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DURECT Corporation (NASDAQ:DRRX)

Q1 2010 Earnings Call Transcript

May 10, 2010 4:30 pm ET

Executives

Matt Hogan – CFO

Jim Brown – President and CEO

Joe Stauffer – Chief Medical Officer

Analysts

David Amsellem – Piper Jaffray

Andrew Hilgenbrink – Jefferies & Co.

Jim Molloy – Caris & Co.

Jeffrey DeSeibert – KB Advisors

Operator

Thanks so much for holding, everyone. Welcome to the DURECT first quarter earnings conference call. Just as a reminder, today's call is being recorded. Now at this time, I will turn things over to our host, Mr. Matt Hogan. Matt, please go ahead.

Matt Hogan

Okay, thank you. Good afternoon. Welcome to our first quarter 2010 earnings conference call. This is Matt Hogan, CFO at DURECT. This call will begin with a brief review of our financial results, and then, Jim Brown, our President and CEO will provide an update on our business. We will then open up the call for a Q&A session.

Before beginning, I would like to remind you of our Safe Harbor statement. During the course of this call, we may make forward-looking statements regarding DURECT's products and development, expected product benefits, our development plans, future clinical trials or projected financial results. These forward-looking statements involve risks and uncertainties that can cause actual results to differ materially from those in such forward-looking statements. Further information regarding these and other risks are including in our SEC filings, including our 10-K and our 10-Qs under the heading Risk Factors.

Let me now turn to our financials. Total revenue was $7.7 million in the first quarter of 2010, which compares to $6.2 million in the first quarter of 2009. Revenue from our R&D collaborations was $3.8 million in the first quarter this year, as compared to $3.7 million in the first quarter last year. Revenue from this source always fluctuates from quarter-to-quarter, depending on the state of development under the various programs, and our role in those programs.

Product revenue from the sale of ALZET pumps, LACTEL Polymers, and certain excipients to King increased by approximately $1.4 million or 59%, from $2.4 million in the first quarter last year to $3.9 million in the first quarter this year. Our gross margin on these products was around 64% in the first quarter. These businesses continue to be strongly cash flow positive for us.

R&D expense was $9.4 million in the first quarter this year, as compared to $9.9 million in the first quarter last year. Now these figures included stock-based compensation of $1.3 million in the first quarter this year, and $2.3 million in the first quarter last year. So if we exclude stock-based comp, R&D expense actually increased by about $522,000.

SG&A expenses were $3.5 million in the first quarter, as compared to $4.3 million in the first quarter last year. These figures included $669,000 of stock-based compensation in the first quarter this year and $1.2 million of stock-based compensation in the first quarter last year. Excluding the stock-based compensation, SG&A expense declined by about $253,000.

Our net loss for the first quarter was $6.6 million, compared to a net loss of $8.7 million for the same period last year. Probably a more relevant financial metric for us than our net loss was net cash consumed during the quarter; that figure was $5.8 million. So at March 31, we had cash and investments of $35.8 million, compared with cash and investments of $41.6 million at December 31.

Thanks again for joining the call and I will now turn it over to Jim for a non-financial discussion.

Jim Brown

Thank you, Matt. The first quarter was a strong one for DURECT. With regard to POSIDUR, we started BESST, the pivotal U.S. Phase III study. Nycomed continued their Phase II studies in Europe, and we amended our licensing agreement with Nycomed to separate funding and control of development for the U.S. and EU markets.

For REMOXY, we continue to support King's progress towards resubmission of the NDA in the fourth quarter this year. ELADUR started a large Phase II study in chronic lower back pain, and we continued activity in the licensing front with multiple programs.

Let us now go through our major programs in a little more detail.

Starting with REMOXY. REMOXY is a 12-hour extended release and tamper-resistant form of oxycodone. Our ORADUR technology is resistant to snorting, smoking, injecting, high-heat exposure, and dissolving in drinks. Regulatory history on this product shows us that the NDA was submitted in June of 2008 and it was granted priority review. However, a Complete Response letter was received in December of 2008. King then assumed control of the NDA from Pain Therapeutics in March last year and King met with the FDA in July of 2009, and they stated after that meeting that they had established a path to address the FDA's comments. King expects to resubmit the NDA in the fourth quarter of this year, with an expected PDUFA date six months after re-submission.

If you look at the potential financial impact of REMOXY to DURECT, it is significant. The oxycodone sales in 2009 were $3.2 billion, and DURECT will receive a royalty on King sales that start at 6% and go to 11.5%, with the 11.5% being close to about $1 billion. So, we take and make some assumptions – we assume that the REMOXY annual sales are somewhat in the range of $500 million to $900 million. That would represent about 16% to 28% market penetration. DURECT would yield royalties that would range between $36 million and $72 million. That will make a big difference to a company that has an average burn rate over the last five years of $14 million.

