DURECT Corporation
Q4 2007 Earnings Call Transcript

Published: 19 Feb 2008

[Operator:]

Hello and welcome to the DURECT 2007 earnings call. We are now ready to begin. Here’s your host, Matt Hogan. Go ahead, Matt.

[Matthew J. Hogan:]

Good morning and welcome to our fourth quarter 2007 earnings conference call. It’s Matt Hogan, CFO at DURECT. This call will begin with a brief review of our financial results and then Jim Brown, our President and CEO, will provide an update on the business. We’ll then open up the call for Q&A session. Before beginning I’d like to remind you of our Safe Harbor Statement. During the course of this call we may make forward-looking statements regarding DURECT’s products and development, expected product benefits, our development plans, future clinical trials or projected financial results. These forward-looking statements involve risks and uncertainties that can cause actual results to differ materially from those in such forward-looking statements. Further information regarding these and other risks are included in our SEC filings including our 10-K under the heading Risk Factors. Let me now turn to our financials. Total revenue was $6.6 million in the fourth quarter 2007 as compared to $5.4 million in the fourth quarter 2006. Revenue from our R&D collaborations was $4.6 million in the fourth quarter 2007 as compared to $3.5 million in the fourth quarter 2006 which is an increase of about $1.1 million or 29%. Revenue from this source will 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 increased by approximately $100,000 from $1.9 million in the fourth quarter 2006 to $2 million in the fourth quarter 2007. Our gross margin on these products was 60% in the fourth quarter 2007. R&D expense was $9.5 million in the fourth quarter 2007 as compared to $11.6 million in the fourth quarter 2006. These figures included stock-based compensation of $1 million in the fourth quarter 2007 and $800,000 in the fourth quarter 2006. About half of the $2.1 million decrease in the fourth quarter 2007 was due to the fact that the fourth quarter 2006 included $1 million in expense related to the up-front fee paid to EpiCept in connection with a license agreement. In addition we had lower clinical trials and contract manufacturing expenses incurred in the fourth quarter 2007 compared with the fourth quarter 2006 as well as lower net third-party research expenses during the period as a result of R&D reimbursement from Nycomed on POSIDUR. Selling, general and administrative expenses were $3.3 million in the fourth quarter 2007 as compared to $2.9 million in the fourth quarter 2006 an increase of about $400,000. These figures contained $553,000 of stock-based compensation in the fourth quarter 2007 and $420,000 stock-based compensation in the fourth quarter 2006. Excluding the stock-based compensation increase the rest of the increase was due to higher patent and marketing expenses. The fourth quarter 2007 net loss included $495,000 death conversion expense associated with the induced conversion of $9.5 million of our convertible bonds during the quarter. Our outstanding balance on the conversion has been reduced from $37.3 million at the end of 2006 to $23.6 million at the end of 2007. Our net loss for the fourth quarter 2007 was $7.2 million compared to a net loss of $9.8 million for the same period in 2006. Probably a more relevant financial metric for us than our net loss was net cash consumed during the quarter. That figure was $4.6 million. Early in 2007 DURECT provided guidance for the anticipated net cash consumption of about $32 to $36 million. Upon release in our second quarter 2007 financials we decreased our cash burn guidance to approximately $25 to $27 million. We’re pleased that the final decrease in cash year-over-year was actually $19.6 million. At December 31, 2007 we had cash and investments of $62 million compared with cash and investments of $81.6 million at the end of 2006. These figures included $1 million in restricted investments in 2007 and $1.3 million in restricted investments in 2006. Let me now turn to our financial guidance for 2008. Our net cash consumption is heavily influenced by the timing and structure of new corporate collaborations as well as outsourced pre-clinical and clinical expenses. While we anticipating entering into new collaborations in 2008 and beyond we believe it’s more conservative to give financial guidance based on an assumption of no new collaborations, no milestones and aggressive funding of our R&D programs many of which are in clinical development. Based on those key assumptions we anticipate net cash consumption in 2008 of approximately $32 to $36 million. I would note that we have multiple late-stage programs that we may potentially partner over the next 12 to 18 months. These include ELADUR, TRANSDUR-Sufentanil for Europe and Asia, POSIDUR for Asia as well as various internal programs we haven’t discussed publicly yet. Thanks again for joining the call and I’ll turn it over to Jim to discuss non-financial matters in more detail.

