in a very strong position. We do not source any of our key materials from China, and we presently have approximately 10 months worth of finished product inventory in our warehouses in the U.S. Furthermore, we have an additional 12 months of API, triamcinolone acetonide at our manufacturing facility in the U.K. Again, it is impossible to predict the long-term impacts of the outbreak. But we feel very good about our ability to provide ZILRETTA to patients over the quarters ahead.

Shifting to our clinical development activities, our Phase II trial to investigate the safety and efficacy of ZILRETTA in shoulder OA and adhesive capsulitis, also known as frozen shoulder syndrome continues to advance, and we anticipate data from that trial in 2021.

As we've previously discussed, these 2 conditions combined account for roughly 800,000 injections, and they present an opportunity for us to expand the use of ZILRETTA with a subset of orthopedists, who primarily focus on sports medicine and commonly treat these conditions with steroid injections.

With respect to our pipeline, we've also been making progress with our 2 drug candidates, FX201 and FX301. FX201 is our gene therapy, which holds the potential to provide OA pain relief for at least a year, improve function and potentially modify disease. As we announced last year, the IND for FX201 was accepted by the FDA, and we recently treated the first 2 patients in our Phase I dose-ranging study. We anticipate treating approximately 15 to 24 patients, who will be followed for 104 weeks with initial readout in 2021.

Now we'll move to FX301. Our NAV 1.7 inhibitor, formulated within a thermosensitive hydrogel for administration as a peripheral nerve block for control of postoperative pain. We've held our pre-IND meeting with FDA, and we remain on track to initiate our first FX301 clinical trial in 2021.

Unlike typical local anesthetics, we believe the selective pharmacology of FX301 has the potential to deliver at least 3 to 5 days of effective pain relief, while preserving motor function, which could enable ambulation, rapid discharge from the hospital and early rehabilitation following musculoskeletal surgery.

Finally, regarding our search for a Chief Commercial Officer. We were very excited to announce the appointment of Melissa Layman earlier this week, and I'm delighted that she is able to join us for today's call. As we've said repeatedly, in our search for a CCO, we were looking for someone who had had success leading an entire commercial enterprise, who had deep experience and expertise in each of the key commercial functional domains, who had a track record as a very strong leader and who would positively contribute to our already strong culture. Because Melissa fulfills all of these criteria and is simply a terrific person to interact with. We could not be more pleased to have her take the helm of our commercial organization. Before David summarizes our fourth quarter financials and walks through the commercial metrics, I'd like to give Melissa the opportunity to make a few remarks. Melissa?

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Melissa Layman, [4]

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Thank you, Mike, and thank you for the kind words. It is such a pleasure to be here today and such an honor to join Flexion. While I've barely been in my role for a day, I can already see what an amazing group of people work here. The team has been welcoming, engaging and candid, and that was consistent throughout the entire interview process from the Executive Committee to the Board members. The commitment to patients and passion for winning has been universal, and that was one of the many reasons I wanted to join. Put simply, I can't begin to convey how excited I am about the opportunity that's ahead of us. The strong foundation that's been laid by Mike, David, Steve Meyers, and the rest of the commercial leadership team is truly impressive, and I'm looking forward to working together to grow ZILRETTA's market share and help make it the leading IA treatment in this space. Over the next few months, I'll be working intensively with our commercial organization, and I look forward to representing our commercial effort on future calls. At this point, I'll turn it over to David.

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David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [5]

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Thank you, Melissa. I'll start by walking through our commercial metrics which, as Scott mentioned, can be found on our website and in the 8-K we issued today.

If you look at Slide 2, you can see that we recorded ZILRETTA net sales of $23.7 million in the fourth quarter of 2019, bringing full year 2019 net sales to $73 million. As Mike mentioned, year-over-year growth topped [220%] (corrected by company after the call). As in previous quarters, we expanded our list of target accounts in the fourth quarter to 4,972, and by December 31, 2019, we've called on almost all of them. At the end of the fourth quarter, 3,488 accounts had purchased ZILRETTA, which is an increase of nearly 360 purchasing accounts compared to the end of the third quarter.

As of the end of December, we had 2,642 accounts or 76% of all purchasing accounts place at least 1 reorder for ZILRETTA. Notably, we saw our reorder rate increase in each quarter throughout 2019, and this occurred on a successively growing customer base. Slide 3 charts our quarterly sales from launch through the fourth quarter of 2019, which provides a very compelling view of ZILRETTA's growth in the market, especially since the introduction of the permanent J Code on January 1, 2019. We do not provide quarterly guidance, but based on routine seasonality impacts, directionally, we anticipate first quarter net sales to be roughly flat versus the fourth quarter of last year.

Moving to Slide 4. This slide and the remaining 2 slides reflect purchases of ZILRETTA by accounts, which represent physician practices, clinics and hospitals of various sizes and purchasing potential. As we look at the distribution of accounts that have purchased ZILRETTA since launch, we stayed with the same groupings that we've used in previous quarters, accounts that have purchased 1 to 10 units, purchased 11 to 50 units or purchased more than 50 units. We continue to see a significant number of accounts with purchases of 1 to 10 units. And as of December 31, 2019, roughly 1,670 accounts had made purchases in this range. While approximately 1,030 accounts had purchased 11 of 50 units. In addition, 794 accounts had purchased more than 50 units, which represents growth of 150% as compared to Q1 2019 when 313 accounts had purchased in this category.

