DURECT Corporation

Thank you. Good afternoon, and welcome to the third quarter of 2012 earnings conference call.

This is Matt Hogan, the 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 our business.

We’ll then open up the call for a Q&A session.

Before beginning, I’d like to remind you of our Safe Harbor statement. During the course of this call, we will 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.

Let me now turn to our financials. Total revenue was $3.8 million in the third quarter of 2012, as compared to $8.1 million in the third quarter of 2011.

Excluding all deferred revenue recognized for upfront fees from our agreements, revenue from our R&D collaborations was $1 million in the third quarter 2012 as compared to $3.4 million in the third quarter 2011. 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 from the sale of ALZET pumps and LACTEL polymers were approximately $2.7 million in the third quarter 2012 as compared to $2.9 million in the third quarter last year. Our gross margin on these products was around 62% in the third quarter this year as compared to 55% in the third quarter last year.

These product lines continue to be strongly cash flow positive for us.

R&D expense was $4.7 million in the third quarter 2012 as compared to $8.5 million in the third quarter 2011. SG&A expenses were $2.9 million in the third quarter this year as compared to $3.4 million in the third quarter last year.

And as a result of the above, our net loss for the third quarter 2012 declined to $4.8 million, compared to a net loss of $5 million for the same period in 2011.

one is we expect to have less revenue from Pfizer, because our role in assisting with REMOXY is diminished at this point. And secondly, in the fourth quarter is when we have to make our annual insurance payments, which total about $600,000.

At September 30, we had cash and investments of $21 million compared to $23.7 million at June 30, 2012. We have essentially no debt other than normal liabilities associated with running the business.

And lastly, we have multiple programs that might potentially be partnered over the next 12 to 18 months. These include TRANSDUR-Sufentanil where we have worldwide rights, POSIDUR with worldwide rights, ELADUR with worldwide rights, ORADUR-ADHD where we have U.S.

and European rights and various feasibility studies that we hope may mature into development agreements much like Relday did last year.

So with that, let me turn it over to Jim to discuss some non-financial matters in greater detail.

Thank you, Matt, and hello everyone. I’ll now provide an update with the most significant recent events.

Regarding REMOXY, we’re working with our commercial partner Pfizer and they are committed to moving the program forward. They recently gave an update on REMOXY, which I’ll cover in a moment.

For POSIDUR, following our pre-NDA communications with the FDA, we are working towards submitting the NDA in the first quarter of next year. For Relday, our partner, Zogenix has started the Phase I and we expect -- and they expect to complete the study by year-end.

Let’s now go through our major programs in greater detail, starting with REMOXY. For REMOXY, we have a confirmatory BA study that has been initiated.

The data are expected in early 2013 and the FDA meeting is targeted for the end of March.

I might note that you don’t do a confirmatory study unless you’re confirming something, namely that you think that you have a solution at hand and now want to generate the data to support it. While we wish this was going faster, turning around a new BA study only about 2 months after the prior study is quite fast and speaks to Pfizer’s desire to get this program to the FDA.

Pfizer updated on REMOXY during their third quarter conference call. And they outlined the one quarter delay in the time to the FDA meeting.

Some additional statements led to misinterpretation by investors and analysts. I will review the comments from Pfizer’s call and clarify the status of the REMOXY program.

Additionally, I will briefly discuss the former Alpharma-King product, AL-02. We’ve been impressed with Pfizer’s technical and manufacturing teams as well as their regulatory capabilities.

And we look forward to the commercialization of REMOXY by their world-class sales and marketing organizations.

I also want to note, when it became clear that there was a misinterpretation of some of the statements made during the Pfizer call, Pfizer’s senior team were quick to provide DURECT with a statement that they would have utilized to further clarify what they had said. I will read the statement in a few minutes.

First, I’ll begin with Pfizer’s original REMOXY communication. In response to a question on the status of REMOXY, John Young, the Head of Pfizer’s Primary Care Business gave an update on the status of the program that included information about the initiation of a confirmatory bioavailability study with data to be available early in 2013.

He also informed investors that a meeting with the FDA was planned for the end of March.

