DURECT Corp (DRRX) 2006 Q4 法說會逐字稿

Hello, everyone, and good afternoon.

This is Schond Greenway, head of IR and Strategic Planning for DURECT Corporation, and on behalf of everyone here at the Company, we would like to welcome you to our Fourth Quarter and Year-end 2006 Financial Results Conference Call.

I have with me today Jim Brown, our CEO;

Matt Hogan, our CFO;

Felix Theeuwes, our Chairman and Chief Scientific Officer; as well as others.

The order of the call will be as follows.

Matt Hogan will briefly review our financial results and then turn the call over to Jim Brown to discuss non-financial matters in greater detail.

Afterwards, we will open up the call for a Q&A session.

Before I turn the call over to Matt, 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, expected product benefits, our development plans, future clinical trials, or projected financial results.

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

Further information regarding these and other risk factors are included in our SEC filings [inaudible - technical difficulty], as well as our 10-Q under the heading Risk Factors.

I will now turn the call over to Matt.

Thanks, Schond.

Good afternoon, everyone, and thanks for joining our earnings call.

I'm going to briefly review our financials, primarily focusing on the fourth quarter, before Jim reviews non-financial highlights in greater detail.

Total revenue was 5.4 million in the fourth quarter of 2006, as compared to 5.8 million in the fourth quarter of 2005.

Revenue from our R&D collaborations was 3.5 million in the fourth quarter 2006, as compared to 4.1 million in the fourth quarter of 2005, which is a decrease of approximately 600,000.

Revenue from this source will always fluctuate from quarter to quarter depending on the state of development under the various programs and our role in those programs.

To provide a little more detail, revenue from pain therapeutics related to Remoxy and our other ORADUR-based products was approximately 1.7 million.

Revenue from Endo Pharmaceuticals related to our TRANSDUR-Sufentanil program was approximately 1.2 million.

Revenue recognized from our upfront license fee from Nycomed was approximately 271,000.

Revenue from other collaborators was approximately 356,000.

Product revenue from the sale of ALZET pumps and LACTEL polymers increased by approximately 300,000 from 1.6 million in the fourth quarter of 2005 to 1.9 million in the fourth quarter of 2006.

Our gross margin on these products was 49% in the fourth quarter of 2006.

R&D expense was 11.5 million in the fourth quarter of 2006 as compared to 7.8 million in the fourth quarter 2005.

Of that $3.7 million increase, 569,000 was due to the inclusion of stock-based compensation due to the adoption of SFAS-123R earlier this year.

Spending on POSIDUR increased by approximately 1.3 million to 3.7 million.

Spending on Remoxy and our other ORADUR-based products increased by approximately 900,000 to 1.7 million.

Spending on TRANSDUR-Sufentanil decreased by approximately 100,000 to 700,000.

Spending on MEMRYTE declined by approximately $1 million to 200,000.

Spending on TRANSDUR-Bupivacaine and other internal projects increased by approximately 1.9 million to 4.5 million.

This included recording a $1 million R&D expense in the fourth quarter due to the upfront fee paid to EpiCept to obtain IP rights related to a transdermal patch containing Bupivacaine for the treatment of back pain.

As you'll hear from Jim shortly, we believe that our R&D spending has been highly productive in terms of adding new products to our pipeline and advancing those that are already in our disclosed pipeline.

Selling, general and administrative expenses were 2.8 million in the fourth quarter of 2006, as compared to 2.7 million in the fourth quarter of 2005, an increase of approximately 160,000.

It's worth noting that had the fourth quarter 2006 not contained 365,000 more in stock-based compensation than in the fourth quarter of 2005, SG&A would have actually declined year over year.

Our net loss for the fourth quarter of 2006 was 9.6 million compared to a net loss of 6 million for the same period in 2005.

I would note that our fourth quarter loss was quite similar to our third quarter of 2005 -- 2006 net loss of 8.6 million but for the $1 million license fee to EpiCept.

Probably a more relevant financial metric for us than our net loss was cash used in operating activities during the quarter.

