DURECT Corporation (DRRX) Q4 2008 Earnings Call Transcript

Matt Hogan - CFO Jim Brown - President and CEO

Ken Trbovich - RBC Capital Dave Windley - Jefferies & Company

Welcome to the DURECT 2008 Q4 Earnings Report. We are now ready to begin.

This call begins 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 included in our SEC filings, including our 10-K, under the heading "Risk Factors". Let me now turn to our financials. Total revenue was $6.6 million in the fourth quarter of 2008, which is essentially unchanged from the fourth quarter of 2007. Revenue from our R&D collaborations was $4.7 million in Q4 of 2008 as compared to $4.6 million in Q4 of 2007, which is an increase of about $156,000 or 3%. Revenue from this source will always fluctuate 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 decreased by approximately $159,000 or 8% from $2 million in Q4 2007 to $1.9 million in Q4 2008. Our gross margin on these products was around 63% in the fourth quarter 2008 and around 60% in the fourth quarter 2007. R&D expense was $8.5 million in the fourth quarter 2008 as compared to $9.5 million in the fourth quarter of 2007, these figures included stock based compensation of $1.4 million in the fourth quarter of 2008 and $1 million in Q4 2007. SG&A expenses were $3.7 million in Q4 2008 as compared to $3.3 million in Q4 2007, an increase of about $422,000 these figures contained $722,000 of stock based compensation in Q4 2008. And $553,000 of stock based compensation in Q4 2007. Excluding the stock based compensation increase, the rest of the increase was largely due to higher patent expenses arising from acquisition of additional patent families in the first quarter of 2008 and the fourth quarter 2007. We had one unusual and complex accounting item in the quarter that I'll take a minute to explain. Back in 2000 we amended an agreement with ALZA in which we gave them stock and warrants, in return for a reduced future royalty and upfront payments on Chronogesic sales. Recall Chronogesic was an implantable pump based on DURECT's technology we licensed from ALZA. This equity was valued at $13.5 million and was recorded as deferred royalties and commercial rights on our balance sheet. The notion was that in the future when we received royalties, we then start to amortize this $13.5 million figure. Earlier this year Endo terminated the agreement with respect to Chronogesic. And when we went through our budgeting cycle at the end of the year. We have decided that we have R&D projects that should be prioritized over Chronogesic. Hence its not clear that there will be future royalties derived from Chronogesic. And therefore we ought to write-off these deferred royalties and commercial rights. This is a pretty esoteric accounting issue and the thing that I would stress is it is non-cash expense of one-time nature. Our net loss for the fourth quarter in 2008 was $19.5 million, compared to a net loss of $7.2 million for the same period in 2007. However, if you exclude the non-cash write-off I just described, our net loss in the fourth quarter of 2008 would have been about $6 million, or about $1.2 million less than in the fourth quarter of 2007. Probably and more relevant financial metric for us in our net loss was net cash consumed during the year. That figure was $9.3 million. Early in 2008, DURECT provided guidance that we anticipated net cash consumption of approximately $32 million to $36 million. Upon licensing ELADUR to Alpharma, we decreased our cash burn guidance to approximately $10 million to $12 million. We are pleased that the final decrease in cash year-over-year was below the low end of that range. This outcome is a function of our business model, which includes moderating our burn rate through licensing the programs typically when they are at Phase II or so. We are quiet proud of the fact that we spent accumulative $48 million over last four years in building our pipeline. The cash burn rate average is now to about $12 million per year. At December 31, 2008, we had cash and investments of $52.7 million, compared with cash and investments of $62 million at December 31, 2007. These figures, both included $1 million and restricted investments. Let me now turn to our financial guidance for 2009. Our net cash consumption is heavily influenced by the timing and structure of new corporate collaborations as well as outsourced pre-clinical and clinical expenses. While we anticipate entering into new collaborations in 2009 and beyond, we believe it's more conservative to give financial guidance based on an assumption of no new collaborations, no milestones and aggressive funding of R&D programs, many of which are in clinical development. Based on those key assumptions we anticipate net cash consumption in 2009 of approximately $28 million to $32 million. I would note that we have multiple late stage programs that may potentially be partnered over the next 12 to 18 months, its include TRANSDUR-Sufentanil for Europe and for Asia, POSIDUR for the US and Asia, as well as various internal programs which we have not described publicly in detail. Thanks again for joining our call. And I will now turn it over to Jim to discuss non-financial matters in greater depth.