Now I would like to change and talk about POSIDUR. POSIDUR is a first in class opportunity. That is, the first injectable product available to surgeons designed to control pain locally for up to three days post surgery. In a 120-patient Phase IIb hernia study with POSIDUR, we demonstrated a 30% better pain control versus the placebo group taking all the narcotics that they desired, and on top of that, we reduced the use of narcotics, as compared to placebo by threefold. We have had an extensive Phase I, II clinical program for this product, with 12 studies completed, two additional ones in progress, involving multiple surgical models including hernia, hysterectomy, appendectomy, and shoulder. In fact, over 400 patients have been exposed to this product with no significant clinical safety concerns being observed.

In the first quarter, we announced the initiation of the POSIDUR Phase III program, BESST. BESST stands for Bupivacaine Effectiveness and Safety in SABER Trial. It is a multi-center randomized double blind control trial in various surgical procedures. We expect to dose about 300 patients in BESST, and we anticipate completion of enrollment in the first half of 2011. To give you a quick update today, enrollment we believe is on track for both the first half 2011 completion, as well as for an estimated early 2012 NDA filing for BESST. We anticipate the NDA filing to include data for more than 600 patients receiving POSIDUR.

Bit of a descriptor on BESST. BESST involves three cohorts. The first two cohorts are active comparator. That is, testing POSIDUR against bupivacaine hydrochloride solution. First cohort is in laparotomy surgeries and the second cohort is in laparoscopic cholecystectomy or removal of the gallbladder. The third cohort is a placebo control. We will be testing POSIDUR versus SABER placebo after laparoscopically-assisted colectomies. There are two co-primary endpoints in cohort three. The first is mean pain intent beyond movement area under the curve during the first 0-72 hours post dose. The second is mean total morphine equivalent of opioid those for supplemental analgesia during the first 0-72 hours post dose.

As a reminder, with regard to our Nycomed collaboration, we received $14 million upfront in this deal, another $8 million for the Phase IIb hernia data that I described earlier. We still have $181 million in potential milestones coming in this program, with royalties that range from 15% to 40% on blended, that move up as sales move up. We also get a manufacturing markup. DURECT retains all the commercial rights to this product for the U.S., Canada, and Japan. Nycomed have the commercialization rights in Europe, the former Soviet states, and other countries around the world, including China, where they are responsible for sales, marketing, and launch costs in these territories.

Now, we will change gears and talk about ELADUR, our transdermal bupivacaine pain patch. This is a differentiated therapy for acute local pain. ELADUR provides three days of extended pain relief as compared to the current market leader, LIDODERM, which is 12-hours on, 12-hours off, with associated breakthrough pain. As a comparator, ELADUR is thinner, with a breathable backing, has potential for less irritation, and is – in my opinion, more patient friendly, and that is, one can exercise with it, take a shower with it. The market opportunities for this product is quite large.

It is over a $750 million market size and a best-in-class opportunity here for us. We have a partnership for ELADUR with King Pharmaceuticals. We receive $20 million upfront, potential for $243 million in potential additional milestones spread across multiple indications in worldwide territories. DURECT receives royalties on net sales, reimbursement for development expenses. King is responsible for the remaining product development, sales, marketing, manufacturing, and launch costs. In April, King commenced a 260-patient Phase IIb study in chronic lower back pain for this product.

Now, an update with regard to our TRANSUR-Sufentanil pain patch. This is a potential best-in-class therapy for the treatment of chronic pain. It provides seven days of therapy versus two to three days for fentanyl patches or twice daily oral opioids, and offers advantages to the patients, as well as to the Healthcare System. To the patients, the advantages are

uninterrupted delivery of pain relief; a smaller size – about 1/5 the size of DURAGESIC, about the size of a postage stamp; potential for less irritation; potential for side effect advantages over both fentanyl patches and oral oxycodone.

For us, the Healthcare System advantages are: it is REMs initially, less potential for divergence, only four patches per month versus 10 or more patches with the other systems or 60 pills. Potential for reduced cost of therapy as well, with fewer interventions and lower cost of goods. And finally, potential for reducing breakthrough meds, which has a more consistent delivery.

To look at the potential commercial opportunities for TRANSDUR-Sufentanil, DURAGESIC revenues in 2009 for J&J were still over about $900 million and the extended release oral opioid market in general – just oral fentanyl patches is over $4 billion. We have an opportunity to capture a significant market share, not only from the fentanyl patches, but as well from oral extended-release opioids. This product has already had a successful end of Phase II meeting in 2009, and is Phase III ready, with a 505 B2 pathway to approval. We own the worldwide rights to this product and are currently in licensing discussions. Our next step is to get a partner and resume the clinical program.