John finished his discussion on REMOXY with a phrase go, no-go in reference to their proposed interaction with the FDA. He also used terms like the teams are working very diligently and extensive insight gained.

That being said, it seems a number of investors and analysts focused primarily on the phrase, go, no-go. The use of this phrase seems to have been misinterpreted.

Pfizer used the phrase in conjunction with reaching agreement with the FDA on their proposed regulatory strategy. John stated and I quote, “We are targeting a late March meeting with the FDA to discuss these outputs and agree to a go, no-go decision”.

Because of the reaction by some investors, Pfizer was kind enough to send the following statement with regard to REMOXY, which I will read. What Pfizer said is, they are targeting a late March meeting with the FDA to discuss these outputs.

Based on feedback Pfizer receives from the FDA at the meeting, Pfizer will subsequently determine the next steps and/or required timing to respond to the Complete Response Letter. John then followed up his comments on REMOXY with a statement about the status of AL-02, the old Alpharma oxycodone product that uses similar technology to that of EMBEDA.

This technology contains naltrexone, a narcotic antagonist and has challenges of its own. Historically, this technology has presented manufacturing challenges as well as the potential for inadvertent release of naltrexone.

I would -- if you care to read more, I’d refer you to the Safety of EMBEDA, an article that is in the Journal of Opioid Management from March and April of this year.

Purdue also has a patent position on this technology and King was required to reach a business agreement with Purdue in order to launch EMBEDA. But this settlement was limited to EMBEDA.

The benefits of REMOXY are significant in the areas of abuse-deterrence and the product has a strong patent position. With REMOXY, we’ve taken tamper resistance to the next level.

DURECT’s ORADUR technology provides for multiple layers of tamper resistant. REMOXY is intended to make it more difficult to snort, chew, extract with alcohol, inject or smoke the product.

This is in contrast to other tamper-resistant technologies that are more one-dimensional, providing only crush resistance or those that add an agent to the patient’s medicine to prevent tampering when this added agent may inadvertently cause the patient harm. DURECT has 4 issued patents for REMOXY.

This should provide protection out to at least 2025 with potential extensions going as long as 2028.

In summary, REMOXY continues to move forward. We and our partner Pfizer have made significant progress with a confirmatory BA study now initiated and a FDA meeting to outline the remaining steps to the re-submission, which is targeted for the end of March 2013.

Just as a reminder of the financial impact this product could have for DURECT, if we look at the U.S. OxyContin sales for 2010 for Purdue, they were over $3 billion out of a $3.7 billion worldwide market.

And my understanding is this year that will be closer to $4 billion on a worldwide basis. And if Pfizer were to able to achieve somewhere in the range of 30% to 50% penetration of that U.S.

market , not expand market, but just the current or the market as it was in 2010, with our royalty that starts at 6% and goes to 11.5%, we would yield somewhere in the range of $70 million to $140 million in royalty payments.

Now I want to change gears and talk about POSIDUR, a post-operative pain product, which is SABER-Bupivacaine. It offers a new paradigm for post-operative pain control.

It’s designed to control pain locally for 3 days after surgery.

We have 2 pivotal trials that are the heart of our NDA for this product. The first is a hernia trial that demonstrated a 30% reduction in pain over 3 days and a 70% reduction in narcotic use.

As well, we have a shoulder trial we demonstrated about a 19% reduction in pain and approximately 40% reduction in narcotic use. This product adds at a potential additional benefit of reducing the narcotic use and associated side effects and costs and the potential for earlier hospital discharge.

One question that investors, I’m sure, have in your minds is, why the change in the submission date, which we had from last quarter, which said late 2012 or early 2013 to first quarter 2013. Well, nothing substantially have changed, it’s just a reflection of the volume of work involved in pulling the NDA together and our dependence on certain contractors and vendors to get these pieces done.

The actual change is on the order of a few weeks to our expected submission date.

We feel like the NDA is coming together nicely, but factoring in turnaround times of vendors and the holidays, it isn’t going to happen by year-end unless we make compromises to rush this submission, which is something we do not intend to do.

