DURECT Corp (DRRX) 2009 Q4 法說會逐字稿

Good day and welcome to the DURECT Corporation year end 2009 financial results conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr.

Matt Hogan.

Please go ahead, sir.

Good afternoon.

Welcome to our year-end 2009 earnings conference call.

This is Matt Hogan, the 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 June date 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 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-Qs and 10-K under the heading risk factors.

Let me now turn to our financials.

Total revenue was $4.9 million in the fourth quarter of 2009 which compares to $7.7 million in the fourth quarter of 2008.

Revenue from our R&D collaborations was $2.8 million in the fourth quarter 2009 as compared to $5.9 million in the fourth quarter 2008.

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 about $200,000 or 11% from $1.9 million in the fourth quarter last year to $2.1 million in the fourth quarter this year.

Our gross margin on these products was around 59% in the fourth.

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

R&D expense was $9.5 million in the fourth quarter of 2009 as compared to $8.5 million in the fourth quarter 2008.

These figures included stock-base compensation of $1.1 million in the fourth quarter 2009 and $1.3 million in the fourth quarter last year.

So if we take out the stock-based comp, R&D expense increased by about $1.3 million.

SG&A expenses were $3.5 million in the fourth quarter 2009 as compared to $3.7 million in the fourth quarter last year.

These figures included $656,000 of stock-based compensation in the fourth quarter this year and $722,000 of stock-based compensation in the fourth quarter last year.

If you exclude the stock-based comp, SG&A expense declined by about $83,000.

Our net loss for the fourth quarter 2009 was $9 million compared to a net loss of $18.4 million for the same period 2008, although that fourth quarter last year contained an unusual non-cash charge of $13.5 million due to a discontinued research program.

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

That figure was $5.6 million.

For all of 2009, our net cash consumed, excluding the financing we did, was $21 million as compared to our guidance at the beginning of the year of $28 million to $32 million.

At the end of the year, we had cash and investments of $41.6 million compared with cash and investments of $52.7 million at the end of 2008.

Over the last five years during which we've invested in building and advancing our pipeline of late stage products, our burn rate has averaged out to less than $14 million per year.

In large part, this has been a function of our success and corporate licensing activities.

Let me now turn to our financial guidance for 2010.

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 2010 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 2010 of about $23 million to $27 million.

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

These include our Sufentanil patch for Europe and for Asia, POSIDUR for the US and Japan, as well as various internal programs we haven't really described publicly in detail.

Thanks again for joining the call and I'll now turn it over to Jim for a discussion of non-financial matters.

Thank you, Matt, and hello, everyone.

I would now like to provide an update with regard to our (inaudible) since our last earnings call.

With regard to POSIDUR, we had positive results from our Phase 2B shoulder study, we started BESST, the pivotal US Phase 3 trial.

We amended our licensing agreement with Nycomed.

Additionally, Nycomed continued with two Phase 2B study they have going on, one in hysterectomy and the other in shoulder.

REMOXY has continued progress toward resubmission of the NDA.

(inaudible) has been putting in place plans with King to start the Phase 2B study in the first half of this year and for business development it's activity on the licensing front with multiple programs.

Let's now go through the major programs.

We'll be starting with REMOXY.

REMOXY is a tamper resistance form of oxycodone.

It provides resistance to various methods of abuse including snorting, smoking, injecting, and attempted dissolving in drinks such as alcohol.

The regulatory history of REMOXY in the recent past is that the NDA was submitted in June 2008 and a priority review was granted.

A complete response letter was received in December of 2008 with the FDA asking for additional non-clinical data.

King assumed control of the NDA from Pain Therapeutics in March 2009 and King met with the FDA in July 2009.

Post that meeting, King stated that they had established a path to address at the FDA comments.

King expects to resubmit the NDA this year with an expected PDUFA date of six months after resubmission.

There is significant potential financial impact of REMOXY in the potential sales for DURECT.