Due to the $14 million licensing payment received from Nycomed, operating activities actually provided 7 million in cash during the quarter.

Even if one excludes the $14 million licensing payment received from Nycomed, the underlying cash used in operating activities was 6.7 million in the fourth quarter of 2006.

Early in 2006, DURECT provided guidance that it anticipated cash burn of approximately 31 to 34 million during the year.

The final decrease in cash year over year was actually 9.4 million, and the cash used in operating activities was 7.2 million.

At December 31, 2006, we had cash and investments of 81.6 million, including 1.3 million in restricted investments, compared with cash and investments of 74.3 million at September 30, 2006 and 91 million at December 31, 2005.

I'd like to take a minute to explain clearly the accounting treatment associated with our Nycomed collaboration so people can understand it properly.

We obviously received a $14 million upfront license fee in the fourth quarter of 2006.

Although this payment is nonrefundable, the accounting rules state that one doesn't record this as immediate revenue but instead you set up a deferred revenue account as a liability on the balance sheet and then record revenue each quarter over the term of our continuing involvement with Nycomed with respect to POSIDUR.

As a result, we anticipate recording collaborative R&D revenue at a rate of 764,000 per quarter over approximately the next 18 quarters due to that upfront license fee.

This figure is recorded as revenue and decreases our reported net loss each quarter, but it's a non-cash item in those future periods.

Also, as we've disclosed, the DURECT and Nycomed partnership involves both parties jointly controlling and equally funding a development program targeting European and U.S. regulatory submissions.

Basically, the two parties are pooling their resources in almost a joint venture fashion for our mutual benefit.

This is a different type of relationship to our previous collaborations in which our partners have been in charge of the development program and then certain aspects have essentially been outsourced back to us to perform.

As a result, unlike our prior collaborations, we won't be recording any revenue from the Nycomed relationship based on our providing R&D activities as part of the collaboration.

Instead, our reported R&D expenses will essentially be a net figure reflecting the outcome of Nycomed paying 50% of the expenses we incur on the POSIDUR program and DURECT paying 50% of the expenses Nycomed incurs on the POSIDUR program.

Now, let me turn to our financial guidance for 2007.

Our cash burn rate is heavily influenced by the timing and structure and new corporate collaborations, as well as outsourced pre-clinical and clinical expenses.

While we anticipate entering into new collaborations in 2007 and beyond, we believe it's more conservative to give financial guidance based on an assumption of no new collaborations and aggressive funding of our R&D programs, many of which are in clinical development.

Based on those key assumptions, we anticipate cash burn in 2007 of approximately 32 to 36 million.

I would note that we have multiple programs that may potentially be partnered over the next 12 to 18 months.

These include TRANSDUR-Bupivacaine, TRANSDUR-Sufentanil for Europe and for Asia, POSIDUR for Asia, as well as various internal programs which we haven't discussed -- described publicly in detail.

Thanks again for joining our call, and now I'll turn the call over to Jim to discuss nonfinancial matters in greater detail.

Thank you, Matt.

I want to quickly review the fourth quarter of 2006 and then the year as a whole before discussing what DURECT has achieved so far in 2007 and what can you expect going forward for this year.

The fourth quarter of 2006 was the highlight of a year of significant progress.

During the quarter, DURECT closed a major collaboration with Nycomed for the European rights to POSIDUR, our lead development program internally.

We also completed phase one clinical studies for two new development programs.

I'll now review the entire year for 2006.

This was a year of growth and significant progress on multiple fronts for DURECT in our management infrastructure, in the number of development programs, with additional partnerships, and with our development programs.

We strengthened our management team in the area of finance with the addition of our Chief Financial Officer Matt Hogan, and in the clinical and regulatory areas with the addition of our Chief Medical Officer Peter Langecker and his team.

With regard to business development deals, we announced three transactions in 2006.

The first was a signing by our partner Endo Pharmaceuticals of 3M for the commercial manufacturing supply for the Sufentanil patch program.

The second was the acquisition of used patent rights for our Bupivacaine patch from EpiCept.

I'll speak more about this product later.

