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Operator: Greetings, and welcome to the DURECT Corporation Fourth Quarter 2022 Earnings Call. . I will now turn the conference over to our host, Tim Papp, Chief Financial Officer. Thank you. You may begin.

Timothy Papp: Good afternoon, and welcome to DURECT Corporation’s Fourth Quarter 2022 Earnings Conference Call. This is Tim Papp, Chief Financial Officer of DURECT. Before we begin, I would 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 can be found in our SEC filings, including our 10-K and 10-Qs under the heading, Risk Factors.

To begin, I would like to review our fourth quarter and full year 2022 financial results. Total revenues in 2022 were $19.3 million compared with $14 million in 2021. 2022 revenues included $10 million of milestone payments related to our POSIMIR agreement with Innocoll, while 2021 included approximately $5.2 million of revenue attributed to an upfront license payment and sale of manufacturing supplies and excipients. Innocoll commercially launched POSIMIR in September 2022. For the fourth quarter of 2022, revenues were $3.3 million compared with $7.3 million for the prior year. This decrease is due to the Innocoll upfront license revenue we recorded in Q4 2021. R&D expense was $36.9 million in 2022 as compared to $31.8 million for the prior year and $10 million for the fourth quarter compared with $8.4 million for the prior year.

The increases were primarily due to higher clinical trial expenses for our ongoing AHFIRM trial, contract manufacturing expenses for larsucosterol and employee and benefit costs, partially offset by a decline in R&D spending on POSIMIR. SG&A expenses were $15.9 million as compared to $14.4 million for the prior year, primarily due to higher employee benefit costs and patent expenses. For the fourth quarter, SG&A revenues were $4.3 million compared with $4.5 million for the prior year, so relatively flat. As of December 31, 2022, we had cash and investments of $43.6 million as compared to $70 million at December 31, 2021, and our cash burn for 2022 was $26.4 million. We also completed a registered direct offering in February 2023, raising $8.8 million in net proceeds, bringing our pro forma cash to $52.4 million.

We believe our cash on hand is sufficient to fund operations into the first quarter of 2024. Now I would like to turn the call over to Jim for an update on certain of our programs.

James Brown: Thank you, Tim. Hello, everyone. Thank you for joining us today for our fourth quarter 2022 update. The fourth quarter was a strong one, with consistent forward progress on our AHFIRM trial. We are excited to remain on track to announce top line results from our Phase IIb AHFIRM trial in the second half of this year. Enrollment continues to progress nicely. We have now dosed more than 260 patients out of our target of 300. We continue to expect completion of enrollment in the second quarter of 2023. If successful, we believe AHFIRM has the potential to support an NDA filing. Our goal is to advance larsucosterol as quickly as possible to approval in AH, an indication for which there are no approved therapeutics. The primary focus of the company is on completing enrollment in our Phase IIb AHFIRM trial for larsucosterol and patients hospitalized with severe AH.

AHFIRM is a 300-patient placebo-controlled, double-blind, multinational study with two active dosing arms and a placebo arm of 100 patients each. We currently have over 60 sites open, including leading hospitals in the United States, Australia, the E.U. and the U.K. We are working with renowned liver centers and some of the world’s preeminent thought leaders in AH. The FDA has granted our larsucosterol AH program Fast Track designation, and a positive result in AHFIRM could support an NDA filing. With this in line, larsucosterol has the potential to be the first FDA-approved treatment for AH, where there is a substantial unmet need for patients. As a reminder, AH is a lethal and costly disease that represents an unmet medical need with no approved therapy.

AH results in about 158,000 hospitalizations per year in the United States, and hospitalized patients have a 90-day mortality rate of approximately 30%. This suggests over 40,000 deaths in the United States each year from AH. We estimate that in the U.S. alone, on average, more than 100 people die every day from this disease. Our goal as a company is to bring a safe and effective treatment to these patients to help alleviate the suffering and save lives. AH continues to represent a significant cost burden to both patients and the health care system. For the vast majority not receiving a transplant, the average cost of treating a hospitalized AH patient can range from approximately $50,000 to approximately $150,000. For those patients who receive a liver transplant, the average cost is approximately $875,000 per transplant in the United States, and these patients are subject to a lifetime of immunosuppression.

