Recent News At Durect Points To Bright Future

| About: Durect Corporation (DRRX)
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Impax Labs Licenses ELADUR

On January 3, 2014, Durect Corp. (NASDAQ:DRRX) announced that it had granted an exclusive worldwide license to Impax Labs (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). 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 agreement, 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 sublicense of the licensed rights.

…Background on ELADUR…

ELADUR provides continuous delivery of bupivacaine for up to three days from a single application. The patch is being designed as a superior alternative to Endo Pharmaceuticals (NASDAQ:ENDP) Lidoderm (5% lidocaine patch). Endo has recorded total sales of $805 million from Lidoderm over the past twelve months. The clinical data to date suggests that ELADUR provides longer duration of action, faster onset of efficacy, and potentially deeper tissue penetration of bupivacaine versus lidocaine with Lidoderm. Sales of Lidoderm peaked at $948 million in 2012.

Durect generated impressive phase 2a data with ELADUR in post-herpetic neuralgia (PHN). The data was presented at the 27th Annual Meeting of the American Pain Society in May 2008. In fact, the data was strong enough to attract Alpharma to license the patch, which brought $20 million in an upfront payment in September 2008. Unfortunately, when King acquired Alpharma, development plans for ELADUR changed, which results in a failed phase 2b study in lower back pain in April 2011. We believe this was a flawed trial and indication, clearly outside the capabilities of a topical pain patch designed for indications like PHN. As a result, the partnership ended and Durect has been seeking a new partner ever since.

Therefore, we believe the deal today is positive for Durect. The upfront payment of only $2.0 million is low, but the backend potential is clearly meaningful. We suspect that Impax will seek to conduct a head-to-head clinical trial of ELADUR versus Lidoderm to assess the true market opportunity for the patch in PHN.

Durect Secures 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.

We remind investors that Durect does have 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. However, management has stated publicly they have no intention of using the ATM prior to the U.S. FDA action date on POSIDUR on February 12, 2014. We discuss the POSIDUR PDUFA below.

Posidur PDUFA Approaching

On June 20, 2013, Durect announced that the U.S. FDA had accepted the company's NDA for POSIDUR (SABER-Bupivacaine) for the treatment of post-operative pain relief. The PDUFA date is February 12, 2014. The drug is an injectable sustained release formulation of the local anesthetic bupivacaine. It is administered during surgery to the surgical site, where it continuously releases therapeutic levels of bupivacaine using Durect's SABER controlled release technology. Clinical data on POSIDUR suggests 72 hours of uninterrupted local analgesia.

Conventional (immediate release) formulations of bupivacaine used in this indication deliver only 6 hours of pain relief. Surgeons will typically inject bupivacaine with epinephrine to prolong the duration of action; however this can create complications and contraindications for patients susceptible to arrhythmias or hypertension. The short duration of action of bupivacaine leads to contaminant use of opioid analgesics, including fentanyl.

As such, patients lacking sufficient pain control from only immediate release bupivacaine have limited options. They can either elect to wear an elastomeric pump that continuously administers bupivacaine or they can elect to administer opioids intravenously via a patient-controlled analgesia (PCA) device. Neither is a good option. Elastomeric pumps cost around $450 per single use. The medical device requires appropriate instillation and removal, as well as patient education. They are cumbersome, have significant non-compliance issues, and major safety concerns. Opioid medications like fentanyl are equally expensive, require additional hospital resources, and carry significant risk of adverse events that tend to lead to longer hospital stays as a result.

…Exparel Expands The Market…

In April 2012, Pacira Pharmaceuticals launched Exparel, a 1.3% bupivacaine liposome injection suspension designed fill the much needed void between immediate release bupivacaine and dangerous opioids. Exparel utilizes Pacira's proprietary extended-release drug delivery technology called DepoFoam®. DepoFoam is a multivesicular liposomal platform that encapsulates drugs without altering their molecular structure and then releases them over a desired period of time from 1 to 30 days. Pacira's investor presentation and corporate website highlights Exparel as providing postsurgical pain control with reduced opioid requirements for up to 72 hours.

