DURECT Corporation
Q1 2017 Earnings Call Transcript

Published: 11 May 2017

[Operator:]

Greetings and welcome to the DURECT Corporation First Quarter 2017 earnings conference 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, Mr. Matt Hogan, Chief Financial Officer, DURECT Corporation. Thank you. Mr. Hogan, you may begin.

[Matt Hogan:]

Okay. Well good afternoon. 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 the business. We will then open up the call for Q&A session. Before beginning, I would like to remind you of our Safe Harbor statement. During the course of this call, we may make forward-looking statements regarding DURECT's products and development, expected product benefits, our development plans, future clinical trials or projected financial results. These forward-looking statements involve risks and uncertainties that 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-K and 10-Qs under the heading Risk Factors. So now let me turn to a brief review of our financials. Total revenue was $4.6 million in the first quarter of 2017, compared to $3.6 million in the first quarter of last year. Revenue from our R&D collaborations was basically flat quarter-over-quarter at approximately $400,000. 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 largely from the sale of ALZET pumps and LACTEL Polymers was $4.1 million in the first quarter of 2017 as compared to $3.2 million in Q1 2016. This increase was largely driven by strong demand for our LACTEL Polymers and based on their backlog our LACTEL product line should have a record year in 2017. Our gross margin, profit margin on these two product lines was 63% in the first quarter of 2017 and these product lines continue to be strongly cash flow positive for us. R&D expense was $7.5 million in the first quarter of 2017 as compared to $6.6 million in the first quarter of last year. SG&A expenses were $3 million in Q1 2017 as compared to $3.1 million in the first quarter of last year. And so our net loss for the first quarter of 2017 was $8.1 million as compared to $7.9 million in the first quarter last year. At March 31, 2017 we had cash and investments of $16.8 million, which compares to $25.2 million at December 31, 2016. But as mentioned in the press release, we expect to close our Sandoz agreement this quarter, in which case our pro forma cash would be more like $36.1 million, reflecting the receipt of the $20 million upfront payment from Sandoz. There are also $43 million in development milestones we could earn under this agreement, of which an amount nearly as large as our upfront payment could be earned in the next three quarters and pre approval POSIMIR with all that potentially achievable in the next roughly 18 months. With that, thanks again for joining the call and I’ll turn it over to Jim to discuss the rest of the business in greater detail.

[Jim Brown:]

Thank you, Matt and hello everyone. This is an exciting time for DURECT, with very positive developments in both the POSIMIR and DUR-928 programs. Regarding POSIMIR, we have now established a major commercial partnership for the U.S. market with Sandoz a division of Novartis and we are going to complete enrollment in the PERSIST trial ahead of schedule. I’ll begin with POSIMIR and our U.S. collaboration with Sandoz, a division of Novartis. POSIMIR is our investigational post-operative pain relief depot that utilizes our patented SABER technology and is intended to deliver bupivacaine to provide up to three days of pain relief after surgery. After a competitive process, we had a number of buying companies in the running and we thank them all for their time and efforts. We are delighted to be working with Sandoz as our commercialization partner for the United States. With Sandoz we get the best of both worlds, as a division of Novartis, Sandoz brings the benefit of a large pharmaceutical company with the resources to support commercialization. And within the Sandoz division we get a dedicated team of institutional sales professionals focused on the U.S. hospital market where they have a significant presence. The economic terms are as follows

[Operator:]

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions]. The first question is from Francois Brisebois. Please go ahead sir.

[Francois Brisebois:]

Thanks for taking the question guys and congrats on the progress. Alright, so I had a couple of here, so in terms of DUR-928, why is it that you guys shows PSC for your first trial in that for DUR.

[Jim Brown:]

WeiQi I'll let you answer that one like.

