DURECT Corp (DRRX) 2014 Q3 法說會逐字稿

Greetings, and welcome to the DURECT third-quarter 2014 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, Matt -- Mr. Hogan, you may begin.

Okay. Good afternoon. Welcome to our third-quarter earnings call. 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'll then open up a call for a Q&A session.

Before beginning, I'd like to remind you of our Safe Harbor segment. 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 10-Q under the heading Risk Factors.

Let me turn to our financials, briefly. Total revenue was $4.3 million in the third quarter of 2014 as compared to $3 million in the third quarter of 2013. Excluding all deferred revenue recognized for upfront fees from our agreements, revenue from our R&D collaborations was $1.7 million in Q3 2014 as compared to $0.3 million in Q3 2013. 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 $2.4 million in Q3 2014 as compared to $2.6 million in Q3 2013. Our gross margin on these products was around 70% in the third quarter of 2014. And these product lines continue to be strongly cash flow positive for us.

There was one unusual item in the quarter that's worth my pointing out. As you'll see from our income statement, and as it will be better explained in our 10-Q that we plan to file tomorrow, our overall gross profit and gross margin was affected by a charge of $1.6 million that we took during the quarter.

Given Pfizer's announcement about REMOXY, we took a hard look at the expected expiration dates of our various lots of excipients, as well as future minimum purchase commitments that we have for these raw materials, and decided that, given the uncertainty, the prudent thing to do was to take a charge at this time. These excipients aren't solely used for REMOXY, but we did expect that would be a major use of them.

If, in the future, we are able to sell some of this material that we've expensed in the third quarter of 2014, at that time, we will report an unusually high gross profit and margin, as there would be no associated cost of goods sold for that inventory.

Moving on to our R&D expense, that was $5.5 million in Q3 2014 as compared to $4.5 million in Q3 2013. SG&A expenses were $3.1 million in both the third quarter this year and the third quarter last year. And as a result of all the above, our net loss for the third quarter was $7.1 million compared to a net loss of $6 million for the same period last year.

Excluding issuance of equity under our ATM facility, our net cash consumed during the quarter was $4.6 million. Now we did use our ATM facility to raise $4.7 million net of the expenses during the quarter by selling 2.9 million shares at an average price of $1.65, such that, at September 30, 2014, we had cash and investments of $37.4 million compared to $37.3 million at the end of the June quarter, and $24.4 million at December 31, 2013.

As a reminder, we have multiple programs that may be partnered over the next 12 to 18 months. These include POSIDUR, where we have worldwide rights; TRANSDUR-Sufentanil, where we have worldwide rights; ORADUR-ADHD, where we have US and European rights; and various feasibility studies we hope may mature into development deals and agreements, much like Relday did.

With that, let me turn it over to Jim.

Thank you, Matt. Let me give a brief update on a few of our programs, and then open it up to questions and answers. I'll begin with POSIDUR.

With 70 million surgical procedures per year in the United States, the postsurgical pain market is huge. The mainstay of treating postsurgical 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, opiates are at the center of the issue of diversion and addiction, a well-recognized problem in the United States, with one in four high school students now having abused a prescription drug. And, in more than 30 states, deaths from automobile accidents have now surpassed accidental death -- been surpassed by accidental death from drug abuse.

POSIDUR's potential value has been validated by Pacira's market valuation, especially when one considers that EXPAREL works for 24 hours, while POSIDUR has been demonstrated, and has demonstrated, three days of postoperative pain control. As a reminder, in our two pivotal trials, we had 20% more patients in the positive group that didn't require a single opioid after surgery as compared to the placebo groups.

We've spoken extensively to surgeons and anesthesiologists, and the universal sole feedback that we get is that there is an unmet medical need for a non-opioid product that would provide true analgesia for the first three days after surgery. Right now, there is 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.

The FDA's recent warning letter to Pacira regarding its promotional materials reinforces the FDA's view that their data only support efficacy for EXPAREL through the first 24 hours. On one level, this isn't new news, as their package insert has always stated this. But on another level, it reminds us that we could be the first non-opioid injectable that works on day one and day two and day three after surgery.

As you know, in February, we received a complete response letter from the FDA with regard to POSIDUR. This complete response letter stated 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 the manner described in the proposed label. The FDA has indicated that additional clinical safety studies would need to be conducted.

In the complete response letter, the FDA had no comments with regard to efficacy, cardiovascular safety concerns, the chemistry manufacturing and control section, the nonclinical or pharmacology sections of the NDA. We held our face-to-face meeting with the FDA regarding this complete response letter on September 23 of this year. We sent in our briefing package prior to the meeting, and posed a number of questions to the FDA.

