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DURECT Corporation (NASDAQ:DRRX)

Q2 2008 Earnings Call Transcript

August 6, 2008 9:00 am ET

Executives

Matt Hogan – CFO

Jim Brown – President and CEO

Felix Theeuwes – Chairman and Chief Scientific Officer

Analysts

Geoffrey O'Brien – Punk Ziegel

John Loath – FAF Advisors

Ken Trbovich – RBC Capital Markets

Serge Belanger – SIG

Operator

Welcome to the Q2 earnings call for DURECT Corporation. We are now ready to begin. Go ahead, Matt.

Matt Hogan

Okay, good morning, and welcome everyone to our second quarter 2008 earnings conference call. This is Matt Hogan, CFO at DURECT. The 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'll then open up the call for the 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 in 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 $6.3 million in the second quarter of 2008, as compared to $13.4 million in the second quarter of 2007. Recall that in the second quarter of 2007, we recognized an $8 million milestone payment, so if we set aside that milestone, our underlying revenues rose approximately $900,000. Revenue from our R&D collaborations was $3.9 million in the second quarter of 2008 as compared to $3.4 million, excluding that $8 million milestone in Q2 2007, which is an increase of about $460,000 or 13%. Revenue from this source will always fluctuate from quarter to quarter depending upon the state of development of the programs and our role in those programs.

Product revenue from the sale of ALZET pumps and LACTEL polymers increased by about $412,000 or 20%, from $2 million in the second quarter 2007 to $2.4 million in the second quarter of 2008. Our gross margin on these products was around 60% in the second quarter of 2008.

R&D expense was $9.9 million in the second quarter of 2008 as compared to $9.6 million in the second quarter last year. These figures included stock-based compensation of $1.4 million in the second quarter of 2008 and $1.1 million in Q2 2007. So absent the change in stock-based comp, our R&D spending was about the same in both quarters.

SG&A expenses were $4.1 million in the second quarter of 2008 as compared to $3.7 million in Q2 2007, an increase of about $400,000. These figures contain $674,000 of stock-based comp in Q2 2008, and $555,000 of stock-based comp in Q2 2007. So excluding that stock-based compensation increase, the rest of the increase was largely due to higher patent expenses arising from our acquisition of additional patent families in the first quarter of this year and the fourth quarter last year.

Our net loss for the second quarter of 2008 was $8.6 million compared to a net loss of $0.5 million for the same period in 2007. Again, the comparable period in 2007 benefited from that $8 million milestone. So our net loss, excluding the milestone income, was essentially flat between the two quarters.

At June 30, 2008, we had cash investments of $47.6 million, compared with cash investments of $62 million at December 31, 2007. These figures both included $1 million in restricted investments. Our decrease in cash was $8.6 million in the first quarter and $5.8 million in the second quarter, for a total cash burn of $14.4 million for the first half of 2008.

I'd also like to note that during the quarter our balance sheet was strengthened by the conversion of all of our remaining $23.6 million in convertible notes at their maturity date. The total amount of our financial debt instruments is now less than $600,000.

Thanks again for joining the call. I'll now turn it over to Jim to discuss non-financial matters in some detail.

Jim Brown

Thank you, Matt and hello everyone. The second quarter was highlighted by the on-schedule submission of our Remoxy NDA, progress in our POSIDUR regulatory discussions, the orphan drug designation for bupivacaine for PHN, which is relevant to our ELADUR program, Endo's new senior management beginning to communicate with regard to the development timing of our seven day sufentanil patch, and the elimination of our convert in the subsequent reduction of our corporate debt from over $24 million to less than $600,000.

On the business development front, we've been actively engaged with respect to ELADUR, TRANSDUR-Sufentanil ex-U.S. and POSIDUR in Japan and other programs we haven't yet publicly disclosed.

Let me briefly provide an update with regard to our lead programs. For Remoxy, the submission of the Remoxy NDA is the first new drug application for a drug candidate using one of our platform technologies. This is a notable milestone for any company, and the first of what we hope will be many NDAs to come. Remoxy is based on our order gel-cap technology, which provides a twice daily form of oxycodone in a more difficult to misuse and abuse formulation. Oxycodone is widely used by patients suffering from chronic pain. In fact, sales of OxyContin and oxycodone oral products were almost $1.6 billion in 2007 and sales of extended release opioids were approximately $4 billion in 2007.

