DURECT Corp (DRRX) 2009 Q3 法說會逐字稿

Good afternoon and welcome to the DURECT Corporation third-quarter earnings call.

We are now ready to begin.

I will hand the call over to Matt Hogan.

Okay.

Good afternoon and welcome to the third quarter 2009 earnings conference call.

This is Matt Hogan, CFO at DURECT.

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 a 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 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 could 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 $8.4 million in the third quarter of 2009, which compares to $6.6 million in the third quarter of 2008.

Revenue from our R&D collaborations was $3 million in the third quarter 2009 as compared to $4.3 million in the third quarter last year.

Revenue from this source always fluctuates 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 $60,000 or 2.6% from $2.3 million in the third quarter last year to $2.4 million in the third quarter this year.

Our gross margin on these products was around 65% in the third quarter of 2009 and around 62% in the third quarter of 2008.

These businesses continue to be strongly cash flow positive for us and our Lactel business is continuing the growth pattern it has shown over the last few years.

Lactel now supplies custom polymers to nine approved products and for our in-house needs the scientists in this unit are contributing to our proprietary position in depot formulations.

We also recorded $3 million in revenue and $2 million in cost of goods sold in the third quarter for the first time related to our sale of excipients to King.

Just to explain this event, this relates to excipients that we actually shipped to King starting in 2008 through Q1 2009.

Although we had fulfilled the purchase orders and been paid for those shipments in prior quarters, due to the accounting rules for revenue recognition we couldn't recognize the revenue and associated cost of goods sold until we signed the formal long-term supply agreement because that is when all the terms and conditions were unambiguously determined.

So just to be clear, although we booked the revenue and related cost of goods sold in the third quarter, there wasn't any corresponding cash flow during this quarter and this represents just a delayed recognition of transactions that took place in prior quarters.

Previously these transactions have been recorded as deferred revenue and deferred cost of goods sold.

R&D expense was $7.6 million in the third quarter of 2009 as compared to $11.4 million in the third quarter of 2008.

These figures included stock-based compensation of $1.7 million in the third quarter of 2009 and $1.3 million in the third quarter of 2008.

I should also point out that the third-quarter 2008 figure included $2.25 million recorded as R&D expense arising from our licensing of patent that was relevant to ELADUR.

So if we exclude the stock-based comp and the license fee, R&D expense declined by about $1.9 million.

SG&A expenses were $3.6 million in the third quarter 2009 as compared to $3.8 million in the third quarter last year.

These figures included $785,000 of stock-based compensation in the third quarter this year and $619,000 in stock-based compensation in the third quarter last year.

Excluding the stock-based compensation, SG&A expense declined by about $449,000.

Our net loss for the third quarter of 2009 was $5.5 million compared to a net loss of $9.2 million for the same period in 2008.

But probably a more relevant financial metric for us in our net loss was net cash consumed, excluding our financing during the quarter.

During the quarter that figure was $4.6 million as compared to $5.7 million in the first quarter this year and $5.1 million in the second quarter.

As you no doubt seen in September, we sold 4.4 million shares basically of common stock to affiliates of Venrock at a price of $2.25 per share, raising gross proceeds to DURECT of approximately $10 million.

We had a one-off chance to raise money with a respected institutional investor, Venrock.

There are no warrants.

The discount is lower than most other financings that have taken place this year, about 8% to 9% off the volume-weighted average price at the time.

We had minimal transaction costs and in particular there is no banker involved so we saved around 6% right there.

So if one is going to raise money we did it in about as cost effective manner as is feasible.

Our rationale for the financing was that what is really going to make us a more valuable company is progress with POSIDUR and our other programs and establishing strong new partnerships.

Having this extra funding puts us in a better position to do both.

At September 30, 2009, we had cash and investments of $47.2 million compared with cash and investments of $52.7 million at December 31, 2008.

These figures included $0.8 million of restricted investments at September 30 this year and $1 million in restricted investments at the end of last year.

Thanks again for joining the call and I will now turn it over to Jim to talk about other matters in greater detail.

