DURECT Corporation (DRRX) Q1 2012 Earnings Call Transcript

Greetings, and welcome to the DURECT First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Hogan. Thank you, Mr. Hogan, you may begin.

Okay. Good afternoon. Welcome to our first quarter 2012 earnings conference call. This is Matt Hogan, CFO of DURECT. This call will begin with a brief review of our financial results, and then, Jim Brown, our President and CEO, will provide an update on the business we then open 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 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. Our total reported revenue according to GAAP was $41.2 million in the first quarter 2012 as compared to $8.6 million in the first quarter of 2011. However that figure reflects the accelerated recognition of $35.4 million in deferred revenue associated with previously paid upfront payments from terminated agreements. Better figure probably would be that our revenue excluding this deferred revenue would have been $5.8 million in the quarter. And the rest of my discussion is going to exclude this $35.4 million which is non-recurring and non-cash recognition of deferred revenue. Excluding all deferred revenue recognized for upfront fees from our agreements revenue from our R&D collaborations was $2.9 million in the first quarter of 2012 as compared to a $3.5 million in the first quarter of 2011. And revenue from that source is always going to fluctuate from quarter-to-quarter depending on the state of development under the various programs and what role in those programs. Product revenue from the sale of ALZET pumps, LACTEL polymers, and excipients used in REMOXY were approximately $2.9 million as compared to $3.1 million in the first quarter of last year. Our gross margin on these products was around 49% in the first quarter 2012. And these product lines continue to be strongly cash-flow positive for us. R&D expense was $5.6 million in the first quarter 2012 as compared to $9.9 million in the first quarter of 2011. SG&A expenses were $3.3 million in the first quarter of this year as compared to $3.7 million in the first quarter last year. And as a result of the above, our net loss for the first quarter 2012, again excluding that $35.4 million recognition at deferred revenue declined to $4.6 million compared to a net loss of $6.4 million for the same period last year. Our net cash consumed during the quarter was $4.4 million. So that at March 31st, 2012, we have cash and investments of $26.4 million. This is pretty much on par with our budget for the year and we have essentially no debt other than normal liabilities associated with running the business. I'd note that we have multiple programs that may potentially be partnered over the next 12 to 18 months. These include TRANSDUR-Sufentanil. POSIDUR, ELADUR, ORADUR-ADHD for the U.S. and Europe and various feasibility studies we hope may mature into development agreements much like Relday did last year. Just one other thing I’d like to mention, we have a universal shelf registration statement in place that’s due to expire in May. This was originally put in place three years ago and it provided for potential financings up to $75 million. These shelf registrations automatically expire after three years. As we don’t think it makes sense for any public company not to have an effective shelf in place. We will be filing a new shelf registration statement for up to $50 million at the same time as when we file our 10-Q basically to replace the existing expiring shelf. I wouldn’t infer from that action that we have any intentions in the near term to do a financing. It’s a just a standard tool that have in our arsenal as a public company. Thanks again for joining the call and I’ll now turn it over to Jim for other matters.

