By Jason Napodano, CFA
Investors are well aware that the single biggest catalyst for shares of Durect (DRRX) remains the filing of the Remoxy NDA by Pfizer (PFE). As such, Durect shares popped on Tuesday, April 30, at around 10:35 a.m. ET based on comments made on Pfizer's first-quarter conference call. John Young, Pfizer's president and general manager of the Primary Care Unit, stated the following:
For Remoxy, we had a productive meeting with the FDA in March and the guidance that we've got out about meeting... it certainly helping to inform the next steps and addressing the issues that the FDA had raised previously in their complete response letter. We believe we have a path forward and we will publicly communicate further details overcoming quarters.
Those words seemed decisively more optimistic than what Young said in November 2012:
Remoxy has been a challenging asset that our teams have been working on very diligently since the acquisition of King. As a result of that work and extensive insights that we've gained around the formulation, we've initiated confirmatory bioavailability studies to assess the pharmacokinetic, or PK profile, of modified Remoxy formulation compositions. And we expect those studies to read out early in 2013. We think that the results of those studies will provide us a much greater clarity on whether or not we'll be able to adequately address the questions raised in the complete response letter that we received from the FDA. So we're targeting a late March meeting with the FDA to discuss those outputs and agree on a net go or no-go decision.
We remind investors that Pfizer did indeed run these confirmatory bioavailability and pharmacokinetic profiling studies, and went ahead with the planned FDA meeting that took place on March 28, 2013. We suspect that if the results of these studies were insufficient to address the FDA's concerns, then Pfizer would have probably postponed the meeting.
Pfizer is no rookie when it comes to interactions with the FDA. It is far too big an organization to waste its time and the FDA's time with inconclusive data. We may be reading too much into these events, but given Young's comments on April 30 and the progression of events that led up to those comments, we believe Pfizer will be preparing the Remoxy U.S. NDA for refile in the next several months.
Remoxy A Blockbuster
The market opportunity for an abuse-resistant oxycodone is enormous in our view. Quite simply, the market for extended release oxycodone (OxyContin-ER) is enormous in itself, with Purdue booking over $3 billion in sales in the U.S. in 2012. The growth of prescription opioid use over the past decade is astonishing. From 1997 to 2007, the milligram per person use of prescription opioids in the U.S. increased from 74 milligrams to 369 milligrams, an increase of 402%.
On April 16, 2013, we note the FDA announced two actions relevant to abuse-deterrent opioids that benefit Durect, Pfizer, and Remoxy. The first is, after reviewing the available science, the FDA will allow the label for opioids to describe abuse-deterrent properties. Purdue's new formulation of OxyContin-ER now contains this language. We suspect Remoxy will have similar, potentially superior language. The second is that the FDA will not accept or approve any generic forms of the original OxyContin-ER. This essentially protects the market for Purdue as the sole player, up until potentially when Pfizer launches Remoxy. Thus, we expect pricing power to remain high.
Durect is entitled to 6.0% to 11.5% royalties on worldwide sales of Remoxy. The royalty rate resets each year, but escalates as sales ramp. Management has not disclosed the actual royalty schedule, but has given guidance (through company presentations) on what investors can expect based on end-user sales at Pfizer. Piecing together these bits of information from Durect management over the past few years, investors can get a very good sense of the royalty on Remoxy. Below are sales and royalty estimates we pulled from various Durect investor presentations over the past few quarters.
Click to enlarge images.
Durect will also supply the excipients used to produce Remoxy. Similar to the royalty rate, the company has not disclosed the actual "cost-plus" transfer price that it will receive on sales of these excipients, only commenting at investor presentations that the initial benefit could amount to as much as a 0.5% royalty payment. We think that once sales of Remoxy increase, the net excipients payment after costs to DURECT will be worth around an additional 0.1% royalty. Excipient sales are an interesting way to potentially track Pfizer's progress. In 2011, Pfizer ordered $490,000 in excipients from DURECT. The number dropped to only $48,000 throughout all of 2012. The 2010 excipient sales figure was $961,000. In 2009, it was $3.0 million. It's clear to see that excipient sales to Pfizer (previously King) have dried up given the two complete response letters. However, excipient sales in the first quarter 2013 totaled $200,000. Is this a sign that Pfizer is starting to re-order ahead of a potential Remoxy ramp? Perhaps. This is something to watch for in the next few quarters.
We have modeled the ramp up in sales we expect of Remoxy at Pfizer. Our assumptions assume that Pfizer will refile the NDA in September 2013, a PDUFA in March 2014, and launch the product in July 2014. We remind investors that in early 2013 the company received issuance of an additional ORADUR patent. Thus, management believes that Remoxy will be protected in the U.S. until at least 2031. We model Pfizer taking 30% of the OxyContin-ER market from Purdue. And we think this is conservative. Remoxy is a superior product to OxyContin-ER in our view. It could easily capture more than 50% of the market. Nevertheless, using a 15% discount rate, and then a 67% probability of approval, we see the potential royalty stream from Remoxy alone worth roughly $2.25 per share. We note BioMedTracker currently forecasts Remoxy approval at 77%, again leading us to believe our model is conservative. Given our $2.25 per share value for Remoxy alone, we believe Durect is an attractive investment.
Plus, we note our 67% probability adjustment is based more on the risk of filing/not filing, rather than the FDA decision. Our adjustment was 50% before Young's comments on April 30. We believe, as Young stated, that there is a path forward for Remoxy and the more the market comes to grips with that the more the shares will continue their upward trend. If we raised our probability of approval to 77%, consistent with BioMedTracker, the target price jumps to $2.60 per share. If we assume Pfizer captures 50% of the market, Remoxy is worth over $4.00 in value.
That said, until the NDA is refiled, we expect Durect to trade at a discount to this target. But make no mistake about it, if Pfizer files the Remoxy NDA, Durect shares will move higher.
Durect remains one of our best ideas in small-cap biotech. With the shares trading at only $1.54 per share, well below our fair-value assumption for Remoxy alone, we think the stock offers potentially handsome returns over the next year. We remind investors that on April 16, 2013, Durect filed the U.S. new drug application (NDA) on Posidur. If the FDA accepts the application -- a decision is expected mid-June -- the PDUFA action date would be schedule for February 2014. Our financial modeling pegs Posidur, even with a complete response letter in February 2014, worth $0.30 per share.
In March 2013, we wrote that the company's cash balance and commercial operations with ALZET pumps and LACTLE polymers limits downside in the shares. We see this worth another $0.60 per share, bringing our full value target price to $3.00. And we know that this price assumes no value for the DURECT pipeline, which includes Eladur, the TRANSDUR Sufentanil patch, Relday, and various follow-on ORADUR-opioids and ADHD compounds.
We encourage investors to download the full Zacks/SCR research report for a detailed look at Posidur and the rest of the pipeline.
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