DURECT Corp (DRRX) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to DURECT's Fourth Quarter and Yearend 2002 Earnings Conference Call.

At this time, I would like to inform you that this conference is being recorded and that all participants are on a listen-only mode.

At the request of the company, we will open up the conference for questions and answers following the presentation.

A rebroadcast of this call will be available approximately one hour following this call.

You can access this at 1-800-428-6051 or 973-709-2089 with an ID number of 279938.

I would now like to turn the conference over to Mr. Schond Greenway, Senior Director of Investor Relations and Strategic Planning.

Please go ahead, sir.

Hello everyone, and good afternoon.

This is Schond, Head of IR at DURECT Corporation.

And on the behalf of everyone at the company, we would like to welcome you to our fourth quarter and yearend 2002 financial results conference call.

I have, with me, today, Jim Brown, our CEO;

Tom Schreck, our CFO;

Felix Theeuwes, our Chairman and Chief Scientific Officer; and Jean Liu, our Controller.

The call will be as follows.

Tom Schreck will review DURECT's fourth quarter and yearend financial results.

Next, the call will be turned over to Jim Brown to discuss the highlights of the quarter and for fiscal year 2002; after which, we will open up the call for a Q&A session.

And just before I turn the call over to Tom, 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, product benefits, product development plans, inter-clinical trials, or potential product markets.

These forward-looking statements involve risks and uncertainties that can cause the actual results to differ materially from those in such forward-looking statements.

Potential risks and uncertainties include, but are not limited to, DURECT's ability to research, develop, manufacture and commercialize its products, obtain product and manufacturing approvals from regulatory agencies, manage its growth and expenses, manage relationships with third parties, finances in its activities and operations, as well as marketplace acceptance of DURECT's products.

Further information regarding these and other risks are included in DURECT's Annual Report on Form 10-K for fiscal year, ended December 31st 2001 that's filed with the SEC on March 28th 2002 under the heading "Factors That May Affect Results."

I would now turn the call over to Tom Schreck

Thanks, Schond.

Good afternoon, everyone, and thank you for joining our fourth quarter and yearend earnings conference call.

We're very happy with our fourth quarter and yearend financial results and proud of our accomplishments for 2002.

I'm going to briefly review financials for the quarter and the year before asking Jim Brown, our President and CEO, to review the highlights of the year in greater detail.

Our net loss for the three months, ended December 31st 2002, was $8.5 million or 17 cents per share compared to $10.1 million or 21 cents per share for the same period in 2001.

Our results for the three months, ended December 31st 2002, included non-cash charges for the amortization of intangible assets and stock-based compensation of 103,000 compared to $1.3 million for the same period in 2001.

Our net loss for the year, ended December 31st 2002, was $37.2 million or 77 cents per share compared to $44.9 million or 97 cents per share for the same period in 2001.

Our results for the year, ended December 31st 2002, included non-cash charges for the amortization of intangible assets and stock-based compensation of $2.5 million compared to $5.3 million for the same period in 2001.

Our net loss for the year, ended December 31st 2001, included a one-time non-cash charge of $14 million for acquired in-process research and development associated with the acquisition of Southern BioSystems.

The research and development expenses were $5.8 million and $29.6 million for the three months and the year, ended December 31st 2002, compared to $7.9 million and 24.6 million for the same periods of 2001.

The decrease in the three months, ended December 31st 2002, was primarily attributable to the reduction of force in November 2002 as a result of an increased focus on cash conservation and product development activities.

The increase in fiscal 2002 was primary attributable to extended research and development activities, especially related to preparation and initiation of the company's pivotal Phase III clinical trial and continuing animal toxicological studies for the CHRONOGESIC product.

The increase in research and development expenses in fiscal year 2002 was also attributable to continued research and development of other pharmaceutical systems based on SABER and DURIN technologies and the hiring of additional research and development personnel.

Selling, general and administrative expenses were 4 million and 11 million in the three months and 12 months, ended December 31st 2002, compared to $2.4 million and $8.8 million for the same periods in 2001.

