DURECT Corp (DRRX) 2008 Q4 法說會逐字稿

Welcome to the DURECT 2008 Q4 earnings report.

We are now ready to begin.

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

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 product 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 heading Risk Factors.

Let me now turn to our financials.

Total revenue was $6.6 million in the fourth quarter of 2008, which is essentially unchanged from the fourth quarter of 2007.

Revenue from our R&D collaborations was $4.7 million in Q4 2008, as compared to $4.6 million in q4 2007, which is an increase of about $156,000 or 3%.

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

Product revenue from the sale of ALZET pumps and LACTEL polymers decreased by approximately $159,000 or 8% from $2 million in Q4 2007 to $1.9 million in Q4 2008.

Our gross margin on these products was around 63% in the fourth quarter 2008.

And around 60% in the fourth quarter 2007.

R&D expense was $8.5 million in the fourth quarter 2008 as compared to $9.5 million in the fourth quarter of 2007.

These figures included stock-based compensation of $1.4 million in the fourth quarter of 2008, and $1 million in Q4 2007.

SG&A expenses were $3.7 million in Q4 2008, as compared to $3.3 million in Q4 2007, an increase of about $422,000.

These figures contain $722,000 of stock-based compensation in Q4 2008, and $553,000 of stock-based compensation in Q4 2007.

Excluding stock based compensation increase the rest of the increase was largely due to higher patent expenses arising from our acquisition of additional patent families in the first quarter 2008 and the fourth quarter 2007.

We had one unusual and complex accounting item in the quarter that I'll take a minute to explain.

Back in 2000, we amended an agreement with ALZET in which we gave them stock and warrants in return for our reduced future royalty and up front payments on CHRONOGESIC sales.

Recall CHRONOGESIC is an implantable pump based on the DUROS technology we licensed from ALZET.

This equity was valued at $13.5 million and was recorded as deferred royalties and commercial rights on our balance sheet.

The notion was that in the future when we receive royalties we then start to amortize this $13.5 million figure.

Earlier this year, Endo terminated the agreement with respect to CHRONOGESIC and when we went through our budgeting cycle at the end of the year we have decided that we have other R&D projects that should be prioritized over CHRONOGESIC, hence it's not clear that there will be future royalties derived from CHRONOGESIC and therefore we ought to write off these deferred royalties and commercial rights.

This is a pretty esoteric accounting issue and the thing I'd stress is it's non-cash expense of a one-time nature.

Our net loss for the fourth quarter of 2008 was $19.5 million, compared to a net loss of $7.2 million for the same period in 2007.

However, if you exclude the non-cash write-off I just described, our net loss in the fourth quarter 2008 would have been $6 million or about $1.2 million less than in the fourth quarter of 2007.

Probably a more relevant financial metric for us than our net loss was net cash consumed during the year.

That figure was $9.3 million.

Early in 2008 DURECT provided guidance that we anticipated net cash consumption of approximately 32 million to $36 million.

Upon licensing ELADUR to Alpharma, we decreased our cash-burn guidance to approximately 10 million to $12 million, we're pleased that the final decrease in cash year-over-year was below the low end of that range.

This outcome is a function of our business model which includes moderating our burn rate through licensing of programs typically when they are at Phase II or so.

We're quite proud of the fact that we spent a cumulative $48 million over the last four years in building our pipeline.

The cash burn rate averages out to about $12 million per year.

At December 31, 2008, we had cash and investments of $52.7 million, compared with cash and investments of $62 million, at December 31, 2007.

These figures both included $1 million in restricted investments.

Let me now turn to our financial guidance for 2009.

Our net cash consumption is heavily influenced by the timing and structure of new corporate collaborations as well as outsourced preclinical and clinical expenses.

While we anticipate entering into new collaborations in 2009 and beyond we believe it is more conservative to give financial guidance based on an assumption of no new collaborations, no milestones and aggressive funding of our R&D programs, many of which are in clinical development.

Based on those key assumptions we anticipate net cash consumption in 2009 of approximately 28 million to $32 million.

