DURECT Corporation's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.27.14 | About: Durect Corporation (DRRX)

DURECT Corporation (NASDAQ:DRRX)

Q4 2013 Earnings Conference Call

February 27, 2014 04:30 PM ET

Executives

Matt Hogan - CFO

Jim Brown - President and CEO

Analysts

Jason Napodano - Zack’s Research

Rajesh Patel - Red Acre Investments

Operator

Greetings, and welcome to the DURECT Fourth Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Matt Hogan. Thank you, Mr. Hogan. You may now begin.

Matt Hogan

Hey, good afternoon. 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 the business. We'll then open up the call for a Q&A session.

Before beginning, I’d 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 included in our SEC filings, including our 10-K under the heading 'Risk Factors'.

Let me now turn to our financials. Total revenue was $4.3 million in the fourth quarter of 2013 as compared to $3.3 million in the fourth quarter of 2012. Excluding all deferred revenue recognized for upfront fees from our agreements, revenue from our R&D collaborations was $1.4 million in the fourth quarter 2013, as compared to $0.7 million in the fourth quarter last year. Revenues 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 and LACTEL polymers were approximately $2.8 million in the fourth quarter of 2013, as compared to $2.4 million in the fourth quarter of 2012 and our gross margin on these products was around 65% in the fourth quarter of this year.

These product lines continue to be strongly cash flow positive for us, and just to highlight this for a second, our total revenue for the year from these two product lines was $11.4 million and they generated $6.8 million in gross profit. That represent year-over-year growth of about 8.5% revenue and 15% growth in gross profit. So a solid year from these product lines. R&D expense was $4.9 million in the fourth quarter, unchanged from the fourth quarter a year earlier. SG&A expense was $3.5 million in the fourth quarter as compared to $2.9 million in the fourth quarter the year earlier, and as a result of the above, our net loss for the fourth quarter was $5.1 million, compared to a net loss of $5.5 million for the same period the year earlier.

Our net cash consumed during the quarter was $3.6 million, if we exclude the net proceeds from our equity financing that we completed in the fourth quarter and that was very consistent with the previous quarters, which have been running a little under $4 million a quarter.

In November, we did a small equity offering. We issued 8.2 million shares at a $1.40 and our net proceeds were approximately $10.6 million. So, at December 31, 2013, we had cash and investments of $24.4 million, compared to $28.9 million at December 31st the year earlier. We have essentially no debt other than normal liabilities associated with running the business. And as you know, we signed a collaboration with Impax in January 2014. That $2 million upfront fee associated with the collaboration was received in January but obviously not included in the cash position I just described.

As a reminder we have multiple programs that may potentially be partnered over the next 12 to 18 months, including POSIDUR where we have worldwide rights, ORADUR-ADHD where we have U.S. and European rights, TRANSDUR-Sufentanil and various feasibility studies that we hope may mature into development agreements, much like Relday did earlier.

With that, thanks for joining the call and I'm going to turn over to Jim to provide more of an update on our development programs.

Jim Brown

Thank you, Matt and hello everyone. As we just had an update with investors about two weeks ago, I'm going to try to be brief with regard to this summary and then open it up for Q&A. I'll begin with POSIDUR. As you know we received a complete response letter on February 12th from the FDA, stating that they aren’t ready to approve the NDA and 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 has indicated that additional clinical safety studies need to be conducted. DURECT is evaluating the issue and recommendations described in the complete response letter and plans to have further discussions with the FDA.

The FDA had no comments regarding the cardio vascular safety concerns, the CMC section, non-clinical pharmacology or other sections of the NDA. We believe the main issue the FDA felt was lacking was enough data for an apples-to-apples comparison of POSIDUR against a comparator other than SABER placebo. The SABER placebo seemed a good comparative for efficacy and cardiovascular safety purposes. But for our safety comparison, the FDA now launched additional data using another competitor, not the SABER placebo. They have suggested bupivacaine hydrochloride or some other placebo like saline.

We believe they felt it was difficult to make safety conclusions, given this mix of smaller studies that we did and the ability to combine these studies in an effective manner across all the various smaller side effects seen. As a reminder, we have dosed – 1,075 patients are included in our summary of safety database. 683 of these patients were exposed to POSIDUR, 268 received SABER placebo and 124 patients received bupivacaine hydrochloride as a control.

