DURECT Corp (DRRX) 2011 Q2 法說會逐字稿

Greetings and welcomes the DURECT second-quarter earnings call.

At this time, all participants are in a listen-only mode.

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.

Thank you.

Mr.

Hogan, you may begin.

Thank you.

Good afternoon.

Welcome to our second-quarter 2011 earnings conference call.

This is Matt Hogan, the CFO at DURECT.

We'll start with a brief review of our financial results.

Then Jim Brown, our President and CEO, will provide an update on the business, and then we will open the call for a question-and-answer session.

Before beginning, I'd like to remind you of our Safe Harbor statement.

During the course of this call, we may make forward-looking statements regarding DURECT's products in development, expected product benefits, our development plans, future clinical trials or projected financial results.

These forward-looking statements involve risks and uncertainties that 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-Q under the heading Risk Factors.

Let me now turn to our financials.

Total revenue grew to $7.8 million in the second quarter of 2011 from $7.3 million in the second quarter last year.

Revenue from our R&D collaborations was $5.2 million in the second quarter this year as compared to $4.7 million in the second quarter last year.

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

Product revenue from the sale of ALZET pumps and LACTEL polymers was $2.6 million in the second quarter, virtually unchanged from the second quarter last year.

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

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

R&D expense was $8.7 million in the second quarter 2011 as compared to $9.2 million in the second quarter last year.

That decrease was mostly due to lower development costs related to REMOXY, ELADUR, our biologics programs, and ORADUR-ADHD, partially offset by higher development costs for POSIDUR and the fentanyl patch.

SG&A expenses were $3.3 million in the second quarter for this year as compared to the $3.6 million in the second quarter last year.

That decrease was mostly due to lower audit related expenses and stock-based compensation expenses.

Therefore, our net loss for the second quarter this year was $5.2 million compared to a net loss of $6.3 million for the same period last year.

Our net cash consumed during the second quarter was $4.4 million, which was considerably less than in the first quarter this year and it was under budget so that at June 30, we had cash and investments of $37.5 million, which compares with cash investments of $41.9 million at the end of the first quarter and $49.6 million at the end of last year.

Our pro forma cash and investments was $39.8 million if you include the upfront license fee from Zogenix which we received in July.

We have essentially no debt other than normal liabilities associated with running the business.

So with that, let me turn it over to Jim to discuss nonfinancial matters.

Thank you Matt.

Welcome everybody.

I'd like to update us with regard to our most significant event for this quarter, starting with REMOXY.

Our commercial partner, Pfizer, received a complete response letter on June 23.

This project couldn't be in better hands than Pfizer's.

We are working with them to resolve the issues and Pfizer is committed to the program.

With regard to POSIDUR, we continued enrollment in BESST, the pivotal US Phase III study.

We are 11 patients from completing enrollment and we estimate another month to finish.

We expect to have topline data in the fourth quarter.

For ELADUR, our main focus going forward is going to be neuropathic pain, in particular post-herpetic neuralgia, and Pfizer is reviewing this program accordingly.

We announced a deal with Zogenix.

This is our first feasibility program to advance into a full development agreement.

[We] continued activity on other fronts.

Let's now go to our major programs in greater detail, beginning with REMOXY.

As oral formulation of oxycodone, it allows 12 hours of extended release as well as tamper resistant.

DURECT's order products are designed to be tamper resistant to multiple mechanisms of abuse, such as snorting, smoking, injecting and dissolving in drinks.

Pfizer received a complete response letter on June 23.

It's largely a CMC [manner] or chemistry manufacturing and control.

Pfizer is committed to the program.

This program couldn't be in better hands and they have the manufacturing experts to resolve the remaining questions.

We are working directly with them as appropriate, given our formulation expertise.

In Pfizer's second-quarter call earlier this week, their CEO, Ian Read, said with regard to the REMOXY approval, and I quote, "On REMOXY, we see it as a when, not if."

Regarding timing, it's unlikely that it will be resolved in less than a year and could be longer.

We want to remind you that, in the end, this remains a huge commercial opportunity for Pfizer and DURECT.

The potential financial impact of REMOXY on DURECT -- I'll outline that briefly.

The worldwide oxycontin sales in 2010 were $3.7 billion and the US oxycontin sales in 2010 were $3 billion.

