DURECT Corporation

Okay, good afternoon. Welcome to our year end 2011 Earnings Call.

This call will begin with a brief review of the 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.

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 Directs products and development, expected product benefits, or development plans, future clinical trials or projected financial results.

These forward looking statements involve risks and uncertainties that could 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 10K under the heading Risk Factors.

Let me now turn to our financials.

Total revenue grew to $8.9 million in the fourth quarter 2011, from $8.5 million in the fourth quarter of 2010. Revenue from our R&D collaborations was $6 and a half million in the fourth quarter 2011, as compared to $5.9 million in the fourth quarter 2010.

Now revenue from this source always fluctuates from quarter to quarter, depending on the state of development of the various programs, and our role in those programs. Product revenue from the sale of ALZET pumps and LACTEL Polymers decreased by approximately $95,000 or around 4%, from $2.6 million in the fourth quarter of 2010, to $2.5 million in the fourth quarter of 2011.

This slight decline was mostly at LACTEL, and had to do with the timing of some shipments that were subsequently made in January. Our gross margin on these products was about 63% in the fourth quarter.

These product lines do continue to be strongly cash flow positive for us. Just to highlight this for a second.

Our total revenue for the year, from these 2 product lines was $10.6 million, and then generated $6.2 million in gross margin, of gross profit. R&D expense was $7 million in the fourth quarter this year, as compared to $9.4 million in the fourth quarter last year.

SG&A expenses were $3.2 million in the fourth quarter of 2011, as compared to $4 million in the fourth quarter 2010.

As a result of the above, our net loss for the fourth quarter declined to $2.1 million, compared to a net loss of $5.3 million for the same period 2010. Probably a more relevant financial metric for us than our net loss was our net cash consumed during the quarter.

That figure was $4.3 million. For all of 2011, our cash consumption was $18.8 million, as compared to our guidance at the beginning of the year of $23 million to $25 million.

So we used about 22% less than the midpoint of our earlier guidance.

At December 31, 2011 we had cash and investments of $30.8 million, compared to cash and investments of $49.6 million at December 31, 2010. And we have essentially no debt other than normal liability associated with running the business.

Over the last 7 years, during in which we invested in building and advancing our pipeline of late stage products, our burn rate has averaged out to around $11 million per year. In large part this has been a function of our success in corporate licensing activities, as well as the fact that we've been cautious in our spending.

Let me now turn to financial guidance for 2012. Our net cash consumption was heavily influenced by the timing and structure in new corporate collaborations, as well as outsourced preclinical and clinical expenses.

While we anticipate entering into new collaborations on 2012 and beyond, we think it's more conservative to give financial guidance based on an assumption of no new collaborations and no milestones.

Last fall, we gave guidance that we thought our burn rate in 2012, would be about $15 million to $17 million. We've recently taken steps to moderate our burn rate in 2012, such that we now anticipate net cash consumption this year of about $12 million.

That's a cut of about 25% from the midpoint of our earlier guidance. Some of the actions that we've taken, including a reduction in headcount.

We currently have a total headcount of 106 employees. That's down about 15% from the end of the year, and it's about 18%, if you exclude the employees associated with ALZET and LACTEL, which are cash flow positive.

No cash bonuses were paid across the company this year, nor were there any salary increases for those at the director level and above. Six vice presidents and above, volunteered to reduce their salary, in lieu of which they received some options of Vest quarterly over the coming year.

That totaled about $250,000 from the senior management team. We also terminated a lease early, from what was our headquarters in Cupertino, and consolidated into our other facilities down the road.

And lastly, we reviewed all outside expenses, and reduced our spending across multiple areas. Of note, we have multiple programs that may be potentially be partnered over the next 12 to 18 months.

These include transfer of fentanyl, worldwide rights, POSIDUR for Japan and other non U.S./Canada territories, ELADUR Worldwide, ORADUR-ADHD for Europe and the US, and various feasibility studies that we hope may mature into development agreements much like Relday did last year. With that, let me turn it over to Jim to discuss non-financial matters in greater detail.

Thank you Matt and hello everyone. Let me start with just a brief summary of DURECT.

DURECT as most of you know is a specialty pharmaceutical company with two late-stage programs and a number of earlier stage ones. As Matt outlined earlier, we have a moderate cash consumption.

About $11 million per year over the last seven years. We have two small product lines that are positive in cash flow contributing to gross profit of over $6 million a year.

We recently reduced our cash burn by about 20% through staff and facility reductions leaving us with a about 2.5 years or more of cash in the bank. We will work with our partners towards the potential approval of our late stage programs while continuing focused efforts on earlier stage programs that are supported in whole or in part by external funding.

