DURECT Corp (DRRX) 2007 Q3 法說會逐字稿

Hello, and welcome to the DURECT Corporation third quarter earnings call.

We are now ready to begin.

Good afternoon.

Welcome to our third quarter 2007 earnings conference call.

This is Matt Hogan, CFO at 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 update on our business.

We'll then open up the call for a Q&A session.

Before beginning, I'd like to remind you of our safe harbor statement.

During the course of this call, we may make forward-looking statements regarding DURECT's products in development, 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-Ks and 10-Qs, under the heading Risk Factors.

Let me now turn to our financial results for Q3.

Total revenue was $4.9 million in the third quarter of 2007 as compared to $5.1 million in the third quarter of 2006.

Revenue from our R&D collaborations was $3 million in Q3 2007 as compared to $3.2 million in Q3 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 $1.9 million in the third quarter of 2007 as compared to $2 million in Q3 2006.

Our gross margin on these products was 60% in the third quarter 2007.

R&D expense was $8.9 million in the third quarter 2007 as compared to $9.9 million in the third quarter 2006.

These figures include stock-based compensation of $1 million in Q3 2007 and $0.8 million in Q3 2006.

The $1 million decrease was due to lower net third-party research expenses during the period as a result of R&D reimbursement from Nycomed on our POSIDUR product.

Selling, general, and administrative expenses were $3.1 million in the third quarter 2007 as compared to $3.3 million in Q3 2006.

These figures contain $497,000 in stock-based compensation in Q3 2007 and $368,000 of stock-based compensation in the third quarter of 2006.

The decrease of $200,000 was due to lower consulting and recruiting expenses.

The third quarter of 2007 net loss included $223,000 in debt conversion expense associated with the induced conversion of $4.2 million of our convertible bonds during the quarter.

Subsequent to the end of the third quarter, we induced conversion on another $9.5 million in the convertible notes, so our outstanding balance has been reduced from $37.3 million at June 30 to $33.1 million at September 30 and $23.6 million on October 31.

As of September 30, 2007, we had cash and investments of $66.6 million, including $1.3 million in restricted investments.

This compares with cash and investments of $81.6 million at December 31, 2006 and $65.8 million at June 30, 2007.

The increase in cash position relative to the end of the second quarter is a function of the receipt in August of the $8 million milestone payment from Nycomed, triggered by our successful POSIDUR Phase IIb hernia study.

I'd also just like to briefly mention our inclusion in a new NASDAQ index.

On September 25, 2007, we were selected as an inaugural member of the NASDAQ NeuroInsights Neurotech Index.

The ticker is NERV.

The Neurotech Index tracks the stock performance of 32 companies which meet certain minimum market criteria and were identified by NeuroInsights as being significantly involved in researching, developing, manufacturing, and marketing pharmaceuticals, biologics, medical devices, and diagnostics for the brain and nervous system.

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

Hello, everyone.

Our third quarter efforts focused on advancing our product development pipeline and on improving our balance sheet.

Matt has covered our reduction in convertible notes, so I'm going to focus on reviewing our lead programs.

I'll begin with POSIDUR.

POSIDUR has the opportunity to be a first-in-class therapy, the first injectable product available to surgeons that is designed to control the pain at the site of surgery for two to three days.

We specifically designed POSIDUR to cover pain for this time period based on focused group meetings with surgeons.

The surgeons identified for us that, for the majority of surgeries, three days of pain control was optimal.

In fact, they wouldn't want substantially longer pain coverage, for fear of masking medical complications.

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

This improvement in postoperative pain control was achieved, even though the placebo patients took over three times more narcotics than the POSIDUR-treated patients.

We believe POSIDUR will be a first-in-class therapy because it works to control pain locally - at the site of the surgical wound.

This is 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.

We have demonstrated with statistical significance in a well controlled Phase IIb study that POSIDUR can achieve better pain control than the opioid medications which are used today, while at the same time was significantly able to reduce 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 allow for pain control for days.

Because these data are so compelling, I'll review the results of our highly successful Phase IIb trial one more time.

The study involved 122 patients.

This was designed to be the study upon which we and our partner, Nycomed, would base the decision for advancing POSIDUR into the Phase III program.

In the study, we demonstrated both statistically significant reductions in pain control as well as total consumption of supplemental opioid analgesic medications.

