DURECT Corp (DRRX) 2010 Q3 法說會逐字稿

Greetings, and welcome to the DURECT Corp third quarter 2010 earnings conference call.

A brief question and answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Matt Hogan of DURECT Corp.

Mr.

Hogan, you may begin.

Thank you.

Good afternoon.

Welcome to our third quarter of 2010 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'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 and 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 latest 10-Q under the heading, Risk Factors.

Let me now turn to our financials.

Total revenue was $8.1 million in the third quarter of 2010, which compares to $8.4 million in the third quarter of 2009.

But bear in mind that we recorded $3 million in revenue, and $2 million of cost of goods sold in the third quarter of 2009 related to our sale of excipients to King.

Revenue from our R&D collaborations was $5.7 million in the third quarter of 2010, as compared to $3 million in Q3 2009.

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 3%, and were $2.4 million in the third quarter 2010.

Our gross margin on these products was around 65% in the third quarter of 2010.

These product lines continue to be strongly cash flow positive for us.

R&D expense was $8.1 million in the third quarter of 2010, as compared to $7.6 million in the third quarter of 2009.

These figures included stock-based compensation of around [$2.2] million in the third quarter this year, and $1.7 million in the third quarter last year.

SG&A expenses were $3.8 million in the third quarter 2010, as compared to $3.6 million in the third quarter 2009.

These figures included $691,000 in stock-based compensation in the third quarter this year, and $785,000 in stock-based compensation in the third quarter last year.

Our net loss for the third quarter of 2010 was $4.6 million, compared to a net loss of $5.5 million for the same period in 2009.

At September 30, 2010, we had cash and investments of $53 million, compared with cash and investments of $41.6 million at December 31, 2009, and $57.2 million at June 30, 2010.

So our cash consumed during the quarter was $4.2 million, down from $6.1 million in the second quarter of 2010.

Given the Hospira transaction in June, and our current spending plans, we believe we will be cash flow positive for 2010 as a whole by about $6 million.

Assuming that is the case, our average cash burn rate over the last six years, while we've been building our pipeline, will have been about $10 million per year.

Subsequent to the end of the third quarter, we were notified that we had been awarded grants totaling $733,000 under the Patient Protection and Affordable Care Act of 2010 for three qualifying therapeutic discovery projects.

We expect to receive this funding in the fourth quarter of 2010.

And these funds are obviously non-dilutive capital to support our programs, based on expenditures we made in 2009.

Thanks for joining the call.

I will turn it over Jim to discuss non-financial matters in more detail.

Thank you, Matt, and hello, everyone.

The third quarter was another quarter of strong progress for DURECT.

The most significant news is around Pfizer.

With their potential acquisition of King, they would now become our partner on potentially five development programs.

For REMOXY, we continue to support King's progress towards resubmission of the NDA in the fourth quarter of 2010, now with Pfizer being the potential commercial partner here.

For POSIDUR, it's continued enrollment in BESST, the pivotal US phase III trial, with our projected completion of enrollment in the first half of next year.

For ELADUR, King continued enrollment in the large phase IIb study for chronic lower back pain.

They now expect top line results in the first half of 2011.

We also continue activity on many other fronts, and I'd like to go through more detail on these projects now.

Starting with REMOXY.

REMOXY is our 12-hour extended release and tamper-resistant form of Oxycodone.

It is based on our ORADUR technology, which affords a very nice tamper-resistant opportunity, in that our ORADUR products have the potential to reduce abuse from the attempts vis-a-vis snorting, or smoking, injecting and/or trying to dissolve in drinks.

REMOXY ORADUR has been a substantial product, and it has attracted more and more fundamental partners over time.

We started working with the ORADUR platform with narcotics in the early 2000s.

We directed a deal with Pain Therapeutics in December of 2002.

In November, 2005, on the heels of completion of the first Phase III, successful Phase III trial for this product, King Pharmaceuticals took over the commercial rights for this product, REMOXY.

