DURECT Corp (DRRX) 2014 Q2 法說會逐字稿

Presentation

Greetings and welcome to the DURECT second quarter 2014 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Matt Hogan. Thank you, Mr. Hogan. You may begin.

Okay, good afternoon. Welcome to our second quarter 2014 earnings conference call. This call will being with a brief review of our financial results and then Jim Brown, our President and CEO will provide an update on our business. We'll 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 in development, expected product benefits, our development plans, future clinical trials, or projected financial results. These forward-looking statements involve risks and uncertainties that can cause actual results to differ materially from those in such forward-looking statements. Further information regarding these and other risks are included in our SEC filings, including our 10-Q under the heading Risk Factors.

Let me now turn briefly to our financials.

Total revenue was $4.6 million in the second quarter 2014, as compared to $3.9 million in the second quarter of 2013. If we exclude all deferred revenue, recognized for upfront fees from our agreements, revenue from our R&D collaborations was $1.7 million in the second quarter of 2014, as compared to $0.8 million in the second quarter last year. Revenue from this source always fluctuates from quarter to quarter depending on the state of development under the various programs and what our role is in those programs.

Product revenue from the sale of ALZET pumps and LACTEL polymers were approximately $2.8 million in the second quarter this year, as compared to $3 million in the second quarter last year. Our gross margin on these products was around 62% in the second quarter of 2014, and these product lines continue to be strongly cash flow positive for us.

R&D expense was $6.1 million in the second quarter of 2014, as compared to $4.8 million in the second quarter last year. SG&A expenses were $2.9 million in the second quarter this year, as compared to $3.2 million in the second quarter last year. So as a result of the above, our net loss for the second quarter this year was $5.5 million, compared to a net loss of $5.1 million for the same period in 2013. Excluding our debt financing, which I'll touch on in a minute, our net cash consumed during the quarter was $4.3 million.

So let me make a few comments about the debt financing that we put in place just prior to the end of the quarter. In part, this was to take advantage of the fact that providers of debt are extremely active at the moment and terms are at about as attractive a level for issuers with our profiles that are likely ever to be.

In the past, we were cautious about taking on debt but we're feeling good enough about our prospects, we felt this financing was now appropriate. We believe this should be well received by our equity investors for the following reasons. The structure is very straightforward and simple. There are no warrants. There are no second drawdowns that might be tied to some performance test. The coupon is below 8% and there are no financial covenants.

So just to walk through a few of those key terms again, we raised $20 million, which is a meaningful amount of capital, representing well over a year's worth of additional cash burn. It's got a four-year maturity and although it's not contractually obligated by any means, a number of Oxford clients have subsequently extended their maturity, which Oxford has intended to do since they only make money when they have loans outstanding.

There is an 18-month interest only period, which takes us into 2016 before principal payments need to be started, which just coincidently happens to tie to when we would expect Remoxy to be approved and launched. The coupon, as I mentioned, is under 8%. There was an upfront fee of $150,000 and there's an additional payment at maturity equal to 8% of the principal that if you really calculate it out, brings the all in true cost of capital on an annualized basis to about 10.5%.

There are no financial covenants to worry about and what Oxford got is a first security interest on our hard assets and a negative pledge on our intellectual property. But I'd emphasize we have total freedom to license our intellectual property in connection with partnering deals.

Lastly, we can prepay the loan if we wish. There are prepayment penalties, but they're not that onerous and they decline over time. And Oxford, if you're not familiar with them, is a leader in this field of venture debt for life sciences companies, and the terms we received are consistent with the last several deals that Oxford has financed, including for some much larger cap companies. And I guess lastly, I would comment that the concept of life science companies utilizing a structure like this is now quite common. Oxford alone has done over $2 billion in loans to healthcare companies over the last few years.

So with all that, at June 30, 2014 we had cash and investments of $37.3 million, compared to $21.8 million at March 31 of this year and $24.4 million at December 31, 2013. And lastly, as a reminder, we have multiple programs who are in discussions about partnering over the next 12 to 18 months, including POSIDUR, where we have worldwide rights, TRANSDUR-Sufentanil with worldwide rights, ORADUR-ADHD where we have US and Europe, and various feasibility studies that we hope are going to mature in development agreements, much like Relday did about a year ago.

