DURECT Corporation (DRRX-NASDAQ)

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March 5, 2010 Issue

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With Four Pain Control Products (Remoxy™, POSIDUR™, ELADUR™ And A Sufentanil Patch) In Advanced Clinical Studies, And Partners In Place To Help Bring Them To Market, DURECT Corporation Is Well Positioned For Future Growth

Matt Hogan
Chief Financial Officer

Matthew J. Hogan has been Chief Financial Officer of DURECT since 2006.  Prior to joining DURECT, he was the Chief Financial Officer at Ciphergen Biosystems from 2000 to 2006.  Prior to joining Ciphergen, Mr. Hogan was the Chief Financial Officer at Avocet Medical, Inc. from 1999 to 2000. From 1996 to 1999, Mr. Hogan was the Chief Financial Officer at Microcide Pharmaceuticals, Inc. From 1986 to 1996, he held various positions in the investment banking group at Merrill Lynch & Co., most recently as a Director focusing on the biotechnology and pharmaceutical sectors. Mr. Hogan holds a B.A. in economics from Dartmouth College and an M.B.A. from the Amos Tuck School of Business Administration.

Company Profile:

DURECT is an emerging specialty pharmaceutical company developing innovative drugs for pain and other chronic diseases, with late-stage development programs including REMOXY®, POSIDUR™, ELADUR™, and TRANSDUR™-Sufentanil. DURECT’s proprietary oral, transdermal and injectable depot delivery technologies may enable new indications and superior clinical/commercial attributes such as abuse deterrence, improved convenience, compliance, efficacy and safety for small molecule and biologic drugs. For more information, please visit www.durect.com.


Healthcare
Drug Manufacturers - Others
(DRRX-NASDAQ)


DURECT Corporation
2 Results Way
Cupertino, CA 95014
Phone: 408-777-1417

 

Interview conducted by: Walter Banks, Publisher, CEOCFOinterviews.com, Published – March 5, 2010

 

CEOCFO: Mr. Hogan, we last spoke in 2008. Have there been any management changes at the company since then?

Mr. Hogan: Before I begin, let me mention that I’ll undoubtedly make forward looking statements that have risks and uncertainties that may make actual results differ from my statements, so I’d like to direct all readers to review our SEC filings for a full discussion of these risk factors.

 

There has only been one management change for DURECT since 2008, but it is a significant one. Last June we were pleased to have Dr. Joe Stauffer join us as Chief Medical Officer. Joe’s background and skill set really fits our situation perfectly. Dr. Stauffer is an anesthesiologist by training who then went to work for the FDA in the division that oversees pain products, which is precisely where our current advanced pipeline is focused. By working in that division, he really understands how the FDA views these pain products and he knows many of their key people on a personal level. After a few years at the FDA, he moved over to industry and joined Abbott, where he worked on developing pain products. After that he joined Alpharma as their Chief Medical Officer and worked on developing pain products including one such product that was recently approved and launched. We got to know Joe during the course of licensing ELADUR™, our bupivacaine patch, to Alpharma late in 2008. We stayed in touch and we were able to convince him to come join us last year. He came onboard in June and has had quite an impact already on our different programs.

 

CEOCFO: You mentioned impact, will you briefly fill us in on some of the ways he has impacted the company?

Mr. Hogan: One of the major areas that he has focused on has been the future development plan for POSIDUR™. POSIDUR is a product intended to treat post-surgical pain with a widely used local anesthetic, bupivacaine. Surgeons often use bupivacaine today to numb the wound for a few hours. Our formulation can extend the pain relief for up to 3 days after surgery and the surgeon can apply it in a simple manner in less than 60 seconds prior to closing. So, the notion is to treat pain with a locally acting agent rather than having to use so many opioids, which act systemically and have a number of associated side-effects such as constipation and respiratory suppression. We’ve reported some very successful Phase II results in hernia surgery, in which we showed about a 30% improvement in pain over the first three days after surgery while at the same time reducing the use of opioids by 3-fold. We had been in dialogue with the FDA for a long time about what we really need to do in Phase III and with Joe’s leadership, we think we have come up with the right strategy for Phase III. In fact, in January of this year, we announced that we had started what we call BESST - the Bupivacaine Effectiveness and Safety in SABER™ Trial - which we feel will be the pivotal Phase III study in the U.S.