Regarding the POSIDUR regulatory strategy, given the FDA guidance we’ve received at our end of -- excuse me, pre-NDA meeting, our team is focused on finalizing the NDA based on the data generated throughout our POSIDUR development program. We will be pursuing a 505(b) (2) filing strategy, which enables us to leverage the long history of bupivacaine.

We think the data we have generated is compelling, but it’s the FDA that is the true ultimate arbiter of the benefit-risk ratio for POSIDUR. After this submission, the FDA has up to 75 days to accept the NDA submission, and if accepted the FDA would then assign a PDUFA date to our application that would be 10 months after the acceptance date, which is to say, about a year after submission.

As a reminder, any NDA submission is subject to a whole range of review and appropriate risks and POSIDUR will be no exception. POSIDUR offers a large commercial opportunity, which is driven by reducing the need for opiates after surgery and their associated side effects.

It’s better for patients with a potential for large healthcare cost savings. We expect that there will be over potentially 70 million surgeries per year in the United States and about 10 million to 20 million procedures would have potential utility for the use of POSIDUR.

Our pricing is to be determined but our market research suggests $250 or more per procedure based on a reduction in narcotic use and their side effects. Because of the significant reduction in opioids in pain for the full 3 days, it’s an easy product concept for surgeons, anesthesiologists and payers to get behind.

The last product I’ll update on is Relday. This is our once a month risperidone product we’re developing with Zogenix.

This opportunity is quite a large one, over $1 billion potential. This format is patient, and really, physician-friendly as far as treatment for schizophrenia.

It offers a needle-free and/or subcutaneous injection versus a 21-gauge and IM injection. So therefore, it offers a simplified, more simplified dosing regimen.

The Phase I was started in July and the study is expected to be completed in 2012. It’s a single-center open-label safety and PK trial that will enroll about 30 patients with chronic stable schizophrenia.

We look forward to these results by the end of the year.

So just to summarize, for REMOXY, Pfizer is planning the FDA meeting in March of 2013 to discuss the resubmission. We’re supporting Pfizer to complete activities required for resubmission to the Complete Response Letter.

Once resubmitted, it’ll be a 6-month review by the FDA. And if approved, it’ll be launched by Pfizer.

For POSIDUR, we plan to submit the NDA in the first quarter of 2013 with the potential PDUFA date for the first quarter of 2014. For Relday, initiation of the Phase I in July of this year, we look forward to the data coming from that trial.

We have the potential for new collaborations and programs with POSIDUR, with Sufentanil patch, ELADUR, our ORADUR-ADHD program and other undisclosed programs.

We also have a number of feasibility projects and other internal programs that haven’t yet been disclosed that we will be advancing.

With that, we’d like to take any questions that you might have.

Jim, I appreciate you sharing that statement with us, I was wondering if we could spend a little bit more time talking about some of the pipeline programs that you’ve talked about hoping to find partners for, and maybe your thoughts around what that strategy might look like. I know in some instances you’ve had the opportunity to sign partnerships with large pharmaceutical companies upfront.

And in the case of REMOXY, obviously it didn’t start out that way, but it’s turned out that way. If you could give us a sense for what it is you guys are looking for in partners, specifically when we talk about TRANSDUR and ELADUR, because it seems like in at least one of those cases, having a smaller partner might be the best way to start this, with the opportunity maybe longer term of it ending up in somebody else’s hand.

I think you’re right. I think they’re 2 very different products and probably find 2 different partners that they make the most sense for.

For the sufentanil patch, I think, it needs a larger partner, simply because it’s a larger investment. It’s a substantial investment to bring that product forward, although it’s got great potential, and we think it really could change the treatment of chronic pain, because of the agent itself, sufentanil because of its wide therapeutic index, because it’s a very nice constant delivery over the full week.

And so 4 patches a month takes the place of however many pills a patient might take. And so it’s great for being able to track patients, especially in care facilities and the like and like I said, the wide therapeutic index makes it quite exciting.

We have 300 patients exposed there, I think 10 clinical trials. But it’s a pretty big commercial effort to bring that product to the marketplace.

And so that has one arena of potential partners. Now for something like ELADUR, probably it fits better in the smaller arena with regard to partners there.