Thank you, Matt, and hello, everyone. I’ll now provide an update with regard to our most significant recent events. Starting with REMOXY, here we’re continuing to work with a commercial partner Pfizer and they are committed to moving the program forward. This quarter, they gave some detail on their action plan for REMOXY including a planned FDA meeting in the third quarter. We announced today that we received important patent issuances that protect REMOXY and the other ORADUR-based opioids out through at least 2025. With regard to POSIDUR, we're pulling together the integrated summaries of safety and efficacy for this program. We scheduled a pre-NDA meeting for this summer and pending a positive outcome from that meeting, we expect to submit the NDA this year. Now let’s go into little more detail with regard to these programs. REMOXY as you know is an ORADUR formulation of oxycodone that allows for 12 hours of extended release and as well tamper resistance. Our ORADUR technology products are designed to be tamper resistant to multiple mechanisms of potential abuse such as snorting, smoking, injecting, or trying to dissolve them in drinks such as alcohol. The most recent Pfizer communication with regard to REMOXY was from Olivier Brandicourt, who is the President and General Manager of Pfizer’s Primary Care business. This was on January 31st of this year, during their fourth quarter earnings call where he stated that they now had a much better understanding of the formulation, the manufacturing controls and what they needed with regard to analytical tests. They plan to conduct two bioavailability studies during the second quarter of this year. And they anticipate meeting with the FDA during the third quarter to discuss next step. Today, we announce the issuance of four ORADUR patents, due to these where composition of matter or formulation patents and one regards the methods of making an opioid containing formulation. Coverage from these patents goes out at least until 2025. We have other pending applications that could go out to 2028 and additionally we may be eligible for patent term adjustments and extensions for these four patents that we described today. In Europe, we have issued patents that go out through at least 2023. While we always had confidence that these most recent applications would issue it is significant that we now have coverage for such an extended period of time. Just as a brief reminder with regard to potential financial impact of REMOXY to DURECT one looks at the worldwide Oxycontin sales, they are on annual basis around $3.7 billion with about $3 billion being inside the United States. We will receive between 6% and 11.5% of sales that Pfizer will achieve with this product with the 11.5% being right around $1 billion in sales. So Pfizer is able to achieve somewhere between 30% and 50% of this current market opportunity. It would mean to direct somewhere between $70 million and $130 million a year. Just as a reminder as a company we have consumed over the last eight years about $11 million a year as a company over our whole history of 14 years about $13 million a year as a company. A brief update with regard to our ORADUR opioids. We have three other narcotics within the alliance with Pfizer and Pain Therapeutics. Those products are hydrocodone, hydromorphone and oxymorphone. Two of these product candidates have been in Phase I and the third has had an IND filed. The overall opportunity for these is quite large; the market opportunity here is probably in excess of $1 billion. And they have of course the ORADUR features that we attribute to this technology and this is the extended releasing dosing as well as tamper resistance. Additionally, we have an ORADUR-ADHD program with our partner Orient Pharma. In this program, they are funding the program through the completion of the first Phase II trial. They will have the rights to the product with the royalty back to us for Southeast Asia. We would retain the rights for the rest of the world including Europe and U.S. This is a quite large opportunity, probably in the range of around $4 billion market size. Features are of course once-a-day dosing and the tamper resistance. We’re currently conducting Phase I study and planned to select our formulation for Phase II this year. Now, I want to talk about POSIDUR. POSIDUR is post-op pain control product. It offers a new paradigm for post-op pain control. It’s designed to locally deliver bupivacaine for three days post-surgically. It got the added potential benefit of reducing narcotic use as well as the associated side effects and costs and the potential for earlier hospital discharge. Our regulatory strategy for this product is a 505(b)(2). Here we’re leveraging off the long history use of bupivacaine and this requires 505(b)(2) strategy requires establishment of safety as well as one well-controlled efficacy trial. For POSIDUR, we have a very nice well-controlled trial in our hernia trial that was conducted down in Australia, was a 120-patient trial; here, we have a 30% improvement in pain scores for three days. We have a 70% reduction in opioid use over these three days including looking at hours 24 to 48 and 48 to 72 separately you can see very nice 70 plus percent reduction narcotic use. Both of these, the pain reduction and the narcotic reduction are statistically significant as compared to placebo. We had interactions with the FDA with regard to the hernia trial and just to give you some feedback with regard to that, this was about a year and half probably over two years now. The good trial, but they felt it was mostly in young, otherwise healthy men and before they would want to see NDA submitted what they wanted us to do is to test the product in more women as well as in older and sicker patients and explore the safety of the product in larger wound sizes as well to establish the cardiac safety at this dose, and that was really a lot of the design around BESST -- with regard to safety of including 300 patients that all were Holter monitors and like that was all built around this as well as the selection of the models within BESST where a lot of patients actually had wounds that were up 12 inches in length. This lead to our clinical trial designs as I just recently stated with regard to BESST and as well as other trials that as a whole this program now has over 1,000 patients involve our trials with over 680 being