Then most recently, just last month, as we near the NDA resubmission for this product, Pfizer has now announced the acquisition of King Pharmaceuticals, and will be the commercial partner for REMOXY.

This acquisition by Pfizer further validates the ORADUR technology platform, as well as the potential for tamper-resistant opioids.

There is a strong fit with Pfizer's desire to grow in their pain franchise on the strength of Celebrex and Lyrica.

As well, it substantially increases the sales and marketing muscle for this product, and the ability to exploit the product on a worldwide basis.

With their greater resources, our hope is that Pfizer will be able to more aggressively develop the other three opioids under this agreement.

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

Take a moment to look at the potential financial impact of this product on DURECT.

The sales of Oxycontin in 2009 was $3.2 billion, and DURECT receives a royalty on net sales that start at 6%, and peak at 11.5%, with the 11.5% being around $1 billion.

Whatever you might have thought about how well King would do with REMOXY, you probably have to think that Pfizer would do two to three times that in sales.

It is not inconceivable that over time Pfizer could capture 0.5 the market or more.

So if we take a look at this product at market opportunity, if we assume Pfizer does somewhere between 10% to 50% penetration into this marketplace, our royalties to DURECT would be somewhere between $20 million to $150 million.

This would have a large impact on DURECT, especially given our cash consumption on average of $10 million over the past six years.

Now moving on to POSIDUR, our post-surgical pain product.

In the first quarter of this year, we announced the initiation of the POSIDUR Phase III program, a program that we nicknamed BESST.

BESST stands for Bupivacaine Effectiveness and Safety in SABER trial.

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

In April, we had communication with the FDA that increased our confidence in the BESST design, and overall NDA strategy.

This feedback centered around the safety and evaluation of diverse patient population that is likely to be exposed to the marketed product, and addresses the FDA's comments provided during past interactions.

Of course, this is all subject to data review from the entire POSIDUR development program.

We expect to dose about 300 patients in BESST, and we anticipate completion of enrollment in the first half of 2011.

In June of 2010, we signed up Hospira as our partner for the US and Canada for this product.

We selected Hospira because, first off, they're in the right place.

That is, they are the former (inaudible) hospital sales product division.

And the sweet spot for Hospira is in the sales to the hospitals.

They had 2009 sales of about $3.9 billion, with $404 million in net income.

They are a major player in injectables.

And they are successfully selling Precedex in the hospital to anesthesiologists.

They have a dedicated acute care sales force.

And as far as POSIDUR itself is concerned, they are our manufacturer, and they know the product very well.

With Hospira, we have a partner to whom POSIDUR is strategically important, and they are motivated and committed towards the product.

We talk about the terms of this deal.

We received $27.5 million up front, with $185 million in potential additional milestones.

We receive double-digit royalties from net sales, and DURECT retains the commercialization rights of this product still in Japan and Korea.

We maintain equal control over the NDA, and responsibility for development expenses.

Hospira though is going to be responsible for commercialization of the product in the US and Canada, including sales, marketing and launch costs.

We pause for a moment and think about where this product is in Phase III.

And if we look at the two deals we have in place, one with Nycomed for the majority of the ex US market, and then the deal with Hospira in the United States, and we look at the upfronts and milestones received for this Phase III product, we received $49.5 million so far.

With the additional potential milestones of $365 million.

So that gives one the sense of the opportunity for this product.

They are actually speaking of the market size.

There are over 70 million procedures in the United States annually for which this product could be applicable.

We've done some targeted market research around this, and (inaudible) that population down to about 32.5 million.

Then assumed about a 30% penetration in that market, with yields about 10 million out of the 70 million.

Then we have done two pricing studies, with prices ranging from $250 most recent -- at $400 based on the pharmacoeconomic advantages that we saw in a hernia trial that we conducted.

And that yields a market potential for this product in the US somewhere between $2 billion to $4 billion.