[WeiQi Lin:]

Well first of all the reason we chose PSC is based on some of our animal studies. And our animal studies in bile duct ligation animal model, which is a representative of cholestatic level injury diseases in human. And clearly show that DUR-928 is highly beneficial in the cholestatic liver injury. And as in comparison with competitive compounds, our compound clearly showed first of all its effect is very quick, very rapid just as our Phase 1b study in the NASH patient shown. And secondly that the important markers to show in the cholestatic liver injury was significantly reduced. So that's why we believe that the 928 will be super effective in a way in these cholestatic liver injury. And for the NASH on the other hand, unless you do a long-term study of using biopsy to confirm the efficacy right now there is no non-invasive biomarkers allow you to measure the efficacy of any drugs. But in contrast where the PSC you have well accepted biomarkers, which is non-invasive. So you can look at the results much more quickly and then much more in the timely fashion.

[Jim Brown:]

Yes I think that's very true. I think we see reductions in these markers of cell that the CK-18 full in cleaved which we'll be tracking in these patients. The enzymes have longer half-life so they when come up after a single dose, but we'll be able to track those overtime, and we’ve seen these various enzyme drop in these animal models we'd expect to see similar results in humans and as well the bilirubin. We saw it going down in only 12 hours in these patients, we saw it down statistically significantly in these animal models with the excluded bile ducts. And so these are all very important pieces. And talking to the patients, one of the things they are really drawn to is what we saw out of our STAM model where we saw reduction in pre-cancerous lesions of liver cancer because in number of these PSC patients eventually do develop cancer. And so they're very excited about the possibility of it helping there as well. So we have a number of reasons why we think it make sense. And so we're excited about it.

[Francois Brisebois:]

Great, that makes a lot of sense. And then in terms of bilirubin that's very interesting that clearly in the medical community came up at EASL. Why is it that they -- what's your opinion on the fact that it's so underappreciated right now or no one else is hitting that kind of reduction in bilirubin?

[WeiQi Lin:]

I think at the bilirubin typically like Jim mentioned, typically you wouldn't see the reduction of bilirubin until it's very slowly or secondary effect of the therapy. And when the lever functioning finally recovers then the bilirubin start to drop. But in this case with the DUR-928 because we believe it acts on the lipid homeostasis inflammation and cell that’s all simultaneously that's why you will able to see the effect much more rapidly much more potently. And then it just acting on directly improving the liver functions.

[Francois Brisebois:]

Okay, great. And then one last one if I could here. In terms of POSIMIR, the Sandoz deal is all those milestones and opportunities are in the U.S., how should we think about POSIMIR's opportunity Ex-U.S. and are you guys trying to partner that for Ex-U.S.

[Jim Brown:]

Yeah, I'll let Mike Arenberg, who is our Head of our Strategic and Corporate Development speak to that.

[Michael Arenberg:]

Yes we have a lot of interest in the product ex-U.S. as you can imagine I think we see several markets outside of the U.S. is very attractive for this product as well where there is a big unmet need. But in this case we wanted to focus on getting the U.S. partner in place first and then we'll move onto discuss things with ex-U.S. partners now.

[Francois Brisebois:]

Okay, excellent. Thank you very much and congrats on the progress.

[Operator:]

Next question is from Yasmeen Rahimi. Please go ahead sir.

[Yasmeen Rahimi:]

Great, thank you so much. It's Yasmeen Rahimi from taking the questions congratulations on the continued progress. Coming out of EASL, I mean, the data is so remarkable, I mean the fact that you're hitting robust changes in many of the inflammatory markers within couple of hour. So talking to KOLs at EASL what was the perception when they came on and saw the data if you could comment on that. And then I had two follow-up questions.

[Jim Brown:]

Okay, yes they were very impressed. We had -- as I said we had thought leaders who are from Academia [ph] we had thought leaders who were investigators who run clinics that do these studies. And then we had a lot of people as you would expect from industry. And they were all quite impressed, I think the more research I think it's the best way research kind of focus people we’re more focusing on CK-18 both cleaved and full lengths. And the fact that we had a such a dramatic reduction in such a short time that was very impressive to them. And then the people who are more clinically focused that saw more patients they were drawn to the bilirubin I think. And all of them like the fact that the inflammatory markers were down and they thought that was very important and that should continue overtime and continue to improve the outcome of the patients. But I would say that's kind of the way it broke down, the researchers are more CK-18 and full and cleaved and the clinicians more bilirubin yes.