Now an update on our programs starting with REMOXY. Our commercial partner Pfizer continues to move REMOXY forward.

We're working with them to aide them in resolving the issues at hand. Pfizer has become much more specific in describing their plans, which include an FDA meeting in the third quarter this year.

At the JP Morgan Conference in January of this year, we went to the breakout session there, and Ian Read is the CEO of Pfizer was asked a question about REMOXY. And he stated with regard to REMOXY they will get it over the goal line.

It's just a matter of when. And in their fourth quarter earnings call, Olivier Brandicourt, who is Pfizer's President and General Manager of their Primary Care business, gave a statement with regard to a question on and I'll paraphrase.

What he said was they now have a much better understanding of the formulation, the manufacturing controls and what they need as analytical tests.

They will conduct 2 viability studies during the second quarter, and they anticipate meeting with the FDA during the third quarter this year to discuss next steps. As a reminder of the potential of REMOXY, and what it means to DURECT from a financial standpoint and from a patient standpoint.

Oxycontin is about a $3.6 billion product on a worldwide basis. With about $3 billion sales in the US.

We think we'll be able to offer to the patients advantages of true twice a day dosing a multiplicity of the use to turn characteristic that are inherent within the older technology. DURECT'S royalties on these sales are between 6% and 11.5%.

And if Pfizer can achieve about third of the US market, that would mean a royalty to payment to DURECT around $80 million and if they can get half the market, it's $140 million.

Now changing over to POSIDUR. Here we're pulling together the integrated summary of efficacy and safety for this program.

We're targeting a pre-NDA meeting in the middle of this year. And pending the outcome of that meeting, we expect to submit the NDA during 2012.

POSIDUR is our post-op pain and control product. It's designed to control pain locally for 3 days after surgery.

As the added patient all of benefit of being able to reduce narcotics and their associated side effects, which has the potential for earlier hospital discharge. We're taking a 505(b)(2) filing strategy for this product which requires establishing the safety for the product, and having one well-controlled efficacy trial.

Additionally, we will be leveraging off the long history of use of Bupivacaine.

We have 2 well-controlled trials that demonstrate efficacy for POSIDUR. first is our hernia trial, where we have a statistically significant 30% reduction in pain as demonstrated on Day 1, on Day 2, and on Day 3 separately, post surgically.

We also have a statistically significant three-fold reduction in narcotic use in this trial also seen in Day 1, Day 2, and as well as on the third day.

Additionally we have a shoulder trial that was conducted in the EU. This was 107 patient trial and this is the first time that we're sharing a little more specifics with regard to this trial.

In that shoulder study, we saw a statistically significant 19% reduction in the pain on movement for the 3 days after surgery. We also saw a statistically significant 67% reduction in narcotic use for the 3 days after surgery.

Once again, this is a three-fold reduction in narcotic use.

So to summarize our POSIDUR efficacy in just a few points. POSIDUR has demonstrated a statistically significant reduction in pain and narcotic use and 2 surgical models.

That is hernia and shoulder. POSIDUR has demonstrated statistically significant pain and reduction in laproscopic surgery.

POSIDUR has demonstrated a statistically significant reduction in pain against Bupivacaine, as an active comparator in the cohorts one and 2 from our BESST trial.

POSIDUR has demonstrated a positive statistical significant reduction in pain and movement in a variety of surgical pain models. Lastly POSIDUR has demonstrated a statistically significant reduction in pain and narcotic use on not only Day 1, but also on Day 2, and 3 demonstrating that we have a true 3-day effective product.

As well, POSIDUR has positive pharmoeconomics. If we look at the hernia trial in particular and an apply a dischargability index comparator to that, we're seeing that we on average are able to get patients out of the hospital about a 1/2 day earlier and if one assumes the $1,200 a day hospital bed, we're saving about $620 per patient.

First to get the agency agreement that our 2 proposed pivotal studies are acceptable for a 505(b)(2) NDA submission. Second, to get the agency agreement that our safety database of over 1000 surgical patients study is adequate for their assessment of the benefit risk of POSIDUR.

And third, to ensure that they structure and format of the data presentations are acceptable to the agency.

Pending that meeting, we're planning to submit the NDA this year. the logic for moving forward with the strategies and with the data that we have in hand are that we believe that overall program shows a positive risk benefit ratio for POSIDUR and qualifies under the 505(b)(2) guidelines.

At this point, we don't see any systemic safety issues. Bupivacaine is a well-established agent with a long history of use.

And with respect to efficacy, we shown in multiple models evidence of reduction of pain scores over 3 days.