Now, I would like to talk about ELADUR, our transdermal bupivacaine pain patch.

This is differentiated therapy for acute local pain.

ELADUR provides three days of extended release, versus the market leader in this area, Lidoderm, which provides 12 hours of pain control.

Lidoderm also has had some issues in the past with breakthrough pain during their 12 hours when the patch is not on.

ELADUR is a thinner system with a breathable backing.

It has a potential for less irritation.

It is also more patient friendly, in that the patient can not only wear the system for three days, but they can exercise with it.

You can go for a swim, you can shower with it on.

ELADUR has the opportunity to be a best-in-class product in a $715 million market.

This original deal was done with Alpharma, they in turn then were bought by King, and now it looks as if King is going to be bought by Pfizer.

So this has been another product that's been in transition for us to -- for stronger and stronger commercial partners as we've gone along.

We originally received $20 million upfront with a potential of $243 million in potential milestones.

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

King, and now Pfizer, is responsible for all remaining product development, including sales, marketing, manufacturing and launch costs.

In April, King commenced a 260 patient Phase IIB study in chronic lower back pain, and they expect topline results in the first half of 2011.

Next, I would like to update with regard to the transdermal fentanyl patch.

This has the potential to be a best-in-class therapy for chronic pain.

It's seven days, versus the two- to three-three day fentanyl patches, or the twice-daily oral opioids.

It offers advantages to the patients, as well as the health care system.

Duragesic revenue, that's the two- to three-day fentanyl patch, in 2009 was about $900 million, and the extended release opioid market in general in 2009 was greater than $4 billion.

DURECT retains the world-wide rights for this product, and we are currently in licensing discussions, and updating our market research while we are evaluating our future development strategy for this product.

Regarding other R&D activities.

First, focusing on our SABER injectable depot technology, here DURECT has a nice opportunity in the area of biobetters.

We're looking to develop small-volume injectable products, that's products that would deliver somewhere from 0.25 cc to 0.5 cc subcutaneously, to enable these proteins and peptides to be released on a very nice control-release for a week to a month.

We have multiple feasibility projects ongoing, and if one looks at the new health care bill that's out there, the data that we developed for these new BLAs has the opportunity to be protected for 12 years.

With regard to our ORADUR technology, we also have some research activities and early development activities going on here.

Here we are building on our efforts from what we have done with REMOXY and the other narcotics.

Our ORADUR technology allows for extended release oral products that are also tamper resistant.

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

And in fact, ADHD drug sales in 2009 were more than $4 billion.

We are working with Orient Pharma to develop an ORADUR ADHD product for selected Asian and South Pacific countries, and DURECT retains the rights for these products for the rest of the world.

Orient Pharma will fund the Phase I as well as the first Phase II study.

And we recently started a Phase I study with multiple formulations.

In summary, I would like to outline the potential key drivers for DURECT over the next 12 to 18 months.

For REMOXY, its resubmission to the NDA by King in the fourth quarter, with the expected PDUFA date six months after resubmission, and a potential launch in 2011, now with Pfizer selling the product.

With POSIDUR, it is conducting BESST, our US Phase III program, with completion of the enrollment projected for the first half of next year.

Potential new collaborations, this would be POSIDUR in Japan, Korea.

And fentanyl patch on a world-wide or regional basis, and other undisclosed programs.

For ELADUR, it is completion of the Phase IIB by King/Pfizer with topline results in the first half of 2011.

And for the transdermal fentanyl, it's a potential for a partnership and restarting the clinical program.

And, finally, advancing our other programs.

The other ORADUR opioids, now with Pfizer, the ORADUR ADHD program, the bio-tech feasibility projects, and other undisclosed programs.

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

We will be conducting the question-and-answer session.

(Operator Instructions)

Our first question is coming from the line of David Amsellem.

Your line is now live.

Hi.

This is actually [Mische Diederman] for David.