The most significant transaction for DURECT in 2006 was our POSIDUR deal with Nycomed.

The Nycomed transaction was important to DURECT in a number of ways -- first off, because of Nycomed's commercial and development capabilities; next, because of the terms of the transaction; and, finally, because of the size of the transaction.

Regarding Nycomed's capabilities, with the completion of the Altana acquisition, Nycomed is now the 25th largest pharmaceutical company in the world.

They have a dedicated hospital and surgical suite sales force.

Nycomed has excellent European clinical, regulatory, and reimbursement experience, and they have a management team with local anesthetic expertise.

This relationship enables DURECT to better capture the value of POSIDUR on a global basis.

Regarding the terms of the transaction, financially, it enables DURECT to maintain ownership of POSIDUR rights in the U.S. and Canada and Asian markets, all the while receiving 50% of the development costs covered.

We receive [inaudible] royalties ranging from 15 to 40%.

We also received an upfront payment of $14 million and another $188 million in milestones still to come.

Additionally, and often overlooked, we receive a manufacturing mark-up on the product.

With regard to the size of the deal, one should consider the magnitude of this deal in the light of the relative market size of the territories licensed to Nycomed.

The market size of these territories is arguably 20 to 30% of the size of the U.S. market.

I will now review the remainder of the development programs with regard to 2006 progress.

We saw significant growth in the number of programs in 2006 with the addition of two new development programs, thereby closing the year with a total of six development programs in development.

Remoxy was the first of these, and with regard to progress in 2006, first off with Remoxy was a special protocol assessment agreement by the FDA.

Upon this closure of this agreement, there was dosing initiated in the final 400-patient Phase III study for this product.

Just as a quick reminder, there was a 200-patient Phase III placebo-controlled trial, which was completed for Remoxy about a year-and-a-half ago.

This study demonstrated a statistically significant improvement in pain control versus placebo.

With regard to our POSIDUR product, the IND was accepted by the FDA.

We reviewed the product development plan with European, as well as U.S., regulatory authorities.

We finalized the product development plan with Nycomed.

We initiated the full Phase II program involving more than 200 patients with multiple clinical trials underway on three continents.

We completed the deal with Nycomed to enable simultaneous development of the U.S. and European -- for the U.S. and European markets and reduction of our financial burden for this program.

With regard to the Sufentanil patch, Endo signed 3M as the commercial manufacturing partner for the product.

DURECT successfully managed technology transfer of the manufacturing process to 3M in order to enable production of Sufentanil patches for the remaining Phase II and Phase III trials and for commercial supplies.

With regard to the second ORADUR narcotic product and the commercialization deal with Endo -- excuse me, with King Pharmaceuticals, the Phase I was completed for this product.

With regard to the Bupivacaine patch, the IND was accepted, the Phase I was completed, and a use patent was then licensed.

Because of our partnerships, DURECT was able to effect this progress while maintaining a cash burn of less than $10 million for the second year in a row, and we move into 2007 with significant momentum and from a position of strength, with over $80 million in the bank, which is more than two years of cash on hand.

In the first month of this year alone, we announced the following.

With regard to POSIDUR, we put in place a worldwide manufacturing agreement with Hospira, and manufacturing development is now underway.

This puts in place another critical component of our development plan.

Hospira is the specialty pharmaceutical and medication delivery company, which was spun out of the hospital products business of Abbott.

They have a 70-year track record of high-quality products and expertise in [inaudible] products.

They are a major player in the industry with over $2.5 billion in sales.

With regard to the Bupivacaine patch, we announced this product, which is a Bupivacaine patch, for the treatment of post-hepatic neuralgia.

This product is designed to provide for up to three days of pain relief versus the existing patch therapy, which is indicated for 12 hours of wear.

We announced the initiation of the first Phase II program with this.

This involves the 50 patient placebo-controlled study in postherpetic neuralgia.

We announced a manufacturing deal that's in place with Corium to supply their remaining Phase II, the Phase III, and the commercial product.

And one should be reminded that we own full rights to this product.