DURECT receives a blended royalty on sales that start at 6% and grow to 11.5% with the 11.5% being around $1 billion.

If Pfizer were able to achieve somewhere between 30% to 50% market penetration, looking at the numbers from the 2010 sales, that would mean royalties to DURECT of somewhere between $70 million to about $140 million.

This would be quite significant for a company with a historic cash burn of about $10 million a year over the past six years.

Now, I'm going to update with regard to POSIDUR.

POSIDUR offers a new paradigm in postoperative pain control.

It's designed to control pain locally for three days post-surgery.

In a Phase II hernia trial, POSIDUR demonstrated a 30% improvement in pain control versus placebo and a threefold reduction in the use of systemic narcotics.

POSIDUR also demonstrated efficacy versus placebo in a shoulder study with a statistically significant improvement in pain control as well as a statistically significant reduction in the use of opioids in this model.

We are currently conducting BESST, the large Phase III study for POSIDUR.

BESST stands for the bupivacaine effectiveness and safety in SABER trial.

It's a multi-centered, randomized, double-blind placebo-controlled trial versus also there is a placebo-controlled section as well as two segments that are active comparator arms.

It's done in abdominal surgical procedures using 5 milliliters of POSIDUR.

In April o 2010, we received FDA correspondents which increased our confidence in the BESST design and overall NDA strategy.

304 patients are expected to be dosed in BESST.

The pool and blinded interim analysis suggested no need to increase the size of the study.

We have 11 patients to go.

We expect to complete enrollment in about a month with topline data in the fourth quarter this year.

Regarding our collaboration with Hospira, we received $27.5 million upfront last year for this program.

We have $185 million in potential additional milestones.

We'll receive double-digit royalties on net sales that are modified after the Nycomed deal.

DURECT retains the commercialization rights in Japan, which is an opportunity for a future potential business development deal there.

We maintain equal control of the NDA.

Hospira has the commercialization rights for this product in the US and Canada and will be responsible for sales, marketing and launch costs for these markets.

We are equally responsible for the development activities and expenses.

The potential market opportunity for POSIDUR can be understood in two ways.

First is just to look at the commercial partnership that we've put in place.

We've received to date in upfronts and milestones $49.5 million from our two partners, Nycomed and Hospira.

We have potential milestones to come with this product that total $365 million.

If we look at the market opportunity for the US alone, there are over 75 million procedures for which this product could be applicable.

We did a bottoms-up analysis with 235 surgeons and identified 32 million specific procedures.

We estimated a market penetration of about 30% into that $32 million market size that yielded a little bit less than 10 million procedures on an annualized basis.

We did two pricing studies.

The first was a price sensitivity analysis that looked at dropping the price and market penetration.

And below $250 we saw no improvement in market penetration, so we set $250 as a floor and the upper end we'll set at $400 based on dischargability index data that Nycomed did from our hernia trial, which demonstrated a savings of about $620 per patient.

So looking at that price range between $250 and $400, you see a market that starts around $2 billion and grows up to maybe twice that.

So it's a huge market opportunity in the US.

Now I want to update with regard to ELADUR, Our transdermal bupivacaine pain patch.

This is a differentiated therapy for acute local pain.

ELADUR provides three days of extended release as compared to Lidoderm, which is used for 12 hours and has issues of breakthrough pain in two-thirds of the patients during the 12-hour off period.

ELADUR is thinner, has more breathable -- has a breathable backing, and the potential for less irritation.

It's more patient-friendly in that one can exercise in it and wear it in the shower.

There is a $750 million plus market opportunity for this product and we have a best in class opportunity here.

Our partner for ELADUR is now Pfizer.

We originally received at upfront payment of $20 million with $243 million in potential milestones from Alpharma, who in return purchased King and now King by Pfizer.

DURECT will receive a royalty on net sales with reimbursement for development expenses.

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

Pfizer is currently reviewing the program and we will work together with them to assess the next steps.

A reminder of what it is that we like about this product -- it provides three days of therapy versus 12 hours, which is not just a convenience matter but also may lead to less breakthrough pain.

It's got a patient friendly design with regard to wearability.

It's thinner, lighter.