Looking at Slide number 5. You can clearly see the distribution of purchases by accounts. Those 794 accounts that have each purchased more than 50 units are in total, responsible for approximately 143,000 units or roughly 81% of all units purchased since launch. As we have mentioned previously, accounts generally move along a utilization continuum from 1 to 10 units to 11 to 50 units and then to more than 50 units. Importantly, none of our purchasing accounts has fully incorporated ZILRETTA into their practice. And this holds true for even the highest utilizers. As a result, we believe there is tremendous opportunity for us to increase utilization across each of these groups. Before I leave this slide, I would like to point out that the total ZILRETTA purchases by accounts in the fourth quarter were approximately 37,500 units, which is lower than the 48,600 units purchased in the third quarter. We believe this quarter-over-quarter reduction was primarily the result of the broad-based rebate program that we introduced in the third quarter. There was a strong amount of enthusiasm and pent-up demand for this program, and we believe that some purchases that otherwise would have occurred in the fourth quarter instead occurred in the third quarter. To a much lesser extent, we believe that the holidays in the fourth quarter had an impact on the sequential quarter reduction as well. Nevertheless, we saw total ZILRETTA purchases by accounts increased by more than 70% in the second half of 2019 versus the first half of 2019.

Moving to Slide 6. Here, we break out ZILRETTA purchases by new and existing accounts. And in the fourth quarter, we added about 350 new purchasing accounts. While we expect to eventually see a slowing in the number of new accounts coming on board each quarter, we continue to be pleased with the progress we are making with new accounts as they typically work their way through the ZILRETTA utilization continuum.

So at this point, I will briefly walk through the fourth quarter and full year 2019 financial results, which we included in the press release issued this afternoon and in our 10-K. We reported a net loss of $149.8 million for full year 2019 as compared to a net loss of $169.7 million for full year 2018. Net sales of ZILRETTA were $23.7 million for the fourth quarter of 2019 and totaled $73 million for full-year 2019. The cost of sales for full-year 2019 was $10 million. The fourth quarter 2019 net sales reflect a gross to net reduction of 11%. A gross to net reduction is primarily comprised of distributor and service fees, returns reserve, health care provider rebates and mandatory government discounts and rebates, such as Medicaid, 340B institutions, and Veterans Administration, Department of Defense. As we previously mentioned, in the third quarter, we started offering rebates to eligible health care providers that are variable based on the volume of product purchased. These provider rebates contributed 4% of the fourth quarter total gross to net reduction of 11%. Research and development expenses were $69.6 million, and $53.1 million for the years ended December 31, 2019 and 2018, respectively. The increase in research and development expenses year-over-year of $16.5 million was primarily due to an increase in salary and other related costs for additional headcount and stock-based compensation expense, an increase in expenses related to portfolio expansion and other program costs, including an upfront payment to Xenon Pharmaceuticals related to FX301, and an increase in development expenses for ZILRETTA. Selling, general and administrative expenses were $129.7 million and $121.3 million for the years ended December 31, 2019, and 2018, respectively. Selling expenses were $96.3 million and $87.3 million for the years ended December 31, 2019 and 2018, respectively. The year-over-year increase in selling expenses of $9 million was primarily due to salary and other employee-related costs and external costs related to marketing and reimbursement support activities.

General and administrative expenses were $33.4 million and $34 million for the years ended December 31, 2019 and 2018, respectively, which represents a decrease of $0.6 million year-over-year. Interest expense was $17.1 million and $15.7 million for the years ended December 31, 2019 and 2018, respectively. We expect that while our operating expenses will continue to increase in the near term, primarily driven by commercial activities in support of ZILRETTA, line extension clinical trials for ZILRETTA, continued development of FX201 and FX301 and development activities associated with future additions to the pipeline. We believe we will be able to increasingly leverage our infrastructure in support of these efforts. As of December 31, 2019, we had approximately $136.7 million in cash, cash equivalents and marketable securities compared with $258.8 million as of December 31, 2018. In addition, earlier this quarter, we fully drew down $20 million from our revolving credit facility, which is secured by our accounts receivables. We believe that our current cash balance with the expected future sales [of ZILRETTA] (added by company after the call) and the ongoing prudent management of our expenses will enable us to reach profitability. However, our projections are based on certain market assumptions, which may or may not be affected by the coronavirus pandemic. As a result, we will continue to review and reassess our [assumptions] (added by company after the call)

in light of those factors. In addition, we will remain opportunistic as it relates to potential funding decisions, and we will do what we believe is in the best long-term interest of Flexion and our shareholders.

At this point, I would ask the operator to please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Randall Stanicky with RBC Capital Markets.

