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POSIDUR Gets Rejected

After the market close on February 12, 2014, DURECT Corp. (NASDAQ:DRRX) announced that the U.S. FDA had issued a Complete Response Letter for POSIDUR™ (SABER®-Bupivacaine), the company's investigational post-surgical analgesic. The press release noted, "The FDA has determined that they cannot approve the NDA in its present form, stating the NDA does not contain sufficient information to demonstrate that POSIDUR is safe when used in the manner described in the proposed label…" The FDA's CRL indicated that additional clinical safety studies would need to be conducted prior to approval. Management is evaluating the issues described in the CRL and plans to have further discussions with the FDA in the next few months.

…Background on POSIDUR safety…

Holding up POSIDUR approval on safety concerns is a little surprising, because safety has not been issue in the Phase 2b and Phase 3 trials. In fact, data from the 2007 Phase 2b hernia trial showed no serious adverse events (SAEs) related or possibly related to POSIDUR. SAE's were generally similar between the three arms of the study, which included POSIDUR 2.5 ml, 5.0 ml, and placebo. Heart rate, blood pressure, respiratory rate, and body temperature were similar at Day 14 to baseline in all three arms. We note DURECT required patients to wear a 12-lead ECG for 24 hours post-op to assess the cardiovascular safety of POSIDUR. The data clearly showed the drug to be safe and well-tolerated in hernia patients. In fact, reduction of opioid rescue dose was also associated with reduction of opioid-related side effects such as constipation, somnolence, dizziness, nausea, and vomiting. This data was presented at the American Hernia Society meeting in March 2008 (Poster #37). Results from the February 2011 Phase 2b shoulder surgery trial demonstrated similar safety and tolerability.

Safety data from the June 2010 European Phase 2b hysterectomy study showed no indications of systemic safety issues. The only issue noted in the press release was local observations (most commonly coded as post-procedural haematomas) at the surgical site. These were observed with frequency in the POSIDUR and SABER-Placebo groups and not observed in the active comparator group (remember this sentence for later).

Data in January 2012 from the Phase 3 BESST study showed POSIDUR patient groups had a similar systemic safety profile as the patient groups treated with SABER-Placebo and active comparator. There were no signs of systemic safety issues. However, local site reactions were observed more frequently in the POSIDUR and SABER-Placebo groups than in the active comparator groups (remember me too); most of these observations were discolorations or localized dryness and itching, the majority of which resolved without treatment during the trial.

…Nevertheless, More Safety Data Is Necessary…

On the update call this morning, CEO Jim Brown stated the CRL from the FDA noted "imbalances" with respect to the safety data. We characterize the FDA's issues as a lack of safety data, not necessarily a specific issue with the safety of the drug itself. For example, when DURECT conducted the clinical trials and analyzed the data for the NDA, efficacy data was compared to SABER-placebo. Based on management's comments, the FDA seemed to have no issues with POSIDUR's efficacy. The issue stems from a lack of safety data vs. an active comparator, such as bupivacaine HCl. Is it fair for the agency to compare efficacy vs. placebo and safety vs. an active comparator? Sure, they are the FDA. They do what they want.

Specifically, the company noted issues like somnolence, localized dryness and itching, and surgical site discolorations as these key imbalances. The FDA saw higher rates of these adverse events or side effects, but lacked sufficient data to quantify vs. an active comparator like bupivacaine HCl (now you know why we suggested to remember those two sentences above). So to gain approval, DURECT needs to conduct some head-to-head studies with POSIDUR vs. bupivacaine HCl and analyze the adverse events and side effects. Additionally, efficacy data will also be collected in these trials. Management stopped short on the conference call of predicting the nature of the trials, the numbers of patients, time, cost, and when they would be in position to re-file for approval. Before they publicly do that, DURECT needs to further analyze the information in the CRL and then meet face-to-face with the FDA in a few months.

Once DURECT completes its internal review and meets with the U.S. FDA, it should have a better sense on how big, how long, and at what costs the necessary work will be. It should also have a good sense of the probability of success. This information will be instrumental in potential pre-re-filing partnership discussions. Our guess, the company conducts two trials in hernia or cholecystectomy in 200-300 patients total, hopefully with both to start before the end of 2014. DURECT has noted being in partnership discussions on POSIDUR in the past. No doubt if the drug had been approved yesterday, DURECT would have several interested parties making offers to commercialize the drug. The question remains whether or not any of these interested parties are willing to help with the re-filing package. This is a difficult question to answer until DURECT can meet with the U.S. FDA and qualify a path forward.