With regard to MEMRYTE, we renegotiated the agreement to aid in the process of collecting the data from the Phase III Alzheimer's disease study, which is being ended early in an attempt to demonstrate efficacy.

This amendment [doubles] DURECT's royalty rate to 10 to 14% and will enable DURECT to receive 10% of any milestone or upfront payments on the product if it is sublicensed to another company.

The first month of this year highlights continued steady progress of our development programs.

During January, we announced two commercial manufacturing agreements.

These, together with the 3M Sufentanil patch manufacturing agreement put in place in 2006, have reduced one of the key risks associated with bringing later-stage programs to the marketplace.

During the remainder of 2007, we look forward to significant progress from our clinical development programs.

For POSIDUR, we look forward to Phase II clinical data and initiation of Phase III dosing.

For Remoxy, we look forward to Phase III clinical data within the first half of this year and preparations to file the NDA in 2008.

With regard to the Sufentanil patch, supplies for the remainder of the Phase II studies are being produced by 3M, and we look forward to the initiation of the remaining Phase II studies in the first half of this year.

For the Bupivacaine patch, it will be Phase II clinical data.

For MEMRYTE, it will be clinical data from the Phase III trial, which was ended early.

If you take a look at DURECT today, you'll see a company with a rich pipeline consisting of five products in Phase II or Phase III and one product with positive Phase I results.

These products are addressing large market opportunities, primarily in the underserved pain management field. 2007 is a year for de-risking and advancing our development products.

We have the team in place.

We have the partnerships in place.

We have the commercial manufacturing in place.

We have products advancing at various stages of development, moving from Phase II to Phase III, from Phase III to NDA preparation.

We have un-blinding of clinical data from four programs -- Phase II data from POSIDUR, Phase III data from Remoxy, Phase II data from the Bupivacaine patch, and Phase III data from MEMRYTE.

We have the potential for various business development deals -- the Sufentanil patch potential deals in Europe or Asia, POSIDUR in Asia, the Bupivacaine patch on a worldwide basis, as well as other programs we have yet to disclose. 2007 will be an exciting year for DURECT, and we look forward to sharing it with you.

We'd now like to take any questions you may have.

[OPERATOR INSTRUCTIONS]

Russell McAllister has a question.

Sure.

Jim, thanks for taking the questions.

This one is really for Matt.

On the remaining milestone payments for POSIDUR, are those going to be recognized immediately or amortized over the remaining life of the collaboration?

Those milestones are recognized when they're achieved and paid, so those do not have to get amortized.

And are you going to be specifying at any point in the near future sort of exactly how those break down?

No, I don't think we'll lay out in advance, but, of course, in any particular quarter where we receive a milestone, you'll get news of that, but I don't think our partner wants us to go into the gory details of what are the various things that are needed to achieve different milestones and how much are associated with each accomplishment.

Okay.

And are those -- or at least some of those milestones assumed in the 32 to 36 million in cash burn estimate, or should I assume that those are not included in that estimate?

We've included in this year's burn estimate certain milestones.

I wouldn't want to get into which ones.

Okay.

That's very helpful.

Thank you very much.

Jon Hickman has a question.

Go ahead, Jon.

Hi.

This is again for Matt.

First off, if you take out the $14 million payment from Nycomed last year, what was your cash used in operations?

Hold on one second.

You gave me some numbers, but I didn't really get that one.

Hold on one second.

It would've been 23 million.

Okay.

So even with the collaborative R&D held from Nycomed this year, you're planning on spending about 10 million more or using about 10 million more in cash this year.

Is that -- that's right, right?

The 32 to --

Yes, but I think the key thing to emphasize, Jon, I think, is this assumption that there are no new collaborations that get struck during the year.

No, sure.

I understand that.

And aggressive movement forward on all the clinical programs --

Okay.

-- those are the two underlying key assumptions.

It's the kind of thing we've done, Jon, the last three years in either -- you know, in both in '05 and '06, we have certainly consumed a lot less than we originally projected.

No, I understand.

Now, is there any -- Jim or Matt, could you indicate to us where you think you might be spending -- which one or two projects you'll be spending the most money on?

