DURECT Corp (DRRX) 2007 Q1 法說會逐字稿

Welcome to the Q1 2007 earnings call for DURECT Corporation.

We are now ready to begin.

Please go ahead.

Good afternoon and welcome to our first-quarter 2007 earnings conference call.

This is Matt Hogan, Chief Financial Officer of DURECT Corporation.

This call will begin with a brief review of our financial results, and then Jim Brown will provide an overview of our business strategy and pipeline.

We will then open up the call for Q&A.

Before beginning, 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 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 SEC filings, including our 10-K under the headline Risk Factors.

Before I turn to our actual financial results, I think there is merit in my briefly describing two aspects of our accounting treatment under U.S.

GAAP, since I believe this will help you understand our financials better.

My first comment is a reminder of the accounting treatment for upfront license payments.

In the first quarter of 2005, we received a $10 million upfront license fee from Endo Pharmaceuticals in connection with our agreement covering TRANSDUR-Sufentanil.

And in the fourth quarter 2006, we received a $14 million upfront license fee from Nycomed in connection with our agreement covering POSIDUR.

Although these payments are nonrefundable, the accounting rules state that you don't record these as immediate revenue, but instead 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 our partner.

As a result, we recorded collaborative R&D revenue of $1.3 million in the first quarter 2007 and $547,000 in the first quarter 2006 related to these upfront license fees.

These figures are recorded as revenue and decrease our reported net loss, but they are noncash items during these periods.

My second comment is a reminder of the accounting treatment under GAAP for our Nycomed agreement.

As we have previously described, 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 to us to perform.

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

Instead, our reported R&D expenses will essentially be a net figure reflecting the outcome of Nycomed paying half of the expenses incurred on the POSIDUR program.

Let me now turn to our financial results for the first quarter of 2007.

Total revenue was $5.7 million in the first quarter of 2007 as compared to $5.2 million in the first quarter of 2006.

Revenue from our R&D collaborations was $3.5 million in the first quarter of 2007 as compared to $3.1 million in the first quarter of 2006.

Reminder -- 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.

Product revenue from the sale of ALZET pumps and LACTEL polymers increased by approximately $115,000 from $2.2 million in the first quarter of 2006 to $2.3 million in the first quarter of 2007.

Our gross margin on these products was 62% in the first quarter of 2007 and 61% in the first quarter of 2006.

$34,000 of stock-based compensation was included in cost of goods sold in the first quarter of 2007 and $8000 was included in cost of goods sold in Q1 2006.

R&D expense was $10.4 million in the first quarter of 2007 as compared to $7.2 million in the first quarter of 2006.

These figures included stock-based compensation of $1.2 million in the first quarter of 2007 and $0.6 million in the first quarter of 2006.

So of the $3.2 million increase in reported R&D spending, $542,000 was due to the increase in stock-based compensation.

Selling, general and administrative expenses were $3.5 million in the first quarter 2007 as compared to $3 million in the first quarter 2006, an increase of approximately $500,000.

These figures contain $668,000 of stock-based compensation in the first quarter 2007 and $321,000 of stock-based compensation the first quarter 2006.

Hence, over 60% of the increase in reported SG&A was due to the increase in stock-based compensation.

Our net loss for the first quarter of 2007 was $8.8 million compared to a net loss of $6.3 million for the same period in 2006.

I would note that our first-quarter loss was about $1 million less than our fourth-quarter 2006 net loss of $9.8 million.

At March 31, 2007, we had cash and investments of $72.4 million, including $1.3 million in restricted investments, compared with cash and investments of $81.6 million at December 31, 2006.

I will now turn the call over to Jim to discuss our pipeline in greater detail.

Thank you, Matt, and hello, everyone.

The momentum that we generated last year with the announcement of our Nycomed collaboration has carried over into the early part of 2007, and we are pleased with the progress against our goals year to date.

I will review our activities on a project-by-project basis, beginning first with POSIDUR.

POSIDUR is a local anesthetic intended to provide postsurgical pain control.

It combines our SABER technology with Bupivacaine, a local anesthetic frequently used by surgeons today.