[James E. Brown:]

Hello everyone. 2007 was indeed a very strong year for DURECT. We had significant clinical data from three separate programs, we reduced our convertible notes and all of this was accomplished while burning 40% less cash than we had anticipated. 2008 is positioned to be the year for the coming to fruition of DURECT’s technology, our project selection process and investment. In 2008 we should see the validation of our business model. Over the next 12 to 18 months we expect to see our first NDA file, a number of development programs move into Phase III and we are well positioned to potentially achieve a variety of business development deals with a number of programs. As I said earlier we accomplished a great deal in 2007. Remoxy met the primary endpoint in its pivotal Phase III study conducted under a special protocol assessment. POSIDUR reported statistically significant improvements in pain control while at the same time meaningfully reducing the narcotic use in 122 patient Phase IIB hernia study. The remaining Phase II studies are now under way with regard to our seven-day TRANSDUR-Sufentanil patch and ELADUR showed improved pain control versus placebo over the three-day treatment period in a Phase IIA study. We achieved this progress while burning considerably less cash than we had initially forecast. We originally projected that we would burn $32 to $36 million in 2007; however, we were able to achieve these results as outlined above while burning only $19.6 million. I’ll now review our lead programs. I’ll start with Remoxy. Remoxy is based on our ORADUR(NYSE

[Operator:]

(Operator Instructions) Our first question comes from Elliott Wilbur from Oppenheimer.

[Elliott Wilbur:]

Question for you, Jim, with respect to the POSIDUR Phase III program, end-of-Phase II meeting. I understand that you don’t want to give us a lot of details, or can’t give us a lot of details at this point, but I guess in terms of just maybe the progression of discussions. When do you expect to be in a position to give us a little bit more detail about the actual clinical development program, the Phase III development program, in terms of the pain models and the like and I guess anything come out of the Phase II discussions that you consider either to be a positive surprise or potentially a negative surprise? And then do you really expect the clinical programs themselves to be the gating factor in the development program or is there maybe something on the safety side that you would actually to be more in the gating factor in terms of when you could actually file the NDA?

[James E. Brown:]

Was that all around POSIDUR?

[Elliott Wilbur:]

All around POSIDUR.

[James E. Brown:]

With regard to POSIDUR first off, I do expect that the clinical program will be the critical path component, in other words, the critical timing aspect with regard to the activities we have to accomplish between now and the NDA filing. We have held the end-of-Phase II meeting as we have been talking about. We aren’t going into any more detail with regard to the Phase II program because we haven’t finished our discussions with the FDA. They continue and it’s a very active dialog as you know. We started this near the end of last year and the Agency becomes quite involved with the filings that come through based on [PADUF] and the other things that are associated and so for programs such as the stage of POSIDUR it has to basically move in its place in line. But now that we’re in the new year I look forward to communicating as soon as we’ve reached clarity with them. Our strategy’s going forward with regard to the Phase III. So it’s an answer that’s not a tremendous additional information other than just to know that we just turned the arrow, we’re now in the new year and look forward to communicating this as soon as we reach resolution.

[Elliott Wilbur:]

I just had two follow-up questions for Matt as well. With respect to your net cash burn guidance, $32 to $36 million, outside of potential strategic transaction, are there any other potential swing factors there in terms of milestones or the like that you haven’t included that could potentially positively impact that?

[Matthew J. Hogan:]

Yeah, we specifically exclude any milestones from the guidance that we gave and we would anticipate getting milestone payments this year. Almost don’t want to quantify them but you saw the kind of milestones we got last year and that kind of order of magnitude is conceivable this year.

[Elliott Wilbur:]

Could you maybe just hint as to what specific programs are more likely to generate those without discussing magnitude?

[Matthew J. Hogan:]

Certainly Remoxy would be one but really all of the partnered programs have a series of milestone payments associated with them. We haven’t gone into detail with what triggers them but with Endo we’re eligible for potentially another $35 million in milestones, with Nycomed another $180 million. So out of all those programs we would anticipate getting some milestone income but because it’s lumpy we’d prefer to give the guidance excluding that. So it’s all kind of gravy if it happens.

[Elliott Wilbur:]

And that leads me to the second part of my question really. I guess with the cash on the balance sheet and then the net cash burn guidance assuming no milestones, it would suggest that you might have to return to the capital markets sometime around year end. I’m trying to get a sense for that and sort of what the potential degree of deferral in a capital market funding is based on milestone activity.

