Title

Presentation

DURECT Corporation misses on earnings expectations. Reported EPS is $-0.46 EPS, expectations were $-0.45.

Operator: Greetings, and welcome to the DURECT Corporation Second Quarter Earnings Call. [Operator Instructions]. It is now my pleasure to introduce your host, Tim Papp, Chief Financial Officer. Thank you, Sir. You may begin.

Timothy Papp: Good afternoon, and welcome to DURECT Corporation’s Second Quarter 2023 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 the development of larsucosterol, expected product benefits, market potential, clinical trial results, regulatory approval and the company’s financial projections. These forward-looking statements involve risks and uncertainties that can cause actual results to differ materially from those in such forward-looking statements, including the risk that larsucosterol does not meet the endpoints in the AHFIRM trial. 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 second quarter 2023 financial results. Our total revenue in the second quarter were $2.1 million, similar to the prior year. R&D expenses were $7.9 million compared with $8.8 million for the prior year. The decrease was primarily due to lower employee-related costs and contract research expenses, partially offset by higher costs associated with the AHFIRM trial and higher contract manufacturing costs. SG&A expenses were $3.8 million compared with $4 million for the prior year. This decrease was primarily due to lower patent expenses and recruiting costs. As of June 30, 2023, we had cash and investments of $34.9 million as opposed to $43.6 million at December 31, 2022. Subsequent to the end of the quarter, in July 2023, we completed a registered direct offering, raising $13.8 million in net proceeds.

Our cash burn in the second quarter was approximately $10.1 million, excluding proceeds from sales under our ATM program, and we believe our cash on hand is sufficient to fund operations through mid-2024. Now, I would like to turn the call over to our CEO, Jim Brown, for an update on our programs.

James Brown: Thank you, Tim. Hello, everyone. Thank you for joining us today for our second quarter 2023 update. We had a productive second quarter, during which we achieved a significant milestone on our journey toward completing the AHFIRM Phase IIb clinical trial for larsucosterol and alcohol-associated hepatitis. In June, we announced that we had completed enrollment for AHFIRM, and we continue to be on track to report top line data in the fourth quarter of this year. We are eagerly anticipating this event, which we believe has the potential to be transformative for DURECT and our shareholders. Our primary focus as a company remains gaining approval for larsucosterol and AH, and bringing this potentially life-saving therapeutics to patients with no effective treatment options today.

Assuming a positive outcome from AHFIRM, we plan to review the results with the FDA in the first quarter of 2024. If approved, larsucosterol would be the first FDA-approved treatment for AH, and we look forward to the possibility of bringing this potentially life-saving therapeutics to patients with no effective therapies available today. Furthermore, during the second quarter, the American Journal of Gastroenterology published clinical data from our Phase IIa trial in AH, and we held an AH-focused KOL event. Lastly, we’re excited to announce the expansion of our epigenetic modulator platform into the field of oncology. By leveraging our expertise in epigenetic modulation, we have internally developed multiple new chemical entities that we think have attractive properties for the potential treatment of both solid and liquid tumor types.

I’ll come back to our new oncology program in a few minutes. But first, I’d like to provide a quick refresher on our AH program as we get closer to the upcoming data readout. As I mentioned, we completed enrollment in our AHFIRM trial in June of this year. We follow these patients for 90 days, so our last patient’s last visit will be in early September, which puts us on track to report top line data in the fourth quarter. As a reminder, AHFIRM is a placebo-controlled, double-blind, multinational study with 2 active dosing arms and a placebo arm of approximately 100 patients each. In total, we randomized and dosed 301 patients with severe AH, which are patients with MELD scores ranging from 21 to 30 and Maddrey Discriminate Function scores greater than or equal to 32.

The primary endpoint for AHFIRM is the difference in mortality or liver transplant at 90 days between larsucosterol treatment and placebo. We enrolled patients in AHFIRM through a global network of clinical sites, including leading hospitals in the United States, Australia, the EU and the U.K. Our sites include renowned liver centers, and we are working with some of the world’s preeminent thought leaders in AH. The FDA has granted our larsucosterol AH program Fast Track Designation, and we are hopeful that a positive result in AHFIRM could support an NDA filing. With this in mind, larsucosterol has the potential to be the first FDA-approved treatment for AH where there is a substantial unmet need for patients. Our confidence that the AHFIRM trial will be successful is supported by our compelling Phase IIa study data, including the recently-published comparisons, 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.

We designed AHFIRM to be a potentially pivotal trial based on our Phase IIa data. In our open-label Phase IIa trial, all 19 patients survived at 28 days, an encouraging result given that based on historical data, approximately 26% of hospitalized AH patients are expected to die within 28 days. We also observed a consistent improvement in key biochemical markers, including bilirubin level, MELD score and Lille scores across patients and doses. In the second quarter, the data from our Phase IIa trial were published in the American Journal of Gastroenterology. This peer-reviewed article includes cross-study comparisons with well-matched severe AH patients from a contemporaneous trial conducted by the Defeat Alcoholic Steatohepatitis or DASH Consortium.

While the sample sizes were small and these were not part of a controlled study, these comparisons indicate that severe AH patients treated with either 30 milligrams or 90 milligrams of larsucosterol has statistically significant lower Lille scores compared to patients treated with the standard of care, including steroids. Lille scores, as a reminder, are a predictor of mortality in liver disease. In addition, liver enzymes levels decreased rapidly in the larsucosterol-treated patients, including a statistically significant reduction in the liver enzyme, ALT. We believe these results provide further evidence of the potential for larsucosterol as a treatment for AH. In May, we hosted a KOL event for our investors to provide physician perspectives on this devastating disease.