Thank you, Matt, and hello, everyone. We made progress on many fronts in 2008. And just to give you a few highlights here. REMOXY NDA was filed and received a Priority Review. The third order based Opioid and PTI collaboration started at Phase I. POSIDUR commence to Phase IIb shoulder study and plans for the Phase III program were refined. Endo completed it's Phase II program for the TRANSDUR-Sufentanil project and ELADUR reported positive Phase IIa results. We were able to eliminate $23.6 million in convertible notes. And we signed our ELADUR collaboration with Alpharma now part of King Pharmaceuticals. And this collaboration should move the program forward into development while substantially lowering our cash run-rate going forward. In the current political and economic environment DURECT has a very attractive business model. We focus on major products with lower development risk and this lower risk is by virtue of the diversified portfolio that we have, not only the number of products but the number of technology by which we spread the risk as well by using known drugs. We make a modest investment through the partnerships that we were able to put in place and we get significant returns from these through having later stage partnering. The results of this are four major deals with significant milestone, in fact, we have over $400 million in milestones from our existing partnerships ,over $100 million worth come during the development timeframe. We are able to have co-investment and yields double-digit royalties. This lower cash burn that Matt described earlier of $10 million to $12 million per year has enabled us to consume less than $48 million round cash over the last four year's. In this prospect, while we are driving our pipeline forward, we now have one NDA file, three products in Phase II, and numerous earlier programs. Over the next 12 to 18 months, we expect to see a plan put forth by Pain Therapeutics and King to address the complete response letter on REMOXY, two development programs moving into Phase III. We also have the potential to achieve business development deals with a number of programs. And we received milestone payments from our existing partner programs. I will now provide a brief update with regard to our lead projects, starting with REMOXY. REMOXY is based on our ORADUR gel-cap technology which provides a twice daily form of oxycodone in a more difficult to misuse and abuse formulation. The REMOXY NDA was submitted on Pain Therapeutics on June 10, 2008. In August of 2008, the NDA was accepted and granted Priority Review. A Priority Review is a designation that is given to drug that offer real advances in treatment or provide a treatment where no adequate therapy exist. There was an FDA panel meeting on November 13, which we felt was positive. The clinical data are strong and considerable data was shared as to how REMOXY is more difficult to tamper with than OxyContin. We were disappointed in December to learn that Pain Therapeutics had received a complete response letter from the FDA. It is fortunate that our Priority Review was granted and at least the feedback was received six months earlier than one normally would have expected. Currently, Pain Therapeutics and King Pharmaceuticals and their technical advisors are accessing the FDA's letter. And PTI has disclosed that they planned to talk with the FDA in the second quarter of this year and will update all of us when they have enough information to give an informed update. As a reminder, oxycodone is widely used by patient suffering from chronic pain. The sales of OxyContin and oxycodone oral products were almost $1.6 billion in 2007. We understand that those sales may have exceeded $2 billion in 2008. There is a huge abuse problem in this country and therefore, we believe there is a major market opportunity for our commercialization partner King Pharmaceuticals. DURECT will receive royalty of 26% and scale to 11.5% plus the manufacturing markup on selected key recipients that we will supply. Now I am going to move to POSIDUR. POSIDUR is an injectable product design to control post-surgical pain for up to three days with Bupivacaine, a well established local anesthetic. We have some very strong Phase IIb data from POSIDUR in hernia trials that were done in Australia, but we were able to demonstrate 30% improvement in pain control versus placebo over the first two to three days after surgery, and if ones looks at the POSIDUR group as compared to the placebo group, the placebo group took 3.5 times more narcotics than the POSIDUR group. These are compelling results and they hold the potential to change the treatment of post-operative pain. What's the status of this development program? Well, we have been in dialogue with the FDA regarding the details of the Phase III. We have been in this dialogue for over one year. Even though it's taken longer that we would have liked or projected, we feel that we have been making progress towards a clearly defined program that sets up the conduct of a successful Phase III. In parallel with these FDA discussions we and our European partner Nycomed are continuing to advance the program. For example, because an orthopedic model will be part of our proposed studies for regulatory approval, we are conducting a 60 patient Phase IIb study in Australia using a 5 ml dose in shoulder surgery. This study is not sized to achieve statistical significance, but is intended to confirm aspects of our current Phase III study design and conduct. It allows us to build on our Phase IIa shoulder work in the Phase IIb setting. Additionally Nycomed is commencing Phase IIb studies in surgical models in Europe. All of these studies will contribute to the total number of patient exposures that will ultimately be required by the FDA and European Medicines Association Agency, EMEA as part of the product approval process in the U.S. and Europe. In summary we and our partner Nycomed continue to make progress. And