The increases were primarily related to a one-time expense of $1.7 million for strategic partner advisory services in connection with the Endo partnership in the fourth quarter of 2002.

At December 31st 2002, we had cash and investments of $48.3 million, including $2.9 million in restricted investments.

We expect that our net loss will range from $27 million to $29 million or 54 to 58 cents per share for the fiscal year of 2003.

DURECT's estimates include non-cash charges for the amortization of intangible assets, stock-based compensation, and depreciation of approximately $4 million to $5 million for the fiscal year of 2003.

We expect our net loss for the first quarter of 2003 will range from $7 million to $7.5 million or 14 to 15 cents per share.

Total cash burn for the fiscal year 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 the recent highlights of our business during the year 2002.

Thank you, Tom.

Good afternoon, everyone, and thanks for joining us.

Over the past year, we have made significant progress in our product development efforts, as we move closer towards our goal of developing products that will improve the quality of life for patients with chronic diseases and enable biotechnology products.

Our progress is particularly noteworthy as demonstrated by our collaborations, and we expect to continue to find new collaborations with pharmaceutical and biotechnology companies throughout 2003.

I will briefly highlight the corporate achievements for 2002 and discuss some additional activities that investors should look toward in tracking our progress during the coming year.

Last year, we stated that our major corporate objectives for 2002 were to sign a commercialization agreement for our lead development program, CHRONOGESIC, and capture value from our additional drug delivery technology platforms that resulted from our acquisition of Southern BioSystems.

Over the past 10 months, we have announced six strategic partnerships using our drug delivery technologies.

As promised, we are very pleased to announce the collaboration with Endo Pharmaceuticals for our CHRONOGESIC product for the US and Canadian markets.

The company believes that CHRONOGESIC have the significant potential to treat patients with chronic pain resulting from a variety of malignant and non-malignant causes.

If approved the product would represent the first systemic medication to provide patients with uninterupted pains for three months in a single application.

We are confident in our ability to move CHRONOGESIC back into the clinic.

Our progress on CHRONOGESIC in the immediate future pertains to completing the optimization of our system design and evaluation of the terminal sterilization manufacturing process, manufacturing or clinical batches within the FDA approval of our amended protocol; and, finally, we're starting the pivotal Phase III clinical trials during the second half of 2003.

Over the last year, CHRONOGESIC attracted high interest from a number of potential partners.

In the end, we selected Endo as a partner for two main reasons.

First to reassure the direct head control of the development process plus that CHRONOGESIC will not be delayed by any strategic needs of our corporate partner; and next, that we would share equally in the financial returns of this product.

Endo Pharmaceuticals is a leading and focused US pain management company with a 230-person sales force that has a projected -- that has projected the 2003 estimate revenue of 440 million and the EBIT of 160 million.

Endo has built a track record for success; but as they're addressing the needs of patients and physicians in the pain market with successful opioid products such as Percocet and Percodan and others for over 25 years.

To recap the terms of this agreement, DURECT will be responsible for the design and development of the CHRONOGESIC product.

In connection with the execution of its agreement, Endo purchased 5 million newly issued common shares of DURECT.

Once upon the trial to restart it, Endo will fund 50 percent of the ongoing development costs.

Endo will also pay DURECT up to $52 million in additional milestones between now and the product approval.

Endo will be responsible for all sales and marketing expenses from CHRONOGESIC launch costs and distribution in United States and Canada including providing a specialty sales force.

DURECT will provide for the manufacturing of CHRONOGESIC.

Endo and DURECT will share profits equally based on projected financial performance of CHRONOGESIC.

We look forward to working closely with our colleagues in Endo on developing and commercializing this very important product.

We're very proud to sign five additional agreements in 2002, which include: first, our agreement with Cardinal Health using our SABER delivery system to develop long acting oral gel-cap products.

Next, a development and commercialization agreement with Voyager Pharmaceutical for a DURIN-based Alzheimer's disease therapy.

Our first biotechnology partnership with BioPartners; in which, we're developing a SABER-based sustained release alpha interferon product for the treatment of Hepatitis C. Fourth, we expanded our license agreement with Thorn BioScience to develop a selected group of SABER-based veterinary products.

