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By Jason Napodano, CFA

Quick Financial Update

On August 5, 2013, Durect Corp. (NASDAQ:DRRX) reported financial results for the second quarter 2013. The company reported total revenues in the quarter of $3.92 million, consisting of $3.01 million of product and excipient sales, mainly driven by sales of ALZET Pumps and LACTLE polymers, and $0.91 million in collaborative payments. Product sales increase 17% over the second quarter 2012. Collaborative payments consisted primarily of ratable recognition of upfront payments from Zogenix (NASDAQ:ZGNX) and collaborative payments from Pfizer (NYSE:PFE) on the Remoxy supply agreement. Product sales exceeded expectations by $0.3 million, whereas collaborative payments were generally in-line with our thinking.

Net loss for the second quarter totaled $5.1 million, or $0.05 per share. DURECT exited the second quarter of 2013 with approximately $21.3 million in cash and investments. Cash usage for the second quarter totaled roughly $4.2 million. We find the existing cash balance to be sufficient to fund operations into the third quarter of 2014.

Nothing New On Remoxy...Until This Fall

No real update was provided by Pfizer, Pain Therapeutics (NASDAQ:PTIE), or Durect on the status of the Remoxy NDA re-file on any of the second quarter update calls. We remind investors that back in May 2013, Pfizer provided a brief update on Remoxy in their Form 10Q filing. From the filing:

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This news was quite a surprise to Durect investors. Only a few days before on their quarterly conference call, Pfizer noted that the meeting with the FDA in March 2013 was "productive" and that the guidance received at that meeting was "helping to inform the next steps and addressing the issues that the FDA had raised previously in the complete response letter." John Young, Pfizer's President and General Manager of the Primary Care Unit concluded his remarks on Remoxy by saying, "We believe we have a path forward and we will publicly communicate further details overcoming quarters."

For Pfizer to use the words, "If we elect to continue development of Remoxy…" only a few days later in its filing certainly spooked investors and creates doubt. The fact that the resubmission is not expected before mid-2015 is disappointing and perplexing to say the least. That being said, we understand that Pfizer will need to conduct additional clinical studies before they re-file the NDA. These include a pivotal bioavailability study with the new modified formulation to bridge to the clinical data conducted with the original formulation, as well as an abuse potential study with the new modified Remoxy formulation. We note these studies will be similar in design to the previous bioavailability and abuse deterrent studies completed by Pfizer, only larger in size. Neither is of significant cost and we believe both can be completed roughly 12 months after initiation.

From a timing standpoint, we anticipate that Pfizer will provide an update on the initiation of these studies in the Fall - perhaps on its third quarter earnings call currently schedule for late October 2013. Subsequent updates are likely on ClinicalTrials.gov. We would be very surprised to see a "no go" decision given the limited cost of the studies, large market opportunity of Remoxy, and the potential for over a billion in annual peak sales. We think it is safe to say that Remoxy remains an enormous opportunity for Durect. Unfortunately, we're going to have to wait a little longer for visibility on the re-filing.

Posidur PDUFA In February 2014

On June 20, 2013, Durect announced that the U.S. FDA had accepted the company's NDA for Posidur (SABER-Bupivacaine) for the treatment of post-operative pain relief. The PDUFA date is February 12, 2014. We believe the market is largely ignoring the opportunity with Posidur. The drug is an injectable sustained release formulation of the local anesthetic bupivacaine. It is administered during surgery to the surgical site, where it continuously releases therapeutic levels of bupivacaine using Durect's SABER controlled release technology.

We recently took a look at the opportunity for Posidur in an article published on PropThink on June 21, 2013. Our article, "FDA Accepts New Drug Application and Creates a Catalyst for Durect Corp." outlines the history of Posidur, discusses the phase 2 and phase 3 clinical data, Pacira's (NASDAQ:PCRX) similar drug in Exparel, and odds of approval. In summary, the odds of approval in February 2014 may be low for Durect, but there is clear logic behind the filing and the path to approval, even if the company does receive a complete response letter in February 2014, seems low. We see Posidur as a superior version of Exparel, which to us looks like a $250 million opportunity at a minimum.