You can shower and exercise with it, and it doesn't dry out like Lidoderm.

It's got a safety profile that is at the low end of the risk Spectrum.

There's not a lot of bupivacaine being systemically absorbed.

We've got orphan drug status and the advantages of that, no filing fee, six-month review in seven years of data exclusivity.

It has the potential to be a best in class patch going into large market as demonstrated by Lidoderm's $780 million in sales last year.

I'll now move to the TRANSDUR-Sufentanil patch.

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

It provide seven days versus two to three days that one sees with Sufentanil patches or the twice-day oral opioids.

Our TRANSDUR patch also offers the advantages to the patients as well as to the health care system.

[Through] DURAGESIC revenues in 2010, they were about $750 million with the US extended opioid market in 2010 being over $4 billion.

DURECT retains the worldwide rights for this product.

We recently have had discussions with the FDA and with several major European regulatory agencies about the future studies that would be required to gain approval for various pain indications.

We are in discussions with potential partners for this product.

With regard to other R&D activities for our ORADUR technology, we are building here on our efforts for REMOXY.

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

Attention deficit disorder products are the second largest category of widely abused prescription drugs.

ADHD drug sales in 2010 were $5.8 billion; that's up 16% over 2009.

Here, we are working with Orient Pharma.

Orient Pharma in this case is funding all the Phase I work as well as the first Phase II study for this product.

They will retain the rights for this product in Southeast Asia with a royalty back to us and we will have the rest of the world free and clear.

We recently completed a Phase I study with multiple formulations and are now focused on optimizing the formulation.

The last product I'll update us on today is a product called Relday.

It's our newest program.

This is a Risperidone once a month needle-free injection.

It's the first controlled release product that is used and delivered through a needle-free injector.

It's a large market opportunity with great growth potential for the treatment of schizophrenia and bipolar disorders.

It requires lifelong therapy.

It's a significantly undertreated disease state with only about 50% of the patients being adequately treated.

Antipsychotic sales were over $16 billion with the long-acting Risperdal Consta in fact sales of $1.5 billion.

This product is a once every two week product that's injected intramuscularly.

We have a potential here to be a best in class products.

We have a longer duration with the first once a month Risperidone product.

We have a very patient-friendly opportunity here with the needle-free subcutaneous injection versus a 21 gauge IM injection.

We have improved PK and the product starts working immediately in a simplified dosing regimen.

It also has the advantages [at the] psychiatrist in that it works right away and can be dosed in the office in a very simple manner.

Specifics with regard to our collaboration with Zogenix provided for $2.25 million upfront, $103 million in milestones.

Zogenix (inaudible) the development and we see a royalty here at DURECT on sales.

Zogenix have a product for migraine headache called SUMAVEL DosePro which was approved by the FDA for acute migraine headaches in July 2009 and was launched in January of 2010.

It's the first single-use disposable needle-free injection system.

With regard to Relday status, we expect to initiate Phase I in early 2012.

So, to summarize, if we look at potential key drivers for DURECT over the next 12 to 18 months, for REMOXY it's to support Pfizer to complete activities required for a timely resubmission of the complete response letter and, if approved, launch by Pfizer.

For POSIDUR its completion of BESST with topline data in the fourth quarter.

If BESST is successful, we will then submit the NDA in the first half of 2012.

For ELADUR, it's review of the development strategy by Pfizer and DURECT and given -- and then getting the program back into the clinic for neuropathic pain.

For TRANSDUR-Sufentanil, it's establishment of a commercialization and develop a strategy as well as a potential partnership.

For Relday, the once-a-month Risperidone, it's initiation into Phase I in early 2012.

We have the potential for new collaborations with regard to POSIDUR in Japan and Korea, specially post-BESST data, with Sufentanil patch on a worldwide basis and ORADUR-ADHD as well as other programs.

We also look forward to advancing the ORADUR-ADHD program to the ORADUR opioids, biotech feasibility projects and other undisclosed projects.

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

(Operator Instructions).

David Amsellem.

Thanks.

A question on REMOXY -- King Therapeutics had noted that the inconsistent release performance in the lots of REMOXY might be due either to the assay or a deficiency in manufacturing.

So do you have any color on whether it's more a function of the assay?

If it is just the assay, why would it take over a year to resolve the issue?