The market opportunity for Oxycontin -- the market actually for Oxycontin in 2009 yielded sales of around $2.8 billion.

DURECT receives royalties on REMOXY sales by King that start at 6% and go to 11.5% with 11.5% being around $1 billion.

If one assumes King achieves market penetration somewhere between 15% to 30% in this market, that would yield REMOXY annual sales somewhere in the range of $420 million to $840 million and royalties to DURECT that would be between $30 million and $65 million.

Now I'm going to turn to POSIDUR.

POSIDUR is a first-in-class opportunity.

It's the first injectable product available to surgeons that is designed to control pain locally for two to three days post surgery.

In a 120 patient Phase 2B hernia study, POSIDUR demonstrated 30% better pain control as compared to placebo in which case the patients were taking narcotics that was essentially standard of care.

If we look at narcotic use, we see it was three-fold less for those patients taking POSIDUR.

We've seen no unacceptable safety concerns in over 380 patients dosed to date with POSIDUR and dischargability announces yielded a pharmacoeconomic savings for the use of POSIDUR at around $620 per patient.

In December 2009 we announced results from a Phase 2B shoulder study from POSIDUR.

This trial design was a double blind placebo control study that involved 60 patients undergoing arthroscopic shoulder surgery.

We saw positive results for POSIDUR.

We saw consistent reduction in pain scores in parallel with reduced opioid use.

POSIDUR's safety profile was comparable to that of placebo.

These data were not significant, but this study was not sized for that.

However, if we were to increase the patient numbers to around 280 patients, we would expect to see a positive T value from this model.

We have compiled an extensive Phase 1-2 clinical program for POSIDUR.

In fact, we have completed 12 studies,.

We have two more that are in progress.

These have involved multiple surgical models including hernia, hysterectomy, appendectomy and shoulder.

Over 380 patients have been exposed to the drug and we see no significant clinical safety concerns.

That leads us to BESST.

BESST is an acronym for Bupivacaine Effectiveness and Safety in SABER trial.

It is the POSIDUR US pivotal Phase 3 study.

BESST was designed based on our FDA interactions, input from expert scientific advisors and teachings from our extensive Phase 2 program.

It's a multi-centered, randomized double blind control trial in various surgical procedures using 5 mL of POSIDUR.

We expect about 300 patients to be dosed in this and we anticipate the completion of enrollment in the first half of 2011.

We also anticipate the NDA filing will include more than 600 patients who will have received POSIDUR.

BESST involves three cohorts, the first two being active compared cohorts and the last being placebo control.

The first cohort is POSIDUR versus Bupivacaine HCL solution after laparotomy.

The second cohort is POSIDUR versus Bupivacaine HCL solution after a laparoscopic cholecystectomy or gallbladder removal, and the final is a placebo controlled component.

This is POSIDUR versus placebo control or SABER -- excuse me, POSIDUR versus SABER placebo after laparoscopic assisted colectomy.

The primary end points for cohort 3 are first to the means, pain intensity on movement, area under the curve during 0 to 72 hours post-dose, and the second is the mean total morphine equivalent opioid dose for supplemental analgesia taken during 0 to 72 hours post-dose.

I want to remind our shareholders of our relationship with Nycomed.

This collaboration with Nycomed was signed a number of years back and on this signing we received $14 million up front.

We also received $8 million on a clinical milestone that was achieved with a Phase 2B hernia data.

We still have $181 million in potential milestones from this collaboration.

(inaudible) sales will receive 15% to 40% blended royalties on net sales, additionally a manufacturing markup, and we retain all the rights of this product for US, Canada, Japan and some other countries around the world.

Nycomed has the commercialization rights with regards to Europe and multiple other countries where they are responsible for sales, marketing, and launch costs in these territories.

We recently amended our Nycomed agreement.

This amendment separated the decision making and funding for the clinical programs in the US and Europe.

This amendment gives DURECT more partnering flexibility for the US and Japan.

