DURECT Corporation (DRRX) Q2 2014 Earnings Call Transcript

Matt Hogan – CFO Jim Brown – President and CEO

Jason Napodano – Zack’s Research

Greetings and welcome to DURECT second quarter 2014 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Matt Hogan. Thank you, Mr. Hogan. You may begin.

Okay, good afternoon. Welcome to our second quarter 2014 earnings conference call. 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 our business. We’ll then open up the call for a Q&A session. Before beginning, I’d like to remind you of our Safe Harbor statement. During the course of this call, we may make forward-looking statements regarding DURECT’s products and development, expected product benefits, our development plans, future clinical trials, our projected financial results. These forward-looking statements involve risks and uncertainties that could cause actual result to differ materially from those in such forward-looking statements. Further information regarding these and other risks and included in our SEC filings including our 10-Q under the heading risk factors. Let me now turn briefly to our financials. Total revenue was $4.6 million in the second quarter of 2014 as compared to $3.9 million in the second quarter of 2013. If we exclude all deferred revenue recognized for upfront fees from our agreements, revenue from our R&D collaborations was $1.7 million in the second quarter 2014 as compared to $0.8 million in the second quarter last year. Revenue from this source always fluctuates from quarter to quarter depending on the stated development under the various program and what our role is in those programs. Product revenue from the sale of ALZET pumps and LACTEL polymers were approximately $2.8 million in the second quarter this year as compared to $3 million in the second quarter last year. Our gross margin on these products was around 62% in the second quarter 2014 and these products continue be strongly cash flow positive for us. R&D expense was $6.1 million in the second quarter of 2014 as compared to $4.8 million in the second quarter last year. SG&A expenses were $2.9 million in the second quarter this year as compared to $3.2 million in the second quarter last year. So as a result of the above, our net loss for the second quarter this year was $5.5 million compared to a net loss of $5.1 million for the same period in 2013. Excluding our debt financing, which I’ll touch on in a minute, our net cash consumed during the quarter was $4.3 million. So let me make a few comments about the debt. It’s very straightforward and simply. There are no warrants. There are no second drawdowns that might be tied to some performance test. The coupon’s below 8% and there are no financial covenants. So just to walk through a few of those key terms again, we raised $20 million which is a meaningful amount of capital representing well over a year’s worth of additional cash burn. It’s got a four year maturity and although it’s not contractually obligated by any means, a number of Oxford clients have subsequently extended their maturity which Oxford’s incented to do since they only make money when they have loans outstanding. There is an 18 month interest only period which takes us into 2016 before principle payments need to be started, which just coincidentally happens to tie to when we would expect REMOXY to be approved and watched. The coupon, as I mentioned, is under 8%. There was an upfront fee of $150,000 and there’s an additional payment and maturity equal to 8% of the principle that if you really calculate it out brings the all-in true cost of capital on an annualized basis to about 10.5%. There are no financial covenants to worry about and what Oxford got is a first security interest on our hard assets and a negative pledge on our intellectual property. But I’d emphasize we have total freedom to license our intellectual property in connection with partnering deals. Lastly, we can prepay the loan, if we wish. There are prepayment penalties but they’re not that onerous and they decline over time. And Oxford, if you’re not familiar with them, is a leader in the field of entered debt for life science companies and the terms we received are consistent with the last several deals that Oxford’s financed including for some much larger cap companies. And I guess lastly I would comment that the concept of life science companies utilizing a structure like this is now quite common. Oxford alone has done over $2 billion in loans to healthcare companies over the last few years. So with all that, at June 30, 2014, we had cash and investments of $37.3 million compared to $21.8 million at March 31st of this year and $24.4 million at December 31, 2013. And lastly, as a reminder, we have multiple programs that we’re in discussions about partnering over the next 12 to 18 months including POSIDUR, where we have worldwide rights, (inaudible) with worldwide rights, ORADUR ADHD where we have US and Europe and various feasibility studies that we hope are going to mature into development agreements much like Relday did about a year ago. And with that, I’d like to turn it over to Jim Brown to discuss some of these non-financial matters of the company in greater detail.