No, I don't think we want to really get into that level of granularity other than to say, as Jim's pointed out, we've got a number of programs that are moving into the clinic or at various stages of clinical trials, and some of those -- you know, even post-Nycomed, we're still responsible for half the expense of that program, and we're in a fulsome Phase II program with that, as you know.

And there are a couple of other internal programs that are either doing a lot of pre-clinical work or clinical work, but I don't think we want to specify exactly how many dollars are going to which program.

Well --

I think the thing I would add --

I don't care about the number of dollars.

I was [inaudible] which programs you thought might consume the most dollars.

You know, the ones that in the clinic, so POSIDUR will certainly still be expensive.

Yes.

Okay.

Typically, the later-stage programs are where you spend most of the money.

Okay, then could you -- Jim, you just finished off kind of running down the data that could be expected this year.

Yes.

Could you be any more specific on the timing of that kind of --

You know, we haven't broken that out, Jon.

We just have been -- well, I guess I can tell you where it has been broken out.

The only -- for POSIDUR and for the Bupivacaine patch, we haven't, although we've said we plan to be in Phase III for POSIDUR this year, so one would expect Phase II data certainly significantly before that.

But for the Remoxy product, Pain Therapeutics and King have said by the end of the second -- first half of the year, so I would expect by June to have Phase III data there, and MEMRYTE has said -- Voyager's said the first half of the year, as well.

So I think you could expect data from those two programs earlier in the year.

Okay.

Thank you.

Sure.

[Dave Winley] has a question.

Hi.

Jim, wanted to clarify on -- your comments on POSIDUR.

You made the special note of the often-overlooked profit on supply of the product.

So that's outside of the sales royalty?

Yes.

And have you commented on how -- what magnitude of profit that is in terms of percentage?

You know, we haven't.

These are pretty standard, I would say, kind of across all of our projects and across the industry, but we have not broken that.

I just wanted people to understand that we were in control of the manufacturing and there was a profit associated with that that was outside the 15 to 40%.

Okay.

And then on the 15 to 40, seems like you've given some rough boundaries around where some of those triggers are that move that royalty rate up.

You know, we really haven't done that.

One could probably take a look at the market in Europe and get a sense of where those things might trigger because they certainly are within the realm of possible, you know, as the product advances.

And so if you consider what a product might do in Europe, you could probably get some sense of the range over which they're spread.

And on moving over to TRANSDUR-Sufentanil, I was writing quickly, but I don't think I got this --

Sure.

-- you said manufacturing agreement with 3M, I believe?

Yes, that's something that hasn't been disclosed before today, I don't believe.

Okay, I couldn't find a press release on that.

Yes, that's right.

And so that's important to know.

We've always said it's a world-class manufacturer, and certainly, 3M is.

And Endo has obviously put this in place.

And when was that finalized?

That was actually finalized in May of last year.

And where do they stand in terms of tech transfer and validation and kind of fully up and running and ready to go?

You know, we -- I think the only thing we can say at this point in time is we have completed the tech transfer to them, and as I did say, that the -- the remaining Phase II supplies and the Phase III and commercial will all be coming from them.

So that was the majority of our effort on this project kind of from May to the end of the year was doing that [inaudible] transfer.

And so the tech transfer, do I conclude from your comment there that it basically concluded around the end of the year?

No, we haven't broken that down in any more detail than [inaudible] say that we -- that that was an activity we were involved heavily in.

I said -- unfortunately, I have to be a bit cryptic here because it's -- Endo is the --

Endo's program, right.

I just wondered, I guess, the spirit of the question that I'm trying to get at, which I may have to direct toward Endo, is -- does completion of that process, I'll say, remove a bottleneck to see TRANSDUR-Sufentanil move more aggressively in development?

I would certainly hope so.

We're confident that we're on track for that.

One of the things that Peter has said publicly and I think will continue to say is that he expects the remaining Phase II to be undertaken this first half of this year, and that -- you know, those are supplies I can tell you will come from 3M, so -- if that helps.

Okay.

Thank you.

Andrew Forman has a question.