Larsucosterol represents a potential multibillion-dollar opportunity in the U.S. alone, while simultaneously providing substantial overall cost savings to the health care system. AH is also a global concern, allowing larsucosterol the potential to serve ex-U.S. AH patients and their health care systems. These ex-U.S. markets represent additional attractive market opportunities. Our confidence that the AHFIRM trial will be successful is driven by our compelling Phase IIa study data, the mechanism of action of larsucosterol, which ties directly into the biology of AH, and our multiple preclinical animal studies, where we observed a profound survival benefit in multiple relevant acute organ injury models. In summary, we continue to make great strides with AHFIRM and have enrolled more than 260 patients to date and have over 60 clinical sites open.

We are on track to complete dosing the last patient in the AHFIRM trial in the second quarter of this year, which would enable reporting of top volume results in the second half of this year. If successful, we believe AHFIRM has the potential to support an NDA filing. We would now like to take any questions you may have.

Operator: . Our first question comes from Francois Brisebois with Oppenheimer.

Francois Brisebois: Congrats on staying on track here. I was just wondering, in terms of the potential of the data to have an NDA filing, what gives you that confidence that you wouldn’t need another trial before filing?

James Brown: It comes from a couple of directions. But the primary one is that there are no approved therapies today for this disease and the mortality rate is so high. The 90-day mortality is 30%. And depending on your MELD score, it can be even higher. If it’s up, I’ll let Norman speak to this as well, but I think it’s north of 25 MELD, it gets significantly higher. So you’ve got a very high mortality and no therapy out there. That being said, we’ve had some communications with the FDA that have indicated as well the potential for that, but they will never commit to anything until they have the data in hand. Quite frankly, until they have the submission in hand, but that’s where we sit right now, both with the FDA and the EMA. Norman, would you want to add anything to that?

Norman Sussman: No, I think — Hello, Frank. I think that covers it all. It is one of the FDA regulations. It’s a specific — that — sorry, that topic is specifically addressed, and the FDA confirmed that it does qualify under the circumstances that Jim just mentioned.

Francois Brisebois: And maybe a second one here, Norman, on — in terms of the eligibility of patients here for getting a liver transplant, can you just maybe discuss the percentage of patients with age that aren’t even eligible just because of how recently they have been consuming alcohol?

Norman Sussman: So it’s a moving target because until a few years ago, there was an absolute rule that was observed by most centers that people had to be abstinent for 6 months. That started to fall away and centers increasingly have dropped the requirement — the abstinent requirement for 6 months. And so even the ASLD changed their guidance to say you could consider it in a severe patient. Having said that, it’s never going to be a solution to the problem because there are only about 9,000 transplants available, half of those are for things other than alcohol. If you see 4,500 transplants and 160,000 admissions, it is a huge imbalance. We’ll never be able to solve it through transplant. The time factor has become less rigid, it comes down more now to numerous social factors and behavioral factors.

Francois Brisebois: Understood. And then — go ahead, Jim.

James Brown: No, I was just going to say Norman already mentioned it, the social factors, whether or not you have the insurance, whether you can pay for it also comes to play, unfortunately.

Francois Brisebois: And is there a percentage of people that you expect would be insured to be treated here?

James Brown: Well, we — patients who have AH, there’s over 85% or so have insurance, but one needs that in order to get a transplant pretty much.

Francois Brisebois: Right. Yes, yes.

Norman Sussman: The trial, there are a lot of experts who work in transplant centers, but a lot of patients get admitted to places where transplant isn’t an option, unless the patient gets transferred out of there.

Francois Brisebois: Got you. Okay. And then lastly, just as we’re — this is the year where the data is coming here. So it’s very exciting for, I guess, the old DUR-928 larsucosterol now. But any thoughts on commercialization? It’s just — in terms of the U.S., you talked about the ex-U.S. opportunity as well, which is unfortunately a large opportunity. But I was just wondering any thoughts about maybe the amount of reps or is just a commercial build that would be necessary if able to file off this data in order to get ready just to get a better feel for what will be necessary to take this on your own? And are the thoughts to take it commercial on your own in the E.U. or in the U.S.? Or just any color on commercial thoughts would be helpful.

James Brown: Yes. First off, yes, ex-U.S., we would expect that we would have a partnership in place. And so that’s a process that’s ongoing. Within the U.S., we look forward to doing it ourselves. And there are some long-tail things that Keith Lui, who is our Head of Commercial here at DURECT, and Business Development as well is already half underway, and he can speak to some of his initiatives.