DURECT noted the FDA's review mentioned no concerns on efficacy, CMC, or pharmacology. That's certainly encouraging. The lack of data to compare these observational imbalances in side effects seems to be the only hold-up. At a minimum, this will take two years to iron out. However, the potential exists that if DURECT can qualify a path forward with the FDA in a few months, the company may be able to partner POSIDUR for this work.

POSIDUR remains a meaningful opportunity, in our view. There are roughly 70 million surgeries in the U.S. each year. There are approximately 1 million hernia procedures done in the U.S. each year. A 20% share in the U.S. hernia market, at approximately $285 per procedure (priced at parity to Exparel®), represents a $57-million opportunity. Expanding into gallbladder, hysterectomy, shoulder surgery, etc… opens the door to a potential market of 10 to 20 million procedures that are ideally suited for a long-acting local analgesic like POSIDUR. Just 5% market share in this broader patient population represents at least a $250-million opportunity for DURECT and a potential licensing partner. The market opportunity outside the U.S. is comparable. We believe POSIDUR, post-approval, could follow a similar path to Exparel and be generating $250 million in annual revenues three years after launch.

Ten Reasons Why We Would Buy DURECT Today

Despite the CRL on POSIDUR, we are buyers of DURECT's stock. Below are ten reasons why today is a fantastic entry point for DURECT investors:

1) Remoxy supports the current valuation: We have long stated that Remoxy alone is worth $1.50 per share. In October 2013, Pfizer (NYSE:PFE) notified Pain Therapeutics (NASDAQ:PTIE) and DURECT that it had achieved technical milestones related to manufacturing of Remoxy, and that it planned to continue to move forward with development. Pfizer also noted, thanks to guidance received from the U.S. FDA earlier in the year, that it planned to conduct two clinical studies with Remoxy prior to re-filing the NDA. These include a pivotal bioequivalence study with the modified Remoxy formulation to bridge to the clinical data related to the original Remoxy formulation, and an abuse-potential study with the new modified formulation. Pfizer told Pain Therapeutics and DURECT that the FDA did not require any further drug efficacy trials with Remoxy.

  • The abuse-potential study is currently underway at Pfizer. This is a 60-patient randomized, double-blind, triple-dummy, placebo-controlled, single-dose, 4-way crossover study designed to determine the relative abuse potential of a new formulation ("K") of Remoxy (PF-00345439) compared to immediate-release oxycodone and placebo when administered orally whole and/or chewed to non-dependent, recreational opioid users under fasted conditions. We are expecting final data collection in June 2014.
  • The second bioequivalence study just recently was sent to ClinicalTrials.gov and should begin enrolling patients in April 2014. This is a 60-patient open-label, randomized, two-cohort, single-dose, crossover study of 40 mg doses of Remoxy (PF-00345439) to evaluate the bioequivalence of modified formulation ("K") vs. the original formulation ("X") under intermediate-fat fed conditions and to estimate relative bioavailability under fasting conditions in healthy volunteers. We expect final data collection this summer.

Pfizer believes it should be in position to re-file the NDA around the middle of 2015, which seems to us to be a rather long time after the collection of the data to prepare the filing. Is Pfizer sandbagging? Perhaps, but nevertheless we continue to believe that Remoxy remains an enormous opportunity for DURECT. We believe Remoxy has potential peak sales in the $1.5 billion range, and DURECT's tiered royalty - roughly 9.1% at $1.5 billion in sales - would provide significant cash flow to the company. We model Remoxy approval in 2016 at Pfizer, with sales eclipsing $1.5 billion by 2020. With a 15% discount rate on the cash flows and 50% probability of approval, we see Remoxy alone worth $1.50 per share to DURECT. This makes us comfortable with buying the stock at today's price.

2) ELADUR offers upside: On January 3, 2014, DURECT Corp. announced that it had granted an exclusive worldwide license to Impax Labs (NASDAQ:IPXL) for the company's proprietary TRANSDUR transdermal delivery technology and other intellectual property to develop and commercialize ELADUR. ELADUR is an investigational transdermal bupivacaine patch for the treatment of pain associated with post-herpetic neuralgia (PHN), an indication for which the product has been granted Orphan Drug designation. Impax will assume control of ELADUR and fund the development and commercialization program, although the two companies will form a joint management committee to oversee and coordinate certain future research and development activities.