When order products such Remoxy are crushed, our technology's long acting matrix is preserved, preventing a rapid release of the active drug. This formulation is also resistant to common methods of abuse, such as injection, snorting, thermal extraction, freeze fracture, crushing, grinding, burning, and rapid dilution in a wide variety of liquids and solvents. The development team for Remoxy has spent the last several years generating rigorous data on these common methods of abuse and the NDA includes animal as well as human data with regard to extractability, pharmacokinetic, toxicology, and clinical studies.

The NDA for Remoxy was submitted in June, and pursuant to the Prescription Drug User Free Act or PDUFA guidelines, the FDA is expected to determine whether to accept the NDA filing within 90 days. At that time, the companies will also learn if the NDA filing was granted a priority review. A priority review designation is given to drugs that offer real advantages in treatment or provide a treatment where there no adequate therapy exists. A priority review means the time it takes the FDA to review an NDA is reduced from 12 months to approximately 6 months.

King Pharmaceuticals will be the commercialization partner for Remoxy and directly receive royalties that start at 6% and scale up to around 11.5%. Additionally, we receive a manufacturing markup on key excipients that we will supply. Just to do the math on the royalties, if King were to achieve sales for Remoxy of around $400 million, which would constitute approximately 25% of OxyContin's 2007 sales and about 10% of the overall extended release opioid market in 2007, DURECT would receive royalties of roughly $28 million. This doesn't include any manufacturing revenues or profits. We are not projecting that Remoxy will do $400 million in sales in any particular year. Actual results could be higher or lower. This is just mentioned to give an illustration of the potential impact to DURECT.

During this quarter, we began to manufacture commercial lots of certain key excipients that are in Remoxy, in order to meet the production schedule of King Pharmaceuticals. And in the second quarter, we made our first shipments to King. We anticipate being able to meet the forecast sent to us by King as they plan their launch quantities. And we are hopeful that given the product's abuse-deterrent features and being a true twice a day formulation of oxycodone, that King's roughly 700-person sales force will be successful with Remoxy. Over the last year or so, we and our partners have been concentrating on getting Remoxy over the goal line. We can now shift resources onto the development of products two, three, and four in this collaboration.

Based on the development of Remoxy and validation of the order technology, we're optimistic about development prospects for these additional products. Pain Therapeutics has stated that it expects to file an IND for a new abuse-resistant opioid under our collaboration in 2008.

Now an update with regard to POSIDUR

POSIDUR has the opportunity to be a first-in-class therapy; the first injectable product available to surgeons that is designed to control pain at the site of surgery for up to three days. In our Phase II-B hernia trial, POSIDUR demonstrated a 30% improvement in pain control versus placebo over the first two to three days after surgery. This improvement in post-operative pain control was achieved even though the placebo group took three times more narcotics than our POSIDUR patient group. Well, why does this matter? Narcotic side effects such as constipation, sleepiness, nausea, and dizziness have a huge impact on patient care, and lengthen hospital stays as well as drive up other healthcare costs. We believe POSIDUR will be a first-in-class therapy because it works to control pain locally at the site of the surgical wound in contrast to post-operative pain medicines available today, such as systemic narcotics which control pain by inhibiting transmission of the pain signal to the central nervous system. What we're attempting to do is stop the pain without numbing the brain.

This quarter, we believe we made solid progress with the FDA in defining POSIDUR's Phase III program. Having said that, our belief is that the best practice among public companies is not to announce things with regard to regulatory discussions until they have been entirely completed. This is extremely important, as the FDA may not like our selectivity in releasing information prior to conclusion. We feel we are making important progress with regard to this program, but we want to nail down all the details with the FDA and what they'll require of the Phase III program and what will be needed in order to support a successful NDA. We are very excited about the prospects of POSIDUR and look forward to initiation of the Phase III program.