At the meeting, the FDA stated they weren't prepared to fully respond to certain of our questions. They said they needed more time to digest what they had heard from us and to discuss the questions internally. But they committed to provide their response to us in their official meeting minutes. We haven't yet received these minutes, but they should be coming shortly. And once we review them, we'll communicate with our investors where we are with the program.

We remain convinced about the medical benefits of POSIDUR, and excited about this product's potential to advance postoperative pain control. As a reminder, we own the worldwide rights to POSIDUR, which puts us in the enviable position for this large potential late-stage asset.

Investors often ask us what our strategic plans are for finalizing development and commercialization for POSIDUR. The short answer is that we are pursuing a dual track process. That is, we are talking to multiple potential partners about licensing and commercialization rights for POSIDUR, while we are also preparing to be in a position to commercialize the product ourselves. Both options are viable and could create tremendous value to us over time.

Our plan is that once we have clarity on the path forward from the FDA, we would drive to concrete licensing proposals, and then weigh those offers against the alternative of commercializing the product ourselves. There's also the possibility that we could use some type of hybrid that is a co-marketing arrangement of some sort. Rest assured, we'll work to maximize the value of this asset.

Let me now turn to REMOXY. REMOXY is an abuse deterrent formulation of oxycodone, which is widely used to treat chronic pain. Oxycodone does about $2 billion to $3 billion in sales annually -- or OxyContin does -- and provides effective pain relief for chronic pain patients. Unfortunately, it has been misused at a rate that the FDA has repeatedly described as a major public health care concern.

On Monday of last week, Pfizer announced that they were returning the rights of REMOXY to Pain Therapeutics. So where does that lead us today? We have lost a strong commercial partner in Pfizer, but also one that was advancing another product in this space in parallel and in competition to ours.

From clinicaltrials.gov, we know that the clinical trials Pfizer discussed with the FDA at their March 2013 meeting have been completed. Pain Therapeutics stated in their call last Monday that Pfizer verbally shared with Pain Therapeutics the preliminary topline result from the five studies, and that these tell Pain Therapeutics that the data support resubmission. Pain Therapeutics also mentioned that they understood there were no stability issues at the six-month time point. This is for the registration batches.

It is important to note that Pain Therapeutics has not yet seen the actual data with regard to these studies -- nor have we. Even though these data would be in-hand prior to the end of this year, Pfizer historically has stated they would not be resubmitting the REMOXY NDA until -- and I quote -- at least the middle of 2015 -- unquote. It is entirely possible that Pain Therapeutics could resubmit their REMOXY NDA with similar timing to the prior Pfizer guidance.

In order to do this, Pain Therapeutics will need Pfizer to fulfill their obligations by returning documents and information in a timely fashion, formatted properly, and of course, the data from the clinical trials will have to be strong enough to justify resubmission of the NDA. Additionally, Pain Therapeutics has stated they intend to use consulting firms and contractors to complete the reports, format, and assemble the regulatory package.

And lastly, DURECT has offered to aid Pain Therapeutics in this effort.

DURECT's order technology is what confers on REMOXY its multiple layers of abuse resistance. And that is we're -- our technology, our order technology, is resistant against snorting, injecting, inhaling, chewing, as well as mixing with drinks such as alcohol. We think the multiple layers of abuse resistance built into the REMOXY product make it a compelling pain product. REMOXY is a straightforward product that's designed to be effective for legitimate pain patients, but with features designed to reduce abuse by illegitimate users.

Prescribing physicians get the comfort of knowing it will be an effective pain product without worrying about writing prescriptions that are easily diverted and then misused. Patients should also get effective pain relief from this true twice-a-day capsule. 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 will be a long period of time for our shareholders to get a meaningful return from REMOXY.

It's a late-stage asset in that the safety and efficacy of REMOXY has been shown conclusively, and the remaining task is to address the manufacturing-related issues that led to the FDA giving the latest complete response letter. Sitting here today, we may be 6 to 12 months away from resubmission of the NDA, and with a review period of six months and a potential product launch in 2016.

As a reminder of how impactful and transformative this could be for DURECT, we receive a royalty of 6% to 11.5% of REMOXY sales. Hence, if PTI's new partner captures 20% to 30% of the roughly $2 billion to $3 billion market, that's a $600 million to $800 million -- $600 million to $900 million potential sales. We would have an annual royalty from that, that would be somewhere in the range of $40 million to $70 million.

That large free cash flow stream would flow straight to DURECT's bottom line. I'd also like to note that we have over $250 million in NOL's built up, so when our royalty stream does start to kick in, we won't be paying taxes for some time.