Brief update with regard to other R&D activities, our earlier-stage programs. Our SABER Injectable Depot Technology, here our opportunity is to create BioBetters. The goal here is to create small volume injectable products, that is quarter of a cc to half a cc that would allow these proteins to be injected once every week to once a month, and we have multiple feasibility programs ongoing.

With regard to oral earlier activities, here we are taking our ORADUR technology and building on what we have done with REMOXY. Our ORADUR technology not only allows for extended release of oral products, but also tamper resistance. And the ADHD are the second-largest category of – and most widely abused prescription drugs. And in fact, in 2009, ADHD drug sales were over $4 billion. We are currently working with Orient Pharma to develop an ORADUR ADHD with them for selected Asian and South Pacific countries, where DURECT holds the rest-of-the-world rights for this product. Orient Pharma will fund the Phase I studies as well as the first Phase II study. We expect the first Phase I study to start this year.

In summary, we have a number of potential key drivers for DURECT over the next 12 to 18 months. For REMOXY, it is resubmission of the NDA by King in the fourth quarter, with an expected PDUFA date six months after resubmission, and a potential launch in 2011. For POSIDUR, it is conducting BESST, our U.S. Phase III program, with completion projected for the first half of next year. Potential new collaborations for POSIDUR is U.S., Canada, and Japan; for the Sufentanil Patch, is worldwide, as well as other undisclosed programs. For ELADUR, it is conducting the Phase IIb by King. For TRANSDUR-Sufentanil, it is establishing a partnership and restarting clinical activities. As well as we look forward to advancing our other programs, the other ORADUR opioids and ADHD products, the biotech feasibility programs, and as yet our undisclosed projects.

We would now like to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first this afternoon to David Amsellem with Piper Jaffray. Please go ahead, David.

David Amsellem – Piper Jaffray

Hey, thanks. Just a couple of quick ones. On the BESST study for POSIDUR, can you just remind us why you are expecting a lengthy enrollment period?

Jim Brown

Okay, I think I will let Joe take that one. Joe, the question is, why do we expect that the enrollment period is going to take, you know, as long as we expect it to take?

Joe Stauffer

Sure, understood. This is Joe Stauffer, the Chief Medical Officer. This trial is unlike any other trial that has been done up until now. There is extensive cardiac monitoring that is done with this trial. All the patients are kept in-house for three days during their operation. There is also extensive pharmacokinetic blood drawals for all of these patients as well, and we are doing this because we want to establish the safety profile of the drug. And typically, you don't see this kind of monitoring done for trials like say bunionectomy or other types of post-surgical trials, maybe in say hemorrhoids or other small procedures. This is a larger procedure and enrolling these types of patients, who tend to be sicker and older with all this extensive monitoring, that is why it takes typically longer than what you might have seen in regular kind of shorter postoperative situations.

David Amsellem – Piper Jaffray

Okay, that is helpful. And then, one additional question on partnership discussions on POSIDUR, particularly for the U.S. partners. Are you looking at a deal primarily after you have Phase III data in hand or are you open to a transaction if one should, you know, if there is a possibility one prior to data?

Jim Brown

You know, we are at a lucky point with this product. There is a lot of interest in it. So certainly, the longer you can keep a product, the greater value you create and if you can go all the way to an NDA, you certainly have tremendous values on the market, that kind of thing. But where we are right now with that, there is a lot of interest, and so, we are talking to potential partners continuously, and we will strike a deal when we think we have one that makes the most sense for DURECT.

David Amsellem – Piper Jaffray

All right, thanks.

Jim Brown

Okay.

Operator

And gentlemen, we will take our next question now from Andrew Hilgenbrink with Jefferies & Co.

Andrew Hilgenbrink – Jefferies & Co.

Thanks for taking the questions, guys. Anything in particular contribute to the higher product revenue during the quarter? It seems like it has been higher than in the past year or two.

Matt Hogan

Well, briefly on the product revenue side, we have these relatively smaller businesses there, where we sell ALZET pumps and LACTEL Polymers, and those businesses, you know, are actually on a very nice positive trend. And in addition, during the quarter, we had some additional sales of excipients to King that relate to REMOXY. So that boosted the revenue. On the collaboration side, it was about flat year-over-year. So I suppose it is on the product revenue side that we saw the growth.

Andrew Hilgenbrink – Jefferies & Co.

And the product revenue, besides the excipients, is there a price increase that was taken, or was it just higher values, or the combination of both?

Matt Hogan

In particular, on the LACTEL side, we are seeing nice volume increase, and we think that that is not our short term phenomenon, we think that is a longer term trend, that that business is really developing nicely.

Andrew Hilgenbrink – Jefferies & Co.

And then, change in topic then, without a partner on POSIDUR for U.S. currently, do you expect the burn rate to increase above the $5 million or $6 million of recent quarters?

Matt Hogan

No, I think it is about on path with what our budget was, and no reason to change our cash burn guidance we gave before for the year.

Andrew Hilgenbrink – Jefferies & Co.