I would note that we have multiple late-stage programs and they potentially will be partnered over the next 12 to 18 months.

These include transfers of Fentanyl for Europe and for Asia, POSIDUR for US and Asia, as well as various internal programs, which we have not described publicly in detail.

Thanks again for joining our call and I'll now turn it over to Jim to discuss non-financial matters in greater depth.

Thank you, Matt, and hello everyone.

We made progress on many fronts in 2008.

Just to give a few highlights here.

The REMOXY NDA was filed and received a prior to review.

The third ORADUR based opioid into the PTI collaboration started at Phase I.

POSIDUR commenced a Phase 2b shoulder study, and plans for the Phase III program were refined.

Endo completed its Phase II Program for the TRANSDUR sufentanil project.

And ELADUR reported positive Phase 2A results.

We were able to eliminate $23.6 million in convertible notes, and we signed our ELADUR collaboration with Alpharma, now part of King Pharmaceuticals and this collaboration should move the program forward in development while substantially lowering or cash burn rate going forward.

In the current political and economic environment, DURECT has a very attractive business model.

We focus on major products with lower development risk and this lower risk is by virtue of the diversified portfolio that we have, not only the number of products but the number of technologies that we can spread these, the risk, as well as using known drugs.

We make a modest investment through the partnerships that we are able to put in place, and we get significant returns from these through having later-stage partnering.

The results of this are four major deals with significant milestones.

In fact, we have over $400 million in milestones from our existing partnerships, over $100 million worth come during the development time frame.

We are able to have co-investment and yields double-digit royalties.

This lower cash burn that Matt described earlier, of 10 million to $12 million per year has enabled us to consume less than $48 million of our own cash over the last four year, and this was spent while we were driving our pipeline forward.

We now have one NDA filed, three products in Phase II and numerous earlier programs.

Over the next 12 to 18 months we expect to see a plan put -- excuse me -- a plan put forth by Pain Therapeutics, and King to address the complete response letter on REMOXY, two development programs moving in to Phase III.

We also have the potential to achieve business development deals with a number of programs, and receive milestone payments from our existing partner programs.

I'll now provide a brief update regard to our lead projects.

Starting with REMOXY.

REMOXY is based on an ORADUR gel cap technology which provides a twice-daily form of Oxycodone in a more difficult to misuse and abuse formulation.

The REMOXY NDA was submitted by Pain Therapeutics on June 10, 2008.

In August of 2008, the NDA was accepted and granted priority review.

A priority review is designated -- is a designation that is given to drugs that offer real advances in treatment or provide a treatment where no adequate therapy exists.

There was an FDA panel meeting on November 13, which we felt was positive.

The clinical data are strong, and considerable data was shared as to how REMOXY is more difficult to tamper with than Oxycontin.

We were disappointed in December to learn that Pain Therapeutics had received a complete response letter from the FDA.

It is unfortunate that a priority review was granted in that at least the feedback was received six months earlier than one normally would have expected.

Currently Pain Therapeutics and King Pharmaceuticals and their technical advisors are assessing the FDA's letter, and PTI has disclosed that they plan to talk with the FDA in the second quarter of this year, and will update all of us when they have enough information to give an informed update.

As a reminder, oxycodone is widely used by patients suffering from chronic pain.

The sales of Oxycontin and oxycodone oral products were almost $1.6 billion in 2007, but we understand that those sales may have exceeded $2 billion in 2008.

There is a huge abuse problem in this country, and therefore, we believe there is a major market opportunity for the commercial -- for our commercialization partner, King Pharmaceuticals.

DURECT will receive royalties that [start at 6%] and scale to 11.5% plus a manufacturing mark-up on select key excipients that we will supply.

Now I'm going to move to POSIDUR.

POSIDUR is an injectable product designed to control post surgical pain for up to three days with bupivacaine, a well-established local anesthetic.

We have some very strong Phase 2B data from POSIDUR, in a hernia trial done down in Australia where we were able to demonstrate 30% improvement in pain control versus placebo over the first two to three days after surgery.

And if one looks at the POSIDUR group as compared to the placebo group, the placebo group took 3.5 times more narcotics than the POSIDUR group.