Can you discuss with us what you see as the advantages for POSIDUR's gel-based delivery system?

And whether you believe there is an inability -- whether you believe the inability to dilute the drug with salient poses any possible commercial challenges?

Gel-based POSIDUR --?

POSIDUR, actually, if you were to pour it out of a bottle, it is very fluid.

It is actually not that distinguishable from water.

It is slightly more viscous.

The way it is delivered -- with our five CCs, we are actually able to get to all of the various surgeries that we wanted to, whether it is hernia or shoulder or some of the much larger surgeries we are doing now.

I don't think you really need -- when they use the naked product today, they will sometimes dilute it up into 20 CCs and inject all around.

But that's not what one needs to do for our product.

I don't know, Joe, if you want to --

Yes.

This is Joe Stauffer, Chief Medical Officer.

(inaudible) as Jim described, it is typically drawn up in a 20 CC syringe.

Sometimes it is diluted, and sometimes it is not.

It's given as a blind infiltration by the surgeon as they close the wound.

Our drug has a very specific delivery mechanism where it is drawn up by the surgeon, it is not diluted, it is literally drawn right out of the vial.

It is easily syringable, and it is placed right at the surgical site under direct visualization.

So, it is easy to draw up a syringe, it is easy to see in the syringe, and it's easy to inject out of the syringe into the wound site.

If I could add to that.

I think the advantage of POSIDUR is that it as very small volume, and that you cannot dilute it.

In fact, the advantage of the small volume is that you can actually pack a lot of activity at the site where the pain really is.

So, you can actually be most effective and, therefore, have the highest local concentrations.

And it is all about the local concentrations for duration.

And the fact that you cannot dilute it is actually a bonus.

Because once we have defined a product with specific delivery characteristics, you cannot screw around with it, you cannot modify it.

It is what you get.

That is a big short coming of people who attempted and not been tremendously successful.

These products -- they can't be stored -- they have to be stored with refrigeration, and they have problems with the dilution and effect of the drug, and it's actually released for less than 24 hours instead of the three days.

Our product can be stored at room temperature, it's always going to deliver for the three days, it's a much more refined technology and system.

That is very helpful, thank you.

Just one more question.

With Pfizer, likely taking over talks with respect to REMOXY, and ELADUR, do you believe there will be less communication now?

Will you be able to release the results?

Will there be any issues around that?

Very good question.

I think it really needs to be determined after the King acquisition is closed out.

We certainly, as a smaller company, have certain things that we need to disclose.

But we have to take into consideration our partners, and we certainly will.

Thank you.

Our next question comes from the line of Jeffrey Deseifert.

Good afternoon.

Several questions, if I may.

First of all, on REMOXY, as you can imagine we are all very much curious as to what is going on.

You have made a number of comments where you are saying you expect King to resubmit in the fourth quarter of this year.

Can you confirm whether that is based on any recent conversations, or just based on their last public pronouncements, which were in August of this year?

It is information after August.

Yes.

Can't give you what day we talked to them last.

We can't get specific, but nothing is changed.

We are still on for the fourth quarter.

As a follow up on REMOXY -- and this is one perhaps for Joe, although anybody could chime in -- Would you expect that the FDA would want to call a second or new advisory committee to review the resubmission, as opposed to the initial 2008 committee?

And if so, do you think it might impact the ability to meet -- ?

The end of your question broke up.

Would it meet the six month time line.

Whether or not the agency has another meeting, clearly that is their call if they want to call a meeting, they can do it.

They have already had a meeting with King.

And with PTI.

And a lot of the major issues around clinical and safety were handled.

And that's typically what they do at these types of advisory meetings.

I'm not saying it's a 100% given that they will not require or ask for a meeting.

This is FDA asking for a meeting.

I think it's a much lower likelihood at this point than, say, the first time around, or even when I was doing it with Alpharma and (inaudible).