It also reflects divergence in the clinical trials for the US and EU approvals.

The clinical programs we're diverging in scope, timing, and cost with DURECT conducting BESST is what we hope will be our single Phase 3 study, and with Nycomed continuing their Phase 2 work and then advancing in to what will likely be multiple Phase 3 trials for EMEA.

We continue to jointly manage and fund other development activities such as the non-clinical and CMC components.

Nycomed has been a great partner.

We look forward to working with them to bring this product to patients in numerous countries around the world.

As part of this amendment, we also expanded Nycomed's licensing territories to include China and 10 other countries.

Sales in these countries will be incremental to sales of Nycomed's original territories with our royalty rates of 15% to 40%.

These additional sales would also be applied to sales milestone payments.

I will now move on to our TRANSDUR-Sufentanil patch.

This product provides seven days of pain therapy versus two to three days for fentanyl patches or twice daily oral opioids.

This product offers advantages in three areas, specifically patients, healthcare system, and partners.

As far as patient advantages, we're looking at uninterrupted delivery of pain relief.

We have a smaller size patch.

It's about one-fifth the size of Duragesic with our largest size system being about that of a postage stamp.

We have the potential for less irritation.

We may have a wider therapeutic index with potential side effect advantages over fentanyl and/or oxycodone.

Healthcare system advantages here we're looking at REMs, less potential for divergence with only four patches per month versus 10 or more for the other patches or 60 pills, potential for reduced cost of therapy and the potential for producing breakthrough medications.

As far as commercial partners, we offer here a best in class therapy with a cost of goods advantage of only one patch per week versus three or four.

From a revenue standpoint, the Duragesic revenues in 2009 were about $900 million.

Extended release opioids in market in general in 2009 was over $4 billion.

With the TRANSDUR-Sufentanil we have the opportunity to capture significant market share from the fentanyl patches as well as from the oral extended release opioids.

We have held the successful end-of-phase 2 meeting with the FDA in 2009.

Phase 3 is ready with a 505B2 pathway to approval.

DURECT holds the worldwide rights for this product and we are in active licensing discussions.

The next step will to be start Phase 3 pending partnering this program or POSIDUR.

The last product I'll update on today is Eladur, our TRANSDUR- Bupivacaine pain patch.

It offers differentiated therapy for acute local pain.

Eladur is intended to provide up to three days of extended pain relief versus lidoderm which is 12 hours on and 12 hours off with associated breakthrough pain.

Eladur is a thinner patch not much thicker than a piece of paper with a breathable backing.

It has the potential for less irritation, less active in the patch.

Bupivacaine is more potent than lidoderm -- excuse me, Lidocaine, and has fewer [acipients].

We have four acipients in our patch versus 16 for lidoderm.

Eladur is also more patient friendly in that one can wear it when you exercise, for example, go swimming or running or take a shower with it.

The market opportunity for this product is quite large over 750 million and we think we have a best in class opportunity.

Eladur was originally licensed to Alpharma and King and buying Alpharma has taken over the rights of this product.

This deal afforded DURECT $20 million in upfront licensing fees with an additional $243 million in milestones of which 93 occurred during the development time frame.

King is responsible for all remaining product development including regulatory filing on a worldwide basis, sale marketing, manufacturing, and launching.

We expect them to commence Phase 2B in the first half of this year.

DURECT receives a royalty on net sales and reimbursement for development expenses.

I will now update briefly with regards to some of our research activities.

Four our SABER [depo] technology, our opportunity here is in the area of bio betters.

Our goal is small volume injectable products.

One-quarter to a half cc subcu with the potential to make biotech products last for a week to a month.

We have multiple feasibility projects ongoing in this area.

With regard to our order technology, DURECT owns all the intellectual property generated in developing REMOXY and the other opioids in the alliance with King and Pain Therapeutics.

Our order technology allows for control release oral products that are tamper resistant.

The second category widely abused prescription drugs is in the area of ADHD drugs.