As a reminder, Nycomed became our partner for this program in the fourth quarter of 2006. Nycomed paid us $14 million upfront, an additional $8 million as our first milestone payment and we have an additional potential $180 million in milestones to come. Nycomed will commercialize the product in Europe and in other defined territories, paying us royalties their sales beginning at 15% and going up to 40%. Nycomed also pays one half the development cost of this program for Europe and the U.S. We've retained all commercialization rights for the U.S., Canadian, and Asian markets. And since this is a surgical suite sale, we think POSIDUR provides a unique opportunity to cover the U.S. market with a specialized sales force of 100 to 150 sales reps, and we believe this will provide us with a launching pad to become a specialty pharmaceutical company.

I now want to update with regard to ELADUR. ELADUR is a transdermal patch containing bupivacaine, which is designed to provide up to three days of pain relief versus the existing market-leading patch, which is indicated for 12 hours of wear. ELADUR is very thin, and has an elegant design for superior wearability. Our patch can even be worn in the shower and during exercise. On May 8, 2008, at the American Pain Society Annual Meeting, we presented a poster that outlined positive results from ELADUR for our 60 patient Phase II-A clinical trial in patients suffering from post-hepatic neuralgia.

We showed improved pain control versus placebo in the three continuous days of treatment. In addition, ELADUR appeared well tolerated overall and patients treated with ELADUR and placebo exhibited similar safety profiles. You can access this poster via our website. As a reminder, we own all the rights to this product. We have received considerable interest from a number of companies about partnering this product, driven no doubt by the commercial successful of Lidoderm, which generated about $700 million in sales in 2007 and which grew at 13% for the first quarter of this year. Given that this product will require a large sales force to fully exploit, it's likely we will partner this program. To that end, we are in active discussions with multiple parties regarding this program.

In June, we were pleased to receive orphan drug designation for bupivacaine for the relief of persistent pain associated with post-hepatic neuralgia, or PHN. Bupivacaine is the active pharmaceutical ingredient in ELADUR direct investigational drug patch. Under the 1983 Orphan Drug Act, if ELADUR is the first bupivacaine product approved for PHN, we will receive 7 years of market exclusivity following the approval of the product by the FDA. Orphan drug designation carries other important benefits, such as a 50% tax credit for clinical research expenses, and that tax credit can be carried forward as long as 20 years. Also, designation of orphan drug products are exempt from the user-fee filing for a new drug application or NDA, which is currently more than $1 million dollars. In addition to business development activities, our ELADUR team has been refining our clinical and regulatory strategy for the next stages of the development program as well as conducting manufacturing, scale-up and processing to secure the Phase II and Phase III supplies.

Now for TRANSDUR-Sufentanil. Our TRANSDUR-Sufentanil patch targets chronic pain users. The market for J and J's fentanyl patch Duragesic was approximately $1.2 billion in 2007. Our patch seeks to provide seven days of pain relief versus existing fentanyl patches that deliver medicine for three days. Our seven day duration could enhance patient's compliance and convenience, and entails a lower manufacturing cost over a monthly treatment cycle. Existing fentanyl patches like Duragesic, are about the size of a dollar bill folded in half, which means that during a month the patient has to find ten rather large spots on their body to rotate the patches around. In contrast, our patch is approximately one fifth the size of Duragesic, approximately about the size of a postage stamp, and during a month, only four such small sites would be required.

Our partner for the U.S. and Canada is Endo Pharmaceuticals and their success with Lidoderm has demonstrated their ability to sell patches used to treat pain. Now that we have provided technology transfer to 3M, our role is largely a supportive one to Endo. We continue to provide technical expertise for their clinical studies and CMC support. Endo's new senior management team has recently completed review of all their R&D programs, and while certain other programs were cut, they have affirmed that the Sufentanil patch is one that they're moving forward. Endo has stated that they expect to have data from a Phase II study with TRANSDUR-Sufentanil by the end of 2008, and expect to hold the Endo Phase II meeting for this program with the FDA either late in 2008 or early in 2009.