we look forward to advancing this program into Phase III later this year. As a reminder Nycomed became our partner for this program in the fourth quarter of 2006. They paid us $14 million upfront and additional $8 million on our first milestone. And we have an additional $180 million in potential milestones to come. Nycomed will commercialize the product in Europe and other defined territories. Paying us royalties on their sales starting at 15% in grow to 40%. Nycomed also pays one half the development cost of the program in Europe and US. DURECT's has retained all commercialization rights for the US, Canada and Asia. Because this product will utilize as surgical suite sales force we think one could cover the US market with a specialized sales force of between 100 to 150 sales reps. Historically we talked about commercializing this product in the US entirely by ourselves, however this is an attractive program to other companies. And it is equally likely that we will partner this product in the US. Although we would expect the structure of any such deal to be put in place in such a way that co-promotion rights would be an opportunity. And therefore allow us a path to building commercial capabilities within DURECT. Now I am going to talk about ELADUR, ELADUR is a transdermal path containing bupivacaine designed to provide up to three days of pain relief versus the existing market leading patch which is indicative of 12 hours of wear. ELADUR's is very thin and has an elegant design for superior wear ability. Our patch can even be worn in the shower or during exercise. In May of 2008 at the American Pain Society annual meeting we presented poster that outlined the positive results for ELADUR from a 60 patients Phase IIa study in patients suffering from post therapeutic order. In October 2008 we closed our collaboration with Alpharma. The deal terms were that Alpharma pay DURECT an upfront license fee of $20 million. Additionally there is $93 million of potential development milestones which is spread over multiple clinical indications and geographical territories as well as a $150 million in potential sales based milestones. If ELADUR is commercialized, DURECT will receive a royalty on product sales. In December 2008, King Pharmaceuticals acquired Alpharma and the rights and the obligations for agreement. King now controls and is responsible for funding the development program going forward. The DURECT ELADUR team, is working with the team at DURECT to finalize the Phase IIb plans and the next steps for this program. The final product to update on today is our TRANSDUR-Sufentanil program. Our Sufentanil patch targets chronic pain users. The market for J&J patch POSIDUR was $1.2 billion in 2007 that may understate the opportunity as the extended release oral opioid markets is well over $4 billion and many of those patients could benefit from superior patch. Our patch provides 7 days of pain relief versus existing fentanyl patches that deliver medication for 2 to 3 days. This should enhance patient compliance and convenience and lower manufacturing cost over monthly treatment cycle. Existing fentanyl patches like Duragesic are about the size of dollar bill folded in hand which means that during a month the patient has to find 10 to 15 rather large spots on the body to rotate the patches around. In contrast our patch which is approximately one fifth the size of Duragesic or about the size of poster stamp and requires only four such small sites during a months time. Our partner for US and Canada is Endo Pharmaceuticals. Their success with Lidoderm has demonstrated their ability to sell patches used to treat pain. Under our agreement Endo is responsible for all development costs DURECT receives a strong royalty on product sales. We're also entitled to about $35 million in milestones, the vast majority of which come during the development and also at product launch. Endo has stated that they expect to hold an end of Phase II meeting with the FDA early in 2009. Over the next 12 to 18 months we look forward to continue progress from our programs in clinical development. For REMOXY and other opioids in the near term we look forward to learning about the action steps taken by pain therapeutics in king in connection with REMOXY to the NDA submission as well as updating our progress with the additional abuse resistance opioids. For POSIDUR it's completing the ongoing Phase IIb shoulder study and commencing the Phase III program. For the Sufentanil patch, the Endo holding the end of Phase II meeting with the FDA following which further communications are in clinical development planned by Endo. And for ELADUR its continuation of the clinical development program building on a positive data on the Phase IIa 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 Phase I. These products address large market opportunities in the under served pain management field. Each of these products has differentiating features that continue and constitute meaningful improvements over the existing therapies. They address important trends in pain management such as abuse deterrents in the case of REMOXY or reduction of use of opioids in the case of POSIDUR and ELADUR. Caracteristic of our development products is the ability to provide for a reduction in healthcare costs. We have multiple products advancing in various stages of development, moving from Phase I and into Phase II and then from Phase II to Phase III. We have collaborations in place with Nycomed, Endo Pharmaceuticals, Pain Therapeutics and King Pharmaceuticals that provide considerable development funding and solid economics upon commercialization. And we have the potential for our future business development deals which historically allowed us to maintain a modest burn rate while we are able to advance these projects. Thank you for your support, and we look forward to sharing our progress reports with you. And now we would like to take any question you may have.