And regarding the review time of the agency -- once that submission goes in and the agency decides they have all the information they need, they give a six month review clock to that.

Sometimes they can actually review it sooner than six months.

We always assume the worse, and it will be six months or longer.

Sometimes it can actually be sooner.

Thank you.

So shifting to POSIDUR, can you --?

You reaffirmed your first half of 2011 completion of BESST.

Can you give us any it feel as to how many patients have actually been dosed so far?

And have any particular issues come up within the process?

I can't tell you how many patients have been dosed, and with respect to BESST, it is an ongoing trial, so it really wouldn't be appropriate to comment on anything until we're able to complete the study on blinded data.

All right -- Could you share with us, to what extent -- as part of -- was DURECT involved in any discussions about ELADUR as Pfizer was doing a review of the King portfolio?

Did they come and -- How much interest, do you feel, there was for the ELADUR product?

We couldn't comment on anything surrounding Pfizer and King.

I don't think it would be appropriate.

Lastly, on TRANSDUR -- we've had the same story the last several quarters -- you're in discussions, you're in discussions.

Could you help us understand a little bit better what are the issues?

It seems like things aren't moving at all on this --?

We are continuing in conversations with people.

We also are collecting some new market research ourselves.

Because the market research data that ENDO performed this -- those data are quite old.

And also there has been a change.

There is a new product coming to the this market place, which we think is actually going to grow and be a better opportunity for the TRANSDUR sufentanil patch.

And that is -- there is a buprenorphine patch that will be launched by Purdue, I believe early next year.

It's been approved and I think they are waiting for the 2011 to launch it.

And that is a less potent opioid.

But nonetheless it is a seven-day product and so it will be very interesting to see where they price that.

And how well that product does -- which we think it will probably do very well.

And it should be a nice (inaudible) for the trans fentanyl product on the commercial side.

Okay.

But, so following on on that -- We are approaching the two year hurdle from when ENDO returned the product.

As investors it all seems very nebulous and gray.

And you have talked at some stage of possibly launching it into Phase III on your own, but you are also continuing to have discussions.

Yes, I think, I understand the tenor of your question.

If one looks at what DURECT has been doing.

We been developing products that we can afford to do, in the time we can afford to do them.

And we have taken POSIDUR into Phase III ourselves, and we've done a deal with Hospira.

And now we have that partnership in place.

And we're able to shift our resources around, and so we're evaluating as we go forward.

We continue to look at this possibility.

But with any business you have to balance the cash in and the cash out.

Over the last six years we've spent on average $10 million.

And we are, I think, doing a very good job of very prudently developing this pipeline and advancing it.

And we are now evaluating the opportunity that we have in front of us.

Deciding -- Do we regionally partner?

Do we globally partner?

Do we take it for ourselves for a while?

Do we move something else in advance of it?

There is all different things we can do as we look at these things.

All right.

Thank you.

Final question for Matt.

Matt, you indicated positive cash flow for this year of $6 million.

Was that correct?

Right.

By my definition that means that the end of the year -- we end this year with more cash by $6 million than we started the year.

That's what I am saying.

And, using the first three quarters, you are at plus $18 million.

As of September 30.

Do you expect to spend, to burn $12 million next quarter?

Let me go back and check your math.

It doesn't sound right to me.

We can do it off line.

That doesn't sound right.

In fact, I know that is not right.

Yes, that is not quite right.

But, the most relevant metric would be our current burn rate last quarter, which was a little over $4 million.

And so, that is the current run rate, as things stand.

It could increase, if we decide to invest in additional things.

But for now, that's the current run rate.

Thank you very much.

That ends my questions.

Our next question comes from the line of Jim Molloy.

Thanks for taking my question.

I wanted to go over a few things on REMOXY if I could.

At the end of the day, you have seen PK spike nicely following the announcement and DURECT did not.

Can you walk through the relative inputs that PK and DURECT have to the product?

Is it shipped right from our dock to King and now Pfizer's door?