POSIDUR is used at the site of surgery and is designed to provide local pain control for two to three days.

We've shown in over 100 patients from earlier Phase II studies that POSIDUR can deliver Bupivacaine without a burst of drug and can achieve 72 hours or more of controlled drug delivery.

We're now conducting extensive Phase II trials involving over 300 patients in various surgical models, including hernia, rotator cuff and appendectomy.

The focus of this effort is to guide the design of a successful Phase III program by providing the dose selection, how to use it in various surgical settings and the surgical procedure selection.

DURECT announced today that we have completed enrollment in the majority of these Phase II studies.

We expect to report the Phase II results in the months ahead.

The POSIDUR program remains on track to commence Phase III trials in 2007.

We announced in the first quarter that Hospira would be our worldwide contract manufacturer.

And their initial manufacturing runs in the first quarter this year have gone extremely well.

This puts in place another critical component of our development plan and reduces another risk in the development of POSIDUR.

Hospira was spun out of the Hospital Products business of Abbott.

They have a 70-year track record of providing high-quality products with extensive parental products experience.

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

As a reminder, Nycomed became our partner for this program in the fourth quarter of 2006.

Nycomed paid us $14 million up front with an additional potential $188 million in milestones.

Nycomed will commercialize the product in Europe and other defined territories, paying us royalties on their sales that range from 15% to 40%, but also pays for one-half the development costs of the program in Europe and the United States.

We retain all commercialization rights for the product in the U.S., Canada and Asia.

Since this is a surgical suite sale, we think POSIDUR provides a unique opportunity to cover the U.S.

market with a specialized sales force of 100 to 150 reps, and we believe this will provide us with a launching pad to become a specialty pharmaceutical company.

We are very pleased with the Nycomed and DURECT joint team's progress on this program thus far.

And as I stated earlier, the POSIDUR program remains on track to commence Phase III in 2007.

I will now update with regard to the Remoxy product.

Remoxy is based on our ORADUR gelcap technology, which provides a twice-daily form of oxycodone.

Our ORADUR gelcap technology is more difficult to abuse, and oxycodone is widely used by patients suffering from chronic pain.

In fact, oxycodone sales were over $1.2 billion in 2006.

King Pharmaceuticals will be the commercialization partner for the product, and DURECT will receive royalties that start at 6% and scale up to 11.5%.

Additionally, we will be providing the key excipients for this product and receiving a manufacturing markup.

We continue to provide program support in 2007, which largely consists of CMC support and supplying key excipients for the product.

Mallinckrodt will be the commercial manufacturer for Remoxy.

The protocol for the Remoxy pivotal Phase III trial was agreed to by the FDA under a special protocol assessment in March of 2006.

Last week, Pain Therapeutics stated that this Phase IIi trial was over 80% enrolled.

And given that an earlier 200-patient Phase III trial showed statistically significant efficacy, we remain excited and optimistic about this product, which addresses the real need for a more difficult to abuse form of oxycodone.

King Pharmaceuticals, the company which is responsible for commercializing Remoxy, stated last week they hope to report the Phase III data results, and I quote, in the not-too-distant future.

They went on to state that King is spending additional funds on Remoxy in order to accelerate the program, including premarket education, and that Remoxy is their flagship under development.

King also stated that they're looking into accelerating the next two ORADUR products within this alliance.

Finally, King reaffirmed their expectation that the NDA for Remoxy remains on track to be filed in 2008.

Now I'm going to go on to our ELADUR product.

ELADUR is the name we selected for our Bupivacaine patch program.

ELADUR is a transdermal patch containing Bupivacaine designed to provide up to three days of pain relief versus the existing market-leading patch, which is indicated for 12 hours of wear.

ELADUR is very thin and an elegant design for superior wearability.

We announced in the first quarter that we have initiated dosing in a 50-patient placebo-controlled Phase II study for post-herpetic neuralgia, or post-shingles pain.

We expect to report the results on this trial in 2007.

In addition to commencing the Phase II program, we also announced in the first quarter that we had put in place a manufacturing deal with [Corean] to supply their remaining Phase II, the Phase III and commercial product supply.