Just to briefly update, we don't have whole insight with regard to the final manufacturing processes that were conducted by pain and pain therapeutics in King because, at that time, we were directly involved and we weren't involved with the manufacturing and scale up of this final product.

But if we look at what we understand now and what Pfizer is working on, I think they've got a great team in place.

We believe that REMOXY [is manufacturable] on a predictable and very reliable manner.

There are no guarantees in life but we believe there -- it's definitely solvable, the issue that's in front of

us.

With regard to your question on the specific timing, whenever you make any changes to how you release a batch, if you set up new batches, then you've got to once again run those batches for the full six months before you can complete that activity and then write those reports up.

So whenever you move to the point that you feel comfortable with whatever change you make or whatever assay change or (technical difficulty) been discussing, you need to make new batches, [put] them up, run them for six months back and forth and the like.

So it just unfortunately just takes time.

Okay, that's helpful, thanks.

The second question regarding the partnership with Zogenix on the long-acting needle-free Risperidone, given that it's a line extension and given that there's a long-acting EF CONSTA on the market, can you talk about how quickly this could potentially move into pivotal studies following the product going through Phase I?

Is this a product that, number one, could be expedited through into pivotal studies, and then I would imagine that number two would be a 505 B2?

Yes, it will be a 505 B2.

As far as the expedited aspect, I think we'd have to let Zogenix answer that, how it might go through.

But I would agree with you.

Most of the time, these products can move [more] rapidly.

If you'll remember, REMOXY, it was taken from Phase I into Phase III fairly quickly.

I think the real advantage this product will have over the Risperdal Consta is the fact that it can be used in a psychiatrist's office.

It's kind of similar to what you saw years ago on Star Trek where they just roll up your sleeve and it's just shot through the skin, so you don't need a nurse practitioner, someone there to give an IM injection.

You don't need all of that aspect, preparatory work that has to occur.

I think, most importantly, half these patients aren't being very compliant.

That's often why they (technical difficulty) at their psychiatrist's office.

With the current Risperdal Consta, you get a patient who's got problems, you give that patient an injection.

That product doesn't start working for two weeks and they've got come in for a second injection at that point.

But during that two weeks, they're already being noncompliant.

You somehow have to get them to be more compliant with their oral meds, which is a challenge.

Ours, once you give the shot, it starts working right away.

They don't have to come back for another month.

You may see them more frequently for psychiatric assistance, but it's only a once-a-month injection.

Okay.

Then one last question.

On ELADUR, you talked about Pfizer reviewing the program.

Any idea when you expect Pfizer to complete that review?

Just remind us, if it were to go into additional studies, what would be the next step?

Sure.

Just as -- I hope that their decision will come down this quarter.

I think there's a good possibility it will.

With regard to the history of the product, we actually completed a 60-patient post-herpetic neuralgia Phase IIa study with this with some very nice pain signal response and the like.

On top of that, we now have 260 patients that have been dosed for a full-on three months, so very nice kind of patch after patch delivery and understanding of safety and wearability of the patch [from that works].

So we've got a lot of patient exposure, some nice efficacy signal.

So the more logical natural process for this would be to start pursue it, or topical neuropathic use such as postherpetic neuralgia.

But at the end of the day, it will be Pfizer's call as to whether or not they're going to be in the game, and then to which trials they want to conduct, but that would be my assumption at this point.

Thanks.

[Robert Manning].

Jim, you mentioned that the interim look at the POSIDUR data said that there's no need to increase the size of the study.

Could you give us a little perspective on that?

It sounds like a plus.

Is it?

It is a plus, but it's no guarantee.

What it tells you is that if you look at the patient population -- first of all, when you conduct a study like this, you have given parameters that you put in place and given expectations of patient responses.

And so you expect that I will have a population of patients that will yield this kind of response, and if I do, and I -- in this case, we used 304 patients, we would expect that, if there is a pain signal similar to what we've seen say, for example, in the hernia trial and on the shoulder data that we've seen, that we'll be able to separate out the active from the placebo.

Okay?

So that sets up kind of a signal-to-noise kind of response.

What we have done to date is we had an opportunity within this product to in a blinded fashion look at that spread, as it were, of numbers, and say whether or not there was enough of a tight grouping there that we could say we think we've got a reasonable enough chance to win.