 

CEOCFO: You have some other products that are entering Phase III as well, can you touch on them?

Mr. Hogan: One program that is even more advanced than POSIDUR is Remoxy™. Remoxy is a tamper-resistant, twice daily form of oxycodone, which will compete with a widely prescribed drug called OxyContin®.  OxyContin is an effective and widely used drug to treat chronic pain, but it is unfortunately often misused and abused by people seeking a euphoric high. The Remoxy NDA was filed in mid-2008 and received Priority Review Status from the FDA. Then, in late 2008 the company that submitted the NDA, Pain Therapeutics, received a Complete Response Letter from the FDA saying that the FDA wasn’t ready to approve it at this time. All of the clinical information was good, but the FDA had some non-clinical issues that they wanted addressed. In March of 2009, the commercialization partner for Remoxy, King Pharmaceuticals, took over development of the program from Pain Therapeutics. King then met with the FDA in July of 2009 to clarify what needed to be done. King has recently stated that they expect to resubmit the NDA in 2010, and then the expected PDUFA guidelines call for the FDA to review the resubmission within six months. So our hope is that our first product will launch in 2011. It is a big opportunity because OxyContin last year did about $2.8 billion in sales. King will enter this large market with a 700-person sales force and a tamper resistant, novel formulation to address what everybody recognizes is a major public health problem.

 

CEOCFO: From our last conversation you had a deal also for POSIDUR in Europe. How is that going, and any other partnerships that we could be looking at going forward?

Mr. Hogan: You are correct in remembering that our partner in Europe is Nycomed, which is a large international specialty pharma company. They are a strong partner that already sells products into the hospital and into the surgical suite, which is where POSIDUR will be sold. Our commercial terms in this collaboration are very attractive. We get a royalty on Nycomed’s sales that starts at 15% and can go as high 40%. There are also $180 million in million in future milestones that we might achieve through that collaboration. However, we have retained the rights to POSIDUR in the US, Canada and Japan, so we are in the midst of possible partnering discussions with a number of parties to license those territories. Clinically, we are in Phase III in the U.S., and Nycomed has two ongoing studies that are in Phase II in Europe. One of Nycomed’s studies is in hysterectomy, and the other is in shoulder surgery and we would expect data from at least one of those studies to report out in 2010. So there is a lot of activity around POSIDUR these days.

 

CEOCFO: Do you expect it to be on the market in Europe and elsewhere before the U.S.?

Mr. Hogan: The U.S. schedule is ahead of Europe at this point given that we are in Phase III and they are still in Phase II.

 

CEOCFO: How is the company financially set to continue your studies?

Mr. Hogan: We ended 2009 with little less than $42 million in cash and we have virtually no debt. Our business model seeks to be a balanced one, where we seek to take advantage of out-licensing certain of our programs on attractive terms in order to offset a sizeable portion of the needed investment, while at the same time retaining certain other programs so that they can be the basis for future collaborations. Over the last several years, because we have had success on the partnering front, our cash burn rate has been fairly modest despite investing in advancing our multi-product pipeline. Over the last five years, our cash burn rate has averaged less than $14 million per year. Assuming Remoxy is approved and launched in 2011, our financial situation dramatically changes as we start to generate a royalty stream that goes straight to the bottom-line. To review the economics of that, we get a royalty on Remoxy that starts at 6% and goes as high as 11˝ %, so if King were to achieve a market share in that $2.8 billion market of anywhere from 15-30%, which we would submit is not a huge stretch, then we would be looking at royalties coming in that are $30-60 million a year. This one product can transform the company in the not too distant future.

 

CEOCFO: Are you receiving milestone payments?

