DURECT Corp (DRRX) 2003 Q3 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the third-quarter 2003 earnings conference call for DURECT Corporation.

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

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

If you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 using ID number 310-398.

I will turn the conference over to Mr. Schond Greenway, Senior Director of IR and Strategic Planning.

Hello, everyone, and good afternoon.

On behalf of everyone here at the company, we would like to welcome you to our third-quarter 2003 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 Jim Lee (ph), our Controller.

The order of the call will be as follows.

Tom Schreck 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 Q&A session.

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 and development, prospective product benefits, product development plans, future clinical trials, our potential product market, and 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 annual reports on form 10-K for fiscal year ended December 31, 2002, as filed with the SEC, under the heading "factors that may affect future results".

I will now turn the call over to Tom Schreck, CFO of DURECT.

Thanks, Schond.

Good afternoon, everyone, and thanks for joining our third-quarter 2003 earnings call.

I'm going to briefly 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 months ended September 30, 2003 was $6.4 million, or 13 cents per share, compared to $9.1 million or 19 cents per share for the same period in 2002.

Our results for the three months ended September 30, 2003 included non-cash charges for the amortization of intangible assets and stock based compensation of 217,000, compared to 688,000 for the same period in 2002.

Cash used in operating activities was $4.3 million for the three months ended September 30, 2003, compared to $6 million for the same period in 2002.

Total revenues were 3 million for the three months ended September 30, 2003, compared to 1.8 million for the same period in 2002.

The increase in total revenues was primarily attributable to higher collaborative research and development revenue recognized from our agreements with various strategic partners as we continue to make progress on our collaboration projects and receive higher net product sales from our product lines such as ALZET and our polymer businesses.

Research and development expenses were $5.4 million for the three months ended September 30, 2003, compared to $7.6 million for the same period in 2002.

The decrease in the three months ended September 30, 2003 was primarily attributable to lower development costs related to our lead product, CHRONOGESIC, partially offset by a slight increase in research and development expenses under our collaborative arrangements and for our post operative pain product.

We incurred higher research and development costs related to our Phase III clinical trial for CHRONOGESIC in the same period in 2002.

The decrease in the research and development expenses in the three months ended September 30, 2003 was also the result of lower personnel expenses due to the reduction in force in the fourth quarter of 2002.

Selling, general and administrative expenses were $2.1 million in the three months ended September 30, 2003, compared to $2.2 million for the same period in 2002.

The decrease was primarily attributable to continued cost savings in the existing corporate infrastructure to support all areas of our business.

At September 30, 2003, DURECT had cash and investments of $92 million, including $3.3 million in restricted investments, compared with cash and investments of $86.7 million as of June 30, 2003.

This increase was primarily due to the net proceeds of approximately $9.5 million received in July, 2003 from the sale of 10 million additional aggregate principal amounts of convertible notes, offset by cash used in operating activities in the three months ended September 30, 2003.

At September 30, 2003, DURECT had 60 million in aggregate principal amount of convertible notes due in June of 2008.

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

Our estimates include non-cash charges for the amortization of intangible assets and stock based compensation of approximately 350,000 to 400,000 for the fourth quarter of 2003.

I will now turn the call over to Jim Brown, our President and CEO, to discuss recent highlights of our business during the third quarter of 2003.

Thank you, Tom.

Good afternoon, everyone, and thanks for joining us.

The three main points I want to convey to you on this conference call are the status of our CHRONOGESIC program, the progress on our post operative pain injectible, and our oral gel cap product for pain management.

In October we announced that we had received data from a preclinical animal test with our CHRONOGESIC pain therapy product, which indicated that less than 2 percent of the units experienced a premature shutdown of drug delivery prior to the end of the three-month delivery period.

As a result of this occurrence, the company has delayed the restart of the product's Phase III clinical program, previously anticipated to begin before the end of this year.

During 2003, DURECT has been exploring additional mechanisms to prevent any premature shutdown and has already generated feasibility data related to these mechanisms.

The Company anticipates initiating animal studies with a number of prototype systems containing these modifications by the end of the fourth quarter 2003.

As well, on the commercial side, we believe CHRONOGESIC remains a very attractive product in a large and growing market, with sales of Opioids for the treatment of chronic pain currently exceeding $3 billion annually.