We would plan to position our hernia and/or shoulder trials as pivotal efficacy studies and these will be supported by the trends of efficacy in BESST and our other trials. Our view is that this body of evidence in multiple surgical models is compelling and maybe the basis for a possible approval.

Having said all that though, we need to explore this with the agency.

POSIDUR remains a large commercial opportunity, and it's largely driven by reducing the opiate use after surgery and their associated side effects. It's better for patients and potentially can offer large healthcare savings opportunity.

There are over 70 million surgical procedures each year in the United States and we estimate that between 10 million to 20 million of these procedures offer the potential market for POSIDUR. The pricing is yet to be determined, but our market research suggest that $250 or more per procedure would be based on the reduction of the narcotic use and side effects associated with that.

We have a partnership with Hospira in the US and Canada. We selected Hospira, because they're a leader in hospital-based products.

We received $27.5 million up front, with regards to this product and we have potential future milestones of over $185 million. We also received strong double-digit royalties for this product.

We're into discussions now in Japan with regard to potential partnering opportunities, and we also are pursuing partnerships for Europe and other territories around the world.

Now an update on ELADUR. Earlier this week, we learned from Pfizer that they would be returning the rights to ELADUR back to direct.

Our strategy will be seek approval for this product for the treatment of post-herpetic neuralgia pain. This is an indication of which we have orphan drug status, and we have a 60 patient Phase II B study with some nice efficacy data.

We will be seeking a new partner for ELADUR.

Now an update with regard to Relday. Relday is our first feasible data program advance to a development agreement.

We have a partner here on Zogenix. It's a large opportunity with anti-schizophrenic market over $16 billion.

And in the injectable product that is the leader there is RISPERDAL CONSTA, which is $1.5 billion for J&J.

Relday would be the first month-to-month product -- control these product for RISPERDAL. It's patient friendly.

Physician friendly treatment offers a nice advantage with regard to this kind of therapy. It's a needle free injector, subcutaneous delivery versus an IM injection with a 21 gauge needle once a month versus every 2-weeks.

So much simplified dosing regime. We're getting closer to submitting the IND, and expect to have the Phase I conducted this year.

A brief update with regard to our ORADUR-ADHD program with Orient Pharma. Here we've conducted multiple Phase I studies, and we think we're getting closer to selecting the lead formulation that would take into Phase II and Phase III trials.

This formulation will hopefully be selected later this year.

Remember this deal is one in which Orient Pharma will be paying for the clinical efforts here through the first Phase II studies. After which we will be either taking it forward ourselves or seeking a partner, and this one where Orient Pharma have the rights in Southeast Asia with the royalty back to us and we have the rest of the world free and clear.

To summarize, the potential key drivers for DURECT over the next 12 months to 18 months. For REMOXY, it's to support Pfizer to complete the activities required for a timely resubmission to the complete response letter.

And if launched, excuse me, if approved, launched then by Pfizer. For POSIDUR, it's the pre-NDA meeting with the FDA.

And depending on the FDA feedback submission of the NDA in this year. For ELADUR it's seeking a new partner and refocusing the development on the original post-herpetic neuralgia strategy.

For TRANSDUR-Sufentanil, it's establishing the commercial and development strategy and a potential partnership. For Relday it's initiating the Phase I.

And with potential of numerous new collaborations, POSIDUR in Japan and the rest of the world. Outside the U.S.

and Canada, for Sufentanil patches worldwide. ELADUR worldwide.

The ADHD program with ORADUR also for the U.S. and Europe as well as other undisclosed programs.

We also look forward to advancing our other programs, that is, of course, the other ORADUR opioides with Pfizer, the ORADUR-ADHD program and biotech feasibility project and other undisclosed projects.

With that, I'd like to open it up for questions.

I wanted to ask with regards to POSIDUR, so if you have, when you have your pre-NDA meeting with the FDA and let's say the FDA comes back and wants you to run additional clinical trials. Can you let us know, is the any obligation for Hospira to burden any of that cost?

And if so what would that be? And if not, is this something that you guys could potentially do on your own in case Hospira decides to bow out?

And if they decide to not, you know, go ahead and pay for this second trials here, would they still be able to be your partner and would just be able to reimburse you after the results? Or is there any -- where exactly are the negotiations with respect to that with Hospira?

You know, there aren't any specific negotiations with regard to that. Post the meeting should the FDA require another Phase III trial then we would, we'd look to conduct such a trial and the way our partnership with Hospira they would be truly our partner there and pay for half of that trial.

