DURECT Corp (DRRX) 2007 Q2 法說會逐字稿

Welcome to the DURECT Corporation second quarter earnings call.

We are now ready to begin.

Okay.

Good afternoon, and welcome to our second quarter earnings 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 our President, and CEO will provide an overview of our business strategy and pipeline.

We will then open up the call for a question-and-answer session.

Before beginning, I would like to remind you of our Safe Harbor statement.

During the course of this call we may may make forward-looking statements regarding DURECT's products in development, expected product benefits, our development plans, future clinical trials, or projected financial results.

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

For further information regarding these and other risks included in our SEC filings including our 10-K and 10-Qs, under the heading risk factors.

Let me now turn to our financial results for the second quarter.

Total revenue was $13.4 million in the second quarter of 2007, including our $8 million milestone, as compared to $6.1 million in the second quarter of 2006.

Revenue from our R&D collaborations was $3.4 million in the second quarter 2007, as compared to $4 million in the second quarter of 2006.

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 was $2 million in the second quarter of 2007 as compared to $2.1 million in the second quarter 2006.

Our gross margin on these products was 62% in the second quarter 2007 and 63% in the second quarter of 2006.

R&D expense was $9.6 million in the second quarter 2007, as compared to $8.5 million in the second quarter 2006.

These figures include stock-based compensation of $1.1 million in the second quarter of 2007, and $0.7 million in the second quarter 2006.

Of the $1.1 million increase in reported R&D spending, $400,000 was due to the increase in stock-based compensation.

The rest of the increase was due to higher employee-related costs as we expanded our R&D team to further advance our pipeline and higher third party research and contract manufacturing costs.

In addition, we recorded a net reduction of R&D expenses of $1.3 million in the second quarter of 2007, representing a net reimbursement from Nycomed, reflecting that both parties bore 50% of development expenses defined under the collaboration agreement for POSIDUR.

SG&A expenses were $3.7 million in the second quarter 2007 as compared to $3.2 million in Q2 2006.

An increase of approximately $494,000.

These figures contain $555,000 of stock-based compensation in the second quarter of 2007 and $323,000 of stock-based compensation in Q2 2006.

Hence about 50% of the increase in reported SG&A was due to the increase in stock-based comp.

The rest of the increase was due to higher employee costs and patent-related expenses in the second quarter 2007.

Due to the $8 million-milestone our net loss for the second quarter of 2007 was $0.5 million compared to a net loss of $8.7 million for the same period of 2006.

The second quarter of 2006 net loss also included $2.3 million in debt conversion expense associated with the induced conversion of $20 million of our convertible bonds during that quarter.

As of June 30, 2007, we had cash and investments of $65.8 million, including $1.3 million in restricted investments, compared with cash and investments of $81.6 million at December 31, 2006, and $72.4 million at March 31, 2007.

This June 30 figure does not reflect the $8 million milestone that we received in August, so our pro forma cash figure would be $73.8 million at the end of the second quarter.

Our cash burn was $9.2 million in the first quarter, and $6.6 million in the second quarter of 2007, for a total of $15.8 million in the first half of 2007.

Adjusting for our milestone payment and a reforecast of likely second half activities, we're adjusting our cash burn guidance for 2007 from a previous range of $32 to $36 million, to a new range of $25 to $27 million.

As before, this burn rate assumes no significant new collaborations in 2007, although we're pursuing potential collaborations on multiple fronts including ELADUR, TRANSDUR-Sufentanil for Europe and Asia, POSIDUR for Asia, as well as various other programs which we have not publicly described in detail.

Thanks again for joining our call and I will now turn it over to Jim to discuss our pipeline in greater detail.

Thank you, Matt.

And hello, everyone.

We have had a strong first half of 2007 as we continue to achieve significant milestones with our publicly announced development program.

In particular, ELADUR began a 50 patient Phase II-A study in Post-Herpetic Neuralgia.

Endo Pharmaceuticals has commenced its Phase II program with the TRANSDUR-Sufentanil patch using products supplied by 3M.

The Remoxy program completed enrollment in its pivotal Phase III study which is being conducted under special protocol assessment.

POSIDUR reported positively statistically significant results in a Phase II-B study in hernia there by triggering an $8 million milestone payment from Nycomed.

And we were able to accomplish all of this after taking into account the Nycomed milestone while burning less than $8 million of our own cash.

The second half of this year holds the potential for more development milestones through our lead four development programs as well as additional business development deals.

