DURECT Corp (DRRX) 2002 Q3 法說會逐字稿

Good afternoon. And welcome, ladies and gentlemen, to the DURECT Corporation third quarter earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen only mode. At the request of the company, we will open up the conference for questions and answers following the presentation. I would now like to turn the conference to Mr. Schond Greenway. Senior Director of Investor Relations and Strategic Planning.

Schond Greenway, Senior Director of Investor Relations and Strategic Planning: Thank you Heather. This is Schond Greenway, head of strategic planning the DURECT Corporation. On behalf of everyone in the company we would like to welcome you to our third quarter 2002 financial results conference call. I have with me today Jim Brown, our CEO, Tom Schreck, our CFO, Felix Theeuwes, chairman and chief scientific officer and Jian Lee (ph), controller. The order of the call will be as follows. I will review DURECT's third quarter financial results. Next the call will be turned over to Jim Brown to discuss the highlights of the quarter. Afterwards we will open up the call for a question and answer session.

Before I turn the call over to Tom, I would like to remind you of the Safe Harbor Statement. During the course of this call we may forward looking statements DURECT's products and development, expected product benefits, product development plans, future clinical trials or markets. These forward looking statements involve risks and uncertainties that can cause actual results to differ materially than those in such forward-looking statements. They include but are not limited to, direct ability to research, develop, manufacture and commercialize a product, obtain product and manufacturing approval from regulatory agencies, manage its growth and expenses, finance its activities and operations well as well marketplace acceptance of DURECT's products. Further information regarding these and other risks are included in DURECT's Form 10-K for fiscal year end December 31st 2001 followed with SEC on March 28, 2002, under the heading that factors results. I will turn the call over to Tom Schreck.

Tom Schreck, Chief Financial Officer, DURECT: Thanks, Schond. Good afternoon, ladies and gentlemen. Thank you for joining our third quarter earnings conference call. I'm going to review financials for the quarter before asking Jim Brown, our president and CEO to review the highlights of the quarter in greater detail. Our net loss for the three month ended September 30, 2002 was 9.1 million or 19 cents per share compared to $8.9 million or 19 cents per share for the same period in 2001. Our results for the three months ended September 30, 2002 included non-cash charges for the amortization of intangible assets and stock base compensation of $688,000 compared to 1.3 million for the same period 2001. Research and development expenses were $7.6 million in the three months ended September 30th, 2002 compared to $7.2 million for the same period in 2001.

The increase was primarily attributable to expanded research and development activities, especially related to initiation of our pivotal phase III clinical trial for our lead program, Chronogesic, in June 2002Chronogesic. The clinical trials are temporary on hold pending agreement between DURECT and the Food and Drug Administration regarding additional monitoring and data collection. These protocol changes requested by the FDA were not in relation to any observed safety issue or adverse event. Independent from the adjustments to the protocol, we are implementing some necessary design and manufacturing enhancements to the Chronogesic product. We anticipate that the changes to the existing clinical protocol and the implementation of these design and manufacturing enhancements will delay the restart of clinical trials until the second half of 2003.

The increase in research and development expenses were also attributable to continued research and development of other pharmaceutical systems based on our SABER and DURIN technologies. Selling, general and administrative expenses were $2.2 million in the three months ended September 30, 2002 compared to $2.3 million for the same period in 2001. The slight decrease was primarily due to cost efficiency achieved in existing corporate infrastructure. At September 30, 2002 we had cash, cash equivalents and investments of $52 million including 2.9 million in restrictive investments. We expect our net loss for the fourth quarter of 2002 to be in the range of nine million to nine and a half million dollars or 19 to 20 cents per share. Our estimates include non-cash charges for the amortization of intangible assets and stock base compensation of approximately $600,000 for the fourth quarter of 2002.

We expect our net loss will range from 27 to $29 million or 54 to 58 cents per share for the fiscal year 2003. Our estimates include non-cash charges for the amortization of intangible assets, stock base compensation and depreciation of approximately $4 million for the calendar year 2003. Total cash burn for 2003 is expected to be in the range of 23 million to $25 million. I will now turn the call over to Jim Brown, our President and CEO to discuss recent highlights of the business

James Brown, President and CEO, DURECT: Thank you, Tom. Good afternoon, everyone. Thanks for joining us. Yesterday we announced a major milestone for DURECT. With the agreement that our agreement with EEndo (ph) (ph) pharmaceutical to collaborate on the development and commercialization of Chronogesic product for the United States and Canada. To recap the terms of this agreement, DURECT will be responsible for the Chronogesic products design and development. In connection with the execution of this agreement, Endo (ph) will purchase $5 million worth of new le issued common shares (ph) of DURECT.

Once the clinical trials are started, Endo (ph) will fund 50 percent of the ongoing costs and reimburse DURECT for a portion of prior development costs upon the achievement of certain milestones. Mile stone payments made by Endo (ph) under this agreement could total towp $52 million. In addition, under this agreement, Endo (ph) has licensed exclusive promotional rights to Chronogesic in the United States and Canada. Endo will be responsible for marketing sales and distribution, including providing specialty sales representatives dedicated to supplying technical and training support for Chronogesic therapy. DURECT will be responsible for manufacturing Chronogesic. Endo and DURECT will share profits equally based on projected financial performance of Chronogesic.