Thank you, Matt, and hello, everyone.

The third quarter was highlighted by the following.

First, we had completion of enrollment in our 60-patient Phase IIb shoulder study of POSIDUR in Australia and continued enrollment in Nycomed's Phase IIb study.

We have the establishment of our ORADUR ADHD deal with Orient Pharma, the signing of our long-term supply agreement with King Pharmaceuticals regarding Remoxy, our equity financing, and finally active licensing discussions with respect to multiple programs.

I will now provide a brief update on our lead programs and other items starting with Remoxy.

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

As you know, the complete response letter for the Remoxy NDA was received from the FDA in December of 2008.

King subsequently took over control of the NDA for pain therapeutics and held a meeting with the FDA in July of this year.

The outcome of that meeting is that King feels it has a clear path forward to resubmit the Remoxy NDA.

King has stated they anticipate that this resubmission of the NDA would occur in the middle of 2010.

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

Sales of OxyContin and oxycodone oral products were over $2 billion in 2008 with further growth expected this year.

There is a huge abuse problem in this country and we believe that this product could be a major market opportunity for King Pharmaceuticals and DURECT.

DURECT will receive royalties that start at 6% and scale up to 11.5% plus a manufacturing markup of key excipients that we will supply.

If King achieves a 20% share of the current OxyContin market with Remoxy, DURECT would makeover $40 million in royalties alone.

As Matt noted, we signed a long-term supply agreement with King in the third quarter.

While we have been working with King on these supply matters for some time, it's nice to have this LTSA in place and this is an additional sign of King's preparation for approval and launch.

A number of people have asked us to comment on Purdue's new formulation of OxyContin and what we thought about this product coming forward.

So we thought we would give a brief update.

Given Purdue's FDA panel meeting on September 4 we expect Purdue's new version of OxyContin to be approved by the FDA at which point Purdue would likely face out the old OxyContin and replace it with the newer version.

We think this is a positive for the market for several reasons.

First off, coming after of the EMBEDA approval this action illustrates the FDA desire for more difficult to tamper with products to be on the market.

It provides an additional barrier to generics, meaning that Remoxy should enter a stronger market place.

Yet from what we can tell Purdue hasn't significantly raised the bar in terms of tamper resistance.

The information that we have seen suggests that this is a marginal improvement over the existing product and it is slightly more difficult to crush tablets.

We believe Remoxy will have a significant advantage over the new OxyContin.

Now I want to move on 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.

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

In addition, the POSIDUR group took three times less narcotics than the placebo group.

These are very compelling results and hold the potential to really change the way post-operative pain is treated.

To review the major ongoing activities for POSIDUR in the third quarter we recently completed enrollment in our 60-patient Phase IIb study which is looking at shoulder surgery.

The data analysis is underway and we expect to have top-line data in December.

We said when we first announced this study it wasn't sized to show statistical significance.

Rather the purpose was to vet the study design and expand our Phase IIb experience in another surgical model.

And we are looking to see a separation between the treatment group and placebo even if P value isn't forthcoming.

Nycomed continues to roll in its Phase IIb studies in hysterectomy and shoulder surgery in patients in Europe.

And under Joe Stauffer's direction we have been actively preparing for the start of our Phase III program.

Lastly, we have been in discussions with various parties about licensing the US, Canadian, and Asian development commercialization rights for POSIDUR.

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

Nycomed paid us $14 million up front, another $8 million from our first milestone payment, and we have an additional $180 million in potential milestones to come.

Nycomed pays half the development costs of this program in Europe and the US.

And Nycomed when they do and if they should be able to commercialize this product in Europe and other defined territories will be paying us a royalty on sales that starts at 15% and goes to 40%.

Now I would move over to ELADUR.

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

The existing market-leading patch in this field is designed to deliver for 12 hours.

ELADUR is very thin and has an elegant design with superior wearability.

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

Last October we closed our collaboration with Alpharma for this program.