Since receiving the complete response letter, we have recruited clinical and regulatory consultants to add their perspective and guidance. We will likely engage one or two more assist our dialog with the agency. On one hand we’d like to meet with the FDA as soon as we are able but on the other we want the meeting to be as productive as possible, which means we need to take the time to pull together the studies that we might propose to address their issues in order that we might get the most out of our meeting with the agency. As a result we don’t yet have a target date for the meeting.

We’ve been asked by some investors how we plan to disclose the outcome of that meeting. Our expectation is that we will wait until we receive the FDA;s response for our meeting minutes to make sure we’re on the same page. We have a number of other programs here creating value at DURECT and I’ll review them now and then we’ll take the questions that you might have.

Let’s start with REMOXY. REMOXY is an abuse-deterrent formulation of oxycodone which is a widely used product for chronic pain. Oxycodone does about $3 billion in sales and it provides -- excuse me OxyContin does $3 billion in sales and it provides effective pain control relief for chronic pain patients. But unfortunately OxyContin products or oxycodone products in general have been used -- misused at a rate that the FDA has repeatedly described as a major public healthcare concern.

Our ORADUR technology is what confers on REMOXY. Its multiple layers of abuse resistance and that is, it's much more difficult -- in fact impossible to snort this REMOXY product, because it’s got the viscosity of Vaseline inside of a gel cap. Injecting it becomes a control [indiscernible] injectable, inhaling it, chewing it and mixing it with alcohol and other drinks, it's very difficult to tamper with. We think these multiple layers of abuse resistance that are built into REMOXY make it a compelling pain product and that Pfizer will do an impressive marketing job when it’s approved.

Pfizer has a major presence in the pain space, with CELEBREX and LYRICA. With REMOXY, Pfizer has a product designed to be effective for legitimate pain patients though with features designed to reduce abuse by illegitimate users. Prescribing physicians can get the comfort of knowing it will be an effective pain product without having to worry about writing prescriptions that may lead to diversion and misuse.

Patients won’t have the stigma of telling anyone that they are on OxyContin, yet they’ll get an effective pain control product with true twice a day gel cap. With Pfizer’s large sales force, they should do very well with this product, once launched. I would also like to note that we have multiple issued patents that go out at least until 2031. So there'll be a long period for our shareholders to gain a return from REMOXY.

It’s a late stage asset and that the safety and efficacy of REMOXY have been shown conclusively and the remaining cash that is needed are to address manufacturing related issues that led to the FDA giving REMOXY its latest complete response letter.

In March of last year, Pfizer met with the FDA to share the extensive work they've been doing on REMOXY and to propose a path forward. The FDA agreed to Pfizer’s proposal. Namely there is no need to replicate earlier Phase 3 work if the bridge back to the data is provided with a bioequivalent study. In October of last year, after a thorough review, Pfizer announced their decision to move forward with the next steps required to resubmit REMOXY and they’re driving the program forward.

Specifically, there are two primary studies that are required for resubmission, an abuse potential study and second a pharmacokinetic bioequivalent study. The abuse potential study with the new formulation we’ve started for clinicaltrials.gov in November of 2013. This is listed as being a 60 subject study with a target completion date of June of this year. In the conference call that Pain Therapeutics held on February 4th, they stated that they understood that roughly 18 to 20 subjects were enrolled at that point in the trial.

Finally, in early February Pfizer posted a study on clinicaltrials.gov that involved 60 subjects to evaluate the bioequivalence of the modified formulation versus the original formulation of REMOXY, under immediate fact-fed conditions and to estimate relative bioavailability under fasting conditions in healthy volunteers. This study has a target completion date April of this year.

We think the problem -- success in these trials is high for multiple reasons. First, a smaller bioavailability study has already been done business Pfizer and the results of this trial support moving forward with a larger bioequivalent study. In other words the bioequivalent study is basically a larger form and more formal version of the bioavailability study that’s already been completed to Pfizer's satisfaction.

And second, the changes to the formulations were extremely minor. Hence we wouldn’t expect the abuse liability study to turnout any different from the study previously done by King Pharmaceuticals and that study met all of its endpoints.

Pfizer's stated resubmission date is no earlier than mid of 2015. We believe that as the months tick by and submission date gets closer, more and more investors will begin to factor this program more prominently into their thinking and the discount we're currently seeing for this program will begin to decrease.