Although, upon a little digging into the actual Exparel prescribing label, we see the half-life of Exparel is 34.1 hours for bunionectomy and 23.8 hours for hemorrhoidectomy. This would seem to suggest waning efficacy at the 72 hour mark. Specifically, note the Clinical Studies section of the label:

- In bunionectomy, Exparel demonstrated significant reduction in pain intensity compared to placebo for up to 24 hours; however, between 24 and 72 hours after there was minimal to no difference between Exparel and placebo on mean pain intensity.

- In hemorrhoidectomy, Exparel demonstrated a significant reduction in pain intensity compared to placebo for up to 24 hours. The difference in mean pain intensity between treatment groups occurred only during the first 24 hours following study drug administration. Between 24 and 72 hours after study drug administration, there was minimal to no difference between Exparel and placebo treatments on mean pain intensity.

Nevertheless, Exparel is an improvement over immediate-release bupivacaine, or bupivacaine with epinephrine. The clinical benefit of a decrease in opioid consumption has not been demonstrated by Pacira, but convincing physicians that less opioid use by their patients is a good thing is not a difficult task. Exparel costs $285 WAC per vial. That's a 25x increase over generic bupivacaine! Despite not being a significant leap forward, Pacira is clearly doing well with Exparel. Perhaps this is because drugs like Exparel and POSIDUR represents a very large market opportunity. Exparel sales for the first three quarters of 2013 totaled $45 million. We see Exparel posting roughly $70 million in sales in 2013, growing to roughly $150 million in 2014.

According to data published by the CDC, there are approximately 70+ million surgical procedures performed in the U.S. each year, a large majority of which require significant post-operative pain control. The vast majority of these patients are inadequately treated for post-operative pain relief. The current standard of care for post-surgical pain includes oral opiate and non-opiate analgesics, transdermal opiate patches and muscle relaxants. These medications are either ineffective or carry significant tolerability and side-effects issues.

Drugs like Exparel and POSIDUR are designed to reduce cost through less opioid use (and corresponding opioid-related side effects) and potentially earlier hospital discharge following surgery. Data published from a retrospective analysis on roughly 320,000 patients in 380 hospitals in the Journal of Pain and Palliative Care (Oderda GM, et al, March 2013) shows that patients with opioid-related adverse events (ORAE) were associated with:

- An increase of 3.3 days longer hospitalization than patients without an ORAE (7.6 days vs. 4.2 days, P<0.0001),
- A $4,707 mean increase from the baseline hospitalization cost compared to patients without an ORAE ($22,077 vs. $17,370, P<0.0001),
- A significantly greater 30-day, all-cause readmission rate (15.8% vs. 9.4%, P<0.0001) compared to patients without an ORAE.

That's why Pacira can charge $285 WAC per vial for Exparel, that's why the company is succeeding in gaining formulary coverage, and that's why the consensus sales forecast for Exparel is roughly $250 million in 2015. That's why Pacira currently has a market capitalization of $2.0 billion. This is an attractive market. In fact, the characteristics of POSIDUR made the product attractive enough that Durect was able to secure two separate development and commercialization deals with larger pharmaceutical companies, the first with Nycomed in November 2006 and the second with Hospira in June 2010.

…The Posidur Data…

The initial success of Exparel provides a glimpse of what could be for Durect. The market that Exparel has expanded we believe POSIDUR could dominate. POSIDUR would offer true 72 hour pain coverage, and thus even greater opioid sparing and cost reduction for patients and physicians.

In July 2007, Durect reported positive results from a multicenter, randomized, double-blind, parallel-group, placebo-controlled phase 2b trial conducted on hernia patients who were randomized into three arms: POSIDUR 2.5 mL (n=42), POSIDUR 5 mL (n=47) and placebo (n=31). Patients enrolled in the study (age 18 to 65) received elective open unilateral tension-free Lichtenstein-type inguinal hernia repair under general anesthesia. The primary outcome of the study was pain intensity on movement evaluated using a numerical rating scale (0=no pain; 10=worst pain possible), collected four times a day. Outcome was assessed via two co-primary efficacy endpoints: the mean pain intensity on movement area under the curve (AUC) over the time period 1 to 72 hours post-surgery, and the proportion of patients who received opioid rescue medications during the study.

The results are presented below for the control and the 5 mL arm. They show a 31% reduction in pain and an 80% reduction in opioid use vs. the control.