dosed with POSIDUR in multiple surgical models. While BESST was being conducted, we completed a shoulder trial in the EU and this trial demonstrated a 19% improvement in pains scores over three days as well as a 67% reduction of opioid use over three days. These are both statistically significant versus placebo. Our next steps for this program, what we’re going to be doing is finalizing our integrated safety and efficacy reports that will tie together the entire body of work we’ve conducted with POSIDUR. We will be holding a pre-NDA meeting with the FDA this summer and pending a positive outcome from that meeting we planned to submit the NDA in 2012. The logic for this submission is, first off we believe that the overall program shows a positive risk benefit ratio of POSIDUR and qualifies under the 505(b)(2) status. At this point, we don’t see any systemic safety issues. Bupivacaine is a well-established agent with a long history of use. With respect to efficacy, we’ve shown in multiple models evidence of reduction in pain scores for over three days. We will position our hernia and shoulder trials as well-controlled efficacy studies and these will be supported by the trends towards efficacy from BESST and our other trials. Our view is that this body of evidence in multiple significant surgical models is compelling and may be the basis for a possible approval. Having said that, we still need to explore this with the FDA. POSIDUR offers a large commercial opportunity, which is driven by reducing the need for opioids after surgery and their associated side effects. It’s better for patients with potentially large healthcare savings costs. We’ve estimated in fact by looking at a dischargeability index from our hernia trial that assuming a $1,200 a day hospital bill will be saving about $620 per day per patient using POSIDUR. There are over 70 million surgical procedures per year in the United States. We’ve estimate a 10 million to 20 million procedures might be the potential available market for POSIDUR. Our pricing is yet to be determined, but our market research suggests $250 or more per procedure based on the reduction in opioid use and side effects. Because of the potential for a significant reduction in opioids and pain for three days, it’s an exciting product concept for the surgeons, the anesthesiologists, as well as the payers. Additionally, we’ve recently had patents issued for POSIDUR that go out to at least 2025 for both the U.S. and the European markets. Now, I want to talk about two our patch programs, starting with our TRANSDUR-Sufentanil program. This is a very wonderful product, the market opportunity for this product is probably over $1 billion. It’s for treating chronic pain. We have a number of advantages over the market leader here, here we have seven days versus two to three days for the fentanyl patches or about one-fifth the size of the fentanyl patches and we have Sufentanil as an active agent versus fentanyl. Sufentanil is about one-tenth -- it’s about one-tenth a dose so it’s much more potent molecule, but the other side of it is, it has a very wide therapeutic indexes compared to fentanyl. And we’ve seen some of this evident the suggested with regard to some efficacy and some side effect profiles that we have from a number of different trials have been conducted in fact head to head trials done with fentanyl patients and Oxycontin patients that they have converted to our patch and we saw it actually statistically significant improvement of pain over a month after conversion. So, this program is poised to move into late stage development over 300 patients have been dosed in 10 different trials and we here at DURECT retain the worldwide rights although we are in licensing discussions with regard to this product. With regard to ELADUR, this is a bupivacaine three-day patch. The market opportunity here is again substantial in excess of $700 million, $750 million; it’s for local neuropathic pain; here are the advantages we would have over the market leader and in this case, it’s Lidoderm, is -- we’re a three day product versus 12 hours. We won’t have the -- hopefully won’t have the breakthrough pain that one sees with the 12 hour products with a much more patient friendly design that is one can wear our patch while exercising, in the shower, going for a swim that kind of thing. As well we have orphan drug designation, but this product for PHN or post-herpetic neuralgia, program's in Phase II about 300 patients have been dosed as well and we’ve retained worldwide rights and are just starting business conversations with regard to that product. Regard to earlier stage programs, our injectable depos and our feasibility work; here, we’re looking to create some biobetters. We are looking to deliver injectable proteins and peptides for up to month, from small gauge needles to subcutaneous injections with volumes in the range of 250 microliter to an ml. We have multiple feasibility programs ongoing, one feasibility program that matured into a full blown development program last year as Relday product. This is one that is partner with Zogenix, this is a once a month risperidone product. It’s a needle-free once-a-month product that we think offers and nice opportunity versus the market leading injectable product today, which is about $1.5 billion in sales and that’s a 21-gauge needle that has to be delivered IM. So just to summarize, the potential key drivers for DURECT over the next 12 to 18 months, for REMOXY is to support Pfizer to complete activities that were required for the resubmission of the NDA. And if approved of course launch by Pfizer. For POSIDUR, it’s a pre-NDA meeting with FDA summer and depending on the FDA feedback submission of the NDA this year. For ELADUR and TRANSDUR-Sufentanil it’s seeking new partners and resuming development. For Relday, it's initiation of the Phase I this year, for the ORADUR-ADHD it's selection of the Phase II formulation this year. Then we have a number of potential areas where we could establish new collaborations that is in the area of POSIDUR, the Sufentanil patch, and ELADUR on the worldwide basis and the ORADUR-ADHD programs in Europe and the U.S. as well as that there is the potential that one or two of these feasibility programs may be turned to full development program. With that we would like to close the formal presentation and open the floor up for any questions you may have.