Thank you, Matt. I’ll give a brief update on our programs and then we’ll open it up to questions and answers. I’ll begin first with POSIDUR. With 70 million surgical procedures per year in the United States, the post-surgical pain market is huge and the mainstay of treating post-surgical pain remains the use of opioids. Opioids are effective at relieving pain, however, they have a variety of known side effects such as constipation, sedation and respiratory suppression. Additionally, opioids are at the center of the issue of diversion and addiction. These are well-recognized problems in the United States with now one in four high school students having abused a prescription drug and, in more than 30 states, deaths from automobile accidents have now been surpassed by accidental death from drug abuse. And in fact, Margaret Hamburg, the Commissioner of the FDA, gave a statement actually on April 29th of this year and she said, and I quote, “Let me say, in no uncertain terms, the prevention of prescription opioid abuse is of the highest priority for the FDA. Nothing can erase the tragedy so many people have had to face as a result of the abuse, addiction or misuse of opioids. But we can make meaningful progress to reduce and prevent our nation’s prescription drug crisis. The FDA is committed to reducing abusive opioids and ensuring appropriate access to pain medications for patients in need.” As a reminder, in our two pivotal trials for POSIDUR, we had approximately 20% more patients who were in our POSIDUR group after surgery remain opiate free as compared to the placebo group. So that means one in five patients more, not taking any narcotics after surgery. We’ve spoken extensively to surgeons and anesthesiologists and the universal feedback that we get with regard to POSIDUR is there is an unmet medical need for a non-opioid pain product that would provide true analgesia for the first three days after surgery. Right now there’s nothing that can be applied at the time of surgery that truly works for more than 24 hours. POSIDUR, with 660 milligrams of Bupivacaine that’s metered out in a controlled fashion over the first 72 hours after surgery, has the potential to meet this unmet medical need. As you know, in February, we received a complete response letter from the FDA. In this complete response letter, the FDA had no comments with regard to efficacy, cardiovascular safety concerns, nor on the CMC non-clinical pharmacology sections of the NDA. The CRL stated that the FDA weren’t ready to approve the NDA, that the NDA did not contain sufficient information to demonstrate that POSIDUR is safe when used in a manner that is described in the proposed label. The FDA has indicated that additional clinical safety studies would need to be conducted. Since receiving the complete response letter, we have been working extensively with clinical and regulatory consultants to add their perspective and their guidance in preparation of our next interactions with the agency. These include four consultants who were division directors or above at the FDA and one who was formerly in the pain division. I’m pleased to announce today that one of our consultants, Dr. Todd McIntyre, who has been working with us these past several months, has recently joined DURECT full-time as our vice president of regulatory affairs. Todd has over 25 years of research and regulatory affairs experience in the pharmaceutical industry. Dr. McIntyre lead teams that have achieved six NDA approvals, as well as multiple supplements for new indications and labeling changes and he’s lead more than 50 FDA meetings. He also has significant international regulatory experience having obtained product approvals in various markets around the world. After obtaining his Ph.D. in neuroscience from the University of Bolder, Dr. McIntyre worked at the National Institute of Health as a staff fellow in the (inaudible) pharmacology before transitioning to industry where he worked for Boehringer Ingelheim, Hoffmann La Roche, Johnson & Johnson and finally Wyeth Pharmaceuticals. We are pleased to have him here leading our interactions with the FDA and pleased that he thought enough about POSIDUR and DURECT that he wanted to come onboard. We’ve had some interactions with the FDA since the complete response letter but the most significant next step is the formal face-to-face meeting. That meeting is set for late September. We’ve used the time well in preparing for this upcoming meeting with the FDA. Our briefing package, which will go out in the very near term, is strong and compelling. We’ve had a chance to confer with multiple outside experts to get their independent unbiased input on our NDA and the FDA’s comments and our briefing package as a response to the complete response letter. Because we’re so close to the meeting, we’ll not comment on the specifics or speculate on the outcome. However, we do look forward to engaging the FDA in order to address the issues that they cite in the complete response letter. We remain convinced about the medical benefits of POSIDUR and are excited about this product’s potential to advance post-operative pain control. We’ve been asked by some investors how we expect to disclose the outcome of this meeting. Our expectation is that we would wait until after we’ve agreed on the minutes with the FDA to make absolutely certain that we’re all on the same page. If there is unambiguous clarity prior to completion of the minutes, then we’ll communicate this information earlier. As a reminder, we own the worldwide rights to POSIDUR, which puts us in the