Operator, we are open for questions.

(Operator Instructions). Okay, we do have our first question from. Sorry I thought we had a question from Ken, but he no longer seems to have his hand raided.

It's all right.

Here we do, Ken with RBC Financial, and that's Ken Trbovich with RBC Capital. Ken Trbovich - RBC Capital: Hey, didn't mean to back out of the queue there. Appreciate taking the question. I guess the first one I wanted start with, I understand the conservatism and the reason for perhaps being as conservative as you are at the start of the year for guidance, but I just wanted to be certain that we understand what new term milestones you might have, if any, for example out of the Sufentanil program or others that you might earn in 2009 that are not included in the guidance.

I would say the potential milestones, in truth our partners haven't given us in most cases the freedom to describe in detail what all the different milestone payments are and what they are associated with, so I want to speak a tiny bit in general. But of course, this year our milestone payments could be zero, or I would say they could be at high as in the range of about $9 million for the year. Ken Trbovich - RBC Capital: Okay.

It's not attributable, solely to Sufentanil patch. There are a couple of other things. Ken Trbovich - RBC Capital: Okay

Just talking in terms of that range. Ken Trbovich - RBC Capital: Not a problem. And then just with regard to the decision or the poster and perhaps, I guess maybe not a decision but posturing on POSIDUR, are you actively now seeking a co-promote partner here in the US. I know the language here in the past has really sort of exclusively focused on trying to build a commercial organization, and while you are not closing that door, it certainly seems like you are opening the door to partnering. So I am just trying to get a sense for how aggressively you are looking for those partners.

It's a great remark, and we are actually not necessarily even need to aggressively look for partners, we had a lot of partners aggressively come talk to us. So there are a lot of people that are quite interested in this. Because of the fact that it's first-in-class therapy and, because it's the only product that we are aware about that that has demonstrated kind of data we have seen in the Phase IIb where hope your experience is showing better paying control than with narcotics. And all of that being said, as we look forward to how we are going to be growing DURECT in the future, we have to take these discussions very seriously. Ken Trbovich - RBC Capital: Okay, and then just I guess in terms of final question, has a program for ELADUR has slowed at all, because of King acquisitions of Alpharma?

Once again a good question, I think however you can't help it have a little bit of a slowdown when you have one party being acquired by another, and team change over. I mean there were certainly some changing of various people on the team. But having said that, we know King very well by virtue of the relationship that we have on the four narcotic products that are being developed through the PTI relationship we have a lot of respect for the King development team, and we are now working, our team is working very closely with theirs to get to the phase IIb underway. Ken Trbovich - RBC Capital: Okay.

So feel good about King as a partner. Ken Trbovich - RBC Capital: Well, I think that takes care of my question. Thank you.

Hey, thanks Ken.