Thorn's first product using our Saber technology has already received approval for the efficacy portion of its New Animal Drug Application or N A D A. The safety portion of this NADA has been submitted, and the remainder of this filing is expected to be submitted to the FDA, later, this year.

This is important to direct, because this is the first SABER product to be reviewed by the FDA.

And, finally, we recently announced our collaboration with Pain Therapeutics to formulate certain long-acting opioid drugs in oral dosage forms.

These collaborations help to reduce the risk profile of our company by broadening our product portfolio mix, validating our technology platforms, and providing us with a substantial source of funding.

We also continue to build our proprietary product pipeline with future potential blockbuster products.

Over the last year, we completed a Phase I clinical study on patients and assess the efficacy of using an infusion of Cromolyn Sodium in asthmatics.

As you're aware, asthma affects an estimated 15 million to 17 million patients and is the leading cause of illness in the children.

US sales of asthma products exceeded $5 billion in 2001.

We earned the process of planning a Phase I-II trial for this product where we'll test patients screening methods and efficacy.

We continue to believe that with increased compliance and optimal dosing, Cromolyn may prove to be one of most effective and safe agents for the persistent asthma, allergies and Hay Fever.

In 2003, we anticipate that we will start Phase I studies for our postoperative pain product and announced the Phase I-II results on our asthma/allergy product.

Investors should look for new partnership announcements, I&Ds and progress with our other partner-funded programs.

As you can see, our partner products together with a robust product development pipeline create a solid product offering and a steady stream of news flow for the coming year.

In 2003, we will continue to build and strengthen our company by executing on our strategy, which is to develop proprietary products as focused on core therapeutic areas and leverage our corporate collaborations.

Our goal is to reduce our cash burn and move towards the self-sustaining business model.

We are very pleased that, year-over-year, we've continued to decrease our cash burn as is evidenced by moving from a cash burn of 33.3 million at 2002 to our estimated range of 23 million to 25 million for the fiscal year 2003; and by virtue of our corporate collaborations, we anticipate that this trend will continue in the future.

In closing, DURECT is a company with broad-based validated cutting edge technologies that are driving the development for potential blockbuster products for the treatment of chronic debilitating diseases and enabling biotechnologies with a focus on attaining a self-sustaining business model.

Thank you very much for participating in this call, and we now like to take any questions that you may have?

Thank you, sir.

The question and answer session will begin at this time.

If you're using a speakerphone, please pick up the handset before pressing any numbers.

Should you have a question, please press "*" "1" on your pushbutton telephone.

If you wish to withdraw your question, please press "*" "2."

Your question will be taken in the order it is received.

Please stand by for your first question.

Our first question comes from Mark Goodman with Morgan Stanley.

Please state your question, sir.

Hey, guys.

Actually, it's Kevin Auckland for Mark.

You were supposed to be making some adjustments to CHRONOGESIC product.

Could you just give us an update on where you stand on that?

I will give it.

I'd actually like to first just restate.

I said -- I made an error in my statement.

I actually said that Endo had purchased 5 million shares and actually it was $5 million worth of stock.

And with regard to their 160 million its EBITDA rather than just EBIT.

So that was I think I corrected both those.

I tend to read a little fast.

Go ahead please?

Your question was on the progress of CHRONOGESIC?

Yes, specifically you still seem to be making some adjustment to the actual product, can you tell us where you stand with that?

Hi this is Felix, Kevin, you know, we had made some very good progress technically on this dosage form and feel very good as to where we are technically.

And as we mentioned earlier actually in the year also that we had in parallel been investigation the process to settlize this drug in a terminal fashion that is after the brochure has been made.

And we also have a lot of data in that area.

So with that progress in hand the -- we have every confidence on back in the clinic by the end -- of the middle of this year.

Okay.

And I just want to clarify did you say earlier that the FDA approved the amended protocol?

Actually, we haven't announced yet that we're still working with them and with our partner moving them forward.

We'll as these things occur we look forward to being able to announce those to the street.

Okay.