And that’s because it’s not -- it’s probably 1/5 the investment that the sufentanil product would require. And it’s primarily initially going to be focused on post-herpetic neuralgia.

We’ve got some very good data from a 60-patient trial there, Phase IIb trial that we did -- or excuse me it was Phase II -- it was a Ib trial. And then we look forward to expanding that once the product would be approved into potentially other indications, but I would focus there initially for PHN.

And so we’re looking at smaller partners with regard to that. In fact that the trial that we did, the 60-patient trial was actually a Phase IIa trial.

Okay. And then just with regard to timing, I know obviously, several of these, it sounds like -- and those 2 aren’t the only ones you would potentially consider partnering in the next sort of 12 to 18 months.

Can you give us a sense from a prioritization standpoint, as you guys look to have conversations with prospective partners, Jim, can you give us a sense as to how many of these are sort of focused around current technologies that we’re aware of, like sufentanil and ELADUR versus maybe some of those feasibility projects and others that you might even have an opportunity to work with somebody else’s new chemical entity and your delivery technology and something that’s truly unique and novel and not something we would have ever considered or thought of before?

Yes. There is some -- definitely, the latter are happening.

So that’s kind of an interesting point. And I’ll start it and maybe hand it over to Felix to talk about how the world is changing with regard to the generic place and what’s happening in that whole arena of biobetters.

But to start with, if I look at the products -- development products we have, clearly the most mature asset is POSIDUR and to that end, there is a lot of interest around that. There are very few late-stage assets like that available.

And so we’re talking to a number of companies about that. Especially since the pre-NDA meeting we’ve had a number of people now in the E-room and we’re moving forward to that process.

I think probably #2 behind POSIDUR, I would say, is probably ELADUR, because it’s a smaller program and easier for companies to get their hands around and the data are pretty compelling. And it’s just an application of almost a topical, in effect, a topical application for a local place.

And so from a general systemic safety standpoint it’s an easier one to get your head around as well. But with regard to the feasibility programs, Felix, do you want to maybe just speak in general to those?

Sure. I think we are in a very fortunate position with our deeper technologies.

This is really where the majority of our new feasibility projects are coming from. And the interest is based on the strength that we have in this area, which is a very growing and strong patent position and as well our technical capabilities in Birmingham, where we can specialize and synthesize various components as complexing agents and rate-controlling polymers.

We have a multiple -- large number of feasibility projects ongoing. And I think it’s clear that the biotech industry needs this kind of capability to reduce frequency of injection to take them from once-a-day to once-a-week or once-a-month.

The Zogenix project is the first one in this series. And it has really helped to focus us essentially on optimizing the technology and also getting the first entry into the clinical setting.

I think that this area is going to be very important for our future and I would expect that in the next -- in the forthcoming future that we will be able to share more of these programs with the investor community.

So question regarding REMOXY, was the 3-month delay roughly from the fourth quarter of this year to the first quarter of next year, the delay in the FDA meeting that Pfizer was supposed to have, was that caused by the results of the bioavailability studies or CMC issues or something else, maybe scheduling, can you explain that a little bit?

Yes. I think what -- the bottom line on this is that this is a process that Pfizer is working towards.

And they’ve got some, I think, some very good data. I was pleased with the data they’ve got from the most recent bioavailability studies.

And they’re kind of bracketing where they want to be. And as John Young said at their quarterly call that they see this next study as a confirmatory study, which means that they’re looking to hone in on being exactly where they need to be.

And to that end they have targeted the end of March for the meeting. And so I think that fits well with timing.

If you think about it, in order to have a meeting at the end of March, you typically have to mail things into the FDA 6 weeks prior to the meeting. And then, in order to be able to mail something in 6 weeks prior to the meeting, would put you at kind of early February.

You have to have data a number of weeks before that if you’re going to finalize it all and get it together to the standards, certainly that any of us would have. And Pfizer, I think, hold themselves to the highest standards in the industry that I’m aware of and certainly expect to do that.

Okay. That being the case, thank you for joining this call.

And obviously, if investors or analysts have other additional questions, feel free to call us at any time, we’d be happy to try to be responsive. Thank you.