The deal terms were that Alpharma pay direct and upfront licensing fee of $20 million with the potential of $93 million in development and regulatory milestones, as well as a $115 million in sales milestones.

These milestones are spread over clinical indications and geographic territories.

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

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

King now controls the funding and program development.

During the third quarter we continued to interact with the King team on details for the next steps in this clinical program which King expects to initiate in the first half of next year.

Now I will move on to our TRANSDUR-sufentanil program.

Our sufentanil patch targets the huge market of chronic pain users.

J&J's fentanyl patch, Duragesic, had revenues of approximately $1 billion in 2008 and there were about 7.5 million prescriptions for fentanyl patches in 2008 which represents significant growth over the 2007 year.

This figure may underestimate the opportunity for our sufentanil patch as there are about 23.5 million prescriptions written in the US for extended-release opioids in 2008 and many of these patients could benefit from a superior patch.

Some of our product's advantages are -- our patch seeks to provide seven days of pain relief versus the existing fentanyl patches which deliver medication for two or three days, as well as advantages over the twice-daily oral opioids.

Our seven-day duration should provide a more consistent blood level of drug and therefore uninterrupted delivery of pain relief.

And from the standpoint about worrying about diversion, during a 28-day period there will be four of our patches to monitor versus nine to 14 fentanyl patches, or as an example 56 OxyContin pills.

Relative to fentanyl patches we should have a lower manufacturing cost 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 a month the patient must find 10 to 15 rather large spots on their body to rotate the patches around.

In contrast, our patch, our largest size system is about 1/5 the size of Duragesic or about the size of a postage stamp.

During a month only four such small sites would need to be found.

We believe that the smaller size of our patch and our formulation which derives fewer chemicals across the skin offers the potential for improved safety and tolerability.

Lastly, there may be an inherent advantage in utilizing sufentanil as the activate agent.

It's a more potent agent then fentanyl and yet there are a number of papers that suggest sufentanil has a wider therapeutic index than fentanyl.

Ten clinical studies have been performed with our sufentanil patch and over 300 patients have been dosed.

The end of Phase II meeting has been held with the FDA.

The result of this meeting is a known Phase III path to an NDA.

We are now in active discussions with multiple companies with respect to licensing this Phase III-ready program.

Now I would like to move on to a new program, one that we haven't had a chance to talk much about, and this is our ORADUR ADHD program.

Besides opioids, another major area of prescription medicine misuse and abuse is the category of ADHD drugs.

Hence, we have decided to apply our ORADUR technology, which is the enabling technology behind Remoxy, to these stimulus.

Attention deficit hyperactivity disorder is a condition that is estimated to affect approximately 7.8% of children in the United States between the ages of four and 17 according to the Center of Disease Control.

The principal characteristics of ADHD are inattention, hyperactivity, and impulsivity.

The condition itself presents in childhood and can be a lifelong condition.

As much as 65% of the children with ADHD continue to present symptoms as adults, and over 50% of patients, who are children with ADHD, are currently treated with stimulants such as amphetamines and methylphenidate.

Sales of ADHD treatments were approximately $4 billion in 2008.

Unfortunately, a national survey on drug use and health in the United States estimates that 1.4 million Americans over the age of 12 years old abuse these stimulants.

To advance our program we have established a deal with Orient Pharma in the third quarter.

Orient Pharma is a subsidiary of a publicly traded company in Taiwan, which is called Orient Europharma.

They were profitable in 2008 with sales of about $110 million.

They have a new manufacturing plant and they want to utilize this planet, and we have been very impressed by their professionalism and their aggressive attitude towards timelines.

The parties will collaborate to perform a clinical development program through Phase II which is intended to provide a data package suitable for further development.

DURECT will be responsible for the formulation and design of the clinical program which Orient Pharma will fund and execute.

Under the terms of this agreement Orient Pharma has the development and commercialization rights in selected Asian and South Pacific countries.

DURECT would receive a royalty on sales in these territories.

Orient Pharma also have manufacturing rights in some markets outside North America.

DURECT retains rights to this drug candidate in the North American, European, and Japanese markets.