These are compelling results and hold the potential to change -- that hold the potential to change the treatment of postoperative pain.

What is the status of this development program?

Well, we have been in dialogue with the FDA regarding the details of the Phase III.

We've been at this dialogue for over one year.

Even though it has taken longer than we would have liked or projected we feel we have been making progress towards a clearly defined program that sets up the conduct of a successful Phase III.

In parallel with these FDA discussions, we and your European partner Nycomed are continuing to advance the program.

For example, because an orthopedic model would be part of our proposed study for regulatory approval, we are conducting a 60 patient Phase 2B study in Australia using a 5 ml dose in shoulder surgery.

This study is not sized to achieve statistical significance but is intended to confirm aspects of our current Phase III study design and conduct.

It allows us to build on our Phase 2a shoulder work in the Phase 2b setting.

Additionally Nycomed is commencing Phase 2b studies in surgical studies in Europe.

All of these studies will contribute to the total number of patient exposures that will ultimately be required by the FDA and the European Medical -- Medicines Association -- Agency -- EMEA, as part of the product approval process in the US and Europe.

In summary, we and our partner Nycomed continue to make progress and we look forward to advancing this program into Phase III later this year.

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

They paid us $14 million upfront, an additional $8 million on our first milestone, and we have an additional $180 million in potential milestones to come.

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

Nycomed also pays one-half of the development cost of the program in Europe and the US.

DURECT has retained all commercialize rights for the US, Canada and Asia.

Because this product will utilize the surgical suite salesforce, we think one could cover the US market with a specialized salesforce of between 100 to 150 sales reps.

Historically we have talked about commercializing this product in the US entirely by ourselves.

However, this is an attractive program to other companies, and it will is equally likely that we will partner this product in the US.

Although we would expect the structure of any such deal to be put in place in such a way that copromotion rights would be an opportunity, and therefore allow us a path to building commercial capabilities within DURECT.

Now I'm going to talk about ELADUR.

ELADUR us 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 has an elegant design for superior wearability.

Our patch can even be worn in the shower and during exercise.

In May of 2008, at the American Pain Society annual meeting we presented a poster that outlined the positive results for ELADUR from a 60-patient Phase 2A study in patients suffering from post hepatic neuralgia.

In October of 2008, we closed our collaboration with Alpharma.

The deal terms were that Alpharma pay DURECT an up-front license fee of $20 million.

Additionally there's $93 million in potential development milestone which are spread over multiple clinical indications in geographic territories, as well as $150 million in potential sales-based milestones.

If ELADUR is commercialized DURECT will receive a royalty on product sales.

In December of 2008 King Pharmaceuticals acquired Alpharma and the rights on the obligations of our agreement.

King now controls and is responsible for funding the development program going forward.

The DURECT ELADUR team is working with a team at DURECT to finalize the Phase 2b plans and the next steps for this program.

Final product I'll update on today is our TRANSDUR sufentanil program.

Our Sufentanil patch targets chronic pain users.

The market for J&Js fentanyl patch DURAGESIC was $1.2 billion in 2007.

That may understate the the opportunity as the extended release oral opioid market is well over $4 billion and many of those patients could benefit from a superior patch.

Our patch seeks to provide seven days of pain relief versus existing fentanyl patches that deliver medication for two to three days.

This should enhance patient compliance and convenience and lower manufacturing costs over a monthly treatment cycle.

Existing fentanyl patches like DURAGESIC are about the size of a dollar bill folded in half, which means that during the month a patient has to find 10 to 15 rather large spots on the body to rotate the patches around.

In contrast, our patch which is approximately one-fifth the size of DURAGESIC or about the size of a postage stamp, and requires only four such small sites during a month's time.

Our partner for the US and Canada is Endo Pharmaceuticals.

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

Under our agreement, Endo is responsible for all development costs and DURECT receives a strong royalty on product sales.

We are also entitled to about $35 million in milestones, the vast majority of which come during the development and also at product launch.

Endo has stated that they expect to hold an end of Phase II meeting with the FDA early in 2009.