Corean is a privately held company that specializes in transdermal development and manufacturing.

As a reminder, we retain full rights to this product.

We have received considerable interest from a number of companies about partnering this product driven, no doubt, by the commercial success of Lidoderm, which is projected to have sales of over $650 million in 2007.

Given that ELADUR will require a large sales force to fully exploit, it is likely we will partner this program.

This program remains on track to report Phase II data this year.

With regard to our TRANSDUR-Sufentanil program, our TRANSDUR-Sufentanil patch targets chronic pain users.

The market for fentanyl patches was over $1.2 billion in 2006.

Our patch seeks to provide seven days of pain control versus the existing patches that deliver pain control for about three days.

Our patch is also potentially about one-fifth the size of the market leader, DURAGESIC.

Our partner for this program in the United States and Canada is Endo Pharmaceuticals.

Their success with Lidoderm has demonstrated their ability to sell patches used to treat pain.

Now that we have provided a technology transfer to 3M, our role is largely a supportive one to Endo with regard to the U.S.

and Canadian development.

DURECT's activities are in process optimization, continuing to provide technical expertise for their clinical studies, and additional CMC support.

Our interactions with Endo Pharmaceuticals suggest that this program remains on track to begin dosing the additional Phase II studies with patches produced at 3M in the first half of this year.

The final product I will update us on today is Memryte.

Memryte is a drug candidate based on our DURIN implant technology, which is intended for the treatment of Alzheimer's disease.

For Memryte, our DURIN technology is used to continuously deliver leuprolide for two months.

Voyager commenced a large Phase III trial late in 2005, but then ended the trial early at the end of 2006 for funding reasons.

Voyager wanted to get an early look at efficacy in hopes of attracting additional funding or a pharma partner.

In the first quarter, we renegotiated our license agreement with Voyager.

This agreement doubled DURECT's royalty rate from 10% to 14% and will enable DURECT to receive 10% of any milestone or upfront payment on the product if a sublicense is put in place.

In consideration, we paid Voyager $1 million and forgave approximately $750,000 in receivables.

Voyager has stated that they are currently reviewing the data from the Phase III Alzheimer's disease study which was ended early, and they expect to have the data analyzed in the first half of this year.

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

With regard to POSIDUR, we look forward to Phase II clinical data and initiation of our Phase III program; with Remoxy, it is Phase III clinical data in 2007 and preparations to file the NDA in 2008; for the Sufentanil patch, it is supplies now for the Phase II trials produced by 3M and initiation of the remainder of these Phase II studies in the first half of this year; with regard to ELADUR, it is Phase II clinical data from our post-herpetic neuralgia study; and for Memryte, it is clinical data from the Phase III trial, which was ended early.

DURECT has the good fortune of 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 the year for derisking and advancing our development products.

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 from Phase III or from Phase III to NDA preparation.

We have unblinding of clinical data from four programs -- Phase II data for POSIDUR, Phase III data for Remoxy, Phase II data from ELADUR and a truncated Phase III data from the Memryte program.

We have the potential for various business development deals with regard to ELADUR, with the Sufentanil patch in Europe and Asia, POSIDUR in Asia, as well as other programs we have yet to disclose.

We expect the remainder of 2007 to be an exciting time for DURECT, and we look forward to sharing it with you.

We would now like to take any questions you may have.

(OPERATOR INSTRUCTIONS).

[Catherine Lu], CIBC World Markets.

Thank you for taking my call.

This is for Elliot Wilbur.

My question is on Remoxy program, it seems the timeline for Remoxy is delayed due to the enrollment, so could you give us some additional color on the enrollment status, and should we still be expecting to see the data by the end of 2007?

I'd have to defer that statement with regard to the enrollment status to our partners, but I can reflect what they have said.

And Pain Therapeutics stated last week that they have completed 80% of the enrollment, so I believe that they are comfortable that the data will be in by the end of the year.

I know Brian Markison also stated last week that he expects the NDA to be filed as scheduled in 2008.

Okay.

One more.