Over the next 12 months, we look forward to continued progress from our programs and clinical development. With regard to Remoxy and the other abuse resistant opioids in the near term, it's hearing from the FDA about the acceptance of the NDA filing and the status of our priority review request, as well as filing an IND for an additional abuse-resistant opioid. For POSIDUR, it is completing our clinical discussions with the FDA and commencing the Phase III program. For the Sufentanil patch, it's completion of Endo's phase II study and scheduling the end of Phase II meeting with the FDA. And further communication on the clinical development plan in general by Endo. With regard to ELADUR, it's continuation of the clinical development program building on the positive data in our Phase II-A study.

In conclusion, DURECT has a rich pipeline, consisting of one NDA now submitted to the FDA, three products in Phase II, and other products in or entering Phase I shortly. These products address large market opportunities in the underserved pain management field. Each of these products has differentiating features that constitute meaningful improvements over existing therapies. They address important trends in pain management such as abuse deterrence in the case of Remoxy and the other ORADUR products or the reduction of use of opioids in the case of POSIDUR and ELADUR.

We have multiple products advancing in various stages of development, entering Phase I and moving from Phase II to Phase III. We have collaborations in place with Nycomed, Endo Pharmaceuticals, and King Pharmaceuticals/Pain Therapeutics that provide considerable development, funding, and solid economics upon commercialization. Yet we maintained a pathway to becoming a specialty pharmaceutical company that commercializes selected products in North America. We have the potential for future business development deals with ELADUR, with the sufentanil patch in Europe and Asia, POSIDUR in Asia, as well as other we’ve programs yet to disclose.

I want to thank you now for your support, and we look forward to sharing our progress with you in the future.

I'm now are going to hand it over to – the particular to feel Felix, Matt, and Peter as I'm on a long distance call from Europe and the Q&A may not work so well from here. So I hand it back to you, Matt.

Matt Hogan

Okay. Operator, we'll open it up to questions, please.

Question-and-Answer Session

Operator

(Operator instructions) Okay. Our first question is from Geoffrey O'Brien from Punk Ziegel. Go ahead, Geoffrey.

Geoffrey O'Brien – Punk Ziegel

Good morning, guys. Just wanted to give a quick question here on POSIDUR; you mentioned earlier that you have made some progress with the FDA regarding Phase III discussions. Just wondering if you could give a little more color on that? At this point have you decided which pain models that you are going to use in Phase III, or is that still in discussion?

Matt Hogan

I'll take a stab at that. I think we've – we know what we want to do, but there's no point in getting anything started until you've kind of got agreement with the FDA that you're doing what they want you to do so that at the end of the process, you put together a package that's in good shape to get approval. So I think that we have a good sense for what we want to do with the program. It's a matter of just making sure that the FDA is in alignment with that for all of the details that are involved.

Geoffrey O'Brien – Punk Ziegel

Right. That makes sense. So do you think that you're in a position to comment at this point as to whether or not you think Phase III would start by the end of 2008, or do you think there's a possibility that that might start early 2009?

Matt Hogan

We really can't say, and it's not entirely in our control, because we're dealing with the FDA. If we could completely control the timing, we could probably put down something; but, until we're done with the FDA, we really can't be precise.

Geoffrey O'Brien – Punk Ziegel

Okay. And then just a question on ELADUR. You know, you guys had talked about starting Phase II or running additional Phase II-B studies during 2008. I was just wondering if you can give an update on the timing of that, and when you might have data from the 2B study.

Jim Brown

Well, with respect to ELADUR, you know, we've been spending a lot of time really trying to plot out what our clinical and regulatory strategy might be and to some extent, that has been influenced by some of these discussions with potential partners. So that we're in alignment with what a potential partner might want to do. And at the same time, what we've been doing is all of the steps to line up supplies to do additional Phase II studies as well as Phase III. So I think at the moment, if you can just hold off a little longer, I don't think we really want to lay out yet what the next steps will be. We do envision doing additional Phase II work, but being a little more precise on the timing, I think we'd rather hold off on that for just this moment.

Geoffrey O'Brien – Punk Ziegel

Okay. Great. Thanks, guys.

Operator

Okay. We have no further questions on the telephone.

Matt Hogan

Why don't we hold for one more minute just in case there is one.