And with that, I'd like to turn it over to Jim Brown for -- to discuss some of these non-financial matters of the Company in greater detail.

Thank you, Matt. I'll give a brief update on our programs and then we'll open it up to questions and answers. I'll begin first with POSIDUR. With 70 million surgical procedures per year in the United States, the post-surgical pain market is huge. And the mainstay of treating post-surgical pain remains the use of opioids. Opioids are effective at relieving pain, however they have a variety of known side effects such as constipation, sedation, and respiratory suppression. Additionally, opioids are at the center of an issue -- of the issue of diversion and addiction. These are well recognized problems in the United States, with now one in four high school students having abused a prescription drug, and in more than 30 states, deaths from automobile accidents have now surpassed accidental death -- been surpassed, excuse me, from accidental death from drug abuse. In fact, Margaret Hamburg, the Commissioner of the FDA, gave a statement in April -- actually, on April 29 of this year and she said, and I quote, let me say in no uncertain terms, the prevention of prescription opioid abuse is of the highest priority for the FDA. Nothing can erase the tragedy so many people have had to face as a result of the abuse, addiction, or misuse of opioids. But we can make meaningful progress to reduce and prevent our nation's prescription drug crisis. The FDA is committed to reducing abuse of opioids and ensuring appropriate access to pain medications for patients in need, end quote.

As a reminder, in our two pivotal trials for POSIDUR, we had approximately 20% more patients who were in our POSIDUR group after surgery remain opiate free as compared to the placebo group. So that means one in five patients more, not taking any narcotics after surgery. We've spoken extensively to surgeons and anesthesiologists, and the universal feedback that we get with regard to POSIDUR is there is an unmet medical need for a non-opioid pain product that would provide true analgesic for the first three days after surgery. Right now, there's nothing that can be applied at the time of surgery that truly works for more than 24 hours.

POSIDUR, with 660 milligrams of Bupivacaine that's metered out in a controlled fashion over the first 72 hours after surgery has the potential to meet this unmet medical need. As you know, in February we received a complete response letter from the FDA. In this complete response letter, the FDA had no comments with regard to efficacy, cardiovascular safety concerns, nor on the CMC non-clinical or pharmacology sections of the NDA. The CRL stated that the FDA weren't ready to approve the NDA, that the NDA did not contain sufficient information to demonstrate that POSIDUR is safe when used in a manner that is described in the proposed label. The FDA has indicated that additional clinical safety studies would need to be conducted.

Since receiving the complete response letter, we have been working extensively with clinical and regulatory consultants to add their perspective and their guidance in preparation of our next interactions with the agency. These include four consultants who were division directors or above at the FDA and one who is formerly in the pain division. I'm pleased to announce today that one of our consultants, Dr. Todd McIntyre, who has been working with us these past several months, has recently joined DURECT full-time as our Vice President of Regulatory Affairs.

Todd has over 25 years of and regulatory affairs experience in the pharmaceutical industry. Dr. McIntyre led teams that have achieved six NDA approvals as well as multiple supplements for new indications and labelling changes, and he's led more than 50 FDA meetings. He also has significant international regulatory experience, having obtained product approvals in various markets around the world. After obtaining his PhD in neuroscience from the University of Boulder, Dr. McIntyre worked at the National Institute of Health as a staff fellow in [endo]-pharmacology, before transitioning into industry where he worked for Boehringer Ingelheim, Hoffmann-La Roche, Johnson and Johnson, and finally Wyatt Pharmaceuticals. We are pleased to have him here leading our interactions with the FDA, and pleased that he thought enough about POSIDUR and DURECT that he wanted to come on board.

We've had some interactions with the FDA since the complete response letter, but the most significant next step is the formal face-to-face meeting. That meeting is set for late September. We've used the time well in preparing for this upcoming meeting with the FDA. Our briefing package, which will go out net income the very near term is strong and compelling. We've had a chance to confer with multiple outside experts to get their independent, unbiased input on our NDA and the FDA's comment, and our briefing package as a response to the complete response letter.