[WeiQi Lin:]

Yes, I would like to add that at one of our clinical advisors meeting and all of our clinical advisors who have world's leading hepatologist. They were extremely impressed with the CK-18 data. And then especially with the reduction we saw in such a quick time and then with a single dose. And then if I believe at EASL there are several companies they are presenting their results on the CK-18 data, but that's all after multi-months daily oral dosing of the drugs then they see either fall in CK-18 or cleaved the CK-18 only one company showed the both CK-18 reductions. But we were able to show more favorably the reduction by a single dose in several hours.

[Jim Brown:]

And that advisory panel that WeiQi is referring to actually had four past presidents of ASOD and they were very impressed with this four various acute organ damage programs that we're actually evaluating for our injectable program. There is -- we think it's going to be very important those will be very important markets for us going forward in the clinic.

[Yasmeen Rahimi:]

Absolutely, I mean with 41% reduction in full length CK-18 and 27% a lot...

[Jim Brown:]

And it was even greater in this anyway, it's really pretty nice. Anyway, sorry, go ahead.

[Yasmeen Rahimi:]

Well that's fantastic. So and then the next question is more tailored to your Phase 2 that you're planning for PSC. So maybe can you guide us in terms of the size and the design and what the primary endpoint would be?

[Jim Brown:]

I think it's probably a....

[WeiQi Lin:]

Well we are still working with our clinical advisors at this time to draft out the protocol. So we're planning on submitting the IND when we are ready.

[Jim Brown:]

Yes it's not too far away, but just little bit early for us to talk about it.

[Michael Arenberg:]

And we're also involving the patient efficacy groups and we had a good chance to meet with a number of them from different countries around the world at the EASL meeting.

[Yasmeen Rahimi:]

Excellent. And then one last question, maybe any timing or catalyst for the injectable program and the topical that you could maybe share a little bit more in detail with that?

[Jim Brown:]

I think, sure there is catalyst for the injectable program will be from the kidney patients. Now we have to take this in its stride because these are chronic kidney patients. And to my knowledge there is really nothing out there one can give to a chronically damaged kidney and make any difference. So if we happen to see any of these biomarkers move like camera one of these I doubt that if we did, but if we did that would be either at the bar of the door that would be amazing I think from that standpoint from biological standpoint and a medical standpoint. But we want to demonstrate that we can dose safely in patients with damaged kidneys and that’s what we are looking to do from this trial. And then post that it will be the IND starting the Phase 2 trials not even IND, starting the Phase 2 trials. And for topical we now are actually screening formulations. And so we are on track to start that trial very early in 2018 that will be our Phase 2 trial in psoriasis tropically applied in the United States.

[Yasmeen Rahimi:]

Great, congratulations again for the great work.

[Jim Brown:]

Thanks so much.

[Operator:]

[Operator Instructions] We have a question from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Good afternoon and congratulations on the progress. A couple of very practical questions, matt could you give us an idea again of what you expect cash utilization or what was cash utilization in Q1 and how do you see it going forward over the next three quarters?

[Matt Hogan:]

Sure, in the first quarter our basic burn rate was about $9.1 million we don’t think it will be that high in the next quarter or two. One of the implications of the more rapid enrollment with the POSIMIR trial is that short-term your expenses go up, but of course if you can finish the trial one or two or three months earlier than you expected, the total cost of trial go down. So some of this is kind of acceleration of the expenses associated with the PERSIST trial. Beyond that I don’t think we give too much guidance, but we think that was kind of high water mark the first quarter burn rate. I guess maybe I’ll transition to one more comment, which I kind of made in my remarks earlier. Besides the upfront payment from Sandoz, which is obviously considerable, we have these other $43 million in development based milestones. And they are structured so that we would hope and expect to receive another payment this year followed by another payment pre approval. And then of course a nice milestone on full approval of the product and all of that could start to come in this year and completed in, in roughly 18 months or so. So we think that’s another important source of funding for us.

[Unidentified Analyst:]

Thank you. As far as the, the royalty levels you have just alluded to double-digit. Could you comment perhaps a touch more how would you say the royalties on POSIMIR under this agreement would compare with the previous Hospira agreement or possibly the Pfizer, Remoxy royalty levels could you give us a little bit of sense of what we might look for?