Armed with the Phase II data from this collaboration we will be in a position to either seek a partner or continue further development on our own.

We view this as a creative way to generate Phase II data for this program while retaining the major commercial markets.

Now I would just like to summarize.

With regard to POSIDUR, we will be seeing data this year from our 60-patient shoulder study.

We expect to start the Phase III program in the first half of 2010 and we have the potential for commercial deals in the US and Asia.

For Remoxy resubmission of the King NDA in the middle of next year and upon approval and launch by King.

For the TRANDURA-sufentanil program, potential commercial -- a partnership and start of the Phase III program by our partner.

For ELADUR it's conducting the Phase IIb program by King.

For the ORADUR HD project it's starting the Phase I work in 2010.

And for our feasibility programs the hope is that at least one of these will mature into a real development collaboration in 2010, as well we continue to solicit new programs using our drug delivery technology.

And as we know from last quarter we have quite a few of these already underway.

This is quite a substantive list.

Our hope and expectation is the profile of DURECT one year from now will be substantially different from our profile today.

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

David Amsellem.

Thanks for taking the questions.

So on the shoulder surgery studied for POSIDUR, when you talk about separation between POSIDUR and placebo, first, can you remind us what the primary endpoint of the study is?

And if it is not powered for significance can you try to quantify for us the difference that you need to see between drug and placebo to deem the trial successful?

Thanks.

So it's typical area under the curve separation that you would typically see for a surgical post-op pain study, much like what you have seen in bunionectomy type studies if you had looked at these kind of studies in the past.

Because it's not powered for superiority because it has only got 60 people in it, you are looking for trends in that separation.

You want to see a separation.

When you are talking about separation, it's on a zero to 10 scale and you are looking for at least a point if you can find it.

Even if you can't, often times the trend alone will tell you that you have got action in which case then you just have to up the sample size depending on other factors as well for a broader signal.

So you don't predefine and the FDA doesn't predefine or pre-specify what is clinically relevant.

In studies like these they are exploratory for a separation and they are not big enough for pivotal efficacy.

Moving to TRANSDUR I see you have had end of Phase II meeting.

Question is can you talk about what a Phase III program might look like in terms of number of patients you need to test, what kind of duration studies you are going to run, how many studies, just sort of outline of the program if you will?

In general for any long acting opioid, very typical for drugs that have been improved recently over the last three to five years, you are looking at chronic pain patients.

And you are going to have to look at them at least for three months in a placebo-controlled fashion.

Those sample sizes in general can range from 200 to 400 patients and they also have to provide long-term safety up to a year.

It's pretty much a standard fare for FDA right now.

So you are looking again at chronic pain patients exposed for a year and you can either do that open label or some kind of active control or placebo-control it if you wanted to, but you don't have to.

But the one that you have to demonstrate for efficacy is at the minimum a three-month long, placebo-controlled trial.

So in other words, nothing unusual at the Agency --?

Correct.

Right, it's standard fare stuff much like Remoxy's pivotal trials, EMBEDA's pivotal trials, the stuff that recently came out from Neuromed.

It's almost boilerplate at this point for the Agency and for us.

One last question, if I may, just on the ADHD program.

Can you say if the technology is going to be used for methylphenidate or for (inaudible)?

No, you know we haven't broken that out, but they are obviously both good product candidates.

We just license the rights to one of those.

Okay, thank you.

Jim Molloy.

Thanks for taking my questions.

Just a quick question on -- let me stand on POSIDUR real quick.

Can you walk through your current thoughts -- the data coming out top line in December for the phase Phase IIb, nice positive to hear.

Can you walk through your thoughts on the timing or length of a Phase III potentially?

The length of -- I mean this is just a single-dose application, Jim.

So the trial is nothing like a chronic pain trial, it's just single-dose stuff.

When you say length what do you mean?

I need to get a --?

It would only be three days in each patient.

From start to finish how long do you think it would take to run a Phase III assuming you could go into it soon after you get your Phase IIb?

Or would you have to wait for Nycomed with their Phase IIb?