Keith Lui: Yes, it’s a good question. Thanks, Francois. I would say as far as commercial activities at this point in the development process, we’re certainly looking into the market access aspect of things, given that this is likely going to be delivered under the inpatient system and under DRG. We’ve done a lot of landscaping work on current status of care and those processes. As far as marketing strategy, we have various launch readiness review processes already underway to ensure that all of our cross-functional teams are aligned on the same plan going into top line results and as soon as we turn that card. So I can’t give you specifics on sales force sizing and all that work is ongoing right now. But surely, by the time we get the top line results, I think we’re in the right preparation state of mind and at the right level to be able to move very quickly upon positive results.

James Brown: Yes, I think it’s safe to say it would be under 100 reps.

Keith Lui: Yes, for hospital products like this. And again, we always start with somewhere — on every launch I’ve worked on somewhere between 1,500. And for a hospital-based product like that, I think that range is still applicable.

James Brown: Yes. And for some of the longer-tail things like the codes and the like, we’ve already got the process in motion.

Keith Lui: Yes. Good.

Francois Brisebois: Okay, great. And in terms of awareness for MSLs and whatnot, is age something that liver transplant docs are very much aware of? Or is it something, based on the fact that there’s nothing really that’s been working and the steroids have really been working for a long time, that there’s a lot of education that’s still needed?

James Brown: Maybe, Keith, you can speak, and then Norman can follow up on that because there’s two different perspectives about the same.

Keith Lui: Yes. No, it’s a very good point and one that we certainly took to heart. And actually it’s a great entry point for our new disease awareness site that we actually just launched. It’s called Explore AH epigenetics. And so there is awareness of AH, particularly over the past couple of years. We’ve seen an increase in the incidence of AH. Unfortunately, over the course of the past couple of years with pandemic, so it has become higher on folks’ radar screens for gastros and hepatologists. But the intersection between AH, the current treatment paradigms, which we all think and hepatologists think are subpar and why there’s still a high unmet medical need, the intersection between AH and the role that epigenetics may play is the reason why we developed this educational website.

That’s an unbranded, just purely looking at — again, that intersection of epigenetics and alcohol-associated hepatitis. So I would encourage you and others to that website. But in between now and top line results, and until we actually are able to launch the product, certainly, education around AH and the role that epigenetics may play in that is a high priority for us.

James Brown: Absolutely. And Norman, maybe you can speak to it from the clinician’s perspective and awareness of this molecule?

Norman Sussman: Yes, especially for the patients that get admitted. So for the hospitalized, AH can be a pretty broad spectrum from very mild disease with very low risk to sort of admission level where people come into a hospital and we expect somewhere between a 30% and 50% death rate. For people who work in hospitals, it’s no surprise. It’s completely overwhelmed most transplant hepatology practices and most transplant programs. It sort of displayed so much stuff it’s become — it’s a crisis in many ways. I can’t — having not worked in a community hospital. Most of the people we see with severe AH are transferred from somewhere else. So that sort of second level where you have hospitals that take reasonably high acuity patients that I’m pretty sure those people know because in my practice, I would get called from hospitals, not always gastroenterologist saying, “Hey, I’ve got this patient with AH.” So I think there’s very wide recognition in the hospital practices.

At the — to add to Keith’s comments, in terms of hepatologists, there is — I would be prepared to say there is not a hepatologist in the United States who is unaware of either AH or of this product. It has received extremely, extremely close scrutiny. People are very excited about it. And I hope the results are as good as we expect them to be, but awareness is not going to be a big issue. And to the site that Keith mentioned, it’s really sort of for the next level of people that need to know more about AH. So it’s really designed to spread the word downstream as it were.

Operator: Our next question comes from Kristen Kluska with Cantor Fitzgerald.

Kristen Kluska: And you’re getting very close to that finish line. So the first question I had was what is your understanding on whether or not there are different histopathological phenotypes of these patients? And even if that is indeed the case, would you expect 928 to behave differently across different populations? Or is the mechanism quite broad to address this?

James Brown: Yes, definitely. I’ll let Norman speak to that for sure. But there are maybe some subtle suggestions of certain genetic components with certain populations I saw some one speak once about a population in South America where that’s a possibility. But I think generally, there isn’t much known. But Norman, what do you think?

