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DRRX: DUR-928 Programs Accelerating. Anticipate NASH, Psoriasis Data Later This Year

03/13/2019
By Brian Marckx, CFA

NASDAQ:DRRX

READ THE FULL DRRX RESEARCH REPORT

Q4 Financial Results and Operational Update
Last week Durect (NASDAQ:DRRX) reported financial results for their fourth quarter ending December 31st and provided a business update. Relative to the financials, revenue of $3.6M included $2.9M in product sales, mostly related to ALZET mini pumps and LACTEL biodegradable polymer products, as well as $0.8M in collaborative revenue. Total revenue was inline with our $3.6M estimate.

Product sales remain a cash cow, with gross margin at nearly 62% in Q4, up slightly from 61% in the two prior quarters. Product gross margin averaged 59% for the full year 2018, up from 49% the year earlier. As earn-outs and sales royalties essentially represent 100% margin, we continue to expect that both product sales and margins will further benefit from;

- the commencement of PERSERIS-related commercialization earn-outs (which represent 100% margin). DRRX receives single-digit royalties on sales by Indivior. In late February Indivior announced that they had launched PERSERIS. Analyst U.S. sales estimates of PERSERIS have recently been upwardly revised

- Methydur sustained release capsules (for ADHD), Taiwan regulatory approval of which Orient Pharma received in September. Orient anticipates launching ORADUR-ADHD in that country in 2019 and is also seeking regulatory clearance and commercialization partners in other Asian countries, including in China. As a reminder, DRRX receives a royalty on sales of the product by Orient and retains rights to it in North America, Europe, Japan and all other countries not specifically licensed to Orient Pharma

Operating expenses in Q4, at $9.4M, were flat from Q3’18 and down about 5% from the prior year period. For the full year, operating expenses were $37.9M, about 15% lower than in 2017. Most of the $6.9M reduction in opex relates to R&D, which fell as a result of lower spend related to certain programs, such as POSIMIR, ORADUR-ADHD and REMOXY ER, partially offset by an increase in costs associated with development progress of DUR-928. Management is guiding for flattish SG&A in 2019 but for R&D expense to increase, which largely reflects ramping activities of the DUR-928 programs.

Cash
Financial position remains very healthy and with a recent amendment to terms of the $20M term loan, which pushed back the initial principal repayment and final maturity dates by 18 months (to June 2020) and 27 months (to Nov 2022), respectively, DRRX’s cash runway is substantial. Cash balance was $34.3M at year-end. Operating burn averaged approximately $4.9M per quarter through 2018. Durect expects their current cash balance to be sufficient to fund operations through at least the next 12 months.

As it relates to the operational front…

- DUR-928 is where we continue to believe most of the upside value lies in DRRX. As a reminder, DUR-928 could have platform-like utility and is being investigated in several formulations and potential applications including oral, intravenous and topical formulas and in indications such NASH, alcoholic hepatitis (AH) and psoriasis. Durect has recently adopted somewhat of an updated strategy as it relates to DUR-928, which relates to honing their focus on accelerating timelines for those indications which they believe hold the most near-term potential to move into late-stage development – with one of those areas being NASH. Recent progress on these programs include (also see our detailed description of DUR-928 programs later in this report);

New NASH Phase 1b program
     • Ph1b open label, multi-site, U.S. study to evaluate safety, pharmacokinetics and ‘signals of biological activity’ of orally-administered DUR-928 over 28 consecutive days in NASH patients
     • Three doses; low, middle and high. Each cohort n= 20 patients
     • DRRX will provide more specifics re: study design following initial patient dosing
     • Initiation of enrollment and initial data expected in Q1’19 and 2H’19, respectively