Operator

Okay. So our next question comes from John Loath from FAF Advisors. Go ahead, John.

John Loath – FAF Advisors

Hey Matt. It's John.

Matt Hogan

Hey John.

John Loath – FAF Advisors

I was just wondering if you could provide a little bit more color – I know you're not really freely able to discuss what's going on in the POSIDUR program with the FDA, but I mean, should we be thinking about an up-size program in terms of multiple pain models here, or is there kind of a discussion going on vis-a-vis endpoints?

Matt Hogan

No. I think – let me be blunt. I think somebody could sit there and say, with the time delays, should I infer that something is wrong? That's not the message we're trying to convey. We feel like we are making progress, and I don't think you have to infer that there's some increase in the number of models are going to be required. That really wouldn't be the direction we're trying to give guidance to.

John Loath – FAF Advisors

Okay.

Matt Hogan

I just want to emphasize there's a little comprehensive package of things you need to go through to get approval, that is a pretty big order, and one of the most critical things a company can do at this stage is kind of get agreement with the FDA on what they need to do before they just rush out and start, because otherwise, halfway through you have got to do amendments, or God forbid, at the end you discover you haven't done what the FDA wants.

John Loath – FAF Advisors

Okay.

Matt Hogan

So that's what we're really trying to avoid at this point; and, you know, we're partway through the process, and unfortunately, like a lot of companies have probably reported, the feedback loop and time with the FDA these days is a little bit slower than we would have hoped or has been case in the past. So I don't think there's any fundamental issue to convey, but it's taken a little longer than we hoped for. We hoped at the end of the process what we come up with a plan that truly the FDA has blessed in all its aspects; and then, at the back end – if it takes some time at the front end, kind of as a reminder, the good news about this kind of clinical program is once we get started, the kind of models we're working with are relatively straightforward to enroll, there's lots of patients and enrollment can be done pretty quickly; and secondly, you don't have to follow these patients for an extended period of time to get your data point. You are following them after surgery for a few days and then have your data point. As a reminder, for example in our hernia II-B study, that work was conducted in about six months for 122 patients and certainly we will need more than that in the Phase III, but it's kind of indicative of the pace at which things can move once you get going.

John Loath – FAF Advisors

Okay. And then sort of an off-topic question, the matrix underlying POSIDUR, in terms of pipeline development, should we thinking about additional products coming off that platform?

Matt Hogan

Well, I think we definitely view that as one of our most important technologies, and it's got application beyond just POSIDUR. Maybe I can turn it over to Felix to make a couple of comments.

Felix Theeuwes

Well, I think the SABER technology has served us extremely well. As you see, we have various opportunities. Foremost, I think has been the investment that we made in the ORADUR area, where we have four active programs ongoing in our first NDA files, and applications in injectable areas, we have applications in topical areas. So we definitely are mining the investment in various areas based on the same safety package and performance characteristics, which we've been able to program via various routes of administration. So I think there are multiple applications still to come with this technology; and as these technologies or as these products are coming online, our patent position is also continuously expanding in this area.

John Loath – FAF Advisors

Okay. Thank you.

Operator

Okay. Our next question comes from Ken Trbovich from RBC Capital Markets. Go ahead, Ken.

Ken Trbovich – RBC Capital Markets

Thanks for taking the question. I guess I'd like to circle back on POSIDUR and maybe ask the question a different way. Given the discussions ongoing with the FDA, what are the chances that your partner is actually able to advance in late-stage trials in Europe before you are here in the U.S.?

Matt Hogan

I think to be honest with you, I'd kind of have to defer a little bit. Nycomed, I don't know that they've sort of blessed us to make comments on what they're doing over in Europe, and I would not want in any way take a chance to irritate an important partner by speaking out of school when they haven't kind of pre-authorized us to say something. I think it is a safe statement that we're very pleased with Nycomed as a partner. They've been great to work with. We have weekly telephone calls with them, quarterly in-person meetings that vary between Europe and here. So their input has been active, and they're very engaged in the program. But I don't know – I'm sorry. I don't think they've kind of authorized us to talk about kind of where they are clinically with the program.