And then, are you guys, can you say any rough number of how many patients have been enrolled in the BESST trial.

Jim Brown

We can say that, however, we don't disclose those numbers right now. The goal is to finish the trial by the first half of next year.

Andrew Hilgenbrink – Jefferies & Co.

Okay. I think that answers my questions, thanks.

Operator

(Operator Instructions) We will go next now to Jim Molloy with Caris & Co.

Jim Molloy – Caris & Co.

Hey, guys; thanks for taking my questions. On the TRANSDUR-Sufentanil patch, I guess one of the concerns back when this product came back from endo was that maybe there was more to the FDA meeting than perhaps obviously can be disclosed. And here we are almost at year end and still waiting on a partner. Is there any way to characterize the late fears that there was more said or worse things said at the FDA meeting that really would bar this product from moving forward or how would you characterize the partnering discussions or the clinical trial plans?

Jim Brown

Yes, you know, Joe wasn't here direct at that time, but he has certainly has pored over those FDA minutes, so I will let him answer that.

Joe Stauffer

Jim, in reviewing those FDA minutes, there is nothing spooky in there, if that is what you are looking for. I mean, it is a typical interaction, end of Phase II interaction between FDA and endo at the time. I think they got very straightforward advice from the agency, all of which is easily doable in a Phase III program. It was definitely ready for Phase III, it is ready now, and there are clearly people that are interested in it. I think at the time, not related to FDA and the company, but if we just move to REMs in general at that time, REMs was kind of an unknown and really a dark horse. People weren't really sure of what it was going to mean. In fact, it has pretty much flushed out now. There are drugs in the market with REMs, as you know, and better other long-acting opioids that are on the market, and we fully anticipate that TRANSDUR would have a very similar REMs. And so, it is not going to be complicated from that perspective. So it is really about finding the right partner, and you know, really is motivated to work with the C2 opioid in this space and those partners are out there, and the good news for us is that we know what those clinical development plans look like, they are actually pretty boiler plated, we would pretty much follow what we had to do for (inaudible). So, you know find the right partner is all we have to – all we really need to do at this point.

Jim Brown

We only have to add to that is from a REM standpoint, Joe, is we have only patches a month to worry about, versus some of the others.

Joe Stauffer

That is right. That is an important piece Jim brought up earlier in his discussions. I mean, one of the issues with REMs is all about it how much product is actually in the supply chain and one of the advantages of TRANSDUR is that you just have so much fewer patches in the supply chain. Despite its high potency, it is really about volume of patches that are there and access to diversion. That is one of the nice advantages for TRANSDUR. Nevertheless, it will still follow a boiler plate REMs.

Jim Molloy – Caris & Co.

Thanks for that. I appreciate that. I agree. It seems like TRANSDUR has significant advantages over current products in the market. I guess my concern is it was March of 2009 you started talking with partners and mostly it will be March 2011 before, you know, a partner has signed – or is there any way to put a timeframe on that?

Jim Brown

Yes, Jim, as always, we never do, but you know, we are talking accurately to people, so we will make some progress, don't worry.

Jim Molloy – Caris & Co.

Okay. Thank you, gentlemen, for taking the questions.

Jim brown

Sure.

Operator

(Operator Instructions) We have a question now from Jeffrey DeSeibert with KB Advisors. Please go ahead, Jeffrey.

Jeffrey DeSeibert – KB Advisors

Good afternoon, gentlemen. A quick question with your burn rate of $5 million to $6 million a quarter and $35 million in cash as of March 31. Can you tell us what your thoughts are about the need to raise additional capital?

Jim Brown

Well, Jeffrey, I don't think our strategy has particularly changed. Our preferred strategy for funding the company is to stick with our model of partnering programs. So we are actively talking to potential partners around TRANSDUR-Sufentanil, which would be a worldwide deal; POSIDUR, which would be a U.S. Canada, and possibly also a Japan deal; and then some other programs that we haven't really fully disclosed. So that is our preferred funding strategy. And as we go along, you know, we constantly have to judge things like where the stock price is and where we are in BD and things like that. So our strategy really hasn't changed. We obviously constantly monitor kind of our cash position and our funding options.

Jeffrey DeSeibert – KB Advisors

All right. Well, as a follow-on, could you give us a sense of your feeling of confidence that you will be able to fund internally rather than via the capital markets this is year?

Matt Hogan

No, obviously we feel pretty good about where we are. So, we will have to see.

Jeffrey DeSeibert – KB Advisors

All right. Thank you.

Operator

Gentlemen, it appears we have no further questions this afternoon.

Jim Brown

Okay. I would like to thank everyone for participating, and if you have questions, please feel free to call the company.

Matt Hogan

Thanks a lot.

Operator

This concludes this conference call. We thank you all for joining us and wish you all a great afternoon. Goodbye.

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