(Operator Instructions). Okay, we now have a question from Dave Windley with Jefferies & Company. Go ahead Dave. Dave Windley - Jefferies & Company: Good afternoon. Thanks for taking the question.

Hey, Dave. Dave Windley - Jefferies & Company: Hi good afternoon. Wanted to follow up there a little bit on the King, your primary, I guess your relationship through Pain Therapeutics. They have taken down our options a lot. The third of the opioids. Are all of those opioids formulated, but for the active ingredient in essentially the same way, it's a same underlying delivery technology, yes?

Well, yeah. The technology that we are using to develop all those formulations are ORADUR technology, which is primarily are saved plus the other components that make it ORADUR technology. Dave Windley - Jefferies & Company: Right.

That's the basis of the license to PTI. Dave Windley - Jefferies & Company: And there are, I believe, under the original license there was an intention to take four, is that correct?

Yeah, the license is structured in such a way that they have a right saving Pain Therapeutics are now by virtue of their sublicense to King have the rights to commercialize four specific narcotics. They are all defined by name and there is as we put in all of our agreements in very close tight knit, due-diligence language that allows for these things developed in a very rigorous and structure manner. Dave Windley - Jefferies & Company: Okay. And are you working on continuing to work on the fourth?

The work is continuing. It's kind of like you start with one, one is like senior in high school, and then you have got maybe a freshman in and you got somebody in junior high school, and you have got like an elementary school kid. So they are just kind of all working at the various levels of maturity. Dave Windley - Jefferies & Company: But they are all progressing?

They are always working with our partners with regard to this. Dave Windley - Jefferies & Company: Okay. Just wondered if the full response on REMOXY from the FDA has implications on formulation that would effect all of these products?

Yeah, I mean to say basically, I couldn't really comment much, but with regard to this and not particularly on the formulation of the ORADUR technology which we are also looking at for other uses outside of the four specific narcotics here. And as far what's going on with regard to the FDA, we’d would have to ask guys to speak to a King or PTI with reference to specifics of REMOXY and their FDA or actions Dave Windley - Jefferies & Company: Jim, can you comment, just to step back a little bit more generally about maybe the context around the deterrence of abuse by injection for using ORADUR technology?

Sure. Probably you are referring to that November comments and that kind of thing. I think personally, maybe more was made of that, if you look into control-release narcotics in general or actually even control-release amphetamines and all the rest of these, they use a lot of different materials to obtain the control-release aspects. If you recall the next day when Alpharma was talking to address the fact that talc was in the formulation, which is a mineral substance. We have identified, if you look up talcosis, just google it, you'll find a lot issues of talc problems 20 years after people have abused these products. In this case I think they were amphetamines and the like. And these are cases of these minerals being still existing in the body. The basis our technology, our ORADUR technology is safe, which is sucrose acetic isobutyric which breaks down eventually into substances that are used by the body in the Krebs cycle. It breaks down into fructose and glucose. So, it certainly doesn't have the longevity that one sees with these minerals. And in some cases these other companies which have control of these products in the market are not only using talc but they are using various other long chain polymers, including metal acrylate and any other things, that are never effectively broken down in the body. So, very, very different circumstances I think, Dave Windley - Jefferies & Company: Okay. The comments today out of the FDA with regard to headlines FDA to meet with drug companies about REMS for certain opioid drugs, what's your thought on that and how they might impact your involvement?

It's great. I think it's actually a really good news for us because once again because it forces the issue of looking at abuse deterrence as a problem. And you see the FDA looking at REMS and other ways to trying to deal with problems out there, and the nice thing about what we are able to do with order is provide them on top of the REMS you can provide for any product, a technology that by itself offers inherent reduction in tampering and those kinds of things. So, we think that we are playing right into what the FDA needs which is this kind of technology. Dave Windley - Jefferies & Company: Okay. Great.

But I do believe the REMS should, I think hopefully will be eventually applied to all the products that are in market not just the new ones. Dave Windley - Jefferies & Company: Right. Thanks.

Okay.

Do you have any other question at this time?

Do I know?

Hearing no other questions. Thank you all for participating and if people do have questions down the road, please call us anytime at the company. Thanks you.

Thanks. Bye.