Ken Trbovich – RBC Capital Markets

Sure. I guess maybe then put a different way; is there any reason why we should expect your R&D spend rate to change at all on a sequential basis? I mean, it's been fairly steady over the last three or four quarters. Is there any reason why we should expect it to change at all until you actually announce a new clinical trial either for ELADUR or POSIDUR here in the U.S. in the remainder of this year?

Matt Hogan

It could go up a little bit, I would say in the next couple of quarters, because we do have some outside activities that we're planning to get going, and even some of the programs where we're working with a partner, if they ramp up what they ask us to do as part of that collaboration, that will record itself as higher R&D spend. So I guess in your model, I would modestly increase in the second half of the year the R&D spend; not dramatically, but modestly.

Ken Trbovich – RBC Capital Markets

Okay. And then just finally, I guess, on ELADUR, what are the risks of actually advancing into a larger – whether you want to call it a Phase II/III PHN study on your own? I understand obviously longer term, you'd like a partner to help you bring on multiple indications at the time of launch, but it seems like there would be very little risk in doing a larger scale trial in PHN at this stage. Can you maybe help us understand that?

Matt Hogan

Don't disagree with anything you're saying. In fact, we're putting all of the steps in place so that we can get those studies going like with our manufacturer, Corian. So I think – I'll say two things. On the one hand, we're optimistic about getting a partner sooner rather than later; and secondly, even if we didn't have that in place, we're not going to let that slow down the program.

Ken Trbovich – RBC Capital Markets

Okay. And then just final question as it relates to Remoxy; my understanding is oftentimes the decision from the FDA on priority review and the decision on accepting the actual filing can made separately. I know obviously in the release you've given 90 days as the time line. But I have certainly seen examples where it's been well under that, is there a communication process between you and the partners so that this communication is conveyed through all three companies simultaneously, or should we really be looking for this communication to come out of Pain and King and then obviously you folks following on with your release separately.

Matt Hogan

I think it would probably come first from Pain Therapeutics and King. It's actually an NDA submission from Pain Therapeutics with King kind of closely at their shoulder. We get the information, but there's a little bit of a lag. I think you're also correct. It's typically up to 90 days. It could be any day, quite frankly.

Ken Trbovich – RBC Capital Markets

Okay. And there were market rumors yesterday about the possibility of King being taken out. How, if at all, would the agreement be altered if there were a change in control?

Matt Hogan

I don't even comment on a rumor like that, I mean, you get rumors every day. I guess I'd voice some skepticism before I get too carried away, frankly. I think – pretend for a second that somebody wanted to acquire King, I think they'd want to acquire King because of the pipeline that they've got, and so I would have to imagine that would be a big part of any evaluation exercise if there was any truth whatsoever to these rumors.

Ken Trbovich – RBC Capital Markets

True, but there's no provisions that would give you or Pain the ability to opt out at this point?

Matt Hogan

I'd have to go back and look. And also it would probably be governed by the agreement between King and Pain Therapeutics more than anything that we're closely aligned with. So I'm sorry. I don't know the answer to be honest with you.

Ken Trbovich – RBC Capital Markets

No, problem. That is fair. Thanks.

Operator

Okay. (Operator instructions) Okay. Our next comes from Angela Larson from SIG. Go ahead, Angela.

Serge Belanger – SIG

Actually this is Serge Belanger for Angela. On Remoxy, are you aware of any efforts that are previously undertaken that could delay or prevent the Remoxy launch?

Matt Hogan

Not really. I mean, I guess I'm not aware of anything – people – I think it is public knowledge. They filed a citizen's petition; but, we're not really aware of any such thing that puts them in some controlling position to dictate the timing of this.

Serge Belanger – SIG

Okay. Thanks.

Matt Hogan

Any further questions? Well, it looks like the market is probably opening and everybody's got a lot of other earnings calls to fend with, and probably want to turn their attention to the market today. But if you have further questions, please feel free to call us. Okay? Operator, I think we'll kind of conclude the call then.

Operator

Okay. This concludes the Q2 earnings call for DURECT Corporation.

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