And with respect to the cash burn for the year, how do you see that unfolding, is it going to be more backend loaded, I would imagine since here we're starting the CHRONOGESIC pivotal later in the year?

No actually in fact it's not.

With the restart of the clinical program we actually will see a decrease in burn out in the latter quarter by virtue of the partnership funding.

Okay.

Thank you.

Thank you.

The next question comes from Deborah Knobelman with JP Morgan.

Please state your questions.

Hi, guys.

How are you?

Fine.

Good quarter.

I just had two questions actually based on the model.

I know that you had a bump up in SG&A, some are payment to Endo.

I was just wondering if we should model anything like that going forward, if there's any milestone you going to include in SG&A?

And then I guess my second question, I guess you partially answered.

But just to confirm that the bump up in the shares out this quarter was from a big chunk, you said $5 million being purchased...

Yes.

And that's not a run rate?

Actually model going forward, right?

All right.

No just thank you so much for the questions, I'll take the latter question first.

That's correct that the $5 million worth of equity that was purchased by Endo is the additional share calculation.

So, one might infer that for guidance in 2003 somewhere in the 15 million share range.

Okay.

For those purposes.

And actually I've been waiting for this opportunity to actually introduce my Controller, Jean Liu and we would love for her to address the question on SG&A.

Hi Deborah, this is Jean Liu from DURECT.

We're going into 1.7 million one-time expense related to strategic partner advisory services.

In the next year, between 2003, there shouldn't be any similar expenses more or less in the book.

Okay, so I should assume it's going to go back to the 2.2ish million run rate per quarter?

That's right.

Okay, great.

Thanks guys.

Thank you.

The next question comes from Mara Goldstein with CIBC World Markets.

Madam, please state your question.

Yes, thank you very much.

I'm wondering in this time period now between when you're -- as you're working on the CHRONOGESIC on the manufacturing side, and then gearing up to go back into the clinic, if maybe there is some kind of update in terms of what you and Endo are working on right now, together as partners?

Well, what we're dong now as far as partners?

Well, obviously we're making -- first of all, hello Mara, good to hear from you.

Thanks Jim.

With regard to the relationship, what we're doing now is we're setting up the way we work together.

So, from a team structure standpoint, there are a lot of governance components that are put together when you're developing a large product like this.

And so, we're getting all of those teams together, and they're starting to work through the process.

So, even though we are moving toward the CHRONOGESIC at this point in time, those teams are very active in clinical trial design strategy, in commercialization strategy and all the rest of those things.

Well, it's an ever-present and very active agreement and relationship.

Okay, and as you begin to recognize revenue from -- or payment from Endo, does that -- will that be booked on the top line or is that a credit to your R&D line?

I'll let Jean take that one.

The reimbursement from Endo will be recognized as revenue.

So, it will be part of collaborate R&D revenue for 2003.

Yes, and we'll have -- obviously, we receive revenue from all of the other relationships as well as Endo.

Okay, thank you.

Okay.

As a reminder, should anyone have any further questions, please press "*" "1" on your pushbutton telephones at this time.

Our next question comes from Cindy Glass with ThinkEquity Partners.

Madam, please state your question.

Hi, good afternoon.

I was hoping if you could clarify something that's in the release that I'm unclear on.

You've mentioned continued animal tox studies for CHRONOGESIC.

Have these been ongoing or are these new studies that you're doing related to the FDA questions that came up over the summer?

Actually, it's a very good question.

And hello, Cindy, it's good to hear from you as well.

Hi.

Yes, actually, with regard to CHRONOGESIC, these are ongoing studies; and some of these studies that we have to do between now and the NDA filings, they're actually more new pre-clinical requirements that came from the new discussions with the FDA, this summer.

Thank you.

As a final reminder, should anyone have any further questions again, please press "*" "1" at this time.

If there are no further questions, I will now turn the conference back to Mr. Greenway for closing comments.

Again, we want to thank everyone for participating on this call; and we look forward to updating you on our first quarter 2003 conference call.

Thanks, again.

Thank you.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 279938.

This concludes our conference call for today.

Thank you all for participating, and have a great day.

All parties may now disconnect.

END