You will recall from our previous clinical trials, patients using a CHRONOGESIC product showed an improvement in pain scores, exhibited reduced side effects, and preferred CHRONOGESIC over their existing chronic pain medication.

We anticipate that the CHRONOGESIC therapy will be a significant improvement over currently available long-term pain therapies on the market today once it proves (ph).

I would now like to focus on some of our other products that we are developing in the area of pain management.

Today we made an announcement that we have completed our first human study with our saber post operative pain relief depot product.

Our post operative pain relief depot product, which is a sustained release injectible using the SABER delivery system and a local anesthetic, is designed to be administered locally around the surgical site after surgery for post operative pain relief.

This pain relief product is intended to provide local analgesics for up to three days, which coincides with the time period of the greatest need for post surgical pain control in most patients.

These initial human clinical tests were completed in 12 normal, healthy volunteers in Europe.

The objectives of the clinical study were to determine the safety and tolerability of SABER and SABER ropivacaine as well as evaluate the pharmacokinetics of our SABER product versus current treatment methods, which include ropivacaine and bupivacaine.

The subjects in the study were injected with a SABER placebo compared with a SABER depot containing a low dose of bupivacaine.

The extent of absorption of the drug was 100 percent, and the rate of absorption of the drug from the depot was found to be continuous for three days as designed.

The release of our drug product over three days is a significant improvement over the period of drug release in current treatment methods, which is typically from four to six hours.

We are very pleased with the biocompatibility that we have seen with SABER depot in these subjects.

The (indiscernible) concentration of the drug measured in this study allowed us to estimate the extent and rate of absorption of these subjects.

This study increased our confidence in the capabilities of Saber depot technology and is very positive for the further development of the SABER bupivacaine product.

We believe that there are over 20 million surgical procedures performed annually in the United States for which this product could be potentially utilized.

One dose of direct postoperative pain relief product is aimed at providing up to 72 hours of regional pain relief to reduce hospital stays and opioid consumption.

We are also pleased to talk about a program for an application of our SABER gel cap technology that we have licensed to Pain Therapeutics.

Pain Therapeutics recently announced the progress that DURECT and PTI have made in developing a novel, long-acting formulation of oxycodone that utilizes our SABER gel cap, targeted to decrease the potential for oxycodone abuse.

Oxycodone is a strong opioid painkiller with an abuse liability similar to that of morphine.

Oxycodone is also the active ingredient in OxyContin, a long-acting narcotic painkiller with annual sales exceeding $1.5 billion.

We believe that this SABER based oxycodone product may deter abuse by making it difficult for the average drug abuser to extract oxycodone from the product.

Due to SABERs high viscosity based component, the potential for abuse of this product may be significantly reduced as compared to current long acting oral pain medications.

SABRE is a unique and practical choice of drug delivery technologies to be used for this particular product opportunity.

The data generated thus far demonstrates that SABER technology may have capability to make a significant contribution to the potential safety and abuse concerns of products that possess very potent compounds, such oxycodone.

We look forward to continued progress as this program moves into the clinic.

In closing, here at DURECT we continue to make progress on booking and advancing our product pipeline through our internal and partner funded program.

And we'd like to thank you now for participating in this call, and we'd now like to take any questions that you may have.

(CALLER INSTRUCTIONS) Mara Goldstein of CIBC World Markets.

I want to ask some questions on SABER, really related -- you talked about the biocompatibility and Pain Therapeutics yesterday released some information obviously about the collaborative work that you're doing.

So I'm hoping maybe you can talk a little bit about the technical features of the product and about where you are from the standpoint of manufacturing and being able to move into greater scale up from there on that product?

And then, I don't know if you're able to, but maybe disclose some of the financial arrangements with Pain Therapeutics on that product, now that it is getting ready to move into the clinic?

First off, you jumped a little but back and forth between the postoperative pain product and the Pain Therapeutics product.

Would you like to speak just to -- which one of those -- the oral or the injectible product?

How about both?

Okay, maybe just generally I'll get into it with SABER.

So your initial question was around the biocompatibility of these things.

We demonstrated -- first I'll take the injectible product first.

We have demonstrated in animal models and now in humans I think everything we've seen to date, some very positive data with regard to biocompatibility both acceptance of the injection, injection site, those kind of things.

And so we feel very comfortable with where the product is as an intangible product for our post operative pain product.

As you know, we have a number of longer acting programs as well in development in the preclinical stage with SABER injectible products that also have demonstrated favorable biocompatibility.