When should we expect to see the data from truncated Phase III for Memryte?

I think we should expect to see those data before the end of the first half of this year, so next month and a half or so.

Dave Windley.

Thanks for taking the questions.

Jim, on business development activities, licensing specifically, you mentioned a couple of possibilities.

Can you give us any more color about how much interest there is, what stage of discussions you might be on on the ones that are actively being discussed?

I don't want to overread your comments, but you mentioned ELADUR and POSIDUR, I think -- didn't specifically name a couple of others that you might have specifically named in prior calls.

Is that an indication that those aren't, say, a TRANSDUR-Sufentanil outside the U.S., is that not part of your licensing thoughts right now or am I just overreading?

And then I've got one more.

Sure.

First, actually, I did say the Sufentanil patch, because we are talking to people in Europe (multiple speakers) about that.

So we are looking at all the same programs and we're still talking to partners.

As you know, we don't give a lot of color with regard to this process because, first of all, you never know how long it's going to take, and things that you think are going to take months take more than a year and that kind of thing.

The other thing is we didn't want to put ourselves in a box.

But I can tell you, I am very impressed with not only the number of people -- in particular, I'm talking about the ELADUR product right now, because it's the most recent we've put into the mix -- the number of companies involved, but also their relative size.

We're getting some very large companies interested in that.

And that surprised me a little bit, but when you look at how successful the product has been and the capacity to move that along at a reasonable rate, I think probably that [escapes] that.

And then you had a second question?

Yes, and just following up on that one first, is the number and size of companies with interest, is that true in a variety of your licensing discussions, or is that most apparent in ELADUR?

We have a lot of partners that we're talking to with regard to all of them, and I expected ELADUR to be in that same kind of range.

I would have to say there's probably more.

More with ELADUR?

Yes.

More than -- and I'm very pleased with the numbers that we have in the others.

So it's just like -- if X is a good number, we kind of have 2X.

Right.

Okay.

On the expense lines, probably a question for Matt, the decline in R&D was -- I guess we thought that the 50% coverage by Nycomed on their part of the POSIDUR program might reduce the R&D a little more than it did, and wondered if you could add any color there.

And the SG&A popped up a little more than we expected, and wondered if that is a level that we should kind of expect to go forward.

Thanks.

I would have to just start by saying I don't think that the numbers we reported surprised us, at least.

I can't comment on what any particular outsider's model might have expected, but in terms of our own expectations, I think we are right on track with what we planned for.

While Nycomed is picking up half the expenses, we're also in an expensive phase of the program with the multiple Phase II studies underway.

So that's part of the explanation.

I think with respect to SG&A, and again, one of the things I tried to highlight was that a portion of the increase period over period is the stock-based compensation, which is noncash, so in a way, if you really want to be detailed about it, you could sort of look at this before and after stock-based compensation, because that kind of clouds things.

And so 60% of the increase in SG&A was just the noncash increase in stock-based compensation.

And is that a function -- because clearly SFAS was in place at this time last year, but is that a function of more people that are --

Exactly.

We have added people during the course of last year -- not too many this year -- and then once a year, we will sort of go through a process of option grants early in the year.

And so I think those are the two main explanation factors.

Okay, thanks for the color.

I will jump out.

Jim Molloy.

Thanks for taking my questions.

I was wondering, on the TRANSDUR Phase III, or the initiation of a Phase II, I should say, with Endo, are there any timelines you can talk about of when that might complete Phase II, enter Phase III, and any sort of contractual obligations that Endo might face to move that program along?

We always do have diligence requirements in all of our contracts.

And there is an amount of leeway in all of those.

But we don't and haven't gotten into publicly talking about those things.

But the Phase II, the remaining Phase II should be starting in the very near term, and one would expect the program to move along very nicely at that point in time.

Remember we've stated at the end of last year that the big hurdle, at least in some of our minds, with regard to this program was putting in place the commercial manufacturing.

Now that has been done.

The tech transfer has occurred.

3M is actually supplying the patches that will be used for the remaining Phase IIs and the Phase IIIs and to launch the product.