[Matt Hogan:]

Could sort of try, it starts double-digit therefore it’s much higher than any royalty we would have gotten from Remoxy. And it’s structured so that it goes up in multiple tiers. So as many of these deals do. So this is an -- but as an example from zero to $100 million you get a certain percentage from $100 million to $200 million you get a higher percentage et cetera. So if we were to get to some modest assumption of $300 million in revenues for POSIMIR alone, which is what it is supposed to do this year. We would be looking at a royalty stream that’s $35 million to $40 million or more per year. And we have no cost associated with that. So it can become quite meaningful. I think that’s about as much granularity as we can get unfortunately. So a similar comment those sales based milestones were met to be structured to be very achievable, you often hear about bio-buck where it have milestones that in canter you never think you’re going to achieve because they kick in at $1 billion or above. But this has many different tiers of sales based milestones that are met to kick in at very reasonable levels. So in the first couple years after launch we would expect to achieve some of those.

[Unidentified Analyst:]

Okay. And if I could follow-up on that, so if we were thinking of what the highest here you might have to achieve under this agreement, would it be a sub-billion revenue that you’d be at the pick of potential royalties?

[Matt Hogan:]

Yes.

[Unidentified Analyst:]

Okay, thank you very much. That's very helpful. One final question, it’s likely that dealing with the group like Novartis you have had to share a great deal of detailed information as part of this agreement. Is there anything in your agreement that provides any kind of a stand still for their ability to buy part of the company or all of the company given the very close look they’ve had on the product, is there anything in agreement that protects DURECT from an unwanted hostile action?

[Matt Hogan:]

No, that would be pretty non-typical for a deal like this.

[Jim Brown:]

And they have no -- they have not received -- this was just a POSIMIR deal. So it’s -- they haven’t -- we haven’t opened the book to other program.

[Matt Hogan:]

But I think to take your question a slightly different direction Jeffry. You don’t do a licensing deal of this magnitude with a blue-chip major pharmaceutical company without them doing extensive due diligence on your product. You’d have to expect as they did that they came in a review to all of clinical data associated with the program, all of our regulatory correspondence with the FDA. Manufacturing issues, the patent portfolio and then they presumably did their own market research and assessment. And it’s pretty unlikely they would want to in-license a product like this if they thought the commercial opportunity was modest why bother. So, this process that we went through with them you’ve got to assume they did all that and if I was a shareholder I’d take some level of comfort from that.

[Jim Brown:]

And I think also one can assume they look at the competition and the like because they certainly have the size to do whatever they wanted whether products on the market or not. So, I think the fact that there our partner speaks well for the product and its potential.

[Unidentified Analyst:]

By all means and then congratulations to the team on outstanding deal just at $150 million market cap for a large pharma who have limitless resources one wonders whether they acquire enough information to make them take certain strategic decisions. But you’ve answered my questions. Thank you very much.

[Operator:]

We have a question from Len Yaffe. Please go ahead, sir.

[Len Yaffe:]

Thank you. I had two different questions. The first is on an old front REMOXY the opioid epidemic is becoming so great in this country that even the insist for clinical and economic review is physician addressed evidence report is under taking a hearing on it in a couple of months to discuss the abused deterrent drugs that are available out there? And I was just wondering and I know it’s been a long road, if you can give us any update that you might be able to share as it relates to REMOXY and as of your last understanding, how you think it compares with some of the abused deterrent products that are out there on the market? And then my second question goes back to DUR-928, and what I’m wondering there is I can appreciate you are looking at PSC first, which is an orphan indication, but obviously the extremely huge market potentially is the NASH indication. And the data from the KOLs continues in their opinions continue to suggest that fibrosis is the determining fact or the effect on that in terms of the efficacy of the drug and not some of the -- in my opinion I’ll say and not some of the drugs that are much earlier on in the treatment paradigm. And I was just wondering if you could discuss DUR-928 as it relates to action on fibrosis/L8 [ph] cells and also even though it would require greater resources and you just deal with your biopsy there are seven or so drugs currently in Phase 2/3 clinical trials that have the patients that are willing to undergo those probably because of the severity of their disease. So could you give us some timeframe when you think it will start to purse the NASH indication more aggressively? Thank you.