The review period for this product will be six months. So our expectation for approval is late 2015 with a launch shortly thereafter. Pfizer gave an update on their R&D pipeline on February 25th earlier this week at the Citibank Conference and REMOXY is listed as one of their key Phase III programs. As a reminder of how impactful a transformer this product could be for DURECT, we received a royalty of 6% to 11.5% of REMOXY sales. Hence if Pfizer captures 30% of the roughly $3 billion market that exists today, we don’t think that’s an unreasonable number. We'd expect to have an annual royalty stream somewhere around $70 million. I'd also like to note that we have over $250 million in NOLs built up. So when that royalty stream starts to kick in, we won’t be paying taxes for quite a while.

Let’s now move on to ELADUR. We're pleased to start this year by announcing our collaboration with Impax and the resumption of development of ELADUR. As a reminder ELADUR is a pain patch that we developed for post-herpetic neuralgia. It’s a three day patch versus the 12 hour lidocaine patch that’s out there today. This is more than just a convenience matter, as it's been reported that two out of three patients that have been dosed with lidocaine patch suffer breakthrough pain during the 12 hours when the lidocaine patch is off. So this could be a meaningful patient benefit and efficacy advantage.

In addition, ELADUR is a very patient friendly design. It contours to the stand and won’t fall off easily. So a patient can exercise with it, go for swim or take a shower. The trends of our collaboration with Impax are that we receive $2 million upfront, $31 million in development milestones, the next of which is to start Phase III, $30 million in sales based milestones. Impax funds all the development and commercialization, DURECT gets a share of the sublicense fees received by Impax if they choose to sublicense the product and we also received a tiered royalty that starts with the mid-single-digits and then goes to lower double-digit royalties.

In terms of next steps with regard to the program, Impax wants to do a short proof of concept study followed by meeting with the FDA to discuss the structure and design of the proposed Phase III program. They're hope is to start the Phase III program later this year. As a reminder we have an orphan drug designation for ELADUR for post-herpetic neuralgia and we have an issued patent in the U.S. that goes out to 2031 and in Europe out to 2027. We're pleased that ELADUR is back in development with Impax and we have another attractive asset that could potentially be in Phase III this year.

The next program I'll update on is Relday. This is a large commercial opportunity. This product features a once a month injection of risperidone. It’s very patient friendly design and also physician friendly as an opportunity for treating schizophrenia to smaller subcutaneous injection versus the market leader out there, which is 5CC IM injection. We have positive single dose Phase I data with a full dose range that is expected for clinical practice. This product is partnered with Zogenix. They plan to initiate a multi-dose clinical trial in second half of this year.

As a reminder of our collaboration with Zogenix, we received $2.25 million upfront. We have another $103 million of potential milestones, $28 million of which are development based and $75 million are sales based. DURECT gets a share of any sublicense fees that are received by Zogenix and Zogenix funds all the development and our royalty backed to DURECT are sales based and they start in the mid-single-digits and go to the low double-digit.

With regard to our other ORADUR opioids, in late of October this past year, Pain Therapeutics regained the rights from Pfizer to develop three other opioids with our ORADUR technology. These are hydrocodone, hydromorphone and oxymorphone. All three of these products have active INDs in place and Phase I work has been done in the past with hydrocodone and hydromorphone.

Future development of these will depend on Pain Therapeutics' decisions going forward but we certainly will be able to benefit from our REMOXY experience. Pain Therapeutics hasn’t stated that they have made a formal decision about developing or out licensing these assets but they did make some comments in their early February earnings conference call and I'd like to describe those comments now.

First, they seem to prefer hydrocodone, and hydromorphone over oxymorphone. Second, they mentioned that they may be able to have one or two of these in Phase III at about the time when REMOXY is submitted ,about middle of 2015. They went on to mention that they are considering an approach for hydromorphone that might not require phase III trial. They of course would have to vet that strategy with the FDA.

We are in active dialogue with Pain Therapeutics about these programs and have begun to do some work and if Pain Therapeutics commits resources, we think these programs have the potential to move quickly and they represent a value stream that could grow over time as they advance the development. As a reminder, we get the same economics in these products as we do from REMOXY. That is a royalty that starts at 6%, goes up to 11.5%. Pain Therapeutics will pay for all the development expenses and we also receive about $6.1 million in pre-sales milestones that are spread across the three programs.