Because we're so close to the meeting, we'll not comment on the specifics or speculate on the outcome. However, we do look forward to engaging the FDA in order to address the issues that they cite in the complete response letter. We remain convinced about the medical benefits of POSIDUR and are excited about this product's potential to advance post-operative pain control.

We've been asked by some investors how we expect to disclose the outcome of this meeting. Our expectation is that we would wait until after we've agreed on the minutes with the FDA to make absolutely certain that we're all on the same page. If there is unambiguous clarity prior to the completion of the minutes then we'll communicate this information earlier. As a reminder, we own the worldwide rights to POSIDUR, which puts us in the enviable decision with regard to this late stage asset.

Investors often ask us what our strategic plans are for finalizing development and commercialization for POSIDUR. The short answer is we're pursuing a dual track process and we're committed to doing the right thing for our shareholders. We're talking to multiple partners about potentially licensing commercial rights to POSIDUR, but we're also preparing to be in a position to be able to commercialize it ourselves. Both options are viable and could create tremendous value for us over time. Rather than pre-judge, our plan is to drive concrete licensing proposals and once we have clarity on that path -- and once we have clarity also on the path with the FDA, we will then weight these offers against the alternative of commercializing the product ourselves.

There's also the possibility that we may do some type of hybrid, a co-marketing arrangement of some sorts. The devil's in the details but we want to be able to make sure that we maximize the value of this asset and we'll pursue this dual track approach to extract this maximal value.

Let me now turn to Remoxy. Remoxy is an abuse deterrent formulation of Oxycodone, which is a widely used chronic pain product. OxyContin sales of which is Purdue's Oxycodone controlled-release product does about $3 billion in sales annually and it provides effective pain relief for chronic pain patients. Unfortunately, it's misused at a rate that the FDA has repeatedly described as, in quotes, a major public healthcare concern, unquote. Our order technology is what confers on Remoxy its multiple layers of abuse resistance. We have resistance to snorting, to injecting, to smoking, and inhaling, to chewing, and to mixing with alcohol and other drinks.

We think the multiple layers of abuse resistance built into Remoxy make it a compelling pain product and that Pfizer will do well and a do an impressive marketing job once it's approved. They have a major presence in the pain space with Celebrex and Lyrica. With Remoxy, Pfizer has a straightforward product that's been designed to be effective for legitimate pain patients, but with features that are designed to reduce the abuse by illegitimate users. Prescribing physicians get the comfort of knowing that it will be an effective pain product without having to worry about writing prescriptions that are easily diverted and then misused. Patients won't have the stigma of telling anyone they're on OxyContin, yet they'll have the effective pain relief of a two twice a day capsule. With Pfizer's large sales force, they should do very well with this product once it's launched.

I'd also like to note that we have multiple issued patents that go out at least until 2031 in the United States, so there would be a long period of time for our shareholders to gain a meaningful return from Remoxy. It's a late stage asset in that the clinical and safety aspects of Remoxy have shown that they have basically demonstrated conclusively really good results. And the remaining task is to address the manufacturing related issues that led to the FDA giving the latest complete response letter for Remoxy.

In March of 2013, Pfizer met with the FDA to share their extensive work that they have been doing on Remoxy and to propose a path forward. The FDA agreed to Pfizer's proposal, that is that there is no need to replicate earlier Phase III work if a bridge back to the data that provided -- can be provided with a bioequivalence study. This study and others are now well underway and can be tracked on clinicaltrials.gov.

In October of last year, after a thorough internal review, Pfizer announced their decision to move forward with the steps required to resubmit Remoxy and they are driving the program forward. DURECT continues to supply key excipients for their Remoxy program to Pfizer. Pfizer's stated resubmission date is no earlier than the middle of 2015. So we are now about three-quarters away from Pfizer's resubmission of Remoxy.