enviable position with regard to this late stage asset. Investors often ask us what our strategic plans are for finalizing development and commercialization for POSIDUR. The short answer is we’re pursuing a dual track process and we’re committed to doing the right thing for our shareholders. We’re talking to multiple partners about potentially licensing commercial rights to POSIDUR but we’re also preparing to be in a position to be able to commercialize it ourselves. (Inaudible) and could create tremendous value for us over time. Rather than pre-judge, our plan is to drive concrete licensing proposals and once we have clarity also on the path with the FDA, we will then weigh these offers against the alternative of commercializing the product ourselves. There’s also the possibility that we may do some type of hybrid, a co-margin arrangement of some sort. The devil’s in the details but we want to be able to make sure that we maximize the value of this asset and we’ll pursue this dual track approach to extract this maximal value. Let me now turn to REMOXY. REMOXY is an abuse deterrent formulation of oxycodone, which is a widely used chronic pain product. Oxycontin sales of which is a (inaudible) oxycodone controlled product does about $3 billion in sales annually and it provides effective pain relief for chronic pain patients. Unfortunately, it’s misused at a rate that the FDA has repeatedly described as “a major public healthcare concern.” Our (order) technology is what confers on REMOXY its multiple layers of abuse resistance. We have resistance to snorting, to injecting, to smoking and inhaling, to chewing and to mixing with alcohol and other drinks. We think the multiple layers of abuse resistance built into REMOXY make it a compelling pain product and that Pfizer will do well and do an impressive marketing job once it’s approved. They have a major presence in the pain space with CELEBREX and Lyrica. With REMOXY, Pfizer has a straightforward product that’s designed to be effective for legitimate pain patients but with features that are designed to reduce the abuse by illegitimate users. Prescribing physicians get the comfort of knowing that it will be an effective pain product without having to worry about writing prescriptions that are easily diverted and misused. Patients won’t have the stigma telling anyone they’re on oxycontin yet they’ll have the effective pain relief of a true twice a day capsule. With Pfizer’s large sales force, they should do very well with this product once it’s launched. I’d also like to note that we have multiple issued patents that go out until at least 2031 in the United States, so there will be a long period of time for our shareholders to gain a meaningful return from REMOXY. It’s a late stage asset and that the clinical and safety aspects of REMOXY have shown that they have basically demonstrated conclusively really good results and the remaining task is to address the manufacture (related) issues that lead to the FDA giving the latest complete response letter for REMOXY. In March of 2013, Pfizer met with the FDA to share their extensive work that they have been doing on REMOXY and to propose a path forward. The FDA agreed to Pfizer’s proposal. That is that there is no need to replicate earlier phase three work if a bridge back to the data that can be provided with a bio equivalent study. This study and others are now well underway and can be tracked on clinicaltrials.gov. In October of last year, after a thorough internal review, Pfizer announced their decision to move forward with the steps required to resubmit REMOXY and they are driving the program forward. DURECT continues to supply key (occipiants) for the REMOXY program to Pfizer. Pfizer’s stated resubmission date is no earlier than the middle of 2015, so we are now about three quarters away from Pfizer’s resubmission of REMOXY. We believe that as the upcoming months tick by and the resubmission date gets closer, more and more investors will begin to factor this program more prominently into their thinking and the discount we’re currently seeing for this program will begin to decrease. The review period is six months, so our expectation is for an approval in late 2015 and a launch shortly thereafter. As a reminder of how impactful and transformative this product can be for DURECT, we receive a royalty that starts at 6% and goes up to 11.5% with the 11.5% REMOXY sales being around $1 billion. Hence, if Pfizer captures about 30% of the roughly $3 billion market, which would be around $900 million, we’d have an annual royalty stream of about $72 million a year. That’d be a large free cash flow opportunity for DURECT that would flow straight to our bottom line. I’d also like to note that we have over $250 million in NOLs built up. So when the royalty stream starts to kick in, we won’t be paying taxes for some time. Now I’d like to move on to ELADUR. We were pleased to start the year by announcing our collaboration with Impax and the resumption of development of the ELADUR patch. As a reminder, ELADUR is a pain patch that we have developed for post hepatic neuralgia. It’s a three-day patch as compared to the 12-hour lidocaine patch. But this is more than just a convenience factor as it has been reported that two out of three patients that use (lidoderm) have a breakthrough problem where the 12 hours from their lidocaine patch wears off. This could be a very meaningful benefit and advantageous position for ELADUR. In addition, ELADUR has a very patient-friendly design that contours to the skin, doesn’t fall off easy so that a