Now, I want to move on to ELADUR. We were pleased to start the year by announcing our collaboration with Impax and resumption of the development of the ELADUR program. As a reminder, ELADUR is a pain patch we developed for post-hepatic neuralgia. It's a three-day patch as compared to the 12-hour Lidoderm patches. This is more than a convenience matter, as it has been reported that two out of three patients have breakthrough pain during the 12 hours when a lidocaine patch is off. So this could be a meaningful patient benefit and efficacy advantage.

In addition, ELADUR has a very patient-friendly design. It contours well to the skin and won't fall off easily, so a patient can exercise with it on or take a shower or go for a swim.

The terms of our collaboration with Impax are as follows. We receive $2 million upfront. We receive $31 million -- a potential for $31 million in development milestones, the next of which is at the beginning of Phase III. We also get $30 million in sales base milestones. Impax funds all the development and commercialization. DURECT gets a share of sublicense fees received by Impax. And on approval, we receive a tiered mid-single digit royalty that goes into low-double digits.

In the terms of next steps with regard to the program, Impax has done a short proof-of-concept study, and we understand that they met with the FDA to discuss the structure and design of the proposed Phase III program. We have to let Impax drive the updates on this program since they are running it.

As a reminder, we have orphan drug designation for ELADUR for postherpetic neuralgia. And we have an issued patent in the United States that goes out to 2031 and an issued European patent that goes out at least to 2027. We are pleased that ELADUR is in development with Impax. And we note that, in a recent press release from Impax, ELADUR was listed as their number two product in their branded product pipeline. And we look forward to their communicating more on this program, which is poised to move into Phase III.

I'd now like to move on to Relday. Relday is a large commercial opportunity. It features the first once-a-month subcutaneous risperidone product. It's a patient-friendly and physician-friendly design for the treatment of schizophrenia. It's a subcutaneous injection versus the current therapy, which is IM.

Positive single-dose Phase I data have been received from the full dose range and is expected for clinical practice for this product. This has been partnered with Zogenix and they plan to initiate a multidose clinical trial in the first quarter of 2015. And Zogenix has stated they expect to have data from this trial in the third quarter of 2015. And the next step following that would be to go into Phase III.

As a reminder of our collaboration with Zogenix, we received $2.25 million upfront. There's $103 million of potential milestones -- $28 million during development, and $75 million are sales-based. DURECT also gets a share of any sublicense fees received by Zogenix, and Zogenix funds all of the development. And the royalty back to DURECT would be mid-single digit to low-double digit.

So let's now review the key potential drivers to DURECT over the next 12-plus months. For POSIDUR, is to receive feedback from the FDA after our recent meeting to clarify what we need to do to address the complete response letter. Following that, we will be continuing development and commercialization of the POSIDUR program, including a potential licensing deal.

For REMOXY, if Pain Therapeutics receiving all the clinical program information from Pfizer, PTI then completing and submitting -- resubmitting the NDA, potential resubmission then in 2015, which would be followed by a six-month review of the NDA; Pain Therapeutics putting in place a new partnership with a potential product launch in 2016.

With regard to ELADUR, it's initiation of Phase III by Impax, which also triggers a milestone payment to us. For Relday, it's initiation of a multidose trial by Zogenix in 2015 with data in the third quarter of 2015.

With regard to the ORADUR-Hydromorphone project with Pain Therapeutics, it's reporting of Phase I results and advancing the program into Phase III in 2015; the potential for new collaborations and programs at DURECT; and with the new collaborations potentially being around POSIDUR, the Sufentanil Patch or ORADUR-ADHD program, as well as other feasibility projects.

With that, we'd like to take any questions that you might have.

(Operator Instructions) Jason Napodano.

I have a question about REMOXY and Pfizer and Pain Therapeutics. And I may just sit here in the dynamic between Pfizer and Pain, and if Pfizer is truly deciding to move forward with AL002, as opposed to REMOXY, one might think it behooves them to drag their feet a little bit in terms of providing useful information back to Pain. Or I think Remi on the call said if it comes in a big -- if it comes in a bunch of boxes and they say good luck, it would take a lot longer.

I'm curious what your guys' thoughts on that are in terms of the relationship that you had with Pfizer and that Pain has had with Pfizer, and how this all would play out. I understand there is six months to transfer technology back, but do you think it could come before that?

Typically, these contracts are such that you have six months to kind of get the last of it done, but the majority of the work, by standard pharmaceutical practices, is due actually fairly quickly. And Pfizer is a very professional organization, and I'm sure they have their components in the proper form and can transfer these things. They may have already started; I don't know. I haven't spoken with Remi the last couple of days.