Mr. Hogan: With respect to Remoxy and the three other opioids that are licensed to Pain Therapeutics and in turn King Pharmaceuticals, there are milestones but they are fairly modest. The real future return to DURECT from that particular collaboration is the royalty of 6-11˝%. In addition, we supply to King some of the key excipients that go into Remoxy, which generates for us additional revenue and earnings. However, if you add together all of our existing collaborations, we are eligible for future milestones that total over $415 million.

 

CEOCFO: Are there any other products that we haven’t touched on that readers should know about?

Mr. Hogan: Just briefly, we have two other products that are in Phase II at the moment. The first is a Sufentanil patch, which would compete with Duragesic and the other fentanyl patches that are widely used by chronic pain patients. This represents roughly a billion-dollar opportunity. We think we have a best-in-class patch as our patch can be worn for seven days versus fentanyl patches that can be worn for two to three days. In addition, our patch is one-fifth the size, so there is less skin irritation for patients. Given the duration of the patch, there are a lot less patches that have to be manufactured so our cost is lower and there are fewer patches that would be in circulation that could possibly be diverted improperly. We own the worldwide rights to our sufentanil patch and it is the basis of on-going partnering discussions.

 

A second program we have in Phase II is called ELADUR™. This is a bupivacaine patch, which would compete with a product called Lidoderm®, which did over $750 million in revenue last year. We think we have a superior patch. The Lidoderm patch can only be worn for twelve hours after which a patient has to take it off and let the skin recover for twelve hours. During that time, a lot of patients have pain recur. In contrast, our patch can be worn for three straight days and it is very patient friendly. For example, ELADUR stays on the skin nicely and can be worn when you shower and exercise. ELADUR would potentially be used for various acute, local pain issues. Our partner, King Pharmaceuticals, will be initiating additional Phase II work in the first half of this year.

 

CEOCFO: What is the market size for these products?

Mr. Hogan: The Sufentanil patch is probably a billion-dollar opportunity, and ELADUR competes against Lidoderm, which did over $750 million last year.

 

CEOCFO: Will you address potential investors please?

Mr. Hogan: We represent an interesting investment opportunity in that there aren’t that many companies that have this many late-stage opportunities. The nature of what we are doing is a little bit lower risk than your typical biotech company where the company might be working on a completely novel compound where the safety and efficacy isn’t well established. In contrast, the active agents in all four of our lead programs have been around for a long time in medical use and are known to be safe and efficacious. What we have done is formulate these agents to produce a better product than exists today. We would submit that the risk proposition that these drug candidates actually make it to market are much better than your typical biotech company. So we have multiple shots on goal, each of these products address big market opportunities and we think that the risk profile to get there is pretty reasonable.

 

CEOCFO: Are you doing road shows to bring the products to the attention of the investment community?

Mr. Hogan: We try on a regular basis to go out and meet with institutional investors at one-one-one meetings or conferences. Further, we are open to chatting with any investor at any time that has an interest in learning more about our company.

 

CEOCFO: Final thoughts, what would you like people to remember most about DURECT?

Mr. Hogan:  After many years of hard work, we believe that we are a company that is on that verge of having our first product (Remoxy) reach the market, which could make a real difference to patients, and which could have a transforming financial impact on our company. Behind that we have several other drug candidates in late stage trials which have considerable market potential because they represent tangible improvements over what is available for patients today. I think it is a very opportune time for people tocome and take a fresh look at DURECT.

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We represent an interesting investment opportunity in that there aren’t that many companies that have this many late-stage opportunities. The nature of what we are doing is a little bit lower risk than your typical biotech company where the company might be working on a completely novel compound where the safety and efficacy isn’t well established. In contrast, the active agents in all four of our lead programs have been around for a long time in medical use and are known to be safe and efficacious. What we have done is formulate these agents to produce a better product than exists today. We would submit that the risk proposition that these drug candidates actually make it to market are much better than your typical biotech company. So we have multiple shots on goal, each of these products address big market opportunities and we think that the risk profile to get there is pretty reasonable. - Matt Hogan

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