We believe that as the upcoming months tick by and the resubmission date gets closer, more and more investors will begin to factor this program more prominently into their thinking and the discount we're currently seeing for this program will begin to decrease. The review period is six months so our expectation is for an approval in late 2015 and a launch shortly thereafter. As a reminder of how impactful and transformative this product can be for DURECT, we receive a royalty that starts at 6% and goes up to 11.5% with 11.5% Remoxy sales being around $1 billion. Hence, if Pfizer captures about 30% of the roughly $3 billion market, which would be around $900 million, we'd have an annual royalty stream of about $72 million a year. That'd be a large free cash flow opportunity for DURECT that would flow straight to our bottom line.

I'd also like to note that we have over $250 million in NOLs built up. So when the royalty stream starts to kick in, we won't be paying taxes for some time.

Now, I'd like to move onto ELADUR. We were pleased to start the year by announcing our collaboration with Impax and the resumption of development of the ELADUR patch. As a reminder, ELADUR is a pain patch that we have developed for post-traumatic neuralgia. It's a three-day patch as compared to the 12-hour lidocaine patch. But this is more than just a convenience factor as it has been reported that two out of three patients that use Lidoderm have a breakthrough problem where they're 12 hours from when their lidocaine patch is off. This could be a very meaningful benefit and advantageous position for ELADUR.

In addition, ELADUR has a very patient friendly design. It contours to the skin, doesn't fall off easily so that a patient can exercise with it on, or even take a shower or go for a swim. The terms of our collaboration with Impax are as follows. First, we will receive $2 million up front. We will receive $31 million in potential development milestones, with the next of which is at the start of Phase III. We also get $30 million in sales based milestones. Impax is responsible for funding all the development and commercialization. DURECT gets a share of any sublicensing fees that are received by Impax. And upon approval, we will receive a tiered single digit royalty that moves up into low double-digit royalties.

In terms of next steps with regard to the program, Impax has done a short proof of concept study and now plans to meet with the FDA to discuss the structure and design of a proposed Phase III program. We have to let Impax drive the updates on this program since they are running it. But as a reminder, we also have an orphan drug designation for ELADUR for post-traumatic neuralgia and we have an issue patent in the United States that goes out to 2031 and an issued European patent that goes out at least until 2027. We're very pleased that ELADUR is back in development with Impax.

Now, moving onto Relday. Relday is a large commercial opportunity. It features the first once a month Risperidone product. It has a patient friendly and physician friendly treatment opportunity for schizophrenia. It's a subcutaneous injection, small volume versus the IM injection that's out there today. It's a positive. We've had data from a positive single dose Phase I trial, which explored the full dose range that is expected for clinical practice. The program is partnered with Zogenix and they plan to initiate a multi-dose clinical trial in the fourth quarter of this year, which is on track. And Zogenix has stated they expect to have data from that trial in the third quarter of 2015. The next step following that would be to go onto Phase III.

As a reminder of our collaboration with Zogenix, we received $2.25 million up front. We have $103 million in additional potential milestones with $28 million being development based and $75 million in sales based milestones. DURECT gets a share of any sublicense fees received by Zogenix. Zogenix funds a full development and the royalties that DURECT would receive back on sales would be mid-single digit to low double-digit.

Now, I'll give a brief update with regard to our other ORADUR opioids. Pain therapeutics has the rights to develop three other opioids with our ORADUR technology. These are hydrocodone, hydromorphone, and oxymorphone. All three of these have active INDs in place at the FDA. The Phase I work has been done in the past with hydrocodone and hydromorphone. Future development of these will definitely benefit from our Remoxy experience. We're now working with Pain Therapeutics with regard to these programs and they are all under approved work plans.

Pain Therapeutics announced earlier this week that they expect to start a Phase I clinical trial with ORADUR hydromorphone shortly with an expectation of starting the Phase III trial for this product in 2015. Pain Therapeutics reiterated the market potential for this product is in the $200 million to $300 million range. As a reminder, we get the same economics on these programs as with Remoxy, that is a royalty that starts at 6% and goes up to about 11.5% and Pain Therapeutics pays for all the development expenses. There are also $6.1 million in pre-sales milestones that are spread across the three programs that we could earn.