Yes, just following up on the other comment.

Could you -- I jumped on the call late.

Sorry, Jim.

Can you just --

[Inaudible] doing, Andy.

Just give us your assumptions again on NDA filings, estimates for each one of the key programs, please?

You know, unfortunately, we haven't given that, but I can -- the only one that we have given that out for, Andrew, is -- our partner has, actually, for the Remoxy product, and that -- what they've said is the Phase III data will be available by the end of the first half of this year, and the NDA will be filed three quarters later.

That's the one that we have the greatest clarity on.

For the other programs, we're going to be starting Phase III for POSIDUR this year.

The Sufentanil patch now that we're producing the products at 3M, so now you're aware that it is 3M doing the manufacturing, Phase II will -- the remaining Phase II will commence this year.

When that completes, the Phase III will start, that kind of thing.

And with regard to MEMRYTE, we'll understand a lot more after the data.

If we get efficacy data, then it's a much different ballgame than if we don't.

So that remains --

Well, let's drill down on POSIDUR and Nycomed for a minute.

Sure.

Given where they are and where you are, starting Phase III, just give us an outline of the clinical development plans so we can try to get some better visibility about when you might file.

And I guess the second part of that question is given that the large series of milestones you're getting, what is it that you think you can leverage out of this relationship that can beat up or, if you will, subsidize, I guess is the way to call it, the U.S. clinical development plan?

Well, first off, we have -- they're paying half the clinical development program, so that's the most important thing to note.

We do have significant milestones coming, $188 million' worth, in fact, on this program.

I guess you didn't catch the -- kind of the middle of the talk, but what I did do, when I reviewed the progress for POSIDUR in '06, what I said is that we reviewed the product development plan with regulatory authorities in Europe, as well as in the United States, and we did this together with Nycomed.

We agreed on a product development plan with Nycomed, and we started this very robust -- these two programs, will all be 200-plus patients.

We have trials ongoing now, multiple trials, in actually three different continents, and as those studies draw to a close, we'll have the end of Phase II meeting and start to Phase III, which we fully expect to be this year.

We haven't given anything else beyond that.

Okay, perfect.

Good progress.

Thanks.

Sure.

Thank you.

Russell McAllister has a question again.

Sure.

Just following up from David's questions earlier on TRANSDUR-Sufentanil, it sounds like that program is starting to gain some momentum.

Could you review to the extent possible sort of exactly where we are and at least generally when we might expect to see some news related to that program?

What I can do is it's probably worth going back a little bit in history on this because we have a lot of experience with Sufentanil as an active [inaudible] in controlling pain.

Those of you who have been following DURECT for a while will remember CHRONOGESIC.

This is an implant that infuses Sufentanil on a continuous basis for up to three months.

We had taken that product into Phase III dose, nearly 100 patients, for some for as long as three months and saw great pain control and saw, in some cases, a statistically significant -- though the trials weren't powered for such -- reduction in certain side effects.

We demonstrated that we could effectively convert patients from a Duragesic, which was J&J's fentanyl patch, and understood the -- and we did a blinded crossover study to understand the relative potency of fentanyl to Sufentanil.

And it was on the strength of all that information then that we built up this patch program.

So once we completed the Phase I work with our Sufentanil patch, we understood the appropriate size of Sufentanil patch that led to given plasma concentrations.

From our work with CHRONOGESIC, we knew the plasma concentrations that led to pain control.

We knew the dose conversion from fentanyl to lead to pain control.

So we applied those principles to a small Phase II study, and we saw very nice pain control in just a small number of patients, 12 patients.

But they were dosed -- these chronic pain patients were dosed for a full month.

We saw very strong kinetics, nice flat-line delivery.

Patients didn't drop for efficacy beyond day one, and they could've dropped at any time.

So tells us we probably have the right dose conversion and we're able to dial that in.

So that's all the background of all this.

What has happened in the interim is Endo has put in place a relationship with 3M to make the commercial supplies.

They want to have the remaining Phase II and Phase III come from that commercial supply line that is now in place.