Under the terms of the transaction, Impax has agreed to pay DURECT a $2.0 million upfront payment in cash. DURECT is also eligible for up to $31.0 million in development and $30.0 million in commercialization milestones from Impax, along with a tiered mid single-digit to low double-digit royalty on annual net product sales, determined on a country-by-country basis. Impax will reimburse DURECT for certain R&D-related expenses and is obligated to pay a percentage of fees received in connection with any sub-license of the licensed rights.

3) Relday Offers Upside: In July 2011, DURECT and Zogenix, Inc. (NASDAQ:ZGNX) 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. 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 has 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.

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 the end of 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. DURECT is entitled to sub-license payments in the area of 10-20% of the overall deal. The market is largely ignoring this potential in our view, and it only further supports our belief that downside in DURECT is limited at today's price.

4) Ditto for ORADUR-ADHD: In August 2009, DURECT entered into a licensing and development 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 an ADHD product that utilizes the ORADUR tamper-resistant technology; this is the same technology used in Remoxy. DURECT retains rights to North America, Europe, Japan, and all other countries not specifically licensed to Orient Pharma. It has been later disclosed that the active drug candidate incorporated in the ORADUR formulation is methylphenidate (previously sold as branded Ritalin), the most widely-used ADHD drug.

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.

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. Orient plans to meet with the Taiwanese FDA shortly to outline the design for a Phase 3 study.

5) TRANSDUR-Sufentanil is a call option: If you asked us to place a value on ELADUR prior to the early January 2014 license to Impax, we would have said, "Zero value is included in our model." DURECT pulled in $2.0 million, and has the potential for another $61.0 million plus royalties now that Impax signed up to move ELADUR forward.

As of today, we have "zero value" assigned for the TRANSDUR-Sufentanil patch (TSP). TSP utilizes the same TRANSDUR delivery technology as ELADUR, only delivering sufentanil instead of bupivacaine. DURECT designed the product to provide continuous delivery of sufentanil for up to seven days from a single application for the treatment of chronic pain. The product is similar to J&J's former billion-dollar transdermal patch Duragesic, but may offer distinct advantages in terms of size (it's about 1/5th the size) and length of application (seven days vs. three days).

We're not going to go over the clinical data on TSP for this article. The short version is that the drug has completed Phase 2b and is ready to move into Phase 3 if a partner emerges. Endo Pharmaceuticals previously had a development and commercialization deal with DURECT on TSP. Endo met with the U.S. FDA after the positive Phase 2b study to discuss the plans for Phase 3. However, in a surprise announcement in February 2009, DURECT reported that Endo returned the U.S. and Canada rights to develop and commercialize the product back to the company. DURECT also holds ex-U.S. rights to the product. Despite Endo walking, DURECT believes it has a clear understanding of what is necessary to conduct a pivotal registration program and eventually file for approval under the 505(b)(2) pathway with TSP.

In our view, we see TSP as a niche product. Duragesic is available generic, and although TSP provides some interesting advantages in terms of size and dosing, we are unconvinced that peak sales are above $200 million. So until we see a deal, we assign zero value. The fact that DURECT surprised everyone and was able to close a deal for ELADUR means a deal for TSP is also possible. Although this may come with a modest upfront payment in the $1-5 million range, it's still cash and it still represents potential upside to the DURECT story.

6) Pain Therapeutics may move forward with ORADUR-opioids: Besides Remoxy (ORADUR-oxycodone), Pfizer previously controlled the rights to three other ORADUR-opioid formulations that utilized hydrocodone, hydromorphone, and oxymorphone as the active drug. However, in October 2013, Pfizer returned the rights to these three drugs to Pain Therapeutics. Pain Therapeutics now owns exclusive rights to these compounds, and would owe sub-license payments and royalties on sales to DURECT.

In Pain Therapeutics' fourth quarter recent press release, the company stated that it was looking at options to develop and commercialize these assets on its own or with a licensee of choice. We note that Investigational New Drug (IND) applications for all three drugs are in place with FDA. We have assigned zero value in our DURECT model for these three candidates, but considering Pain Therapeutics' entire future is tied to Remoxy, it might behoove the company to strike a deal on any one of the above three ORADUR candidates, which would funnel milestones and potential royalties back to DURECT.