[Matthew J. Hogan:]

I think that it really comes down to our success on the business development front and on the milestone front because if those come through the way that we’re hopeful, we may well not have to go back to the markets for quite a long time. But it really depends on those factors. And I think there we’ve kind of tried to articulate that we have multiple shots on goal on the business development front. We’re in active discussions on ELADUR. The Sufentanil patch Europe and Asia are two other separate possibilities for transactions. POSIDUR in Asia is a possibility and then there are some programs that we really don’t talk about too much that also could yield cash flow for us. So I think it really comes down to those factors. The way we’re presenting the cash burn guidance in a sense is meant to be a highly conservative approach to things. I don’t want to say worse case, because you can always be worse, but a really conservative way because it doesn’t include the milestone income and it doesn’t include business development income.

[Operator:]

Our next question comes from David Lickrish from Broadpoint Capital. Go ahead, David.

[David Lickrish:]

Couple of quick questions, Matt, I guess for you just to start. What do you think the share count will look like at the end of 2008 assuming those converts do go into equity? What sort of number should we be using there?

[Matthew J. Hogan:]

Okay, so we enter the year with 74.1 million shares, and underlying the remaining convert is another 7.5 million shares. So if you add that in you get 81.6 and then there’s always some small per quarter increase in the shares outstanding because of the exercise of some options or our employee stock purchase plan, but those amount to a couple hundred thousand a quarter. Let’s say we end the year about 82 million shares out.

[David Lickrish:]

Okay, just want to make sure that we’re on the same page there. And then as you know Endo does not disclose a lot of detail with regard to the Sufentanyl program. My question I guess to you because they won’t say anything until they move into Phase III, have they had any concerns about the formulation or have they sent it back to you to be reformulated or tweaked?

[Matthew J. Hogan:]

That’s a good question, but no. What we’ve been doing is working with 3M to basically take what was developed here through a Phase II process and do the tech transfer and so that process of scale up and tech transfer has occurred and now 3M are making actually the clinical Phase II supplies that are being used right now in the clinic. As you know because our partner is Endo they don’t like to share much but I can tell you the product is well positioned to be able to move forward in a timely manner from a CMC standpoint.

[David Lickrish:]

Okay, so then just based on some of the prior clinical studies we can extrapolate what the length of time is required to complete those Phase II studies and then try and anticipate an announcement from them with regard to a Phase III program. I guess my other question is just with regard to the other product under development, the ELADUR program. You’re talking about doing some scale up just with regard to Phase III is that something that you’re not going to contemplate but hopefully on a business development front would move forward with a partner at this point in time? And if you don’t see something materialize in the next quarter or two, is it something that you would be motivated to move forward on your own?

[James E. Brown:]

That’s a great question but basically we keep our projects moving forward regardless of partnering. We have huge interest in this product and I think Matt’s referred to that and that’s why we’re trying to have the words that we have around the potential burn rate as we laid out, but I think the important piece here is to note ELADUR is moving forward full steam ahead, there are a lot of people who would love to help us with this product and as the year unfolds we’ll see how that shakes out. But yeah, right now we’re doing the scale up work, getting ready to be able to make the Phase III supplies for that.

[Operator:]

Our next question comes from Russ McAllister from Merriman, Curhan, Ford & Co. Go ahead, Russ.

[E. Russell McAllister from Merriman:]

Most of my pipeline questions have already been asked and answered but I was wondering if you could briefly revisit the other Remoxy programs, PTI 202, etcetera? Sort of where those are and if any significant progress is being made.

[Matthew J. Hogan:]

It’s a good question. The second product in the alliance completed Phase I a little while ago now. If you’ve been following the King story what Brian Markison has said is they’ve really been focusing their effort to get the Remoxy out and we’re very pleased with the timeline and are looking forward to that NDA being filed this year. The other projects now that that’s pretty well in hand, the other projects are moving to the forefront and as I said, we continue to work actually on all four of them at this point in time. They’re all in various stages of moving forward. We do have diligence components built into our agreements and they are all taken into account.

[E. Russell McAllister from Merriman:]

Jim, any sense of when we might hear news on those or just that they’re moving forward?

[James E. Brown:]

That would have to come from King most likely. As you know they have been very quiet about what the active agents are and so that hasn’t been disclosed either. I would assume at some point in time when they feel it makes the most sense then they’ll describe where the products are in development and perhaps what the agents are.