Pain was reduced by approximately 30% over the first two to three days post surgically as compared to placebo.

And total consumption of supplemental rescue medications was decreased by 3 to 3.5 times over each of the three days following surgery.

Why does this make a difference?

Well, there are numerous studies which have demonstrated the healthcare cost savings which can be achieved by reducing narcotics side effects, including potentially reducing hospital stays.

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

With regard to safety, in our overall Phase II program for POSIDUR, over 450 patients were tested, with over 300 patients dosed with active POSIDUR and about 150 with placebo.

We have seen comparable safety profiles in the POSIDUR-treated patient groups as compared to the placebo-treated groups.

And the drug administration was well tolerated.

Additionally, in the Phase IIb hernia study, the side effects commonly observed with opioid medication use were less frequently seen in the POSIDUR treatment groups as compared to placebo, as you would have expected, given the threefold less narcotics being taken.

We have held the end-of-Phase II meeting with the FDA and are in dialog with them regarding the Phase III program.

When these discussions are complete, we'll be in a position to describe the execution of the Phase III program.

I'd also like to note that, working with Hospira, our contract manufacturer for POSIDUR, we advanced the CMC component of this program in the third quarter of this year.

Hospira has produced supplies for our ICH stability studies, the validation studies, as well as the Phase III clinical trial supplies.

So these critical components are now well in hand.

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

Nycomed is a privately held specialty pharmaceutical company that is now the 25th-largest pharmaceutical company in the world.

They have a strong presence throughout Europe, in Russia, and the Commonwealth of Independent States, and other selected territories, where we license them the commercial rights to POSIDUR.

They have a major hospital-based sales force with access to the surgical suite, and pain management is one of their core therapeutic areas.

They sell several products in the surgical suite for the control of hemostasis and multiple pain management products, including transdermal fentanyl and [enceds].

As part of this deal, Nycomed will assign a dedicated sales force to promote POSIDUR in its territories.

Nycomed has paid us $14 million up front.

This quarter, they paid us $8 million for the Phase IIb milestone.

And we have an additional potential $180 million in milestones to come.

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

Nycomed also pays one-half of the development costs of the POSIDUR program for the European theater as well as U.S.

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

Since POSIDUR will be sold for use in the surgical suite, we think it provides a unique opportunity to cover the U.S.

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

I'll now update with regard to Remoxy, which has the potential to be the first NDA filed based on DURECT's technology.

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, which largely consists of designing the dosage form, supplying key excipients, and general CMC support for this 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.

According to our partners, King Pharmaceuticals and Pain Therapeutics, the Remoxy Phase III trial is fully enrolled, and top-line results of this study are expected in the fourth quarter of 2007.

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 more difficult-to-abuse forms of oxycodone.

Oxycodone is widely used by patients suffering from chronic pain.

OxyContin, an oral, controlled-release oxycodone product, had sales of over $1.2 billion in the U.S.

in 2006.

And that figure reflects the presence of generics which were in the market in 2006.

The OxyContin generics were removed from the market this year.

Potential for future market growth may be driven by the aging population, the increasing focus on treating pain, and improved deterrence features that may mitigate the physician's concern regarding abuse.

King Pharmaceuticals will be the commercialization partner for this product, and DURECT will see royalties based on King's sales that start at 6% and scale up to 11.5%.

We also receive a manufacturing markup on key excipients that we will supply.

We are hopeful that, given the product features of an abuse-deterrent form of oxycodone and a true twice-daily dosage form, King will be able to garner significant market share.

I'll now change gears to talk about our TRANSDUR sufentanil program.

Our sufentanil patch targets chronic [pain users].

The market for Duragesic and other fentanyl patches was over $1.4 billion in 2006.

Our patch seems to provide seven days of delivery as compared to existing patches that deliver for three days.

Our patch has the potential to enhance patient compliance and convenience and entails a lower manufacturing cost for a given treatment cycle.

Existing fentanyl patches, like Duragesic, are about the size of a dollar bill folded in half, which means that, during a month, the patient has to find ten rather large spots on their body to rotate the patches.

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 small sites would be required.

Our partner for the U.S.

and Canada is Endo Pharmaceutical.