That will occur, and the Phase II -- remaining Phase IIs will be done this year and the Phase IIIs as soon as they possibly can be and going forward.

Terrific.

So we definitely at least expect to see some Phase II results this year and possibly enter Phase IIIs later [inaudible] --

You know, we'll have data.

As to whether or not Endo will share any of this, I can't say.

The only thing I can say that Endo has said is that when this product starts Phase III, they will announce that, and you'll see us -- we get nice payments, so you'll see a milestone payment to DURECT, and they -- Peter said that he'll give clarity once they start Phase III as to when the NDA is expected.

Terrific.

So then you'll get a lot more clarity.

That's very helpful.

Thanks, Jim.

Sure.

Elliot Wilbur has a question.

Thank you.

Can you hear me all right?

Certainly.

Hi, Jim.

How are you?

Fine, thanks.

I guess first question actually would be for Matt.

With respect to the cash burn guidance for 2007, 32 to 36 million, I would obviously assume that that's going to be tiled more toward the second half of the year.

I'm just wondering if you could maybe give us some sort of relative degree of what we should be thinking about 3Q, 4Q versus what might actually burn in the first half?

I don't know if I would assume that.

I would assume probably roughly ratably throughout the year.

Okay.

And that's even with expected commencement of Phase III trials given that --

Yes, because I mean -- well, as you recall, we're doing a pretty fulsome Phase II.

Yes.

So don't forget that in your thinking.

Okay.

We're not taking a shortcut Phase II approach to just launch into Phase III.

It's a pretty fulsome Phase II.

Yes, we're doing between two to 300 patients in multiple Phase II trials.

Okay.

So with the Nycomed funding in the Phase III, it shouldn't really change things all that much, I guess, is the message there.

Okay.

And then with respect to TRANSDUR-Bupivacaine, want to make one point of clarification here.

I'm assuming this is the previously undisclosed development program?

Yes, it is, and we actually announced that when we announced it the first week in January.

It is the previously undisclosed program.

Okay.

The artist formerly known as.

Exactly.

And then what are we -- what should we be thinking about in terms of the duration of dosing in that trial?

Well, it's going to depend on the study.

We're looking to the system to be applied for up to three days, and so as we look to these various trials, we'll start initially with single applications and move up to multiple applications [as one go through].

Okay.

And then I mean, lastly, on POSIDUR, doesn't sound like we're going to get too much more incremental information there as far as timing and things go, but can you at least remind us at this point whether or not all these ongoing Phase IIs are at least fully enrolled?

You know, we haven't broken those out, but we do have a number of trials underway.

Just so one understands kind of where we are with regard to the Phase II, I probably should review that.

We finished an 81-patient hernia trial.

This was done in patients who had had hernia surgeries, so this was a Phase II study.

The focus of the study was really looking at the primary influence of dose proportionality and safety and kinetics [inaudible].

We, in fact, took blood draws on all 81 patients, did plasma PK levels on all 81 patients.

We gave up to a gram of Bupivacaine in a large number of these studies safely and understood the kinetics.

And the most important thing we demonstrated was that one could control the burst, which was the first time in my mind that that's been able to be done with this product.

And so that really has opened the door for us.

On the heels of that, we've sat down with the regulatory authorities.

You're going to have to look a long ways to find a rational scientific mind that won't understand that Bupivacaine won't numb an area of the body, and so it's more now -- and now we've got the 72-hour kind of range plus two to three days of kinetics without burst.

So we've got the kinetics and the burst and length of duration.

We've got a molecule that will numb an area when applied appropriately.

So it's now really how to use this product in the various surgical [wounds] and also which various surgical wounds would we want to utilize for the Phase III program being -- the goal here not being to get into Phase III as quickly as possible.

If that was our goal, quite frankly, we could've started some Phase III work last year.

Our goal is, rather, to get out of Phase III with a successful program.

And so to that end, Peter and his team, and now with the Nycomed team for a greater part of last year, have been looking at various pain models.

You notice we don't have hips and knees.

It's not we don't think the product won't be effective in there.

Just hip enrollment will probably be a bit slower.

There's a lot of variability in knee.