I will now review the first half projects on a project by project basis.

I will begin with POSIDUR.

POSIDUR has the opportunity to be a first in class therapy.

The first injectable product which is available to surgeons and is designed to control pain at the site of surgery for two to three days.

POSIDUR has demonstrated a 30% improvement in pain control versus placebo over the first three days after surgery in our Phase II-B hernia trial.

This improvement in postoperative pain control was achieved even though the placebo group took over three times more narcotics than the POSIDUR patient group.

We believe POSIDUR will be a first in class therapy because it works to control pain locally at the site of the surgical wound, in contrast to postoperative pain medications available today, such as systemic narcotics which control pain by inhibiting transmission of the pain signal within the central nervous system.

This quarter, we've now demonstrated with statistical significance in a well controlled phase II-B study that POSIDUR can achieve better pain control than the opioid medications used today while significantly reducing the need for these narcotic medications.

This would be the first injectable product available to surgeons, that would be applied at the time of closure and then control wound pain for days.

I will now review the as a results of this highly successful POSIDUR Phase II hernia study.

This study involved 122 patients and was designed to be the study upon which we and Nycomed would base the decision for advancing POSIDUR into Phase III trials.

In this study we showed both statistically significant reductions in pain and total consumption of supplemental opioid analgesic meds.

Pain was reduced by approximately 30% over the first three days post is surgery versus placebo.

The total consumption of supplemental rescue meds was decreased by 3 to 3.5 times.

Why is it important to be able to reduce the amounts of narcotics needed to control postoperative pain?

Well there have been a number of studies which have demonstrated the health care savings and benefits which can be achieved by reducing narcotic side effects and potentially the length of hospital stays.

Another question you may ask yourself, is how can one achieve a 30% improvement in pain control when a patient can take all of the narcotic medicine they need to be able to control their pain?

After all, narcotics are considered the gold standard for controlling pain.

Well, several experts have told us the answer may lie in better controlling the signal of pain where it originates rather than attempts to later suppress pain once it has signaled.

In other words, it is better to prevent the pain where it originates rather than let the pain occur and then try to mitigate it.

POSIDUR works by controlling pain locally and reduces narcotics needed leaving the patient with a clearer head and potentially reducing postoperative pneumonia along with more frequently seen side effects, such as nausea, vomiting, GI stasis, and constipation.

I will briefly speak to safety aspects.

In our overall -- excuse me, in our overall Phase II program for POSIDUR, in which over 450 patients were tested, and in which over 300 patients were dosed POSIDUR, we have seen safety profiles in the POSIDUR groups which are comparable to the placebo groups.

And POSIDUR appeared well tolerated.

In the Phase II-B hernia study the side effects commonly observed with the use of opioid medications were less frequent in the POSIDUR treatment group as compared to placebo.

In preparation for the Phase III program, we have now scheduled the end of Phase II meeting with the FDA.

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

Nycomed paid us $14 million up front and they have now paid $8 million for the most recent milestone.

We have an additional $188 million in potential milestones to come.

Nycomed will commercialize the product in Europe and other defined territories, paying us royalties on product sales ranging from 15% to 40%.

Nycomed pays one-half the development cost of the program in Europe and the United States.

DURECT has retained all commercialization rights for the United States, 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 sales reps and we believe this will provide DURECT with a launching pad to become a specialty pharmaceutical company.

I will now pause and address some of the more recent questions that we've had from investors.

Those are, can you describe the plan Phase III protocol?

What are the target indications?

How many patients do you estimate you will need to achieve approval?

And how long will Phase III take?

In answer to some of these questions, clearly, we are going to be able to -- excuse me, we are going to apply what worked in the hernia Phase II-B study and change as little as possible in the Phase III protocol from the successful study.

We intend to develop POSIDUR for a broad range of surgeries.

As a reminder, I would note that we've now dosed over 300 patients with POSIDUR during our Phase II program, which gives us a good start on the total number of patients required from a safety standpoint.

Without commenting on the likely number of patients required for approval, I would note that we largely have chosen surgeries that are frequently performed which is a positive from an enrollment standpoint.

And we don't have to track these patients for a long time period after surgery.

Following the end of Phase II meeting with the FDA, we will provide additional information on how the final Phase III program will be executed.

I will now update on the Remoxy program.

Remoxy is based on our ORADUR gel cap technology which provides a twice daily form of oxycodone in a more difficult to abuse formulation.