Does it stop by PK for an enhancement?

Can you walk through and clarify what exactly happens there?

Sure.

With regard to the relationship on the deal terms, we get 6% to 11.5% royalties.

They get it 15% to 20% royalties.

They are pretty much a REMOXY-only company.

They have a couple of small products, and I think it is more of a one-product play.

And that might be part of what you saw.

Some people don't really realize that DURECT is the intel inside, with regard to REMOXY.

And they will understand that more over time.

We are, from a development side, DURECT is working directly with King, and presumably then,directly with Pfizer with regard to REMOXY.

PTI is no longer involved with that product.

And as far as the manufacturing of the product, we make certain insipient that will be forwarded to the manufacturing facility where the product itself will be made.

That mostly likely will now be a Pfizer facility, and PTI is not involved in that process.

They do obviously get their royalty, though.

Then I understand there is, on December 2, there is a joint REMs meeting.

Is that it something you will be a part of, or focused on?

This is Joe Stauffer.

That meeting, so far as I know, is really focused on [Oppata] and their new tamper resistant, or crush resistant, product.

We are not involved in that.

We were not requested to be at the meeting.

I will very likely be at that meeting myself just observing and listening.

But, so far as I know, that's the joint meeting only about Oppata and [Endo].

That certainly makes sense.

Maybe in your -- What are your thoughts on what might come out of this and potentials for the FDA?

Any shift in the FDAs thinking on getting something on the label for [Omoxy] or [Opana] or any of these tamper resistant drug that is would allude to greater safety on these drugs.

My suspicion is that the FDA will stick to their guns and be consistent with what they have done with the most recent approvals, and that includes (inaudible) and Purdue's new product.

A lot of what will be discussed, honestly, depends on what ENDO has proposed in their label.

That's my sense.

I don't know that.

I have no information there.

But typically, that's why they are calling these types of meetings.

But we will find out a few days before the meeting, and really know exactly what they are looking for.

That is speculation on my part.

And that likely will have an impact on how the REMOXY label looks ultimately as well, I assume.

I would think so.

I think we are all going to look very consistent to each other.

The last question for Joe.

The bupivacaine -- I'm sure you're using Herculean efforts to get it going and on track for the second half of '11 data.

Any thoughts on and any potential hiccups or potentially finishing earlier?

I would always love to finish things earlier.

But for right now, I'd say we are on track for the first half of next year.

First half is an oral complete, and then data the second half, correct?

That's correct.

How quickly would you imagine you would be able to turn around, assuming the data looks good, to file and NDA?

Well, it all depends on the data.

It's not just the date from this trial, but also all the legacy data base migration from all the other trials that we have done and that Nycomed has done.

And that is also a Herculean effort after this particular trial is done.

So, sometimes it can take two to three months to even understand your data.

And then once you have it, then it can take you up to nine months sometimes.

Thanks.

Thank you for taking the question, guys.

Our next question comes from the line of Nick Farwell.

Just a quick point of clarification.

When you mention that the cash burn in the third quarter that was just completed was a little over $4 million, and you got the grant for a little over $700,000, and you are suggesting that the cash burn would be consistent with the fourth quarter, I am assuming you are -- or, perhaps you aren't -- you are taking into consideration the $700,000.

Maybe I am being a little conservative.

We haven't gotten that, yet, and I tend to round a little bit, rather than get hung up on precision.

Let's say we burn $5 million, plus or minus.

That ends at $48 million, and we started the year with about $42 million, that's about $6 million.

Okay.

Then the second question is, How do you P&L that?

Does that come under --?

Good question.

We will probably record it as other income.

Okay.

Thank you very much.

I appreciate it.

Thank you, there are no further questions at this time.

Do you have any closing comments?

No.

I appreciate everyone's interest.

If you have questions, always feel free to call management.

That does conclude today's conference.

You my now disconnect your lines at this time, and thank you for your participation.