[Operator:]

Our next question comes from Dave Windley from Jefferies & Company. Go ahead, Dave.

[David H. Windley:]

My first question is on ELADUR and you talked about the high level of interest from potential partners for that product and potentially those partners being of the larger variety. I guess I was wondering if you have gotten to a point in those discussions or your internal evaluation that would lead you to a more clear view as to whether this would be, I’ll call it a big pharmastrategy, where the partner would pursue a lot of the what are off-label uses for LIDODERM on label for ELADUR or pursue more of a straightforward PH in strategy? If that’s become more clear in your internal analysis at this point?

[Matthew J. Hogan:]

We have done a lot of analysis around the entire development strategy for this product as our potential partners have. But I think it would be very presumptuous of me to say one or the other. We are talking to a number of companies actively here. I would say on average they are the much larger companies which generally can take a more broad stroke approach. That’s probably the about best I can give at this point, Dave.

[David H. Windley:]

Are you – this is sort of off the beaten path, but since a couple of your partnered products are in the controlled substance arena, we certainly aren’t aware of any trend but know of a data point or two where some companies have had trouble getting quota for controlled substances. Have you run into anything like that with the DEA?

[James E. Brown:]

You can run into that problem with the DEA if you don’t plan and lay things out pretty well. The DEA are a – their mechanism and their efforts are really all around policing the use of these controlled substances and so one needs to make sure that you’ve got the control procedures in place internally as well as order in advance, next year’s needs. And so I can see where let’s say a company who’s getting into this may have – let’s say they want to do a new program for narcotic X and they would have go back then to the DEA and ask for an increased allotment for product X. Maybe they never even had in their allotment for the given year. So that can be an issue if you don’t look out far enough, but right now we’re in good shape.

[David H. Windley:]

On the POSIDUR program, I think Elliott asked a couple questions around that, but I guess looking at some of your prior comments, my question is very directly is this program timing, in terms of your start of Phase III, is it slipping? We thought that in some prior comments you had indicated that you hoped to start Phase III in early 08 and now you’re saying more toward mid-year and I just wondered if I’m reading that correctly, what specifically are the issues that are slowing that down?

[James E. Brown:]

We haven’t gotten into that and we won’t with regard to the details of our conversations and I think yes, we’ve had some changing and some slippage as far when this actually starts but the culmination of the discussions may well lead to a strategy that enables things to move faster. So you never know until you’re done with the discussions. I think we have to wait until we’re done with these and we see what the Phase III program looks like. It’s not about when you start, it’s about when you finish.

[David H. Windley:]

Moving on then, the TRANSDUR-Sufentanil program you commented on David’s question, but I wondered if the leadership change at Endo has any impact on the progression of that program?

[Matthew J. Hogan:]

That’s an interesting question. I think what we have at Endo is a project team that we’re working with that hasn’t changed. They’ve had some change at the top. We’re looking forward to the progress that can be made with this program looking forward and working forward. Now I think that 3M is in place we feel that it’s well positioned to be able to quite frankly move into Phase III. So we’ll see how the future unfolds.

[David H. Windley:]

My last question, I promise. I could have sworn that as I was reading the press release I saw an allusion to earlier stage programs that you have consistently talked about working on. I wondered if you might provide some detail around how many of those there are or when we might see more elaboration on what is in the pipeline say behind ELADUR and behind the second King pain therapeutics collaborative compound?

[Matthew J. Hogan:]

That’s actually a good question. At any one given moment in time we probably have around a half a dozen feasibility programs percolating at direct. Some are with internal funding, some are with bio-tech companies and some are with pharmaceutical companies. The example I just stated is ELADUR. One year a couple years back gave the statement that we would announce what this product by the end of the year and so we had everybody waiting, waiting, waiting and then when we wanted to complete Phase I and start Phase II and so we described it right at the beginning of 2007. Rather than do that kind of thing in the future what we’ll do is just say here’s the project and here’s where it is in the clinic. We typically like to advance our programs a little farther along before we talk about them just because we want to secure any IP that we can and make the progress that we can. Also quite frankly if people aren’t interested in investing in direct with the four lead products that we have now, I think we’ve got phenomenal products, they aren’t going to be particularly interested in a Phase I program kind of thing.

[Operator:]

We have no further questions at this time.

[Matthew J. Hogan:]

Thank you all for participating and we’ll look forward to updating you next quarter if not earlier. Thank you.