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

[Mallencrot] will be the commercial manufacturer for Remoxy.

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

And according to Pain therapeutics and King Pharmaceuticals, this Remoxy Phase III trial is fully enrolled in the top line results of this study are expected in the fourth quarter of 2007.

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

Oxycodone is widely used by patients suffering from chronic pain.

Oxycodone sales were over $1.2 billion in 2006.

King Pharmaceuticals will be the commercialization partner for this product and DURECT will receive royalty on sales that start at 6% and scale up to 11.5 % based on King sales.

Plus the manufacturing markup on selected key accipients that we will supply.

I will now move to our TRANSDUR-Sufentanil program.

Our Sufentanil patch targets chronic pain users.

The market for fentanyl patches was over $1 billion in 2006.

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

Existing fentanyl patches, like Duragesic, are about the size of a dollar bill folded in half which means during a month a patient has to find ten rather large spots on the body to be able to rotate these patches around because one typically gets swelling and a redness under there, and one needs to let the skin rest before you put a new patch on.

In contrast our patch is approximately one fifth the size of Duragesic, about the size of a postage stamp, and during the month only four such sites would be required.

Our partner for the U.S.

and Canada is Endo Pharmaceutical, their success with ViaDerm has demonstrated their ability to sell patches to treat pain.

Now that we've provided technology transfer to 3M our role is largely supported to Endo Pharmaceutical's for process optimization and continue to support the technical expertise for their clinical studies and some CMC support.

Clinically, we are pleased that Endo has commenced their Phase II program for this product in June.

Final program, I will update on today is ELADUR.

ELADUR is a transdermal patch containing bupivacaine which is 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 has an elegant design for superior wearability.

We are conducting a 50 patient placebo controlled Phase II-B study for post-herpetic neuralgia or post-shingles pain.

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

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

Although we received considerable interest from a number of companies about partnering this product.

Driven no doubt by the commercial success of LIDODERM which is expected to do over $650 million in sales in 2007.

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

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

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

With regard to POSIDUR, we look forward to the end of Phase II meeting with the FDA.

For Remoxy, we look forward to Phase III clinical data in the fourth quarter and preparations to file the NDA in 2008.

For the sufentanil patch, it's execution of the Phase II studies by Endo Pharmaceuticals.

And for ELADUR it's the phase II-A clinical data from our post-herpetic neuralgia in the fourth quarter of this year.

In conclusion, DURECT has a rich pipeline consisting of four products in Phase II or III, and one product with positive phase I results.

These products are all addressing large market opportunities primarily in the under served pain management field.

2007 is the year for de-risking and advancing our development products.

We have the management team in place here at DURECT, we have the partnerships in place and we have the commercial manufacturing in place.

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

We anticipate unbinding clinical data from two more programs this year, it will be Phase III data from Remoxy and Phase II-A data from ELADUR.

We have the potential for various business development deals with regard to ELADUR, either in the regional deal or worldwide, for the sufentanil patch in Europe and or Asia, and POSIDUR in Asia.

As well as programs we have yet to disclose.

The remainder of 2007 will 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) Our first question comes from Dave Windley.

Go ahead, please.

Hi, good afternoon, gentlemen.

Thanks for taking the questions.

I want to start on POSIDUR.

Jim, you talk about -- you have obviously partnered certain geographies to Nycomed, and you've kept U.S., Canada, and Asia, and then when you talk about commercializing and moving to a specialty pharma company, you speak to U.S.

specifically.

Are your plans to also sell to Canada directly yourself?

Or would you license Canada out?

It is a very good question.

And it is one that we haven't yet made a final decision on.

There are certainly a number of companies that are quite successful with Canada and U.S.

being lumped together and we may well do that but as we all know, the reimbursement systems are quite different in Canada so I think that remains open at this point in time.

Okay.

Second question is, in regards to ELADUR, and that being I believe it was ELADUR you talked about being a pretty sizable program and one that you would partner out and my question is, partner out at what point?

Is it post Phase II-B?

And that seems a logical point.

But where would you anticipate partnering out?

Certainly the more mature the program is, typically the better return one gets.

But I can tell there is an awful lot of interest in this program right now and I think it is because as one looks from a technical standpoint, we have the kinetics, we have already shown that we get three days of nice delivery and I think once you have shown that the product performs like that, moving through the other paces are less risky, as it were, from a pure development standpoint.

And so we have been talking to a number of people for awhile.