[Matt Hogan:]

Maybe Jim, you want to tackle REMOXY.

[Jim Molloy:]

Yes, I will go after REMOXY, first of all my opinion that REMOXY is from a abuse determined standpoint really the superior product, potential product that’s out there, I mean we have shown five different ways by which we can reduce abuse from, from snorting, from injecting from mixing with alcohol, inhaling and chewing. okay so we got all those. So and we’ve shown it in various different studies and alike. So clearly it’s got a nice opportunity. As far as the timing of it all that’s entirely of the pain therapeutic I think the last thing I heard as they were looking at the end of this year is it.

[Matt Hogan:]

Yes, they have to do two other abuse studies, which they have said they think they can complete by the end of the year. And that they had talked about the outline of those studies extensively with the FDA. So they are -- hopefully they are very much in line with what the FDA wants to receive. So they will get that data hopefully by the end of the year and then they are going to have a pre-NDA meeting as we understand it with the FDA and then recently that. And you would certainly hope that the political wins are in our favor. It’s almost tragic that this isn’t available for patients.

[Jim Brown:]

I would agree. And then likewise the POSIMIR fits, I think so nicely in there because of the percent of patients who are not taking any narcotics. We are seeing in our two payroll trials one in five patients not taking any and if you apply that even a small fraction of a penetration in that marketplace, the potential for reduced prescriptions and reduced narcotics on the street is dramatic. And also there is a percentage of people who have this prettiest position when exposed first to narcotics they end up with problems later on so by never being exposed maybe save their lives and their families the problem might. I was at a conference in San Francisco a year and half and so ago that it was very eye opening on prescription drug abuse and the like and there were some parents they are talking about their children who had just been exposed because hurt a shoulder in high school sports or something and were into huge problems. And I will never forget this one mom talking about how she had 20 something year old son who had become addicted after surgery, shoulder surgery. And she said she went to sleep every night praying the she wouldn’t that call and waking up every morning thanking god she didn’t’ and I just think it’s really something that is very important to all of us. And so we’re hoping that both REMOXY and POSIMIR can help. As far as reducing fibrosis we do -- we have seen this kind of stuff with our molecule we know that the mechanism of actions by which we work and maybe WeiQi speak a…

[WeiQi Lin:]

Yes, in fact for the fibrosis about half of our patients in the Phase 1\b trail those NASH patients are either severe fibrosis or advanced fibrosis or psoriasis. So that’s just a single dose we were able to see these biological activities as matter of fact these patients with a psoriasis or advanced fibrosis or sever fibrosis they responded greater than rigorous NASH patients. So we clearly see in addition in animal studies we saw that strong anti-fibrotic product activities of DUR-928. So we strongly believe that DUR-928 certainly with the half what that demonstrate anti-fibrotic activities in the NASH trial. But in time we certainly would do NASH trial and it’s just because right now as we know there is -- first of all there is no non-invasive measurement for NASH therapeutic effect. So in other words you have to do relatively longer term of clinical trial in order to see the efficacy if you do a relatively shorter trial it’s just not justifiable to do biopsy in these patients. And then second of all there are multiple non-invasive diagnostic tools are being developed at this time, such as MRI or fibro scan or MREs. However all these methods as well as biomarkers are still beginning validated it’s not fully accepted by the greater society. So in other words we would have rather wait till when these methods are available because we believe DUR-928 can be effective in NASH patients in relatively short timeframe than most other therapeutics testing in the trials. So in the shorter time it’s just not reasonable to do about if we can use the non-invasive method.

[Jim Brown:]

And in the interim as a smaller company, we can really make a lot of progress moving the ball down the field and one of these indications which may achieve approval much faster than a NASH approval.

[WeiQi Lin:]

That's true.

[Jim Brown:]

And that would make a big difference to our shareholder and to the patients by which we reserve.

[Len Yaffe:]

Great, thank you very much.

[Operator:]

There are no further questions at this time. I would like to turn the floor back over to management for closing remarks.

[Matt Hogan:]

Okay. We would just like to thank you all for participating. And of course if people have questions after this, they are always free to call us and we would be happy to talk to you. Thank you.

[Operator:]

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