Norman Sussman: Yes. The histopathological diagnosis has more or less — well, you know this from our previous discussion. In the U.S. practicing, no one biopsy these patients. Some people actually including the object to the term of this biopsy proven. It’s really just — there is a constellation of findings. There’s no classic histologic finding that defines AH. It usually shows a number of features. It’s a mixed number. And the diagnosis in, I would guess, 95% or more of cases is clinical. The prognostic value of the biopsy, there have been a few papers that refer to it, but my opinion and the opinion of several of my senior colleagues is that the biopsy gives very little additional prognostic or diagnostic value. And that the last — it’s somewhat — there are people who really believe the biopsy shows some value. And I don’t mean to those people’s opinions, but a lot of people do not think that the biopsy adds much in any regard.

Kristen Kluska: Okay. Can you remind us what you’ve shared publicly related to the powering that way into this trial? And what’s your latest understanding or expectation on how the placebo arm would behave in light of published findings and natural history around this 90-day point? It sounds like you’re citing about 30% mortality at this time?

Norman Sussman: Yes, we are. But I think.

James Brown: Go ahead.

Norman Sussman: Okay. So it’s a blinded study. So we don’t know which — who’s falling into what group. But our endpoint — observed endpoints are very close to our projected endpoints that the statistician and I and several other people at DURECT worked on prior to coming up with a final protocol. So we’re more or less on track.

James Brown: You’re referring to this very surprising paper that was published on surprisingly low mortality, but that is a historic low and no other papers have not demonstrated that number. And for sure, our event rate is well above that.

Kristen Kluska: Okay. And then outside of the primary endpoint 90-day mortality or liver transplant, can you remind us some of the key secondary outcome measures you’re going to be looking at as well? And whether you’re looking at different markers, cell counts or other factors that are going to help you understand the contribution to liver injury?

Norman Sussman: So we have a lot of second endpoints. The two most promines are looking at 28-day outcomes for both mortality. So we have in the hierarchical transplant events, meaning transplant or death, followed by death, followed by 28-day transplant or death, followed by a 28-day mortality. And then a variety of biomarkers that, I can’t remember all of it off the top of my head, the things like Lille score MELD progression. And then we’ll also stratify by enrollment MELD.

Operator: . Our next question comes from Ed Arce with H.C. Wainright.

Antonio Arce: Let me add my congrats on the continued progress and staying on track. I wanted to ask a couple of questions around that pace, just to make sure that come June 30, we’ve reached full enrollment. First, just looking at the pace given over 200 patients were enrolled on the November 2 update, and you now have over 260 as of today. So over the last 4 months, that comes out to about 15 patients a month. And I’m just wondering if that’s a fair way of thinking about the progression? That would indeed, from the current point, get you to the target of 300 by the end of June. And then the second question, just again, along with time lines, but also the activities that are involved. From the point of last patient last dose, if a second dose is necessary for that last patient to the data readout, what activities are involved in the process of those number of months?

James Brown: Sure. First off, yes, your calculation, I think, is fine. It’s — in my — from my — where I sit, probably a bit on the pessimistic side. I certainly hope we’ll do better than just barely squeaking in. But the team is doing a great job of enrolling. And whenever that last patient, last visit occurs, and it actually isn’t from the last dose, it’s from — when they were enrolled in the study. Day 1, they get the first dose. That’s when the 90-day clock starts. And so from that last patient dosed, one can count forward 90 days. Then — and as even now, we are doing real-time cleanup. And Norman can give us a specific number, but it’s a very high percentage already of the data that we’re looking to clean up. And that’s a constant process with any clinical trial.

To the extent that you can, you’d like to, in real-time, keep the data as — for each of the patients as well organized and query anything that needs to be queried and kind of iron out any discrepancies or any data points that are missing and the like. And — so let’s just say we have north of 80% of that wrapped up or in hand by the time they get last patient last visit, then you’ve got another — the team feels very optimistic. They feel, 2. I’m kind of saying probably closer to 3, but it will be in that 2- to 3-month time frame. — that we will continue to clean up the data until we get to the point where we feel comfortable enough that we want to go hands and pencils down, and we’re going to have data lock. And at that point, within just a very short time within just a few days, we’ll have the — we’ll have the information, and we’ll have the data that we look forward to announcing.