In 2009, we signed a deal for order ADHD with Orient Pharma for selected Asian and South Pacific countries.

Orient Pharma will be funding the Phase 1 as well as the Phase two 2 studies in this area.

We expect these Phase 1 studies to start in 2010.

In summary, I'll review the potential key drivers for DURECT over the next 12 to 18 months.

For REMOXY it's resubmission by the NDA to King this year.

The expected PDUFA date six months after resubmission and the potential launch in 2011.

For POSIDUR, it's conduction BESST our US PHase 3 program.

Potential for new collaborations with POSIDUR in the US, Canada, and Japan for the Sufentanil patch on a worldwide basis and for other undisclosed programs, for TRANSDUR Sufentanil, it's the start of Phase 3 program pending funding.

For Eladur, it's initiation and conduction of the Phase 2B by King as well as advances in our other programs including our other order opioids, order ADHD and our biotech feasibility projects and some undisclosed programs.

Operator, we'd now like to take any questions you may have.

Thank you.

(Operator Instructions) Our first question comes from [Jim Molly] with [Caris] and Company.

Hey, guys, thanks for taking my question.

Just a quick question on POSIDUR.

Obviously the safety looking very good, but safety rearing its head at the FDA perhaps a little more recently than it has in the past.

What signal would you look for that -- can you characterize the type of signals you would be watching out for that would be a negative for this drug?

Absolutely.

As I said earlier, we haven't seen any, but we have Joe here today, so I'll let Joe address kind of how we're looking at safety.

Sure.

Bupivacaine as an active has an inherit potential for any cardiovascular or central nervous system problems.

We haven't seen any of that.

So what I'm specifically talking about is stroke, heart attack, seizure if you get the drug into the wrong spot.

We haven't seen any of that.

On the other side, there has been recent evidence of Bupivacaine potentially causing chondrolysis which is breakdown of the cartilage in and around joint spaces.

Our drug has never been studied in and around joint spaces nor do we intend to study it there, so I think we're in pretty good shape as far as the current exposures that we have and all of the ongoing stuff that we're doing, not just us but also Nycomed.

Just to add to that, what we believe we may be developing here is a safer form of Bupivacaine than the naked product today.

Right.

That's also true.

We also know that data we've sent this to the FDA as well.

We actually have demonstrated that the blood levels you do with with Bupivacaine from SABER are actually less than what you see with the currently marketed product which is a pretty strong position for us to be in.

So it's nice to have that in hand, and we'll continue on with monitoring safety, primarily cardiovascular and central nervous system in the best trial going forward.

Excellent.

Thank you very much for addressing that.

Jim, you have mentioned -- or Joe you mentioned hopefully completing enrollment in the first half of next year and then best case scenario or expected case scenario for (inaudible) trial coming out with data?

That is correct.

We had a great investigator meeting at the latter part of last year, and right now things are going according to plan.

So I think the investigators are excited.

We're excited about it as well and things are moving just along and we're still working towards those ends on those time lines.

I'm sorry, second half fourth quarter 2011 early 2012 expected for top line data on the trial?

Actually, what we have said is that we expect the NDA to be filed two years from starting the study which will be January of this year.

Our hope is we will see the data in 2011 and wrap up the NDA for early 2012.

Excellent.

Thanks very much.

That's still on track.

Lastly, on TRANSDUR, I know that in the past you had mentioned I think in the third quarter call that potential partners were in the data room and consultants asking the right questions.

I know this is a long process, takes a while to come to conclusion.

Any updates on where the partnerships stand?

As you know, we just continue and I think the best example that I can give is with regard to the Eladur deal that we did with Alpharma at the time.

They were really kind of the last group in.

We were talking to a half dozen companies at the time, some of the biggest pharmaceutical companies in the world and then along came little Alpharma and with a great team and a wonderful sales and marketing and when they came in and did what they -- what we kind of look at as our beauty pageant aspect of the whole thing with our sales and marketing teams come in to present what way would do, they just blew us away with their opportunities.