If you speak to the oral application, there we have some initial human data that we've done with some over-the-counter products that we've talked about that speak well to biocompatibility.

SABER itself, as a food additive, has been used for over 20 years.

And so to that end there are well-established uses for that product and a very long history of using that product orally in people.

The application of using SABER in an oral gel cap which is controlled release is something that obviously is newer to the technology, and we have some, with regard to the OxyContin products, very interesting -- some very positive data coming out of some animal work that I believe Pain Therapeutics talked about when they were in New York that one should be able to get some additional information on.

So I think we're very favorably disposed with regard to both the applications.

I think you had two other questions, one on the (inaudible) of SABER, and the other was a financial arrangement post operative pain (multiple speakers).

With regard to the scale up procedures on SABER, we certainly are constantly working on these processes.

SABER is actually, I don't want to overstate things, but it is, with regard to a technology base, is easier certainly than other products that we are looking at a scale on that, just by virtue of the fact that it is as a chemical that we're mixing these other chemicals with versus -- if you look at (indiscernible) up mechanical processes and things like that.

Typically these things are a little bit easier to do.

So as far as taking it from one size batch to another, these are things that we have done and will continue to do.

So it shouldn't be, I wouldn't think, a major issue as we go forward.

With regard to the financial arrangements, this is actually something that we haven't disclosed with regard to Pain Therapeutics and I don't think I would be able to add additional light other than just to tell you how the costs are broken down by virtue of milestone payments.

With regard to that, we'll be having milestone payments throughout the development process.

We are reimbursed for the research and development work that we are doing here at DURECT in support of that program, the CMT package in particular there.

And then, on top of that, we will receive when the product is approved a milestone payment -- excuse me, royalties.

Okay, thanks.

Stephen Davis of SJ Davis Capital.

Could you give us an idea of when you think the Phase II placebo might start and how long that (indiscernible) might take?

For the injectible?

The post operative pain product?

Right now we aren't projecting exactly when that will start, although I expect that that program should move into Phase II next year.

As we advance that program, we'll be giving more information out as time goes on.

Okay.

And just a follow-up.

I assume the SABER product, the injectible is similar -- it's obviously the same technology at Pain Therapeutics.

Does that give you confidence that it will work on that side, because it's an oral drug versus the injectible?

Can you just maybe talk about that?

It is the same product and that is it's SABER, which SABER stands for sucrose acetate isobutyrate, it's a highly-esterified sugar matrix that works well as a control release (ph) injectible product, and so we're developing it for a number of indications here at DURECT.

We've talked about some of those previously.

We're looking at biotech agents in order to get small molecules, anything from three months to one month with regard to our post operative pain relief product we're looking for just simply three to four days.

So that's one application of SABER.

With regard to the oral control release, what we're doing then is taking this SABER matrix and putting it into a gel cap and taking our oral -- what would typically be an immediate release product that you would see from a gel cap and making those extended release, so you get 12 to 24 hours release.

But, two different approaches to the body, one systemic vis-a-vis (indiscernible) and the other systemic vis-a-vis an oral release.

But similar in overall approach as far as using a matrix as a way of protecting the drug and allowing it to be delivered out over time.

Thank you.

Gary Nachman of Morgan Stanley.

A couple questions.

First on CHRONOGESIC, you mentioned the feasibility data for the new mechanism.

Could you elaborate a little on that, what type of data have you seen so far?

And then, regarding the animal studies, that should start by the end of the fourth quarter.

I'm assuming they should last around three months.

Is it reasonable to think that you'll be back in the clinic some time in the second quarter of next year?

Could you give us a timeline for that?

I don't think we want to make any projections as far as a timeline is concerned, but there are things that we know and there are things that we are in the process of researching, obviously.

And what we know is that the causes of the shutdown are very well understood at DURECT.

We obviously worked on it substantially last year, and we have pioneered a number of mechanisms that we expect will allow us to eliminate the causes for shutdown.

And so those mechanisms have been researched off-line in parallel with the activities on CHRONOGESIC last year, and we are now incorporating these mechanisms in four to five dosage forms, and our goal is to start initiating some of those performance trials in vitro and in animals by the end of this year.

So how many new mechanisms are you looking at right now, and how many of those are going to go into animal studies by the end of this year?

There are several mechanisms and each one of them has kind of different embodiments.