It doesn't mean we're going to win by any stretch, because all of the active and placebos could be entirely mixed, and we have no sense whether or not the drug works at this point.

It's a blinded.

But what it does give us -- makes me feel better is the fact that my biostatistical group, when they did this analysis, determined that we did not need to enroll more patients to be able to establish what should be a reconcilable signal, if such a signal exists.

But if you didn't have a good signal-to-noise ratio, you would've had to increase the size of the trial, wouldn't you?

So doesn't that carry some fairly significant positive vibrations to it?

It carries some vibrations but you can't say for sure.

All you can really say is that there is a spread there that's adequate to be able to determine things, that is not crazy.

It's not too broad.

It's not kind of like porridge from Goldilocks.

It's not too hot; it's not too cold.

It's just right in the right range.

Given that, we feel comfortable that we've got the right patient numbers.

But it doesn't guarantee anything.

Sure, I understand there are no guarantees.

You've got to finish the trial for guarantees.

Thanks.

[Jeffrey Disoux], [DC] Group.

If we could just turn a little bit to the balance sheet, $37.5 million cash as of June 30.

Matt, could you give us a feeling of what your thoughts are as far as cash burn in the second half of the year?

I think we've been saying recently over the last few months that our burn rate right now is about $5 million a quarter.

In the second quarter, it was $4.4 million.

Obviously, that's before the Zogenix deal as well, so we'd have to keep that in.

So I think the current run rate is $4 million to $5 million a quarter is about right.

And if you do the pro forma for June 30, the cash number is almost $40 million.

All right.

Well, so assuming by year-end that means we would expect to be down to about $30 million.

Can you share some thoughts as to what the Company's plans are as far as additional capital?

We don't have firm plans.

We constantly have to juggle kind of where are we with the stock price, which obviously we don't like, and where we are with other business development activities.

We're obviously doing everything we can to moderate the burn rate, keep that as low as possible while not doing anything that would slow down important projects like POSIDUR or REMOXY, those kinds of activities.

So, we'll just have to monitor things but we don't have any firm plans right at the moment.

And other thing Jeffrey, we don't anticipate that the burn rate would be going up for sure next year because, in fact, if anything, it should be the same to heading down because we won't be having the same kind of clinical expenses we currently have with POSIDUR if that program wraps up.

Okay.

But from -- do you feel that, from a business development viewpoint, there are things in the pipeline -- obviously you can't talk about specifics -- but that could remove the need to tap the equity markets between now and the year-end?

That's possible.

I guess the only other comment I'd make is if we had to do something, we would bias it towards something very small, but there's no appetite for doing anything large, that's for sure.

As we also look at the partnerships that we do have in place currently, the addition of Zogenix plus the additional work that we're doing in support of REMOXY will also help deter some of the -- carry some of the expenses of our current employees as well, shifting them away from internal projects to external projects.

All right, thank you.

Circling back to POSIDUR, so 11 patients to go.

Thank you very much for having shared specific data with us.

I'm hearing that you feel pretty good that, barring unforeseen circumstances, that should be -- enrollment should be completed by the end of this month.

Should we be thinking 90 days to generate data is probably a reasonable target allowing, again, for -- it's not a certainty, but it's a reasonable assumption?

Probably not far off.

Just bear in mind, just to be precise, when we say we'll finish enrollment, that means that last patient in the study has his surgery and is dosed.

Then that last patient does have to come back for a follow-up visit 30 days later, just because that's what you have to do as part of the protocol, one last safety visit.

Then at that point, we can consider the trial done, and then the statisticians can lock the database and start doing their work.

So 90 days plus/minus.

It might be a little bit longer but not much from when we dose the last patient.

So we're still comfortable with fourth quarter.

There is no change there.

We are not signaling any change, quite frankly, with this call, sort of saying 11 patients.

It hasn't changed much.

We're right where we kind of felt we have been for the past couple of months as we look at things.

(Operator Instructions).

There are no further questions at this time.

That being the case, thank you all for participating.

If people do later have questions, as always, please feel free to give us a call.

Thanks a lot.

Thank you.

Bye.

This concludes today's teleconference.

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Thank you for your participation.