So it will come pretty quickly, and it’s really just a matter of cleaning up the data to make sure — because once you lock the database, it’s really difficult and you should never actually go back. If you want to use it as a pivotal trial, you’ve got to be really done when you lock it. And so that’s the most critical piece actually in those last few months where you’re going through and making sure that you’ve got everything well understood and well in hand. Norman?

Norman Sussman: Yes, I agree with what Jim just said. We’re — the activities we’re — the trial is proceeding at a decent pace. I don’t think — I’m more optimistic than your projection because typically during the holidays, most trials slow down a little bit. So we have picked up the pace again. And I’m pretty confident that we will finish on time. In terms of what to do, we’re preparing for the final analysis. So we’re — at the moment, we’re preparing all of the reporting shelves and all of the — the sort of the tables are ready to be populated there. As you can imagine, a trial of this size, there are thousands of data points. And then as Jim says, we want to make sure that we decided on all of our analysis. You can always do a post-hoc analysis, but doing it prospectively gives everyone a lot more confidence. And so we’re trying to make sure we haven’t left anything out before we do the data lock.

Antonio Arce: Great. That’s very helpful. Maybe just a couple more for me, more on the commercial side. And I’ll open it up to anyone, but of course, wants to give some comments, I appreciate that. So as you had mentioned earlier, I think, Jim, — there’s a wide recognition of the problem in the hospital or I think actually it was Norman. And also no hepatologists in the U.S. is unaware of either AH or larsucosterol, which is also, of course, very encouraging from the prescriber’s perspective. So given that background, I was just wondering if you could comment on the 85% of patients that have insurance? What breakdown do you think that sits at? And to the degree that you’ve had any sort of interactions, even just tangentially, what are your thoughts about the degree of receptivity on the payer side?

James Brown: Yes. Well, I’ll let speak — Keith speak to the payer piece. But as far as the percentage of patients who have insurance of the 150-some-odd thousand hospitalizations per year, I would say, the vast majority. From what we can glean, it’s north of 80%, maybe north of 85% of those patients. And so that would put them in the right place from that standpoint. And the cost of this disease, unfortunately, is horrific. When you take that number of 150,000. And you multiply it by a number that’s somewhere between 50,000 and 150,000, you’re clearly running a huge bill. It’s in the $5-plus billion range. And that’s not taking into account at all the cost of liver transplant, which, as Norman tells us, there aren’t that many livers available.

There’s maybe 4,000-some odd, but that’s 4,000 almost 1 million each. So that’s a very expensive component as well. So you add all this together and you’re talking about a substantial cost to the health care system in the United States. Somewhat less than that in Europe, but not much. It’s still quite large in Europe as well because the patient population is a little bit bigger, I think, and other markets around the world. So we think that sets us up very well to have a product that can save lives. Remember, about 30% of these people are dying and can be very rewarding to our shareholders as well. So we think that we can create a very successful product for DURECT, save the health care system an equal amount of money in that range, and still be there to be able to save lives.

But maybe, Keith, you can speak more specifically to enhancing awareness in payers.

Keith Lui: Ed, this is Keith. Good question. And of that 80% or so that are insured, I would say it’s a mix of Medicare, Medicaid and private insurance, probably being a little bit more heavily towards the Medicare and Medicaid when we look at the NIS 2019 data that we published on previously. But I think the value proposition to the hospitals, we are certainly doing a lot of research around that and building our case. But just going back to the primary endpoint of a firm being a statistically significant reduction in mortality and liver transplant that in and of itself would be a huge benefit to deter people and have them take them off of the wait list and off the liver transplant list because, as Norman stated previously, there’s way too much demand for the limited supply of livers for transplant.

But in addition to that primary endpoint, obviously, there’s a number of market access and reimbursement factors in the hospital that I think larsucosterol could help offset things like decreasing length of stay, decreasing diagnostics and health care — other health care realization, hopefully, decreasing the time spent in ICU that these severe AH patients typically comprise. So I think there are a number of potential cost upsets that we are investigating in depth between now and top line data. And obviously, after top line data, the market access and reimbursement division of our commercial team will certainly be one that is active now and will certainly ramp up after top line results.

Operator: Thank you. There are no further questions at this time. I’ll hand the floor back to management for closing remarks.

James Brown: With that, we’d just like to thank you for your time. And as always, please feel free to give us a call or contact us. We look forward to catching up. Take care.

Operator: Thank you. This concludes today’s conference. All parties may disconnect. Have a great evening.