So I do think the product is in shape now to be able to go forward at a very deliberate and more predictable pace than it has been in the past.

I don't know if that helps, Jim, but --

That does, indeed.

Thank you.

For ELADUR, the Phase II data are very clear on -- that will start, or you will be supplying data on that in '07.

Any thoughts on when a Phase III might start and when the ideal time to partner this product might be?

Good questions.

The Phase III, it's hard to say.

I mean, we still need to get Phase II data first.

So we will get that and then we will have a look, and there's potential for various ways one can approach the marketplace with regard to this product for post-herpetic neuralgia and other uses as well.

I'm sorry, there was another piece -- oh, when would be the ideal time to partner -- that really depends on the market.

And certainly the farther you are into development before you partner, the greater the returns are, but when you have a very competitive process like this may well heat up to be, then that can actually generate the potential for doing an earlier deal.

And just two last questions.

In the POSIDUR U.S., the Phase II data we're expecting from POSIDUR, any thought on what format or forum we might see that in?

And then the cash burn rate -- are you sticking with your guidance of $32 to $36 million cash burn in '07 (multiple speakers)?

I will let Matt address the cash burn rate.

With regard to the POSIDUR data, most likely we will be talking about that -- topline results will be announced by DURECT and then we will be presenting it in more detail at a conference.

With respect to the cash burn, there's no reason right now for us to change our guidance.

But I do want to just remind you that when we gave that guidance, we made a couple of real caveats to it, and the first was it assumes no new business development deals this year.

And as we just described, we are honestly working towards potentially several, so it's meant to be a kind of a conservative piece of guidance -- assume no new deals -- and the second thing is that it assumes that we can, if you will, manage to spend the money that quickly, that all the programs move along as quickly as they possibly can.

So with those two caveats, yes, we think we're still on track.

Thank you very much for taking the questions.

Andrew Forman.

This is a follow-up to the other questions.

With four big shots on goal here in Pain, I think some of us get a little confused about what are the -- I guess you might call it the risk factors of development and regulatory and approval from here on in.

Can you share with us some of the gating factors, as you see it, for Remoxy, for POSIDUR, for the trans-fentanyl patch?

And then is it fair to say that ELADUR, because it's more straightforward, understanding what the history of Lidoderm is, is that a potentially faster approval process?

I guess what I'm trying to do is understand sort of probability of success and time to market, because several of your programs have been in Phase II I think it's fair to say longer than we might have expected a few years ago.

It really does depend on the program, because I think you look at the Remoxy program, it moved from Phase I to Phase III in less than a year.

So I think it does depend on the project we're talking about.

But I know the Sufentanil patch with Endo was in Phase II longer than probably anybody would like.

That was, as you know, based on putting in place the commercial manufacturing, so it really kind of depends on the various projects we look at.

But to address them all, I will take some of them, and I'll actually ask Felix to address some of the technical hurdles as well, just so you get a different voice on the phone or different perspective.

I'll start Remoxy.

As far as Remoxy is concerned, I think it's very important to note a couple of things on that project.

First, the commercial manufacturing agreement is already in place.

Mallinckrodt is going to be supplying the product.

Next, it's a well-understood molecule in oxycodone and, in fact, a Phase III trial has already been completed with over 200 patients that demonstrated statistically significantly response, and so we've got that.

We've got just phenomenal kinetics on its true twice-a-day dosing form.

And so we have all those pieces in place, and then on top of that you add special protocol assessment by the FDA -- agreement by them for the final 400 patients.

And now, King is taking that one forward.

Brian Markison was very bullish when I listened to his talk from last week, and I would encourage you guys to go on their site and listen to it if you'd like to hear a little more, and basically was looking forward to launching the product and taking it forward.

So I think from a regulatory risk standpoint, everything has risk, but there you've got nice controlled release.

You've got a dosage form that is performing just as we expect.

It has already performed in one Phase III trial.

We are only doubling the number of patients in the last Phase III trial that will be [acquired] well-understood molecule.

So I feel very comfortable about that.