No, no.

Don't need to wait for Nycomed.

And kind of end to end it's anywhere between 18 months and two years till you can get it started, get the data, get it ready, and get it filed.

That remains in-line with what you said before.

Correct.

Maybe a question for Matt.

The $10 million financing is certainly a nice pick up there.

How does that speak to thoughts for the partnership for say a TRANSDUR?

I think it's reasonable to think it's the next sort of large potential milestone that might be coming in should that get partnered.

I don't think you -- I guess I know where you are going with the question and I don't think I would read anything into it.

I think we would feel very comparable with the way the partnering discussions are going.

We just sort of felt like it's always good to have a little bit more gas in the tank.

It puts you in a stronger position, for instance, when you are in partnering discussions because nobody can feel like they have any leverage over you or you are under undue pressure to take a quick deal that may not be the optimal deal.

So if the way you were going with the question was in that vein, I wouldn't read anything into it.

I think the other comment I would make is obviously had we chosen to we could have taken a $10 million commitment from a lead investor like a Venrock and grown this into a larger financing.

And we obviously chose not to.

So, again, it was viewed by us just as it's prudent to have a little bit more gas in the tank.

Can't argue with that.

Then maybe the last question will be on ELADUR.

It looks like the Phase IIb start is now looking at first half '10.

I thought before we were looking at second half '09.

Am I correct on that or is that --?

I know it's -- there is a lot going on at King.

Unfortunately, Jim, it has never been under our control.

It's under King's control.

Whenever you have a company acquire another company oftentimes it takes a while to sort through the portfolio and put your priorities straight.

But I do think King is off and running.

The combined team is working very closely now on the next study so we are looking forward to that getting underway.

Okay.

Thank you very much for taking the questions.

Andrew Hilgenbrink.

It's [Dave Jefferies].

You guys just mentioned I think to Jim's question that you wouldn't really have to wait to go from IIb to III on POSIDUR.

Would it be your intention then to move quickly into III?

That is our hope, correct.

Absolutely.

We are just trying to keep Joe down.

Joe, that is perfectly fine.

Kick them around a little bit.

That is why I am here.

And then the other -- the news, your comments about the ADHD product and enabling ability to get the Phase II data on the ADHD product.

I guess the broader question I wanted to ask there is how many programs are you willing to support in development at any one time, Jim?

I guess it's kind of a backdoor question to what is coming up in the pipeline but --?

It's a good question.

We are willing to support whatever we can afford kind of.

As you know, we have been trying to be very cautious in the money we spend over the last four years.

I think we have spent less than $12 million a year on average I think.

So we certainly have way more product concepts that we could unfold than we can afford to do.

And so we try to market our partnerships and the deals that we do and the maturing of our products against what we bring forward.

We found that the Orient Pharma people were just really good people to work with.

They gave us an opportunity to be able to advance this program a little faster than I thought we would be able and so now we can take this into Phase II with their help and stretch it into a program after that.

Once we have a partnership or two in place with the more mature products we will be able to bring new things, but we always have a lot of things on the burner.

We do have as we said last quarter these four feasibility deals that which at any one given time one of those might mature into a development deal as well.

But you never know.

Okay.

On some of the announcements or the commentary around King and Remoxy, your supply agreement to supply key excipients, I guess the curiosity that I had was why just that?

Did they want to manufacture the finished product or --?

It's a good question.

Strategically it doesn't make sense for DURECT to put in place manufacturing.

Whenever we have done a development deal we have always ended up working with an outside supplier for that.

But for little DURECT to set up commercial manufacturing is not an effective use of our cash.

We are much better off bringing that next project forward and let a more established facility do the manufacturing.

And that is really King's responsibility.

Okay.

And the, Matt, the margin reflected in what you have recognized in the third quarter is comparable to what you will earn once commercialized?

Yes, that is correct.

Okay.

I think that is all I had.

Thank you.

And there are no further questions on the line.

Okay.

With that, we are always available if people want to ask questions and thank you for your interest.

Take care.