Over the next 12 to 18 months, we look forward to continued progress from our programs in clinical development.

For REMOXY and the other abused opioids.

In the near term we look forward to the action steps taken by Pain Therapeutics and King in connection with the REMOXY NDA submission.

As well as updating our progress with the additional abuse-resistant opioids.

For POSIDUR, it's completing the ongoing Phase 2B shoulder study and commencing a Phase III program.

For the Sufentanil patch, it's Endo holding the end of Phase II meeting with the FDA, following which further communications on the clinical development plan by Endo.

For ELADUR it's a continuation of the clinical development program building on the positive data from the Phase 2A study.

In conclusion, DURECT has a rich pipeline consisting of one NDA now submitted to the FDA, three products in Phase II and other products in Phase I.

These products address large market opportunities in the underserved pain management field.

Each of these products has differentiating features that constitute meaningful improvements over existing therapies.

They address important trends in pain management such abuse deterrents in the case of REMOXY or reduction of the use of opioids in the case of POSIDUR and ELADUR.

Characteristic of our development products is the ability to provide for a reduction in healthcare costs.

We have multiple products advancing in various stages of development.

Moving from Phase I and into Phase I and moving from Phase I to Phase II and then from Phase II to Phase III.

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

And we have the potential for future business development deals which historically have allowed us to maintain a modest burn rate while we were able to advance these projects.

Thank you for your support and we look forward to sharing our progress reports with you.

Now we'd like to take any questions you may have.

Okay.

We do have our first question from -- I'm sorry, I thought we had a question from Ken.

But he no longer seems to have his hand raised.

All right.

Here we o, Ken with RBC Capital -- and that's Ken Trbovich with RBC Capital.

Didn't mean to back out of the queue there.

Appreciate taking the question.

I guess the first one I wanted to start with, I understand the conservatism and reason for perhaps being as conservative as you are at the start of the year for guidance, but I just wanted to be certain that we understand what near-term milestones you might have, if any, for example out of the Sufentanil program or others that you might earn in 2009 that are not included in the guidance?

I would say the potential milestones, in truth, our partners haven't given us in most cases the freedom to describe in detail what all of the different milestones are, and what they're associated with so I want to speak a tiny bit general, but of course this year our milestone payments could be zero, or I would say they could be as high in the range of about $9 million for the year.

That's not attributable solely to a Sufentanil patch but to a couple other things.

I'm just talking in terms of that range.

Not a problem, and then just with regard to the decision -- or the posturing, perhaps, maybe not a decision, but the posturing on POSIDUR, are you actively now seeking a copromote partner here in the US?

I know the language here is really sort of exclusively focused on trying to build a commercial organization and why you're not closing that door.

It certainly seems like you're opening the door to partnering so I'm just trying to get a sense for how aggressively you're looking for those partners.

It's a great remark, and we're actually not necessarily even needing to aggressively look for partners, we had a lot of partners aggressively come talk to us, so there are a lot of people that are quite interested in this because of the fact that it's first-in-class therapy, and because it's the only product that we are aware of out there that has demonstrated the kind of data we have seen in the Phase 2B, where you're showing opioids, you're showing better pain control than with narcotics, and all of that being said, as we look forward to how we're going to be growing direct in the future, we have to take these discussions very seriously.

Okay.

And then just -- I guess in terms of final question, has the program for ELADUR slowed at all because of King's acquisition of Alpharma?

Once again, a good question.

I think probably you can't help but have a little bit of a slowdown when you have one party being acquired by another and the team change over.

There were certainly come changing of the various people on the team.

Having said that, we know King very well by virtue of the relationship that we have on the four narcotic products that are being developed through the PTI relationship, we have a lot of the respect for the King development team, and we're now working -- our team is working very closely with theirs to get the Phase 2B underway, so feel good about King as a partner.

Okay.

I think that -- I think that take cares of my questions.

Thank you.

Great.

Thanks, Ken.

(Operator Instructions).

Okay.

We now have a question from Dave Windley with Jefferies & Company.

Go ahead, Dave.

Good afternoon, thanks for taking the question.