I guess my question -- sorry to interrupt, but it was more to do with regulatory, because I think some of the feedback Endo had given is I think they got a little gun-shy about the approval of the generic DURAGESIC.

So I'm just wondering whether essentially your Lidoderm-like patch might have an easier approval process in terms of sort of a hill to climb.

I guess that's what I'm trying to understand.

It might.

I don't know if would have an easier one or not.

This is -- I'm now just talking about the Remoxy -- it's an oral product, and so it certainly -- and it's not a generic version of Oxycontin.

It is basically a separate patentable dosage form from that standpoint.

Felix, do you want to make a comment on that?

I think Brian Markison gave a talk the other day, and I think he was speaking, he was asking about the regulatory approval, and I think that --

He was quite bullish.

Yes.

He was very positive, and also he indicated the fact that we have a noninfringing dosage form, which I think clears up some of the uncertainties that are in people's minds.

Yes, so I think, just to start with Remoxy, I think we feel -- I guess what we're trying to say is we feel very comfortable with that.

It's not that we don't feel any less comfortable about ELADUR.

As far as ELADUR is concerned versus all these other ones, it hopefully will be a reasonable path through the FDA as well, because there we're talking about really just delivering into the skin a very, very minuscule amount of drug.

In fact, we deliver one-tenth the amount of Lidoderm that is in the -- excuse me, lidocaine that is in Lidoderm.

You should also know that the efficacy of bupivacaine as a topical and local anesthetic is well understood, just like it is with lidocaine.

And we have very positive Phase I data, which show plasma concentrations, and given the potency ratio between lidocaine and bupivacaine, that data is very predictive of what you should find as efficacious levels in the skin for post-herpetic neuralgia.

So I think that, I think, makes us feel very positive about the fact that the outcome of the Phase II data should be very positive.

Does the fact that some of these drugs are scheduled and some aren't matter from the regulatory approval timeframe?

No, I don't think so.

I think it costs a little more to do the formulation work, because you've got to have more people involved and that kind of thing.

But outside of that -- and you have to plan well enough in advance to order the product you need and all that with the DEA -- from a regulatory standpoint, I don't think so.

I think there -- I mean, maybe there might be a subtle advantage to -- I don't think you'll ever get any breaks, but the oxycodone that's more difficult to abuse, especially with the alcohol extraction, those kind of things being more difficult with this dosage form should hopefully provide a little leg up, but you never can say.

I think the two programs where I feel people feel major questions is POSIDUR, but we have some very great, positive data, as you know, in Phase I, the controls, the delivery profile, and so I think when the Phase II data comes out, that certainly will be very well understood one way or the other.

So that is coming.

And I think on Memryte, people feel exactly the same sort of uncertainty a little bit -- are we going to be able to reproduce the data that was shown in the women's trial?

And so those two outcomes will be coming rather very soon.

Why do you know essentially that Memryte will be out in the next month?

Did they announce -- Voyager -- that they're going to put it out at an Alzheimer's meeting, or what?

Yes, actually, they sent a letter to their shareholders a couple weeks back that said that they would be in the next -- near term, they would be talking about the data.

You said your royalty is now 14%?

10% to 14%, and we get 10% of any deal they do -- any milestone.

If they run out of money, you can go give them another $1 million and get it up to 20%.

Why not?

Thanks, gentlemen.

Russell McAllister.

Thank you for taking the questions.

Just a timing clarification on the POSIDUR results.

I might have missed this earlier in the call as those timelines went by pretty quick, but Phase II results, multiple trials ongoing -- are those coming sort of mid-2007 third quarter?

Is that correct?

What we said is that we announced today, and you will see that in our press release, that we have completed enrollment in the majority of these Phase II studies.

So that is a very important announcement for us and shouldn't be passed over.

So that is a milestone, a significant milestone for us as a company.

And we expect to report the data in the month ahead.

Certainly, we're on track to start the Phase III this year.

So, sorry, Jim -- within the next month, is that what you said?

I did not say -- I said in the months ahead, plural.

There are no other questions at this time.

Okay.

Hearing no more questions, thank you all for participating, and we look forward to updating you on our progress next quarter.