But certainly that can be done in fairly short order. You should also know that we worked closely with Pfizer with regard to putting in place the answers to the FDA's questions surrounding manufacturing issues. And to that end, DURECT was key to those answers and those solutions. And so, if allowed by Pain Therapeutics, we could certainly construct that component of the NDA, the CMC component of the NDA, and put the arguments and finalize the reports, everything that needs to be done.

So I think that can be done actually in relatively short order. We simply just need the stability data, which we understand are good. We also understand, at least from a top line standpoint, there were no issues with the bioequivalence and the dose proportionality. And those were key components to it all. If one has those, basically, you've got, I think, the lion's share of what one needs for an NDA resubmission.

Would you -- I'll put you on the spot a little bit here -- would you say it's safe to assume that REMOXY will be back under review a year from now?

I mean, it's anybody's guess. It all depends on that transfer. And the problem is, it's not me doing it. Right? It's got to go into -- from Pfizer to Pain Therapeutics. And we're here to offer to help. And so it's impossible to say.

But it's not -- I would think it's not out of the realm of possible. I think it -- as I said in my talk, I think it's entirely reasonable that Pain Therapeutics could potentially be resubmitting in around the same timeframe as Pfizer originally had said, because they put so much cushion into that program.

Yes.

With the data effectively being available now, and they weren't going to plan to do it until after the middle of next year, you know, that's quite a long time.

If Pain repartners REMOXY and they get upfront payment, are you guys owed any subpayments off of that?

No. That all goes to them. We each just get our royalties.

Got you. Okay. And then just as far as communicating, I was going to ask you a whole bunch of questions about POSIDUR, but I suppose we'll wait until you get the minutes back. But as far as when you get the minutes back, what are you guys expecting? Another call or a press release? Or how are you going to update us on that?

I'd say a press release and maybe a call if it's appropriate or just take questions from people.

Right.

We certainly won't sit on it. Our intent is to get it, digest it, so we can communicate it and then we'll tell people where we are.

Got you. Okay, guys. Thanks for the update.

You're welcome. Thank you.

Annabel Samimy.

Thanks for taking my question. I am going to ask actually about POSIDUR. Because last time we spoke, regarding the CRL, you did have suspicions about what you felt the FDA was concerned about. So, I guess when your CRL first came out, it was the imbalanced observations between POSIDUR and bupivacaine. Do you have any further flavor as to where FDA's concerns lie? And what information you offer to them that could allay some of those concerns?

No, I think we're still in the same boat where they've made these observations around surgical site side effects. And we have simply pointed out where the imbalances actually truly aren't there.

And also, to put in perspective, we've gone back to the literature and add in additional information -- surgical literature here -- to show whatever the side effect -- if you're looking at wound itchiness, let's say, or something, what is the rate of that for hemorrhoid surgery, or whatever the surgical classification might be -- and we found these within the literature. And whenever we looked at any of these side effects, we find that we are well within the background literature typically seen frequency of these side effects.

Okay. So then if that's the case, then why would they even -- brought anything up for that matter?

I think it's a matter --

Like what was it that caused them concern in the first place that they actually even brought it up? (multiple speakers) If these are so in line with the surgical literature?

Well, we didn't have that surgical literature information in our NDA listed as such. And we -- so we've kind of listed that -- if you look at the integrated Summary of Safety for the program, you put all of the information in there, and what we do have is we have the majority of the work that we did for this drug, we compared POSIDUR against a POSIDUR control, a placebo. So, effectively, the vehicle without the bupivacaine. So we had POSIDUR against its vehicle.

And then we -- but we had infrequently a few trials that we did comparing POSIDUR against standard of care. And in this case would be bupivacaine hydrochloride, naked bupivacaine. And so where we saw some of the imbalances, just as an example here, for the -- we had 200 patients that were in our best trial that were -- they were colon cancer patients and diverticulitis. These were older, sicker -- much sicker patients, quite frankly.

And in this -- in these 200 patients, we compared POSIDUR against a placebo of the POSIDUR product -- no bupivacaine hydrochloride patients. And yet if you look at a trial where we use bupivacaine hydrochloride as a control, that would be one of our shoulder trials. Actually, we had a couple like this, where we did POSIDUR against the POSIDUR placebo, but you also included a group that had bupivacaine hydrochloride.