[Operator Instructions] Our first question comes from Jim Molloy.

I wondered if you could share with us, I know Pfizer didn't mention REMOXY on their first quarter call and there may be limited information that Pfizer will let you talk about, but is there any further communication that you can share with us outside about the REMOXY program?

I don’t think we can at this point in time. I mean I think their first quarter call from what we could discern was pretty well dominated by their recent financial maneuverings and their sale of the nutraceuticals business. Yes, the one thing about we can say is just to reiterate that the bioavailability stages are ongoing now, and we look forward to the FDA meeting in the third quarter, and hopefully they will communicate more after that, I expect that they will.

Hey, great. And then perhaps you talk your clinical programs in development. As you’re looking at out-licensing or what have you, is there a way that from the outside one might rank which may more likely than another, which looks better on an out-licensing basis than another?

Well, I think it’s interesting, we -- as always I never what I project one deal versus another, because you never know as we’re running it. But there is particular program in that we are -- we have a lot of conversations around right now. And that’s one of our patch programs, and it’s been out there for a while, but there is a lot of interest. And so, I’ll just least at that. But you never -- I would not guarantee anything until we get a deal.

Our next question comes from Jeffrey DeSeibert.

A several questions for you. Couple of questions first for Matt. Matt, $4.4 million cash burn in the first quarter. I think that the idea was trying to bring 2012 back towards a $12 million cash burn. Can you give us any color as to whether you think that’s still going to be an achievable number for 2012?

Yes, we think it is. I think that the first you can’t take $4.4 million multiplied by 4 as the real run rate. Always knew the first quarter would be highest, and there are two reasons for that in particular. The first is, we had some invoices that are kind of carryover from the Phase III for POSIDUR and those had to be paid in the first quarter, but now that is behind us. And then the second thing is, as you know, we did a reduction in force, reduced head count during February, but you don’t get the real benefit of that till kind of a following quarter. Because in the quarter, you did it -- a, it happened halfway through the quarter; and b, you have severance payments and things like that. So, you don’t really see it until the second quarter. So, I guess my answer is we do expect that second quarter burn rate would be lower than first quarter. And we think we can do approximately $12 million, that’s about the right number. Again, always assuming no new milestones, no new business development deal of course.

Right. Matt, the next question is, tell us on the ALZET et cetera line. Do you think that still got some growth potential in it? It seems like recently growth has slowed down and margins have deteriorated a bit. Can you share any thoughts with us on that?

Well, from the top-line perspective, it’s always the scale of both of these is relatively small. So, it’s really easy to get a lumpy quarter either in your favor, or against your favor, and you -- but you shouldn't necessarily extrapolate from that. So, the first quarter happened to be a little bit soft revenue wise for ALZET in Europe. But we don’t think that’s a long-term trend. And previous quarter, once we had some softness with LACTEL, and it was purely because they didn’t ship, they wanted a position to ship some orders and then the following quarter they were to ship on them and then it counts as revenue. So, I think the answer to your question is from a top line perspective, I wouldn’t read much into the little dip in the quarter. The main growth of all those is going to be LACTEL probably more than ALZET. And then with respect to your gross margin question, the ALZET business inherently has a higher gross margin and so to the extent that its sales dip a little bit that will bring the overall gross margin down if you follow me, but again I don’t think there is a long-term trend there. And I think the LACTEL margins while inherently a little bit lower at this point in time, as their revenues grow because more of their costs are fixed then the gross margin within that product line will expand too.

All right. Jim, coming on to POSIDUR right, after the surprising news of the Hospira decision and that all of a sudden you now have essentially worldwide rights to the product, did the phones ring or it’s nobody seemed to really care and your business development people are going to have to roll up their sleeves and pound on doors. Can you give us any color on that?