As to when that deal will get done, it may never get done or it may get done sooner rather than later but I won't be able to comment on that.

Yes, and then with regard to TRANSDUR-Sufentanil, Endo's obviously moved that into Phase II, are you able to say when you expect to have reportable data on that?

Or is that a defer to Endo question?

It is unfortunately is absolutely a defer to Endo question.

I certainly look forward to and hope it will be significant for them to be able to talk about, but they are really a more commercially driven company so they may not say much.

You will see more clarity from what Peter Langecker has said once the product moves into Phase III, he plans to give a lot more clarity with regard to timing of the overall program.

Okay.

Thank you for taking the questions.

Thank you.

And our next question comes from Jim Molloy, go ahead, please.

Hi, guys.

Thanks for taking my question.

I had a couple of questions just on POSIDUR to follow up.

Any thoughts on -- and addressed after the FDA but what are your thoughts on what the Phase II might look like regarding another surgical model of POSIDUR?

And then also perhaps the appendectomy study, any thoughts when that might wrap up and a potential place to present the data.

Well, I think all of the -- we will be presenting the clinical data, as the congresses come up, and so those -- unfortunately most of them are in the winter.

There might be something in the fall.

I don't know, it kind of depends.

You need to hit the submission deadline so anything that now -- that we can submit between now and the end of the year, that's where we will try to submit it, the hernia society meeting, which will then be in March, in Phoenix, next year, for instance, would be a good place to present the hernia protocol and the outcome.

So it really depends.

And as far as the Phase III protocols and models and all of that, I think we need to wait and defer until the end of Phase II meeting.

Okay.

Any thoughts on the appendectomy study and how it is going?

The appendectomy study driven time line is actually by its protocol design and looking at individual quarters, so that is not a study that is under high pressure, so we are moving very, very deliberately on that study.

We're starting the next cohort.

So that is an ongoing project.

It is hard to say how long it will go.

All I can say is accrual is not a problem.

On an accrual study, the time line is not driven by accrual.

It is really the protocol design.

And this is also another one like the remainder -- or the other of these Phase II-A studies that because the groups are so small, that we aren't going to be reporting those out efficacy standpoint or anything else.

Maybe just a final question then.

Can you give a thought on in inquiries from potential partners for POSIDUR, any term sheets or anything like that or where it stands?

For POSIDUR, for U.S.

you mean?

Correct.

I think right now, our goal would be to be able to keep the product if we can.

And so -- but certainly, it is a very valuable asset and as you can imagine, there is certainly always interest.

Thank you for taking the question.

Sure.

Our next question comes from Russell Mcallister.

Go ahead, please.

Hi, good afternoon.

Thank you for taking the questions.

I wanted to follow up on your comments, Jim, on the end of Phase II meeting for POSIDUR.

Post that meeting, do you intend to have a conference call or anything to talk about your thoughts on what you finalized for protocol, or should we expect that next quarter?

And what form I guess do you think that that information will come out?

Yes, I really don't know at this point.

We haven't given it a lot of thought.

I think we're going to have a meeting and then go forward from there.

Certainly at least I would expect at a quarterly update one would have additional information with regard to these programs.

So I would think I have to leave that up in the air right now.

Terrific.

And based on the timing of the end of Phase II meeting, would you think that you would -- that would be appropriate for the next quarter, or do you think you might already be underway at that point.

That is a really good way of asking that question.

I do appreciate that Russell.

But I think we're trying not to give anything with regard to the specific timing of it.

But just to let people know that we do have the goal to be able to start the Phase III this year.

And so, certainly if one thinks about timing, one can look at that, and that goal is in place.

Terrific.

Thank you for entertaining the questions.

No problem.

(OPERATOR INSTRUCTIONS) I do have a question from Andrew Forman.

Go ahead, Andrew.

Good afternoon.

Nice update.

I continue to be surprised that the billion dollar story has a $300 million-dollar valuation.

I am a just a bit rusty, forgive me, getting too old to do this, what are the characteristics of this market in terms of building your own marketing infrastructure.

How many sales reps, if one chooses to model the next several years, which it seems like now is the time to do that given that you are getting much closer with POSIDUR, how should we think about that and what penetration into other hospitals, the hospitals, sort of the med tech marketing model I guess, and who are some of the other players that are in this space that we can look at as sort of comps in this specialty market, specialty niche?

There aren't a lot.

If you look at Europe, Nycomed is in the surgical suite and they have some clotting products and they have some things there.