So we are constantly talking to people and we never give a projection of when the deals will come.

We just don't, because you can't project these things and you end up giving power to those negotiating with you.

Very hard to know when they are going to wrap up.

Thank you very much for taking the questions, guys.

All right.

(Operator Instructions) Our next question comes from [Nick Farwell], and he is with Arbor Group.

Jim, I just have a quick follow-up.

I'm curious why the timeline to enroll your 300 patients for the BESST clinical extends well into -- I think you said the first half of 2011.

Why is that so long?

This is Joe.

That's because this is a one-dose trial.

It's a one-dose delivery.

However, it's a surgical trial, you have to enroll the right type of patients at the right sights, capture the data in the right way, and one of the biggest issues operationally with a trial like this is to get it through an IRB.

As you know, we have three cohorts in this trial and some of the things that we're doing as part of this clinical trial are not what you would normally see in clinical practice.

For instance, we're doing intensive cardiovascular monitoring for all three days post-dosing.

You just don't do that in the regular real world when you're dealing with surgical patients.

Nevertheless, we have to do it here for regulatory purposes, so you have to pick the right sites you can actually attract the right kind of patients who are willing to have surgery done under those conditions.

Having said that, we are also conducting it not just in the states, but "ex" US as well.

So you have different IRBs that are on different timelines.

Sometimes you have to customize certain things that you do operationally within the trial, and it's not just as simple as, say, doing a bunionectomy trial or even a molar extraction trial.

There are three different cohort, three different surgical models.

Different locations for all of the particular model so those are some of the nuances of why it takes so long.

So I assume the three cohorts are run sequentially, run in tandem, not sequentially.

That's right.

Everything is running all at the same time.

And again, we cherry picked the right kinds of surgeons for the right kinds of cohort.

So what I'm hearing you say on what is a relatively straightforward operation that it requires very unique circumstances to justify the entrance of that person in any one of those cohorts.

That's correct.

I'll just give you an example to add some color.

Particularly when you do a laparoscopic gallbladder removal or laparoscopic cholecystectomy, that's what we have actually in cohort 2.

Typically those patients will come in -- in the real world, those patients will come in the day of surgery, say a Monday, they'll have surgery and go home the next day.

It's a very straightforward procedure.

Happens all the time all over the world.

In our case, we have to do this procedure and then keep them in house for an extra two days and then ask them to fill in more paperwork, even follow up stuff.

You're asking a lot of a patient to do that.

And so that's why, again, the operations themselves are straightforward, but the operations within the clinical trial is that much more difficult, and so we're very meticulous about who we pick and who we let do this.

Okay.

I appreciate it.

Thank you.

Sure.

(Operator Instructions) We'll go next to Dave Windley with Jefferies & Company.

Hi, thanks for taking the questions.

I wanted to follow up on the -- on Jim's question about safety signals and, Joe, you commented I think you called it chondrolysis.

Is it not possible that the FDA would expect you to anticipate that the drug could be used in other surgical models like knee, ACL, MCL, something like that, that would expose the drug around cartilage?

Well, we're not studying it there, number one, the FDA hasn't asked us to study it there, number two.

Having said that, once the drug is approved, the FDA knows that it can have a wide use.

And so one of the things that they asked us to do was study it in some type of relevant what I call bony or hard tissue model, which we've done in shoulder surgery.

We've been very careful when we did that particular model not to go in and around joint spaces.

So one of the concerns that would have as a surgeon and the FDA would have as a regulatory body, based on some of the emerging evidence that they've seen come out with and of the current products is that when and if those drugs can get into joint spaces, that can cause cartilage breakdown.

We're not going there, and again those things happen with pumps.

We're not a pump, and we're placed with direct visualization with our drug right in the spot, so we believe we have a pretty robust package here of the data that's already been generated but also what we're looking at with BESST and what our European partners are doing.