I can give you little color. We have had some conversation with people, but I think both we and potential partners are looking forward to getting the feedback from the FDA meeting. I think getting too serious before that doesn’t make a lot of sense because post-that we’ll have a good -- I hope, a good roadmap as to what that NDA looks like and the timing of it all. And so then one can look at their relative time to potentially launch the product for approval and you can start to discern the potential values and look to possibly putting a deal in place. So short answer is, yes, there are a number of companies interested and we’re going to hold our powder dry for just a few months here while we go through this regulatory process.

All right, thank you. I mean I certainly follow that line of thought. I was just curious whether the fact that the worldwide rights were available, have triggered people to going to pick up the phone and say listen you this is interesting if the FDA conversation goes well, were they like to sit down with you and talk in detail or was it a big yawn?

Yes, no, I think definitely there is some interest in the product. I think it will also -- with viscera [ph] being launched just this past month I think people will be looking at that and seeing how does that product do; although, we think we have significant advantages over them. Nonetheless, they'll be looking at this because it will be the first product in this category out there. And then as well, internationally, there is we’ve had numerous conversations as well, because there are some markets that won't wait for an FDA approval. So, there are some other markets that were exploring the possibility of maybe looking at putting in a distribution deal sooner rather than later and trying to exploit the product even prior to approval in the U.S. if that’s possible.

Well, I mean there have been the perennial discussions with the Japanese for the last x years some?

Yes. Yes, Japan is not a fast to market kind of company, country sorry.

And so, the first kind of new thing we heard, your answer to that previous question, a little bit of activity on the patch side. Was this a discussion that as you’ve quietly been working on for a long time or is it somebody who kind of came up out of the blue and said "Hey I would like to talk to you about this?"

We’re actually talking to a number of partners for a quite a longtime. What we’ve been doing with regard to these programs, in particular sufentanil program has been -- really our focus has been to define the regulatory strategy both in the U.S. and outside the U.S. and we’ve done I think a really good job of that last year. And as we’ve achieved greater clarity one can start to assign what’s the kind if cost and timing of making this a commercial reality and so that becomes I think a very meaningful piece to this whole puzzle.

All right. And on your biobetter pipeline earlier this year you’d expressed some hope that there might be another something that might stick its head above the path in a Zogenix type deal. Do you still have that sense -- hope that something looks like it might mature?

I do, but you can never tell what these things are. They are earlier stage programs so one month it looks like this and it looks like that I mean one really just has to keeping working away at these things. And so I don’t want to give too much hope for all this I just think we have a number of these programs ongoing and at some point in time in the future one of them, the next one will mature just as the Zogenix product did.

Our next question comes from Nick Farwell.

Matt to what degree did the risk and I think was in February reduced the collaborative research revenue potential for the balance of the year? Maybe another way to ask that is with $3 million in revenues for this first quarter, is that a run rate that we should anticipate roughly for the full year because of the RIF or is that some timing issues?

I think the RIF is disconnected from revenues. The revenue arises if a partners working on a program and there is a body of work that our scientists are supposed to do as part of the overall program. If that happens we will have the people to put on it and we’ll generate the revenue. If there is another part of the program where we don’t have to be very involved and then we won’t have the revenue that doesn’t mean the programs not going forward just means they are doing a lot of the work instead of us.

Correct, I understand.

I don’t think the RIF affects our revenue going forward and it is going to fluctuate every quarter because I say some programs we're heavily involved for a period of time and then other times we’re kind of -- we’ve done our debt and it’s up to somebody else. So they are kind of disconnected.

If there is some range that you would feel is in sort of a projected internal range of some kind you think seems reasonable for this year versus the $22 million last year?

I don’t have anything on my fingertips. I’d want to think about it before I said something and then felt bad about what I answer. I mean I think we think more -- we built our budget, which is bottoms up of course. Program driven and it’s our best guess what the revenues will be for different projects and we try to make sure that a certain portion of our R&D folk are covered if you will by partners. And that’s all consistent with the kind of overall burn rate guidance we gave of about $12 million.

[Operator Instructions] It appears we have no further questions at this time. I will now like to turn the floor back to management for closing comments.

Okay. Well, we appreciate everyone’s interest in the company and if you have further questions, please do feel free to call in anytime. Thank you.

Thank you. Bye.

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