patient can exercise with it on or even take a shower or go for a swim. The terms of our collaboration with Impax are as follows. First we receive $2 million upfront. We’ll receive $31 million potential development milestones with the next of which is at the start of phase three. We also get $30 million in sales based milestones. Impax is responsible for funding all of the development and commercialization. DURECT gets a share of any sublicensing fees that are received by Impax. And upon approval, we will receive a tier single digit royalty that moves up into low double digit royalties. In terms of next steps with regard to the program, Impax has done a short proof of concepts study and now plans to meet with the FDA to discuss the structure and design of opposed phase three program. We have to let Impax drive the updates since they are running it. But as a reminder, we also have an orphan drug designation for ELADUR for post hepatic neuralgia and we have an issued patent in the United States that goes out to 2031 and an issued European patent that goes out at least until 2027. We’re very pleased that ELADUR is back in development with Impax. Now, moving Relday, Relday is a large commercial opportunity. It features the first one a month risperidone product. It has a patient-friendly and physician-friendly treatment opportunity for schizophrenia. It’s a subcutaneous injection small volume versus the IM injection that’s out there today. It’s a positive… we’ve had data from a positive single dose phase one trial which explored the full dose range that is expected for clinical practice. The program is partnered with Zogenix and they plan to initiate a multi dose clinical trial in the fourth quarter of this year, which is on track. As Zogenix has stated, they expect to have data from that trial in the third quarter of 2015. The next step following that would be to go on to phase three. As a reminder of our collaboration of Zogenix, we received $2.25 million upfront. We have $103 million in additional potential milestones with $28 million being development based and $75 million in sales based milestones. DURECT gets a share of any sublicense fees received by Zogenix. Zogenix funds full development and the royalties that DURECT would receive back on sales would be neat single digit to low double digit. Now I’ll give a brief update with regard to our other ORADUR opioids. Pain Therapeutics has the right to develop three other opioids with our ORADUR technology. These are hydrocodone, hydromorphone and oxymorphone. All three of these have active INDs in place at the FDA and phase one work has been one in the past with hydrocodone and hydromorphone. Future development of these will definitely benefit from our REMOXY experience. We’re now working with Pain Therapeutics with regard to these programs and they are all under approved work plans. Pain Therapeutics announced earlier this week that they expect to start a phase one clinical trial with ORADUR hydromorphone shortly with an expectation of starting the phase three trial for this product in 2015. Pain Therapeutics reiterated the market potential for this product is in the $200 million to $300 million range. As a reminder, we get the same economics on these programs as REMOXY. That is a royalty that starts at 6% and goes up to about 11.5% and Pain Therapeutics pays for all the development expenses. There are also $6.1 million in pre-sales milestones that are spread across the three programs that we could earn. The final program I’ll review today is our ORADUR ADHD program. The lead formulation in this program is methylphenidate and it’s demonstrated in the following phase one study: rapid outset of action, a long duration with one a month dosing, small capsule size relative to the leading products that are on the market, it’s also tamper resistant due to our ORADUR technology. Orient Pharma met with the Taiwanese FDA to outline the phase three program and they’re developing plans for their Asian and South Pacific territories. The US, European and Japanese rights are retained by DURECT and we’ve initiated licensing discussions now that we have the formulation in hand with our supporting PK data. Let’s review the potential key drivers for DURECT over the next 12 to 24 months. For POSIDUR, it’s meet with the FDA in late September to clarify and address the issues with the complete response letter and then to continue development and commercialization of POSIDUR program including a potential licensing deal. For REMOXY, it’s Pfizer completing the required studies that is the (BE) in these potential studies and resubmission, which is targeted for the middle of 2015 followed by a six-month review by the FDA and then product launch. For ELADUR, it’s initiation of the phase three by Impax, which also triggers a milestone payment for us. For Relday, it’s initiation of the multiple dose trial by Zogenix in the fourth quarter of 2014 with data in the third quarter of 2015. For ORADUR hydromorphone, it’s starting phase one this quarter and advancing it to phase three in 2015. As Matt said earlier, we have the potential for new collaborations around POSIDUR, Sufentanil patch, ORADUR ADHD or some of our feasibility programs. Last would be the potential for a new program to enter clinical development this year for DURECT. With that, I’d like to thank you for your time and we’d like to take any questions you might have.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) The first question is from the line of Jason Napodano. Jason Napodano – Zack’s Research: Good afternoon, guys.