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The Overlooked Pipeline

Below we briefly touch on the rest of the pipeline, which we believe offers some downside protection, and even modest upside, albeit at a less predictable rate.

...Relday...

In July 2011, Durect and Zogenix, Inc. entered into a license agreement to develop and commercialize a proprietary, long-acting injectable formulation of risperidone using Durect's SABER controlled-release formulation technology in combination with Zogenix's DosePro needle-free, subcutaneous drug delivery system. The product is called Relday. Zogenix is handling the clinical work for Relday. Durect received an upfront fee of $2.25 million, and can earn up to an additional $103 million in total future milestone payments, along with mid-single-digit to low double-digit royalty on annual net sales.

On July 12, 2012, Zogenix announced that it had initiated its first phase 1 clinical trial for Relday. Results were released in early January 2013. The data showed a favorable safety and PK profile demonstrated with the 25 mg and 50 mg once-monthly doses of Relday. In fact, Zogenix elected to continue the current study to include a 100 mg dose of the same formulation. These results were released on May 2, 2013. Top-line data shows the 100 mg dose achieved risperidone blood concentrations in the therapeutic range on the first day of dosing, and maintained throughout the one-month period.

With this trial now complete, dose proportionality has been established across the full dose range that would be anticipated to be used in clinical practice (50 mg to 100 mg). The 100 mg dose was safe and well-tolerated, with no unexpected adverse events, including injection site reactions, as compared to the initial phase 1 clinical trial with the 25 mg and 50 mg doses. We expect that Zogenix will push forward with a phase 1b multi-dose clinical trial, which would provide the required steady-state PK and safety data prior to initiating phase 3 development studies, sometime during the second half of 2013.

Relday is designed to compete with Johnson & Johnson's (NYSE:JNJ) long-acting formulation of risperidone called Risperdal-Consta, or Consta for short. The FDA approved Consta in 2007 for both schizophrenia and bipolar I disorder. J&J sold approximately $1.6 billion worth of Risperdal Consta in 2012. Dosing is with a 21 gauge needle every two weeks. A 21 gauge needle is 0.8192 mm thick (outer diameter). Relday would offer both less frequent dosing along with a less painful needle-free injector that utilizes Zogenix DosePro technology. If successful, we see Relday as a potential $500 million product. But even before commercialization, we think it is fair to assume that DURECT will collect another $10 to $20 million in milestone on Relday between now and 2014 (estimated phase 3).

Zogenix has begun partnering activities on Relday. The company has retained Locust Walk Partners of Cambridge, MA, a transaction advisory firm for life sciences companies, to provide exclusive transaction advisory and support services for a Relday commercial deal. On Durect'ssecond quarter conference call in early May 2013, management noted the economics of a sub-license payment being in the area of 10-20% of the overall deal. The market is largely ignoring this potential for non-dilutive cash in our view. Relday only further supports our belief that downside in Durect is limited at today's price.

...ORADUR-Methylphenidate...

Durect is developing a drug candidate for the treatment of Attention Deficit Hyperactivity Disorder (NASDAQ:ADHD) using its ORADUR tamper-resistant technology; this is the same technology used in Remoxy. Durect is seeking a way to provide once-a-day dosing with added tamper-resistant characteristics to address common methods of abuse and misuse of the most widely used ADHD drug, methylphenidate (previously sold as branded Ritalin), which was announced on August 1, 2013.

ADHD drugs act by stimulating chemical neurotransmitters in the brain such as dopamine and epinephrine. However, stimulants such methylphenidates (Concerta and Ritalin), dextroamphentamine (Adderall), and lisdexamfetamine (Vyvanse) are often misused and abused by teenagers as a means to perform better in school.