The final program I'll review today is our ORADUR ADHD program. The lead formulation in this program is our -- is Methylphenidate and it has demonstrated the following in a Phase I study, rapid outset of action, a long duration with once a month dosing, small capsule size relative to the leading products that are on the market. It's also tamper resistant due to our ORADUR technology. Orient Pharma met with the Taiwanese FDA to outline the Phase III program and they're developing plans for their Asian and South Pacific territories. The US, European, and Japanese rights are retained by direct and we've initiated licensing discussions now that we have the formulation in hand with our supporting PK data.

Let's review the potential key drivers for DURECT over the next 12 to 2 months. For POSIDUR, it's meet with the FDA in late September to clarify the -- and address the issues with the complete response letter, and then to continue development and commercialization of POSIDUR program, including a potential licensing deal. For Remoxy, it's Pfizer completing the required studies, that is the [BE and B] potential studies, and resubmission, which is targeted for the middle of 2015, followed by a six month review by the FDA and then product launch.

For ELADUR, it's initiation of Phase III by Impax, which also triggers a milestone payment for us. For Relday, its initiation of the multiple dose trial by Zogenix in the fourth quarter of 2014 with data in the third quarter of 2015. For ORADUR hydromorphone, it's starting Phase I this quarter and advancing into Phase III in 2015. As Matt stated earlier, we have the potential for new collaborations around POSIDUR, Sufentanil patch, ORADUR ADHD, or some of our feasibility programs.

Last would be the potential for a new program to enter clinical development this year for DURECT. With that, I'd like to thank you for your time and we'd like to take any questions you might have.

(Operator Instructions) The first question is from the line of Jason Napodano.

Just a question on POSIDUR for your FDA meeting in September. I'm wondering if you guys have kind of thought out a design for the next clinical trial that you might potentially be running and if you're prepared to kind of show that design to the FDA or is that a little advanced from where you are now? Are you going to basically talk with the FDA before you kind of get into a design of a trial?

Yes, I think at this point we're so close to the meeting, I don't want to speculate kind of on anything with regard to the meeting. I'd just as soon have the meeting and then get back to you on that because we're just very short time away. So just have to say we're -- look forward to updating you after we meet with them.

Okay. From a modeling standpoint, the milestone from Impax for the initiation of the Phase III in the fourth quarter, how should we be kind of thinking about that milestone? Is that meaningful, something we want to make sure that we have in our model?

Well, it is meaningful in that it's definitely bigger than the upfront payment that we received from them. And the only hesitancy I have at the moment is we really need to let Impax kind of guide to when the Phase III is going to start. I just don't feel comfortable speaking to that right at the moment since they are in charge of the program and they're driving it, and I know they want to meet with the FDA and talk about what the Phase III is going to look like. So timing, I don't want to comment on, but the amount is definitely very helpful for us, given our size of our burn.

Okay. And if I recall, the upfront was $2 million.

That's correct.

Okay, so the initiation of Phase III is bigger than that.

Yes.

Okay. And then just last question. I noticed that I've been tracking the efforts on clinicaltrials.gov. I've noticed that some of these studies have completed bioavailability study, I believe the dose proportionality study have completed. I noticed a new study about the effects of ethanol and I guess they're trying to dissolve the product. And I've noticed that the abuse potential study is still recruiting, although the update on that is in July.

So just, do you have any sense on when all of these studies will complete?

I think they're pretty well on track, I mean within a month or so. And the nice thing is, they're repeats of studies that have already been conducted and there were very minor adjustments made to the formulation in order to get that assay to run smoothly. So I wouldn't expect anything we've looked at with regard to alcohol extraction, those kind of things, they shouldn't change appreciably anything you'll see from the clinical standpoint. So and they're very small trials. The last one that you just mentioned, the alcohol extraction is -- I don't -- I think is it 30 patients. Yes, it's a small number of patients.

So I would expect the timing from those is not going to be critical path to this resubmission. I think those will be done in the near term and written up. I think they've said that they're doing another ICH stability. That will be wrapped up, the one-year point, and then those reports put together. So I think that's probably the critical path to resubmission.

I would assume they need 12 months of stability.

Exactly, yes. They don't need it, but I think that's what they want to do.

Got you. Okay. Thanks for taking the questions.

Thank you. (Operator Instructions) At this time, there are no questions in the question queue. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Thank you.

Thanks.