And we actually did very well if you add up all of the -- against DURECT -- excuse me, POSIDUR against bupivacaine hydrochloride, you typically would be able to show a nice signal there. But if one looks at the surgical site side effects, now you're comparing surgery Type A, which is colon cancer and diverticulitis -- older, sicker patients -- against surgery Type B, where you have younger patients, more robust patients, who simply had shoulder surgery. They hurt their shoulder playing some sport somewhere, typically.

And so, if you are comparing in the integrated Summary of Safety, and you compare all of the POSIDUR group side effects -- and I'll take the narcotic-related side effects such as itchiness, wound itchiness -- if you -- you would see probably a higher rate of that in the: colon cancer and diverticulitis patients because they are typically taking more narcotics. They're more severely ill. They've got other things going on.

In the shoulder trial, you don't see as much of that because you aren't in a severely ill patient population. They aren't taking as many drugs. The other side of it is that narcotic -- excuse me, the colon cancer trial was done in the US where we actually scripted for and did a survey of the patients, actually looking for the various side effects. So -- and whenever you seek out and ask for side effects, you get them at a higher rate.

In the shoulder trial, that work was done in Europe. And there, we didn't survey these patients; didn't go out and request that information. So, then you wait for spontaneous reporting, you get a lot less of these kind of side effects. And so, you are effectively kind of a patient B. So the patient B's have lesser rates of these things.

And if you compare the POSIDUR group against the bupivacaine hydrochloride in surgery B, the surgery -- shoulder surgery, you don't see any differences between those groups. But when you compare the bupivacaine hydrochloride patient B from shoulder against the colon cancer patients, then you do see a difference. And so that kind of sets up for a disconnect. And it requires -- it's a very long-winded answer, but it requires that kind of teasing out for all of these various side effects.

Okay, great. And just -- if I can just ask another question on REMOXY?

Sure.

The suspicion that Pfizer had returned the product because they were more interested in their AL002 --

Right.

-- because of -- clearly, because of the economics around that --

Sure.

What are the chances for partnership, given the fact that you're going to have two big players in the room possibly around the same time that you are entering? Is that going to -- is that dynamic going to attract the right type of partnerships? Or are you going to be in a complete disadvantage at that point?

I think there will still be a nice opportunity for Pain Therapeutics. This is me speaking, right? I don't -- I'm not going to do the partnership; Remi is. But I do think there's a nice opportunity here because it's such a big market. It's $2 billion to $3 billion.

And I -- there are different shades of -- as Felix always says, abuse deterrence comes in shades of gray. And I think we really do have the first line of abuse deterrence with our ORADUR technology. You've got what Purdue have out there, which is a shell that can be cracked and overcome with heating, and some real problems to it. Then you've got what Pfizer is taking forward with them, Embeda, and I believe AL002 as well. I think you'll see AL002 possibly coming out with an NDA in the near-term. We'll have to see. But I wouldn't be surprised to see it between now and the end of the year, even early next year.

But those use little tiny time pills of an antagonist, effectively a physiologic poison in the drug that has been shown, with the Embeda case, to put patients at risk. So you've got the potential to put a patient at risk in order to try and reduce abuse; versus ours with the five layers of tamper-resistant (technical difficulty) extracted to chewing, snorting, that kind of thing.

So we have the state-of-the-art -- the iPhone, as it were, of abuse deterrence out there with our technology. So it's just -- so you're asking what's the market going to be like? It's going to be a branded market that's got two big players potentially, Purdue and Pfizer, absolutely big boys for sure, but if we get another partner, they can actively compete in there.

And you can see we've kind of taken down our assumption still thinking it could be $40 million to $70 million for us, but we are assuming whoever it is, is going to get a smaller piece of that market. But nonetheless they're going to be quite successful. And the kind of companies -- one could list a whole bunch of them. But we're talking about an NDA that can be actually approved by the time he does the deal. So that's a pretty sweet potential. You can get into -- being the third entry into a market with the number one technology, is not a bad place to be.

Got it. And then one more question on your cash burn. What are your expectations going into next year? Where are you with your cash and where does that last -- how long does that last you till?

Well, right now our burn rate is about $4.5 million a quarter. That's kind of our base rate. We haven't done our formal budgeting for next year because we are in the midst of that process right now. But I would take that as our core burn rate right now. That could go down if we sign some partnerships. That will make the burn rate lower. Conversely, if we wind up doing some studies for POSIDUR, then that would go the other direction. But we don't know what that might be yet. So I guess my answer is roughly $4.5 million a quarter right now.

Great. Thank you.

You're welcome.

(Operator Instructions) There appear to be no further questions at this time.

Okay. Well, with that, I think we'd like to thank you for participating. And if people do have questions that occur to them later, please feel free to give us a call at the Company. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.