Hi, Dave.

Hi, good afternoon.

Wanted to follow-up there a little bit on the King.

Your primary -- I guess your relationship through Pain Therapeutics, they have -- I guess taken down or optioned a lot, the third of the opioids.

Are all of those opioids formulated but for the active ingredient in essentially the same way?

It's the same underlying delivery technology, yes?

Well, yes, the technology that we're using to develop all of those formulations is our ORADUR technology, which is primarily our SAVE plus the other components to make it ORADUR, that's the basic of the license to PTI.

And is -- there are, I believe, under the original license there was an intention to take four; is that correct?

Yes, the license is structured in such a way that they have the right, they being Pain Therapeutics, have now, by virtue of their sublicense to King have the rights to commercialize four specific narcotics.

They are all defined.

They are by name.

And there is a, as we put in all of our agreements a very close-tight knit diligence language that allows for these things to be developed in a very rigorous and structured manner.

And are you continuing -- or are you working or continuing to work on the force?

The work is continuing.

It's kind of like you start with one, one is like a senior in high school, and then you have got, maybe a freshman, and then you have somebody in junior college -- or junior high school, and then a elementary kid.

So they are just all working at their various levels of maturity.

But they are all progressing?

They are.

We are always working with our partners with regard to these.

Okay.

Just wondered if the full response on -- on REMOXY through the FDA has implications on formulation that would affect all of these products?

Yes.

Yes.

I mean, it's not from -- basically I couldn't really comment much, but it's -- with regard to this, and not particularly on the formulation, our formulation is our ORADUR technology which we are also looking at for other uses outside of the four specific narcotics here.

And as far as what is going on with regard to the FDA, we would have to ask you guys to speak to King or PTI with regard to specifics of REMOXY and their NDA iterations.

Jim, can you comment -- I guess to step back a little bit more generally about -- maybe the context around deterrence of abuse by injection for -- using ORADUR save technology?

Sure.

Probably you are referring to the November comments and that kind of thing at that (inaudible - multiple speakers) meeting?

Yes.

Yes, I think personally maybe more was made of that than -- I think if you look in to control-released narcotics in general, or actually even control-release amphetamines and all the rest of these, they use a lot of different materials to obtain the control-release aspects.

If you recall the next day when Alpharma was talking they addressed the possibility of talc -- or not the possibility, but the fact that talc was in the formulation which is a mineral substance.

We've identified, if you look up talcosis, just Google it you will find a lot of issues of talc products 20 years after people abused these products.

In this case I think they were amphetamines and the like and these are cases of these minerals being -- still existing in the body.

Our -- the basis of our ORADUR technology is SAVE which is sucrose acetate acebuterate which breaks down eventually into substances that are used by the body in the CREB cycle, it breaks down to fructose and glucose.

So it certainly doesn't have the longevity that one sees with these minerals.

And in some cases these other companies which have control of these products in the market are not only using talc, but they're using various other long chain polymers including Methyl Acrylate and other things like that which are, effectively never broken down by the body, so very, very different circumstances, I think.

Okay.

Moving on, then.

The comments today out of the FDA with regard to -- the headline, FDA to meet with drug companies about REMS for certain opioid drugs.

What are your thoughts on that?

And how they might impact your involvement?

That's great.

I think it is actually really good news for us.

Because it once again forces the issue of looking at abuse deterrence as a problem.

And you see the FDA looking at REMS and other ways of trying to deal with the problems out there and the nice thing about what we are able to do with ORADUR is provide them on top of the REMS that you can provide for any product, a technology that by itself offers inherent reduction in -- in the tampering and those kind of things, so we think that we're, playing right into what the FDA needs, which is this kind of technology.

Okay.

Great.

I do believe that REMs should -- I think that hopefully they will be eventually applied to all the products that are on the market, not just the new ones.

Right right.

Okay.

Thanks.

Okay.

Do we have any other questions at this time?

Do I, no?

Okay.

Hearing no other questions.

Thank you all for participating, and if people do have questions down the road, please call us any time at the Company.

Thank you.

Thanks, bye.