Dave, just to add to that, we don't anticipate -- we don't expect to have on the label anything for intra-articular use or inside the joint.

These catheters that have had this problem historically were approved as devices and they don't really know at this point in time whether it is the catheter itself in the joint space, whether it's the saline that's used as a carrier for the Bupivacaine being pumped through at a fairly rapid rate which could be pushing away nutrients.

Or the high volume flow.

Or the drugs, because chondrolysis, the cells that make up cartilage, they survive almost on the edge of a desert if you think about it.

They get their nutrients by diffusion through the synovial fluid, and if that is being replaced by saline at some great rate, one does not know what you end up doing to them.

Right.

Okay.

It would be precedent for the FDA to hold up an application for off label, would there not?

No, not necessarily.

How a but to REMOXY?

Abuse is off label.

No one would ever prescribe for abuse.

I hear what you're saying.

Abuse is an unfortunate sequela that can potentially happen with opioid drugs.

In the case of our drugs here, we have absolute control, well, we don't have control as a company but the surgeons who are delivering the drug, it's a one-time shot controlled use situation here.

So the REMOXY situation where there has been no abuse with REMOXY, it's not approved yet, but in our case I think we're good to go.

I think our label will -- we have a pretty broad indication that we're shooting for here and the data that we're generating with both Phase 2 and Nycomed what we have in Phase 3, that data will instruct the label.

Those label negotiations, as you're probably well aware, we get into a lot more detail of that later in the NDA stage at the pre-NDA filing and all through the review as well.

And if it is labeled not to be used in a joint and a surgeon uses it in a joint and causes a problem, then that person is liable for that.

Sure.

Exactly.

And whoever our commercial partner is, they'll be well tuned into appropriate promotion here.

They're not going to be promoting it for use in joint spaces.

You're right.

That clearly would be a potential for off label use and, as I said before, up until now and going forward, we have no intention to ever use this drug in and around anyone's joint space.

Right.

Okay.

Slightly different question down a different road here.

I was wondering how much of the $35 million or so in R&D is, for lack of a better word, payroll-type costs versus AP-type costs?

In other words, how much of your activity are you executing or overseeing with your own people versus executing virtually?

Dave, I didn't walk into this conference room and bring those numbers with me.

So I guess two quick comments that occur to me.

We're going to file our 10-K around March 4 and in there we will give a breakout within R&D of how much we spend on different programs.

So that might be of interest to you.

Okay.

And then I'll have to go back and pull out, if you want it, roughly how much is internal cost versus external costs, broadly-speaking.

Maybe another way to get it.

This is just some basics, but like what's the total head count of DURECT these days?

About 127 people.

And how many people are in R&D?

Let me see if somebody in the room has that.

I think one comment I would make is when you look at our whole head count, by the way, there's a whole series of people that work at ALZET and LACTEL.

You kind of have to carve out, because they're cash flow positive activities.

So having said that, of 127 employees, 77 are in research and development, 22 are in manufacturing and 28 fall into SG&A.

And, again, some of those SG&A, some of those are selling like ALZET and LACTEL.

That's an important piece because They are between what, about 35 people, approximately?

Yes.

And and they generate about $8 million top line, about $4 million bottom line.

So it's a nice little business.

Okay.

And how much how much of your budget are you spending on early stage kind of feasibility work on stuff that you haven't announced yet?

Last year at least it's perhaps in the neighborhood of about $12 million, just looking at it.

Now some of that does get reimbursed because if it's a feasibility project with a partner they're basically refunding that, they're paying for that.

And you would run that through revenue and expense, or it would net out in the expense line?

It would be revenue and expense.

Yes.

Okay.

All right.

Thank you.

You're welcome.

And with to questions remaining, I would like to turn the call back over to your presenters for any additional or closing remarks.

Well, we appreciate everyone's and and look forward to updating you again on our progress in the future.

If you have questions, obviously please call us.

Take care.

Again, that does conclude today's conference call, and we thank you for your participation.