Statistically significant reduction in both pain intensity and opioid use was observed for the 5 mL POSIDUR dose. The data above were presented at the American Hernia Society meeting in March 2008. Data from the trial showed no serious adverse events (SAEs) designated related or possibly related to POSIDUR. SAE's were generally similar between the three arms. 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 shows the drug to be safe, effective, and well tolerated in hernia patients. Reduction of opioid rescue dose was also associated with reduction of opioid-related side effects such as constipation, somnolence, dizziness, nausea, and vomiting.

In February 2011, Durect announced results for a second phase 2b trial, this time studying POSIDUR in 107 patients undergoing shoulder surgery in a randomized, double-blind, design. Data from this study is presented to the right, which shows statistically significant reductions in both pain intensity (-21%) and opioid use (-67%) vs. the control.

Following the impressive results of these phase 2b studies, Durect met with the U.S. FDA to outline a path towards registration. Recognizing that if approved, POSIDUR could have significant use by surgeons in a wide variety of surgical procedures, the FDA asked Durect to conduct additional clinical trials in a sicker and older patient population, while also incorporating varying types of incisions.

In January 2010, Durect initiated the phase 3 BESST (Bupivacaine Effectiveness and Safety in SABER Trial), a multicenter, double-blind trial that sought to enroll over 300 patients in three cohorts undergoing a variety of abdominal surgical procedures.

- Cohort 1: An active comparator cohort in which patients were randomized to receive either POSIDUR 5 mL or commercially available Bupivacaine HCl solution after laparotomy (large wound).

- Cohort 2: An active comparator cohort in which patients are randomized to receive either POSIDUR 5 mL or commercially available Bupivacaine HCl solution after laparoscopic cholecystectomy (small wound).

- Cohort 3: A double blind, placebo controlled cohort in which patients are randomized to receive either POSIDUR 5 mL or SABER-Placebo after laparoscopically-assisted colectomy (medium wound).

In January 2012, Durect released results from BESST. On the first co-primary endpoint, pain reduction during the 72 hour period (AUC), the POSIDUR 5 mL group achieved a 7% reduction. This was not statistically significant versus placebo (p=0.1466). The 7% reduction resulted when assessing pain on movement and whenever supplemental opioids were administered. With respect to pain on movement alone, i.e. not subject to request for opioids, the POSIDUR 5 mL group reported a 10% reduction, which was statistically significant (p=0.0410).

On the second co-primary endpoint, median total morphine-equivalent opioid dose for supplemental analgesia during the period 0-72 hours post-dose, the POSIDUR 5 mL group reported approximately 16% less opioids consumed versus the placebo. This was not statistically significant (p=0.5897). Data from Cohorts 1 and 2 were pre-specified to be pooled due to their small sample size. For Cohorts 1 and 2 (pooled), the mean reduction in pain on movement was approximately 20% (p=0.0111) for the POSIDUR 5 mL group compared to the patient group treated with immediate-release bupivacaine. The median total morphine-equivalent opioid dose for supplemental analgesia during the period 0-72 hours post-dose for Cohorts 1 and 2 (pooled), was approximately 18% less opioids consumed compared to the bupivacaine HCl group (p=0.5455).

The failure of POSIDUR to meet statistical significance in the co-primary endpoint was clearly disappointing. POSIDUR had worked well in the phase 2b hernia and shoulder trial - comprised of generally healthy patients with pain resulting from the surgical wound. However, in sicker patients with a large visceral pain component, the drug proved less effective. This was probably due to the underlying disease (colon cancer, diverticulitis) causing pain beyond the surgical procedure. This is a pain that most likely requires more powerful analgesics than the local-acting bupivacaine. Nevertheless, both Nycomed and Hospira returned all rights to POSIDUR after the results of BESST.

Not all was lost on BESST however. We believe the safety of POSIDUR was clearly demonstrated in the trial. Overall, the POSIDUR groups showed a similar systemic safety profile as the patient groups treated with placebo and active comparator. All patients in the trial wore a Holter monitor to record cardiac events. There were no signs of systemic safety issues. No negative safety signals were seen in the cardiac and neurologic safety assessments.