Hi. Jason Napodano – Zack’s Research: Just a question on POSIDUR for your FDA meeting in September. I’m wondering if you guys have kind of thought out a design for the next clinical trial that you might potentially be running and if you’re prepared to kind of show that design to the FDA or is that a little advanced from where you are now? Are you going to basically talk with the FDA before you kind of get into a design of a trial?

Yeah, I think at this point we’re so close to the meeting I don’t want to speculate kind of on anything with regard to the meeting. I just assume have the meeting and then get back to you on that because we’re just very short time away. So I’ll just have to say we’re… look forward to updating you after we meet with them. Jason Napodano – Zack’s Research: Okay. From a modeling standpoint, the milestone from Impax for the initiation of the phase three in the fourth quarter, how should we be kind of thinking about that milestone? Is that meaningful, something we want to make sure that we have in our model?

Well, it is meaningful in that it’s definitely bigger than the upfront payment that we received from them. And the only hesitancy I have at the moment is we really need to let Impax kind of guide to when the phase three is going to start. I just don’t feel comfortable speaking to that right at the moment since they are in charge of the program and they’re driving it. I know they want to meet with the FDA and talk about what the phase three is going to look like. So timing I don’t want to comment on but the amount is definitely very helpful for us given the size of our burn. Jason Napodano – Zack’s Research: Okay. And if I recall, the upfront was $2 million.

That’s correct. Jason Napodano – Zack’s Research: Okay, so the initiation of phase three is bigger than that.

Yes. Jason Napodano – Zack’s Research: Okay. And then just last question, I noticed that I’ve been tracking the efforts on clinicaltrials.gov. I’ve noticed that some of these studies have completed bio availability study. They believe that the dose proportionality study have completed. I noticed the new study about the effects of ethanol and I guess they’re trying to dissolve the product and I’ve noticed that the abuse potential study is still recruiting, although an update on that is in July. So just do you have any sense on when all of these studies will complete?

I think they’re pretty well on track, I mean, within a month or so. And then the nice thing is they’re repeats of studies that have already been conducted and there were very minor adjustments made to the formulation in order to get that assay to run smoothly. So I wouldn’t expect anything we’ve looked at with regards to alcohol extraction, those kind of things, it shouldn’t change appreciably anything you’ll see from the clinical standpoint. So and they’re very small trials. The last one you just mentioned, the alcohol extraction, I don’t… is it 30 patients or less?

18. I don’t have it in front of me.

Yeah, it’s a small number of patients. So I would expect the timing from those is not going to be critical path to this resubmission. I think those will be done in the near term and written up. I think they’ve said they’re doing another ICH stability. That’ll be wrapped up at the one year point and then those reports put together. So I think that’s probably the critical path to resubmission. Jason Napodano – Zack’s Research: Good. I would assume they need 12 months of stability.

Exactly, yeah. They don’t need it but I think that’s what they want to do. Jason Napodano – Zack’s Research: Got you, okay. Thanks for taking the questions.

Sure.

Thank you. (Operator Instructions) At this time, there are no questions in the question queue. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

Thank you.

Thanks.