The final program I’ll update is our ORADUR-ADHD program. Here the lead formulation demonstrated the following in a Phase 1 study last year. A nice rapid onset of action, a longer duration that would allow for once-a-day dosing, but also has a smaller capsule size relative to the leading product on the market and its tamper resistant due to our ORADUR technology.

Our partner for Southeast Asia is Orient Pharma. They met with the Taiwanese FDA to outline their Phase II program Taiwan and they’re developing plans for their Asian and South Pacific territories. DURECT retains the U.S., European and Japanese rights for this product. And now that we have a formulation in hand with supporting PK data, we’ve initiated licensing discussions for this product.

Let’s now review in summary the potential key drivers for DURECT over the next 12 months to 24 months. For POSIDUR it is to meet with the FDA to clarify and address the questions they have in a response letter. And then it’s pursuing development and commercialization of the POSIDUR program, including the potential licensing deal. Through REMOXY, is Pfizer conducting the required studies that is the BE and abuse-potential studies and resubmission with the target data middle of 2015 followed by a six month review by the FDA and then product launch. For ELADUR, its initiation of Phase III by Impax later this year, which would trigger a milestone payment for us. And for Relday is initiation of a multi-dose trial year by Zogenix in the second half of this year. We have the potential for PTI ORADUR program advancing into the late stage development, potential for new collaborations around POSIDUR, our Sufentanil patch, the ORADUR-Methylphenidate program or one of our feasibility programs. Additionally there is the potential for a new program to enter clinical development this year.

With that I'd like to thank you for joining our call and we’ll now take any questions you have.

Question-And-Answer Session

Operator

We’ll now be conducting the question-answer-answer session. [Operator Instructions]. Thank you. Our first question is from the line of Jason Napodano. Please proceed with your question.

Jason Napodano - Zack’s Research

Just a question and this maybe better for Pain but can you give me a sense Jim, of what the path forward would be for our hydromorphone product that wouldn’t require a Phase III?

Jim Brown

You certainly should take that up with them but my suspicion would be that they would be trying to do some kind of pharmacokinetic comparison to the product that's already out there and try to link in that way. That would be the only way you’d be able to do that. [indiscernible] Bioequivalent, but then the question is how can you do that and also have the abuse deterrence and that I think is the question.

Jason Napodano - Zack’s Research

Great okay. Maybe I’ll take that up. It’s interesting though.

Jim Brown

Yes, I think it’s an interesting strategy. We can certainly make a product that would do that but then can you get the claims on abuse deterrence? That’s the question from a regulatory standpoint.

Operator

[Operator Instructions]. The next question comes from the line of Rajesh Patel. Please proceed with your question.

Rajesh Patel - Red Acre Investments

I was just wondering the language that you put out in the press release for the POSIDUR CRL said that FDA said it couldn’t be approved for the label that you requested. Do you sense that there is any possibility of a modified, maybe more narrow label that possibly could be approved right now without additional studies?

Jim Brown

I think that that is the way the sentence was written. It begs the question and we’ll certainly probe that with the agency but I wouldn’t hold out tremendous hope for that at this point in time. I think we need to sit down with them and address any concerns they have.

Rajesh Patel - Red Acre Investments

And then just one other question on the POSIDUR. As far as the CRL not having issues regarding the efficacy and [indiscernible], does that -- is it basically you're -- the absence of that is what informs you that they don’t have issues with that or does it specifically state that okay, we’re okay with everything else.

Jim Brown

Typically, I think if you look at the way a complete response letter is supposed to work, it’s supposed to be literally that, a complete response letter. So they're meant to give you all the issues that they have with the package. And it was relatively short. It was all around these safety components that I discussed before, things like duritis and somnolence and things like that, the discoloration, that kind of stuff.

Operator

Thank you. [Operator Instructions]. Thank you. We have no further questions in the queue at this time. Would you like to make some closing comments?

Jim Brown

Well I guess given that we did a call about two weeks ago, it's not surprising that we don’t have too many new questions. Regardless if people think about it and you do generate some questions, please feel free to call any of us at the Company when you want. And with that, thank you very much.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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