The company believes that Chronogesic has significant potential to treat patients with chronic pain regarding from a variety of ma malignant and non-malignant performs. If approved, the product would represent the first systemic medication that provides patients with uninterrupted pain treatment for three months from a single application. With an established commercial infrastructure, a number of goal pain products and 230 sales representatives focus on promoting therapies for pain management. Endo (ph) is a well established player in the pain management arena. Over the last year, Chronogesic has attracted high interest from a number of potential partners. In the end, we selected Endo (ph) as our partner because we believe this transaction accomplished our objective and it is the best outcome for the patients, DURECT and shareholders.

For over 25 years Endo (ph)'s core management team have been addressing the needs of patients and physicians in the market with opiate (ph) products such as Percocet and Percodan as well as extended release morphine. Endo (ph) has built a team of commercial sales and marketing executives with established track records for launching and building new branded ethical pharmaceutical product businesses. Over the course of our discussions we have developed a great relationship between the two organizations andare confident that together we will be bring together Chronogesic (ph) to the marketplace. This is a true marketplace where both companies have active development and into the commercialization of the product through joint committees, comprising members from both companies. We look forward to working closely with Endo (ph) on developing and commercializing this product to a successful launch.

On another note, this morning we also announced we have amended our development and commercialization agreement with Alva (ph) corporation which we have develop, commercialize and manufacture products using Alva's (ph) patented Duras (ph) technology in selected fields of use. Under this amended agreement, our maintenance of exclusivity in our fields of use is no longer subjective to minimum and/or (ph) requirements for development spending or the number of products that we have under development. This amendment eliminates the requirement of $44 million of product funding for all fields of use between January 2002 through December 2004.

The commercial diligence requirements under the previous agreement were also amended to provide that DURECT retain exclusive commercialization rights to product developed under this agreement on a worldwide basis as long as DURECT has commercialized such products and selected major market countries. In addition, Alva (ph) and DURECT may collaborate to commercialize selected products under specific terms. These changes to the agreement align more closely DURECT and Alva and strengthen the relationship between the two companies. We believe that this agreement will enhance our ability on development of therapy incorporating the Duras (ph) technology.

We are focused on continuing to make progress on all of our development programs. as well, we continue to look for opportunities to collaborate with other biotechnology and pharmaceutical companies to develop and commercialize innovative pharmaceutical systems products utilizing our platform drug delivery technology in the areas of chronic diseases. In closing, we would like to restate our goals for the remainder of the year. This these are for go on the design and manufacturing enhancements of the Chronogesic product, to continue to add new partnerships, and to enter the market (ph) with new products. Thank you for participating this call. We would like to take any questions you may have.

+++q_and_a

Thank you, sir. The question and answer session will begin at this time. If you are using a speakerphone, pick up a hand set before pressing numbers. Should you have a question, please press star one on your push button telephone. If you wish to withdraw your question, press star two. Your question will be taken in the order it is received. Please stand by for your first question. Our first question comes from Gary Nachman with Morgan Stanley. Please state your question.

Gary Nachman, Morgan Stanley: Hey, guys, first, a point of clarification. I'm assuming that the fiscal 2003 guidance include the collaboration with Endo (ph); is that correct?

No. The guidance that we are providing does not include the actual cash burn is not imputing the Endo (ph) relationship other than the Endo (ph) commitment to equity.

OK. So you haven't factored any potential mile stone payments in there?

No, we have not.

OK. What -- I'm sorry? OK. What do you expect the cap ex to be related to the manufacturing improvements for Chronogesic next year?

Yeah. We're not specifying that amount.

OK. And I'll try this.

Gary, I think we would like to provide further guidance on 2003 in our subsequent earnings call.

OK. Can you tell me, what do you think, after you do all the enhancements, that you think the gross margin will be for Chronogesic?

Again, we are not breaking out gross margin details.

OK. I'll try another one. What do you expect the cash to be at the end of this year?

At current burn rates, we are projecting between 47 and 49 million

OK. And, lastly, I don't know if you will tell us this. Now that you have the new collaboration with Endo (ph), can you give us the time frame of when you expect to break even?

I think at this point we aren't projecting that far forward right now, Gary.

OK. Thanks.

I think with regard to margins would one could assume that by putting in place the internal sterilization (ph) that we will have better margins, but we aren't projecting what they will be.

OK. Thanks.

Thank you our next question comes from Corey Davis from J.P. Morgan. Please state your question.

Corey Davis, JP Morgan: Thanks. Thinking about your guidance for the burn rate next year, it looks like there is a pretty substantial reduction in the burn rate for '03. I'm curious where that reduction is going to come from?

Most of the reduction, Corey, as you know, the earnings model that exist today comprise a full-blown phase III program, which include patient enrollment and no additional funds from a potential partner. So there's, obviously, the adjustment that one needs to make, both in clinical and manufacturing, and the fact that there is a delay in the pivotal (ph) phase III program in the second half of '03

A reduction in the burn rate not relative to my or anybody else's model, but relative to this quarter's burn rate and next quarter's burn rate

Yeah. The burn rate, as you can tell, has been adjusted downward by virtue of the fact we are not currently in a pivotal phase III program.