We're picking models where there are more similarities in pain, so we're looking at rotator cuff and shoulder surgery.

We're looking at hernias and hysterectomies and appendectomies, and things like that.

And so it's a systemic -- not systemic -- selective, systematic process that we're going through to pick our phase -- our probably one or two Phase III models.

Okay, and then just a follow-up question along that line of commentary, Jim.

I'm assuming since Nycomed entered the picture, then that nothing's really changed in terms of the different models that you're thinking about?

No, and it's interesting -- we've actually -- people aren't aware of this, but we'd been talking with Nycomed for a year -- over a year, actually, starting in November of '05, and they have -- their CEO, Håkan Björklund, came out of AstraZeneca, was involved with Ropivocaine, and a number of other team members were.

They've got consultants there.

And Peter actually took them with him as consultants to a number of European regulatory authorities.

And so they've had a hand in the product development plan.

In fact, we reached concurrence with Nycomed on the entire product development plan.

Had signed off on that before we ever signed the deal.

Okay.

No further questions.

Thank you.

We have one more question from Dave Winley.

Hi.

Thanks.

Just wanted to follow up.

On your -- Jim, on your TRANSDUR-Bupivacaine, the goal is for that to be applied after three days, correct?

We're exploring it for up to three days, yes.

Three days?

Yes.

Would -- do you know at this point then would it also then have to be removed and the patient go without medication for a period of time?

You know, we haven't done that work.

We're just doing the Phase II work right now.

What we have done is shown that the product effectively delivers Bupivacaine for three days.

That much we know.

You know, the clinical utility of how that will be used, I think, will have to be tested in the clinic so -- but that would be -- my ideal dream would be to have -- you haven't seen this product -- yes, you have.

It's a very thin, almost like a second skin, and to be able to allow that kind of protective aspect without the heavy wetness of the current systems, to afford that to the patients, I think, would be great, but we'll have to see.

Just a dream right now.

So Lidoderm, for example, is 12 on, 12 off, right?

Right.

But you wouldn't anticipate this would be three on -- three days on, three days off?

No, we don't.

We anticipate that it would just be kind of rolling from one to the next.

Okay.

Thank you.

Sure.

Scott Henry has a question.

Thank you, gentlemen.

Just a couple questions.

First, on the R&D line, did I hear correctly that there was a $1 million charge in Q4 for EpiCept?

And, additionally, should we expect to see a $1 million charge in Q1 of '07 for the MEMRYTE transaction?

That's exactly correct.

Okay.

And, as well, just reading through the press release, it does seem to highlight the potential to partner TRANSDUR-Bupivacaine perhaps a little more than you guys have on other products in the past.

Do you think -- I mean is it fair to say that you've kind of fast-tracked that product to partner it as opposed to taking it later?

I'm just curious -- your interpretation of that.

No, it's not, actually.

We haven't fast-tracked anything.

We're just developing it at our normal pace.

But I can say, as you would expect, when one looks at the marketplace and the opportunity, there's been a huge amount of interest on this.

And so we may have a partner.

We may never have a partner on this.

You know, remains to be seen, but there's a lot of interest.

Okay.

Well, that's helpful.

And just the final question, just trying to translate the 32 to 36 million in cash burn into the income statement, and I guess that's always going to be hard to do without the assumptions known going in, perhaps could you talk just a little bit about the R&D line in '07 relative to '06?

Do you think it should be in the same ballpark or dramatically higher or lower?

You know, I don't know that I have my spreadsheets directly in front of me.

Maybe I could skip to the bottom line, and I think the net loss is probably going to be a little bit higher than the cash burn that's shown because, of course, we have a lot of non-cash items, like stock-based compensation.

So I don't know if that helps you, but I'd say the net loss figure should be a little bit higher than the reported cash burn.

Okay.

Well, it certainly sort of helps a little bit.

Well, thank you guys again for taking the questions.

No further questions.

Okay.

If not, well, we want to thank you all for your time, and we look forward to talking to you soon.

Take care.

This concludes DURECT's conference call.

Thank you, and have a great day.