And I think in the U.S., you would have to look at something, obviously they have a bigger product line, but like [inethacon], from J & J where they're selling sutures into the surgical suites, so this is a very different from other products out there in that it is truly is a surgical suite sale.

So our commercial consultants and the work that we have done so far has pointed to somewhere in the range of 100 to 150 reps, but this is just an estimate at this point in time.

This will become more finalized as we add in our commercial officer, within DURECT, and take the product forward in that person's hands.

The buildout of the effort here within DURECT will start with that one individual and then building a team around that person as the project matures and warrants the investment.

And remind me the number of surgeries, because you're in so many different sub indications, when you did your Phase II, if you add that all together, how does one think about the market opportunity?

Is it big enough for someone like J & J to care?

I think the market is phenomenally large.

From what we have seen.

We and Nycomed have done separate work as well but if we look at from a top down analysis, the top five countries in Europe and the whole of the U.S.

market involve over 107 million procedures annually.

And of which between 50 to 70 million of those procedures are in the United States alone.

And we actually did a bottoms up analysis last year where we talked to 275 surgeons and from various categories, and those 275 surgeons looked at the characteristics of this product, which at the time we were looking for simply kind of equivalent pain control, we weren't looking at 30% improvement in pain control, but just equivalent pain control with less narcotics is what we kind of looking for, and at that point they came back with survey results that showed about 32 million procedures in the United States alone.

Now I think you would have to -- I'd say that caveat, of better pain control, do you actually get better penetration out of that.

It's possible.

So you are looking at a substantial market size and then we did a price sensitivity analysis study with hospitals and we identified that below $250 a procedure, the hospitals were insensitive to the price.

In other words, the price no longer had an influence as to whether or not they would penetrate, the product would penetrate or there would be product sale so if one takes that 30 million procedures or so, and you put the $250 price against that, it yields you something that 30% of which is 2.4, so it is over $8 billion entire opportunity.

So I would think even a J & J would be interested in something that large.

Will you have enough data, Jim, that can make a pharmaco economic argument because one thing about constant health care reform that you can get a patient out of the hospital, or out of the ICU a day early you're talking thousands of dollars of savings and to what extent are you going to include that in your ongoing studies?

I think we will be including that in as will Nycomed and I can tell you before they signed on the deal Nycomed did their own market research and even in countries that pharmaco economically focused as France, this product made sense and I think from there you can only expand but we're looking at potentially reducing narcotics and their side effects which includes everything from nausea, vomiting, constipation and keeping people in the hospital longer to the far end of that which is identified by our surgeons surveyed potential to reduce postoperative pneumonias, because what you're doing with narcotics is actually saying you're numbing someone's brain to control their pain.

And so what you're doing there is taking people sometimes to the point of loss of consciousness in order to attempt to control pain.

And we have been able to get better pain control than those narcotics by themselves.

And as well, one can possibly reduce surgical complications.

Just a last question, Jim, and I will get off.

You mentioned the hernia meeting, is a relatively near-term meeting where we could see clinical data.

Are there other meetings that we should pay attention to?

Well, I will let Peter address that.

Just one other thing on the pharmaco economic piece.

I think recent surveys groups have shown hospital costs are now ranging pretty close to $3,000 a day, so anything one can do to get the patient out of there is significant savings.

But Peter, if you can talk about the various congresses coming up.

Yes, I think the next one that we have targeted is the hernia meeting, and then there may be other meetings, it is hard to say whether that is accepted or not.

So we will, as the meeting matures, I think we will have the data there.

Nice progress, guys.

Keep it up.

Thanks.

Our next question comes from Elliot Wilbur.

Go ahead, please.

Thank you.

Just a quick follow-up question on the POSIDUR program.

Jim, you have previously talked about exploring or potentially exploring intraarticular dosing of POSIDUR and I was just wondering if you could provide us with any update on that aspect of the program.

Right now we're not providing any update on that.

What we're doing right now is focusing on more of a general surgical kind of approach as Peter outlined last time and that's what this end of Phase II meeting is all about and because this is a product that can be applied very specifically, it offers the potential for intra-articular and that would be a follow on program, like a line extension type thing.

There are a whole host of different line extensions one could extrapolate and think about for this product which I could go on for a long time, but there are just additional opportunities.

Thanks.

Sure.

There are no further questions at this time.

Okay.

Well, thank you very much.

Thanks a lot.

Bye.