AH Phase 2a study with IV DUR-928
     • Includes two patient cohorts;
          ∙ Part A: moderate AH at three dose levels; 30mg, 90mg and 150mg (n=4 per dose cohort) and
          ∙ Part B: severe AH at 30mg, 90mg and possibly a 150mg dose (n=4 per dose cohort)
     • Protocol recently amended with the goal of speeding trial completion. Protocol now allows for Part B to commence enrollment (initially with low-dose) following review by trial oversight committee, while simultaneously continuing to enroll Part A. This protocol modification allows investigators to immediately enroll these higher MELD-score patients and speed overall completion time of the trial
     • Low-dose (30mg) cohort (n=4) completed among both Part A and Part B patients
     • Based on positive feedback from their clinical trial investigators, dose escalation committee and expert advisors (as it relates to safety and PK review), both Part A and Part B are approved to enroll the next-highest dose (90mg). DRRX is advancing Part B to 90mg dose and recruiting Part A patients for 90mg. Expect to complete Part B 90mg dose this year
     • Previously, the plan was to transition the study to Dr. Craig McClain at the University of Louisville following completion of the 30mg dose of Part B. But, following positive review of this cohort, the plan is now for DRRX to continue this study and for Dr. McClain to conduct a parallel, NIH-funded, study

◦ Psoriasis with topical DUR-928
     • Plans underway for a Phase2a proof-of-concept study with topical DUR-928 in patients with mild-to-moderate plaque psoriasis
          ∙ U.S., multi-site, randomized, double-blind (patients serve as own control)
          ∙ Primary endpoint is change in local psoriasis scores
          ∙ Targeting enrollment of 20 in order to obtain data on at least 15 patients
          ∙ DUR-928 applied topically once-daily for four weeks with four-week follow-up
     • Anticipate dosing starting in Q1’19
     • Topline data expected in 2H’19

Primary Sclerosing Cholangitis Phase 2a study with oral DUR-928: PSC program has been discontinued as DRRX focuses DUR-928 on NASH, AH and psoriasis

- U.S. launch of PERSERIS. On July 30th Indivior announced that FDA approved their NDA for PERSERIS (risperidone), the first once-monthly subcutaneous risperidone-containing, long-acting injectable for the treatment of schizophrenia in adults. That triggered a $5M milestone payment to DRRX. DRRX will also receive single-digit royalties on sales by Indivior. On February 27, 2019, Indivior announced the U.S. launch of PERSERIS.

- Regulatory approval of Methydur sustained release capsules (for ADHD) in Taiwan. Orient Pharma received notice of regulatory approval in Taiwan in September. Per DRRX’s Q4’18 earnings release in early March, Orient Pharma has stated that they expect to make Methydur commercially available in Taiwan in 2019. DRRX receives a royalty on sales of the product by Orient and retains rights to it in North America, Europe, Japan and all other countries not specifically licensed to Orient Pharma. While we do not expect significant royalty-related revenue from sales in Taiwan (population ~24M), we do view this as meaningful as it may be a harbinger for accelerated development and regulatory activities in other, more meaningful markets, such as China

- POSIMIR CRL response anticipated. As a reminder, DRRX submitted an NDA (via 505(b)(2) pathway) to FDA for POSIMIR in April 2013. FDA responded in February 2014 with a Complete Response Letter. Following interaction with the agency, Durect conducted and completed a Phase 3 clinical trial of POSIMIR (PERSIST trial). As reported in October 2017, while results favored POSIMIR, the trial failed to meet its primary endpoint of a statistically significant reduction in pain on movement over the first 48 hours after surgery as compared to standard bupivacaine HCI. Durect has now completed a total of 16 clinical studies with POSIMIR.

DRRX recently engaged Dr. Lee S. Simon, a physician and previous (2001 – 2003) Director of FDA’s Analgesic, Anti-inflammatory and Ophthalmologic Drug Products division, to evaluate potential next-steps with POSIMIR. Based on his review of the PERSIST data, Dr. Simon advised the company to formally respond to the Complete Response Letter. As such, DRRX expects to make a full response to the CRL in 1H’19. Given an anticipated six-month FDA review period, Durect should have an answer from the agency before current year-end. As we had removed POSIMIR from our model, a ‘favorable’ response from FDA – most notably, a reasonably efficient pathway to U.S. marketing approval, would likely provide upside to our estimates.

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