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Daniel James Busby, RBC Capital Markets, Research Division - Senior Associate [2]

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This is Dan Busby on for Randall. A couple of questions. First, among the high-prescribing accounts, in particular, can you give us a sense of how much more room there is to grow within those practices? I think I heard you mentioned that you haven't fully penetrated any of those accounts yet. And of the physicians in those accounts who aren't using it, what's the pushback you're hearing?

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David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [3]

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Yes, Dan, this is David. So as we shared in our prepared remarks and in the deck, we've got almost 800 accounts that have purchased 50 units, more than 50 units of ZILRETTA launch to date. In the vast, vast majority of those accounts, ZILRETTA has not been fully adopted, incorporated into their practices and even there's a subset within those accounts of almost 50 accounts that have purchased more than 500 of units of ZILRETTA launch to date. So there's room to run with those almost 800 accounts as well as the other accounts that are less than 50 units of ZILRETTA purchased launch to date. And in terms of the other part of your question, in terms of why have they not fully incorporated ZILRETTA at this juncture. The way this will typically work is take a practice with 5 or 6 physicians [1 or] (added by company after the call) 2 of those physicians have started to use ZILRETTA and are using ZILRETTA for their patient -- appropriate patient population. But there just hasn't been awareness and experience with ZILRETTA for the other 3 or 4 docs in the practice. So it's a process. It's a process for the docs that are treating the existing patients to talk to their colleagues or our representatives to be making those physicians that are not yet using ZILRETTA, aware of ZILRETTA, getting them comfortable with reimbursement. So that's really what is going on.

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Daniel James Busby, RBC Capital Markets, Research Division - Senior Associate [4]

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Okay, that's helpful. And I guess, as a follow-up to that, if 1 practice, if 1 or 2 physicians within a practice, have secured reimbursement? Is it typically the case that other doctors who aren't using it, but may in the future, they would have reimbursement set up already? Or is that more kind of doctor by doctor?

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David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [5]

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No, it's typically at the office level, at the clinic level. But the -- it's an issue of just getting familiar and comfortable with reimbursement, experiencing reimbursement, and that takes those docs that have not achieved that to just go through the process.

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Operator [6]

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Our next question comes from Elliot Wilbur with Raymond James.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [7]

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A couple of questions. First, Mike, I believe you mentioned in your commentary that you expect 1Q 2020 ZILRETTA sales to be essentially flat versus 4Q '19. Just want to get maybe a little bit more color behind that? How much of that you think is attributable to high deductible plans, perhaps influencing utilization versus other factors such as seasonality or just sort of overall company conservatism kind of in light of potentially increased macro uncertainty here in the short term?

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [8]

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Yes. So I think there are a few things, Elliot. So it's a good and important question. First, just to recognize, historically, in this space, the hyaluronic acids are typically down 10% in the first quarter, with the driver being, as you point out, deductible. That is a key driver. I think that you also have to look at an older population may be less active in the winter months. And as a result, have less need to go to their physicians. So there are a couple of reasons why there is a basis for, relatively speaking, the first quarter being softer than other quarters and why we have guided to flat in the first quarter.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [9]

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Okay. And then with respect to your commentary around some of the data points that emerge from the claims data that you're referring to in terms of the payer mix with Medicare representing now a higher proportion. How should we think about the relative opportunity with respect to additional growth levers such as repeat administration, bilateral administration within the context of a greater Medicare book of business versus commercial?

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Michael D. Clayman, Flexion Therapeutics, Inc. - Co-Founder, President, CEO & Director [10]

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Yes, it's a good question. We -- as you know, the Medicare population has the opportunity to benefit most directly in a sense from ZILRETTA and that physicians can use same-day without any hesitancy and proceed with confidence that they will be reimbursed. They can repeat dose without any concern about reimbursement. They can do bilateral injections, et cetera. So we like the Medicare population. We also like the commercial population. It's very straightforward with Medicare. And I would say directionally, as a modest bump up in the representation of Medicare is, wind in our sails and will improve our circumstances. As we often say, this is not a light switch, but it's directionally encouraging.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [11]

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Okay. And then just a couple of financial questions for David as well. With respect to SG&A trends, they've held relatively flat in the $32 million, $33 million range over the last 4 quarters, not sure kind of directionally would expect it to increase, but obviously, you've been able to get a lot more leverage out of that line than probably what we would have expected at the beginning of the year. So how should we think about progression of that number over the course of 2020?

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David A. Arkowitz, Flexion Therapeutics, Inc. - CFO [12]

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Yes, Elliot, great question. So to your point, it has been relatively flat quarter-over-quarter in 2019 the G&A component of that. So if you just look at quarterly SG&A for fourth quarter about 20 -- excuse me, about $32 million, about $8 million of it is G&A, that will stay flat in the ensuing quarters. $24 million of it is commercial. And as we've talked about before, slightly more than half of that is related to headcount and support of spend, and we are right-size from a headcount standpoint. So increases in that portion will be minimal, where we're going to see some increases over time are external marketing activities in support of increasing ZILRETTA sales. But because that's only less than half of the selling and marketing spend, you're not going to see SG&A go up by meaningful amounts quarter-over-quarter. And on top of all that, as you might imagine, we're very focused on leveraging as best we can, our SG&A infrastructure that we've built up over the past 4 quarters.

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