All right. Now, then your answer to Gary's question that your guidance had not factored in the Endo (ph) collaboration, that didn't mean it hasn't factored in the start of the phase III trial?

That's a very good clarification. We still will be factoring that in, but our current expectation where it resides to burn is the additional cash equity component from Endo (ph) is factored in to our capital at the end of the year, and we do expect that that Endo (ph) commitment and collaboration will be in place. But without that, at the moment, we do have two years of cash on hand at the end of 2002

Corey Davis Can you just remind us what areas you do have rights to under the Alva (ph)A agreement for the other indications?

Sure. We can review briefly the five fields for you. The first is central nervous system - delivery of central system, of which a sub category is the pain product Chronogesic. Then we have delivery of the cardiovascular system, the delivery to the inner ear as well as delivery to vascular graft and also cancer immunotherapy. Those are the five fields

Those are ones you have rights to?

Yeah. Those are the original fields we had when we started the company and retained

Did you say that this deal with Alva (ph) eliminates 44 million if required funding.

Yes.

Over the next two years?

Essentially three years. All of this year and the next two years

OK.

Corey, it is Tom Schreck again. I wanted to elaborate on our cash burn and cash position. On the integral component of the Endo (ph) collaboration, when that trigger of phase III is in place, the second half of '03, obviously our cash position in cash burn will be extended based on that collaborative effort

All right. Sorry. So now you have confused me further.

I think it is actually pretty clear that our cash position at the end of the year of projected end of this year will be between 47 and 49 million

yes.

And without the Endo (ph) collaboration we have two years of cash. With the Endo (ph) collaboration, we will have, arguably, two and a half to three years

Maybe another way of looking at that question is a couple times on the burn rate. Why the difference between the burn rate which the burn rate this year and next year. There are three factors affecting that. As Tom stated earlier, we will be essentially postponing the heavier clinical spends until the second half of the year around Chronogesic. Next, we are seeing and continue to see, basically, costs cost savings as we look at the new manufacturing process. There will be a reduction in cost there. Lastly, it will be our partner coming on board and sharing our expenses 50-50. I think all three of those are contributing

(inaudible) additional funds will come in.

Right.

By saying that 23 and 25 million burn rate in '03, are you assuming that phase III starts in the second half and you're going to be spending in that trial on that number?

Yes.

OK. All I had. Thanks.

Our next question comes from Mara Goldstein from CIBC World Markets. Ma'am, please state your question.

Mara Goldstein, CIBC World Markets: I'm not sure there is anything left to ask.

Sorry, Mara.

I will try in a different way. I understand there is not a lot of clarity with Chronogesic expected to start trials the second half of the year. I don't know if there is a potential you could layout out for us how the cash burn in the quarters might look particularly because you are spending on the manufacturing side. Tom, you mentioned in your statement lower SG&A due to cost efficiency. Does that mean a layoff?

No. We don't comment on, you know, those employee related matters. I'm sorry, Mara. What was the first question?

the first question had to do with the quarterly patterns, given that you are continuing to invest in the production process in the first half of the year and then potentially the initiation of the Chronogesic phase III. If maybe you could flush out what the year is going to look like.

I would hope to do that in your quarter to quarter detail in our fourth quarter call.

OK.

Thank you.

Our next question comes from Cindy Glass with Thinkk Equity Partners. State your question

Cindy Glass, Think Equity Partners Good afternoon. Given the Chronogesic has been the program that we all have been paying attention to and that seems to be in the waiting place, what other kinds of milestones should we look forward to either in other programs or partnerships with other technologies?

That's a great question, Cindy. I appreciate that. We are, obviously, about Chronogesic and the partnership in place. We will have the financial capabilities to bring that very large part to the marketplace in a very successful way. The other programs, as you know, we have filed an ID earlier this for cronosulfate (ph) product, which is systemic treatment of asthma. We are in the clinical programs with that right now. So we look to see data from that coming forward in future months. We also will be entering the clinic still this year with a couple of programs. So we are very excited about what's happening with regard to those. We will be announcing these as we go forward.

As well as additional partnerships. There will be partnerships that we will be talking about in the not so distant future that we haven't had a chance to talk about. The great thing about the other programs that we are talking about now is SABER, buy injectable, DURIN release technologies as well as SAVER oral release (ph) technologies. There are a number of exciting programs that we are going to see make great strides in the clinic next year. By the end of '03 we have a number of programs in mid-training toward late stage development. We have a very broad basis to build from.

Great. Thank you.

As a remainder, should anyone have any further questions, please press star one at this time.

Schond Greenway OK. This is Schond Greenway again. I thank everybody for participating on this call. We look forward to updating you in our fourth quarter call. Thanks again. Bye.

Ladies and gentlemen, if you wish to access the replay of this call, dial 1-800-428-6051 or 973-709-2089 with an ID 264664. This concludes our conference call for today. Thank you for participating. Have a nice day. All parties may new disconnect.