…Odds Of Approval…

Despite the failure of BESST, in April 2013, Durect filed for approval of POSIDUR through the 505(b)(2) pathway. We note that management met with the U.S. FDA in July 2012 to outline its plans for the application. In total, Durect filed with 13 clinical trials, in multiple surgical models, with 683 patients exposed to drug and no significant systemic safety concerns. Besides the two phase 2b trials, the NDA included data from smaller phase 2 trials in hernia, appendectomy, and hysterectomy. Data from BESST will be included as well.

Investors will probably ask, why bother to file the NDA if both Nycomed and Hospira have walked, and there is a high chance of a CRL given the failure of the phase 3 BESST trial? Management's theory is that the company has demonstrated clear evidence of efficacy in two randomized, well-controlled, clinical trials - the phase 2b hernia trial (soft tissue) and the phase 2b shoulder trial (hard tissue). The company has also demonstrated efficacy of POSIDUR vs. immediate-release bupivacaine (active comparator). The pool analysis does show statistical significance, and it is clear that patients receiving POSIDUR use less opioids during the first 72 hours post-surgery.

A good friend once told me, "If you torture the data, it will confess to anything!" Thus, despite the pooled analysis showing statistical significance, we are skeptical of approval in February 2014 based on the failure of BESST. The FDA specifically asked Durect to conduct a trial of that nature (i.e. older / sicker patients with visceral pain).

Therefore, we think the FDA will come back and ask Durect to conduct one confirmatory phase 3 trial before it approves the application. Management has said publicly that laparoscopic cholecystectomy (gallbladder) removal surgery would be a potential target for such a trial. Data from this cohort in BESST was statistically significant when compared to placebo. That being said:

1) The NDA costs little to file, only time and effort. Management focus is not an issue; and, as the company's first sponsored NDA, the approximate $1.8 million PDUFA fee was waived.

2) Durect owns worldwide rights to POSIDUR. The drug has four patients granted (2 U.S., 1 EU, 1 Japan) that protect the asset to at least 2025. The company would like to re-partner the drug for commercialization. Given the initial success that Pacira is having with Exparel, we think the company can re-partner on favorable terms.

But that this point, partners are most likely asking Durect the same questions investors are asking - what's necessary to gain approval? Heck, the FDA may surprise us all and approve the drug in February 2014! However, a complete response letter (CRL) on POSIDUR is not the end of the world for Durect. In fact, it provides valuable information to the company on what is necessary to gain approval. A CRL on POSIDUR should lay out what Durect has to do before it can re-file. This may include a phase 3 trial in gallbladder in 100 patients at a cost of $10 to $12 million. If that's the case, at least now Durect knows exactly what it needs to do, and can go back out to new potential partners with a plan of action.

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.

Our financial model does not assume POSIDUR approval until 2016, which means we expect a complete response letter in February 2014 outlining the necessary steps to conduct one additional clinical study in gall bladder removal and re-file in 2015. We do this to be conservative. Certainly if the FDA approves POSIDUR in February 2014 the stock is going to skyrocket. We think POSIDUR approval sends the shares to $3.00. Rejection probably sends the shares back to $1.25, so at today's price of $1.83 Durect still offers very favorable risk / reward.

Pfizer Chugging Along With Remoxy

There is nothing major new to report on Pfizer (NYSE:PFE) and Remoxy. In August 2013, we learned that Pfizer had initiated a small study with Remoxy in healthy volunteers. The study was an open-label, single-dose, randomized, three-way crossover study to estimate the effects of food on Remoxy pharmacokinetics following oral 40 mg doses of "Formulation K" and to estimate its relative bioavailability compared to "Formulation X" in the fasted state. We note since 2011, Durect has been working on various formulations of Remoxy to address the issues raised in the second complete response letter in June 2011. This study has since completed.

On October 21, 2013, Pfizer notified Pain Therapeutics (NASDAQ:PTIE) and DURECT that it had achieved technical milestones related to manufacturing of Remoxy, and that they planned to continue move forward with development. Pfizer also noted, thanks to guidance received from the U.S. FDA earlier in the year that they planned to conduct two clinical studies with Remoxy prior to re-filing the new drug application (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 first of these two studies, the abuse-potential study, is currently underway at Pfizer. We expect the pivotal bioequivalence study to begin shortly. Pfizer believes they should be in position to re-file the NDA around the middle of 2015. 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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.