7) ALZET & LACTLE are worth $0.25 per share: DURECT currently manufactures and distributes ALZET - miniature, implantable osmotic pumps and accessories used for experimental research in mice, rats, and other laboratory animals. The company controls the rights to these products on a worldwide basis. DURECT acquired the ALZET product line from ALZA in April 2000. In 2012, we estimate that ALZET contributed $7.5 million in revenues to DURECT. For 2013, we estimate ALZET at $8 million. We model a similar amount for 2014 and 2015.

The company also designs, develops, and manufactures a wide range of standard and custom biodegradable polymers based on lactide, glycolide, and caprolactone under the LACTLE brand for pharmaceutical and medical device clients for use as raw materials in their products. LACTLE contributed approximately $3.7 million in revenues to DURECT in both 2011 and 2012. We model a similar amount in 2013 and 2014.

Combined sales of ALZET and LACTLE products have been consistently growing over the past several years. The chart below is taken from the company's historic filings and shows the growth in revenues from ALZET and LACTLE, and the gross margin for the business.

(click to enlarge)

These product lines have been pretty steady over the past few quarters. ALZET and LACTLE contribute revenues to the top-line and solid cash flow to help reduce operating burn. We see this business worth approximately $25 to $30 million in value based on 2.5x to 3.0x revenues. This equates to a value of $0.25 per share.

8) DURECT has plenty of cash: On November 13, 2013, DURECT Corp announced the closing of an underwritten public offering of approximately 8.21 million shares of common stock at an offering price of $1.40 per share. Felix Theeuwes, DURECT's Chairman and Chief Scientific Officer, purchased 714,285 shares in the offering for an aggregate purchase price of approximately $1.0 million. Net proceeds to DURECT from the offering were approximately $10.6 million.

DURECT exited the third quarter ending September 30, 2013 with $17.4 million in cash and investments. We believe operating burn in the fourth quarter was around $4 million. Therefore, we forecast cash at the end of 2013 stood at around $23.0 million. Adding in the $2.0 million upfront payment from Impax above, along with another $4-5 million burn in the first quarter 2014, and we calculate cash on March 31, 2014 will still be above $20.0 million. DURECT also has an "At-the-Market" controlled equity offering active with Cantor Fitzgerald & Co. that allows for the sale of common stock up to $25.0 million.

9) Despite the CRL, POSIDUR is not dead: On DURECT's update call this morning, CEO Jim Brown noted that the CRL contained no issues with respect to efficacy, CMC, or pharmacology. The plan is to complete an internal review of the CRL over the next few months and then meet face-to-face with the U.S. FDA to qualify a path forward for the refiling. Above, we noted that we expect the company to conduct two trials in hernia or cholecystectomy in 200-300 patients total, hopefully with both to start before the end of 2014. DURECT has noted being in partnership discussions on POSIDUR in the past. No doubt if the drug had been approved yesterday, DURECT would have several interested parties making offers to commercialize the drug. The question remains whether or not any of these interested parties are willing to help with the re-filing package. This is a difficult question to answer until DURECT can meet with the U.S. FDA and qualify a path forward.

DURECT noted the FDA's review mentioned no concerns on efficacy, CMC, or pharmacology. That's certainly encouraging. The lack of data to compare these observational imbalances in side effects seems to be the only hold-up. At a minimum, this will take two years to iron out. However, the potential exists that if DURECT can qualify a path forward with the FDA in a few months, the company may be able to partner POSIDUR for this work.

10) It's called Buy Low: Ok, I admit I'm struggling for reason number ten, but I wasn't going to call this article, "Nine reasons to buy DURECT," so here I am ending with the ultimate market proverb of, "Buy low, sell high." For all the reasons outlined above, I think DURECT represents a good pick up at today's price. And today's price is 30% below yesterday's price. Did anyone really believe that POSIDUR was going to get approved? Make no mistake about it, I'm a DURECT "Bull" and have been since I first initiated coverage for Zacks in September 2012 (at $1.10 per share). But even in my most recent report for Zacks dated January 8, 2014, I stated:

(click to enlarge)

The CRL was expected. I've changed nothing in my financial model based on yesterday's news. Today, you are buying Remoxy, getting ALZET and LACTLE for free, with upside if ELADUR, TRANSDUR-Sufentanil, POSIDUR, Relday, ORADUR-ADHD, or ORADUR-opioids moves forward. DURECT has $20 million in cash and $250 million in NOLs to defer future taxes. That's a good investment in my book.

Source: 10 Reasons To Buy Durect Right Now