MonitoringTheFuture.org reports that 6.4% of 10th-graders and 6.8% of 12th-graders used prescription amphetamines non-medically in 2008. In the study, amphetamines ranked 3rd among 12th-graders for illicit drug use. A National Survey on Drug Use and Health (NSDUH) showed that in 2006 and 2007, about 6.4% of full-time college students reported using such stimulants as Adderall or Ritalin non-medically. A 2009 investigation tracking calls to the American Association of Poison Control Centers from 1998 to 2005 showed that teenaged victims of prescription ADHD drug abuse rose by 76% over that eight-year span

In August 2009, Durect entered into a development and license agreement with Taiwan-based Orient Pharma Co., Ltd. Under terms of the agreement, Durect granted to Orient Pharma development and commercialization rights in certain defined Asian and South Pacific countries to ORADUR-ADHD. Durect retains rights to North America, Europe, Japan and all other countries not specifically licensed to Orient Pharma.

The goal of the collaboration is to generate a clinical data package through a phase 2 study. Durect is responsible for formulation and study design of the phase 1 and phase 2 clinical trials, which Orient Pharma will fund and execute. Orient Pharma is responsible for all remaining development and commercialization activities in its licensed territory. If commercialized, Durect will be entitled to receive a royalty on sales of ORADUR-Methylphenidate by Orient Pharma. Orient Pharma has committed to supply a portion of Durect's commercial requirements for ORADUR-Methylphenidate in all territories other than the U.S.

Methylphenidate is the most commonly used medication for the treatment of ADHD. In 2012, approximately 3.1 million prescriptions of generic methylphenidate were written. The product is cheap, at only roughly $10 per monthly prescription. However, branded competitors such as Concerta (a dual release formulation of methylphenidate IR/XR) sells for as much as $175 per month. Concerta sales peaked at $1.3 billion in 2009 (~$1 billion in the U.S.). Global sales of Concerta in 2012 totaled around $1 billion (~$0.6 million in the U.S.). Generic methylphenidate in branded terms equates to a roughly $500 million opportunity in the U.S., similar to the current run-rate for Concerta. Alternative formulations of methylphenidate exist, including Daytrana, a transdermal patch, and Quillivant XR, an extended release formulation developed by Pfizer and NetWave.

We see an ORADUR-methylphenidate product as a meaningful opportunity for Durect. Methylphenidate products have sales exceeding $3 billion worldwide. Uptake of Shire's Vyvance, a $1 billion product, is driven primarily by the products reduced abuse potential. We think ORADUR-methylphenidate would offer superior abuse potential to generic methylphenidate (Ritalin) or various formulations like Concerta or Quillivant XR. We remind investors that Pfizer acquired NetWave in October 2012 on the strength of Quillivant XR. Pfizer paid $275 million to acquire NetWave, and NextWave's shareholders are eligible to receive additional payments of up to $425 million based on certain sales milestones.

Stock Attractive

In the past we've written that Remoxy has at least a 50/50 chance at approval. We still believe that to be the case; and think the odds go up substantially after Pfizer files the application. We suspect that Pfizer will provide an update on the potential NDA filing for Remoxy in the next few months (guidance is for "this fall"). If all goes well, we should see a re-filing of the NDA at some point around the middle of 2015.

In the meantime, the Posidur PDUFA is scheduled for February 12, 2014. Pacira Pharmaceuticals has done a nice job in carving out the new market for drugs like Exparel and Posidur, so approval would be a major positive event for the company. If Posidur is met with a complete response letter, which seems to be the consensus based on our rudimentary investor poll, we believe the company can quickly move forward with a phase 3 gall bladder removal study in 2014 and re-file in 2015.

The stock is currently trading at $1.26 per share. We value Durect, as we value all biotech companies, based on the risk-adjusted probability of future cash flows. Based on our analysis, Remoxy is worth $2.00 per share and Posidur is worth $0.35 per share. That gets us to $2.35. Adding in the $21.3 million ($0.21 per share) in cash on the books as of June 30, 2013, another $0.30 for ALZET and LACTLE, and another $0.30 for the pipeline, which includes Relday and ORADUR-methylphenidate, that brings us up to roughly $3.00 per share.

Source: A Busy Next 6 Months For Durect Corp.

Additional disclosure: PropThink is a team of editors, analysts, and writers. This article was written by Jason Napodano, CFA. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relationships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at www.propthink.com/disclaimer.