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

Now that we provide a technology transfer to 3M, our role in this program is largely a supportive one to Endo for process optimization, providing technical expertise for their clinical studies, and CMC support.

With regard to the clinical development, we are pleased that Endo has commenced their Phase II program in June, but all updates on this program have to come from them.

The last program I'll talk about today is ELADUR.

ELADUR is a transdermal patch containing bupivacaine, designed to provide up to three days of pain relief.

The existing market-leading patch in this space is indicated for 12 hours of wear and has the potential for having breakthrough pain during the 12 hours when the patch cannot be worn.

ELADUR, our three-day patch, is very thin.

It has an elegant design for superior wearability.

For example, ELADUR is designed to stay on while the patient is exercising or in the shower.

We are currently conducting a placebo-controlled Phase IIa study in approximately 50 patients with post-herpetic neuralgia, or post-shingles, pain.

We announced today that we have completed enrollment and 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.

We've 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 do over $650 million in sales in 2007.

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

Over the next few quarters, we look forward to continued progress from our programs in clinical development.

For POSIDUR, it's finalizing the Phase III program and commencing the studies.

For Remoxy, it's 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.

And, for ELADUR, it's the Phase IIa clinical data from our post-herpetic neuralgia study 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 addressing large market opportunities, primarily in the underserved pain management field.

We've made solid progress in 2007 in [de-risking] and advancing our development products.

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

We anticipate reporting clinical data from two more programs this year, Phase III data for Remoxy and Phase IIa data from ELADUR.

We have collaborations in place with Nycomed, Endo, King Pharmaceuticals, and Pain Therapeutics that provide considerable development funding and solid economics upon commercialization.

Yet we've maintained a pathway to become a specialty pharmaceutical company that commercializes selected products in North America.

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

I'd like to thank you now for your support, and we look forward to sharing our further progress with you.

We'll now take any questions you might have.

(OPERATOR INSTRUCTIONS).

We do have a question.

Our first question comes from Jim Molloy.

Please go ahead.

I was just wondering if there might be any chance of an update on the programs beyond Remoxy, PTI-202 and the two other programs after that that were to be advanced into the clinical trials that you guys are also working on with King and Pain Therapeutics.

Yes.

There are, of course, three other programs in that, and one of them has completed initial Phase I work.

We haven't said much about that because our partners aren't.

But I think, as you look into next year, you'll see significant progress with regard to the second program in that and the third as well.

So I think you'll start to have more color with regard to those.

As well, as people can find out by listening in on our analyst day meeting, we have other programs advancing.

We have our own internal programs that we expect to see some progress on as well.

(Inaudible).

Essentially, we have a number of field work programs with a variety of partners in the biotech space, as well as in conventional pharmaceutical compounds.

And we hope that we can give you some more news on those next year as well.

Okay.

Thank you for taking the question.

Our next question comes from Himanshu Rastogi.

Please go ahead.

My question is on POSIDUR.

Can you talk about when you start thinking about the sales and marketing infrastructure?

You mentioned the Phase III program.

We're probably going to start rolling forward from next year onwards.

And you mentioned the sales force size that might be needed.

When do you start building that infrastructure?

That's a great question.

This is basically an effort that we will begin-- We've actually started the process.

We have a number of consultants we work with on the outside who are involved with compensation reimbursement and all the various aspects of those pieces.

And that's been work that we've been doing for a while now.

We will start to build out the team next year as this project matures in Phase III.

The nice thing about it being a rather small sales force is we won't have to do any significant hiring with regard to specifics of the sales force until this product's much closer to the marketplace.

But the infrastructure - the marketing infrastructure, the commercial team is something that we will begin building next year.

Have you considered using a CSO, contract sales organization, here?

Absolutely.

Our partner, Endo, was quite successful in doing that early on.

And it might be a possibility here.

There are-- This is something one could do.

There are just plug-in groups that are readily available for the surgical suite, but it doesn't mean that one can't work with a group and create that.

And that certainly is one of the strategies that we're looking at.

It's a less expensive way of getting into a marketplace.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS).

I'm not seeing any further questions.

I think that's the result of having a successful analyst day a couple of weeks ago.

Thank you all for listening.

If you do have questions, management's available.

Please reach out to us.

We'll be happy to chat with you.

Thank you all very much.