So for proprietary reasons we can't really disclose exactly what they are.

We will obviously derive a lot of strength from those mechanisms once we have enclosed them in those systems, and we will be able to share more of those activities as time goes on.

I think, Gary, looking at this process, I think we would expect that it would take a couple of turns I would imagine in the animal models, unless we get very, very fortunate.

Okay.

And one for Tom.

How do you see the run rate for R&D looking for 2004 given the CHRONOGESIC delays?

Is this quarter that just passed a decent run rate for next year?

I'm just going to turn the question over to Jan, Gary, thanks for the question.

But yes, we see a very similar run rate prospectively for 2004.

But for specific clarity -- please, Jan.

We are also in the process of preparing for the company's 2004 budget and evaluating the overall program cost for CHRONOGESIC and other development projects.

So we will actually keep everybody more updates of our fiscal 2004 financial guidance at our fourth-quarter and year-end 2003 earnings call in the first quarter of 2004.

Okay, thank you.

(CALLER INSTRUCTIONS) Patrick Flanigan of Adams, Harkness & Hill.

I was just wondering if you could just update us on what your current strategy is with your SABER-caine product in terms of out licensing.

Well, with regard to SABER-caine, as with regard to any of the products that we're looking at here at DURECT -- (multiple speakers) The name of that we're using for that product is our SABER post operative pain control product.

With regard to that product, we have held discussions with the potential corporate partnerships in the past, and we continue to hold discussions at this point in time.

The timing with which we will put a partnership in place, should we elect to do so, will just be one that occurs in its own due course.

And so I wouldn't expect anything in the nearer term.

I think that we look forward to putting these partnerships in place because of the opportunity that they afford us and our partners, and -- but we're quite excited about this project and the progress we've made, and we're looking forward to carrying it farther for ourselves.

We have a lot of interesting turn rate (ph) as well with regard to turn (inaudible).

I think I'd like to just state regarding the SABER that this has been a very exciting quarter to end with the information that we have.

I think SABER had always the great expectations for us as far as controlled drug delivery, but in many ways this quarter we really learned for the first time how it behaves in humans.

And I think we were always worried about how does it feel, how does it behave, and how does it inject, and I think it's very exciting to find out that all of the expectations that we had have come to pass.

And that we have now a great depot formulation with simplicity of fabrication, with quality of delivery, and with perfect compatibility with the body.

So we feel very bullish on taking this project forward on our own, and I think given the strength that we have in the financial side, I think we'd like to carry it further before we need to share it with anybody.

But we are always open to partnering.

And also on the oral side, I think we did not have any expectation in the oral side that we were going to make a contribution, but the data that we've seen today are very stellar.

I think (indiscernible) we talked about that a great deal in New York last week.

But we're very excited to see the abuse potential negation come to pass and also the very nice controlled drug delivery capability that flows from it.

And I think the system will turn out to be very nicely scalable from a commercial point of view, and from a manufacturing point of view.

I was also just wondering for SABER-caine, is a Phase II trial the next step, or do you need to conduct additional work before a Phase II trial can begin?

Actually we have finished our first part of the Phase I study, which was basically the compatibility, the performance from a kinetic point of view, and what we now have to do is from a special deposition point of view around the wound site and from an adequacy point of view try to figure out what the ratios and what the composition should be.

And it comes down to basically an optimization of the formulation this year to take it to the next step.

I think what we are very pleased with, Patrick, is the duration of delivery.

And you'll see, as we -- probably next time we get a chance to present, in fact (multiple speakers) you'll see some nice plasma curves coming out and some very -- we've been able to dial in at three to four day delivery.

So that aspect we're very pleased with, but it's (indiscernible) we'll be doing some additional speaking of that as we take that forward.

Okay, so it is fair to assume then that a Phase II study isn't likely to begin until the middle to second half of next year?

I think it's premature for us at this time to give any guidelines, but the project is moving full steam ahead on this end.

Okay, thank you.

(CALLER INSTRUCTIONS) If there are no further questions, I will turn the conference back to Mr. Greenway to conclude.

We'd like to thank you for participating on this call and look forward to updating you on our progress on our fourth-quarter and year-end conference call, slated to begin in the first quarter of 2004.

Thanks again.

Ladies and gentlemen, if you wish to access the replay for this call you do so by dialing 1-800-428-6051 or 973-709-2089, using ID number 310-398.

This concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.