Should they be not interested and bow out, then we would bear the full burden of that, and they would no longer be our partner. It's basically the way it would work.

Okay. So it's pretty straight forward.

Yes.

And then with regard to ELADUR, was there any, is there any additional color? Is it just a reprioritization, why Pfizer returned the rights to it?

Yes, I think it really was. You know, they're a big, complex organization, and I think they took their time which makes me feel somewhat good about the product.

I knew it went very deep into their review process, and into their budget process for this year. But it didn't go all the way through.

They had other priorities that they chose to spend their effort on. But nonetheless it's a wonderful asset.

It shows great efficacy for post-herpetic neuralgia. We think it has great advantages over Lidoderm out there.

Less break though pain potentially. You can wear it in the shower and exercise and all those things that we liked about it initially that led to the deal with did with Alpharma.

And at that time just to remind you, I think we had, I think at the peak point about a half a dozen large pharma companies looking at this product. So, I think it's a good opportunity and we'll have to see where it goes from here.

Great. And then, my last question.

What was their upfront money? Was there any upfront money that they had given you on that program?

Yes, they actually, Alpharma had paid us $20 million up front.

So, coming back to POSIDUR again, could you give us a little more color on where you are in the process of putting together your safety and efficacy studies and, you know, when you think these might be complete and what information you may be prepared to share with us?

Sure. Actually, what I'll do is I'll introduce Dave Ellis.

Dave is a colleague of ours who's our Chief Medical Officer here. He has many, many years of experience in MDs, PhDs.

Been associated with actually seven different NDAs. So, Dave is the quarterback on this, so I'll let Dave speak to that.

Yes, we're essentially complete with our integrated safety analysis plan, and the data management group we're working with is actually starting to generate integrated adverse event tables and so on. So, that is pretty far along.

For the integrated efficacy summary, we have come to an agreement between ourselves and Hospira, which trials we will include as pivotal and how the combined studies will be structured. And this information has gone, again, to our data management group who are in the process of finalizing the analysis plan for efficacy.

And for all of our data, both for our most recently completed trial, as well as our pivotals and other legacy trials, they already have the fully structured analysis files and data bases. So, that's all ready to go as soon as we get our analysis plan finalized.

So, I suspect next month or so, that will all be complete and we'll actually start generating data before we go to our meeting with the FDA.

Well, if there are no further questions at this time I think . .

.

Fair enough.

Sorry about that. I dropped on the question queue there.

So, as a follow-up to the comment on POSIDUR, can we take it that as far as the safety plan now that data are complete, that there are no adverse effects and as far as that section of the submission, you feel very good about it?

That's correct. Certainly the systemic adverse events are -- there's really no difference between that and our control agents, either, either SABER placebo or Bupivacaine hydrochloride itself.

So the systemic is clean.

And so you think you might have the comparable data out of the efficacy study by the end of March?

Well you know, Jeffrey, this is where I think we, given that we're working with Hospira, I don't think we can get too specific with regard to those things, but I think Dave has given you a lot of color with regard to where we are.

On track for . .

.

Yes. But I think we're on track for a mid-year pre-NDA meeting.

It's probably safe to say that.

All right. And as a further follow up, you'd indicated that some of your degree of comfort with the main thesis of why a POSIDUR NDA could be submitted based on what you currently have.

You went after some thought leaders in the industry. Can you put some more color on that and share with us who some of these people are and why they've given you the level of comfort you believe you have?

We won't be able to share the names with you, but the why is they review the data just as we do and they sit down with us and with our partner, Hospira, and we look at all of the efficacy and information that we have from these various trials. And that's where we've drawn the conclusion, that Dave was just outlining to you, that we're going to submit to the FDA both the hernia and the shoulder trial both as pivotal trials.

One, we haven't quite defined the strategy, but we may be kind of hard tissue / soft tissue, that kind of thing. We're still nailing that down, but it will be probably along that vein.

And could you, on a different subject, could you comment as to where you feel you are in terms of any other potential collaborations that might evolve into something like the Zogenix transaction?

Oh, the feasibility deal is maturing to a development deal. I think we have a number of feasibility deals ongoing, and because they're research, you can never project for sure.

I think we have certainly and opportunity for one that may well mature that far this year. Can't say absolutely, but I think it's got a shot.

And then, of course, with now the development programs that we have, we have a number of opportunities there, as well. So I think there's a good chance that we can bring some BD money in this year and take that $12 million that Matt talked to you about down.

That would be, certainly, our objective.

Okay. Well, as always, if people think of additional questions later, or just want to ask it one-on-one, please feel free to call management.

We'd be happy to spend time with you. Thanks again for participating.