We were pleased to be joined by Dr. Paul Gaglio from Columbia Presbyterian and Dr. Brett Fortune from Montefiore Einstein. They were able to draw from their wealth of experience treating AH patients and share their views on the unmet need in AH and the potential role larsucosterol could play to transform the treatment of this highly lethal disease. The slides and audio from this presentation are available on our website. During our KOL event, we shared additional information on the commercial opportunity for larsucosterol, and if we attain approval, our approach to building for a successful launch. In addition to its high mortality rate, AH represents a significant cost to the U.S. healthcare system, with over 150,000 hospitalizations attributed to AH at a cost of between $50,000 to $150,000 each.

As a result, in addition to the potential saving of patients’ lives, larsucosterol represents a potential multibillion-dollar opportunity in the United States alone that could simultaneously provide overall cost savings to the healthcare system. We’ve begun to lay the groundwork for potentially commercializing larsucosterol in the United States and believe we can launch the product effectively through a moderately-sized hospital-focused sales force. We also continue to build awareness around the role of epigenetic regulation in acute diseases like AH. As one of these initiatives, we launched a new disease education website that you can find at www. exploreahepigenetics.com to elucidate the role of the epigenome in AH. AH is also a global concern, allowing larsucosterol the potential to serve ex-U.S. AH patients and their healthcare system.

These ex-U.S. markets represent additional attractive commercial opportunities. Because we enroll patients from a global site network, we believe a positive result from AHFIRM may support regulatory filings in the EMA and other regions. We are also pleased to announce the expansion of our epigenetic modulation platform into the field of oncology. Our mission at DURECT is to be a global leader in the emerging field of epigenetic medicine, and this latest development is a significant step towards achieving that goal. Aberrant DNA methylation has been shown to play an important role in the development of tumors. As a result, we believe DNMT inhibitors have significant potential as a drug class for the treatment of cancer. Building on our knowledge of epigenetic regulation and our unique understanding of DNMTs, we have focused on a novel approach to DNMT inhibition.

The inhibition of DNMT is a well-established and highly desired target in oncology. Working with teams of experienced chemists and biologists, we have created a large complement of internally developed novel small molecule DNMT inhibitors that exhibit broad spectrum activity against multiple liquid and solid tumor types. We currently have multiple new chemical entities that are in preclinical development for a variety of oncology applications. These compounds display unique and desirable physiochemical properties and pharmacokinetic profile as well as favorable tolerability. By the end of 2023, we intend to select a product candidate to advance into clinical trials in cancer patients. Our goal for this program is to be prepared to initiate clinical trials by the end of 2024.

In summary, we completed AHFIRM enrollment in the second quarter and are on track to report top line results in the fourth quarter of 2023. If AHFIRM is successful, we intend to review the results with the FDA in the first quarter of 2024. We are leveraging our knowledge of epigenetic regulation to the field of oncology and look forward to selecting a lead product candidate from our NCE development program and advancing into the clinic. We would now like to take any questions you may have.

Operator: [Operator Instructions]. Our first question is from Kristen Kluska with Cantor Fitzgerald.

Richard Miller: This is Rick on for Kristen. Maybe first on the oncology program you talked about today. Is there any color you can give us into the screening process that you’ve gone through with these library of molecules in terms of how large the library was? And maybe kind of where you’re adding your screening process in terms of the magnitude of different molecules here?

James Brown: We probably won’t give that kind of detail, but just sufficient to say we screened a large number of cancers against a large number of molecules and we have actually, from there, pared it down into the group that the initial class is graduating that we’re taking forward. So we have — we’re very close in between now and end of the year. We’ll select the first cancer and first drug that we’re taking forward.

Richard Miller: Excellent. You also mentioned ex-U.S. opportunities for larsucosterol. So just as you’re thinking about kind of ex-U.S. opportunities, is there any development kind of in thinking about whether you’d be looking at ex-U.S. commercial partners? Or how are you thinking about that process?

James Brown: Yes, we certainly wouldn’t be looking to commercialize it ourselves ex-U.S. We think the opportunity is, from a patient number standpoint, I think Western Europe is probably equivalent to or a bit larger than the U.S. patient population size. And so we think it’s an exciting opportunity, and these patients are in as desperate need as they are here in the United States. So the opportunity is absolutely there, and we’re looking to put a partnership in place actually. And I’ll let Keith, who’s on the line as well, maybe speak a little bit more to that.

Keith Lui: Yes. I would just add that given the diversity of the reimbursement pricing and various other regulatory factors in Europe and other ex-U.S. markets. it’s likely that we would look for a formidable partnership there. So I agree with Jim’s comments there, and there’s certainly an equal, if not potentially larger marketplace outside of just the U.S. where we think larsucosterol could achieve prominence there. AH is not regional to just the U.S., so it certainly is a global issue.

Richard Miller: Okay. And maybe 1 more. Maybe we’ll swing back to the oncology program, just to ask, given the different indications with potential for DNMT inhibitors, can you talk a little bit about the decision-making process that led to undertaking in oncology specifically? And maybe also touch on whether there could be different indications for larsucosterol down the road, as you’ve talked about in the past?

James Brown: Yes. First, I just stay with larsucosterol, because that is the main theme here at DURECT. And so, yes, we, obviously, looking at AH, but as we’ve talked about in the past, we’ve done about a dozen different animal models where we’ve shown it can protect against multi-organ damage from things as broad ranging as acute pancreatitis, sepsis, stroke, acute kidney injury, things like that, so there’s a lot of opportunity there as well. As you know, we did the 1-month study in NASH, where we showed tremendous potential as well for larsucosterol. As far as the oncology program, what we’re doing here is we often get a question from shareholders, kind of what is next outside of larsucosterol. And so it’s a program that WeiQi has been guiding for a number of years now and has finally gotten to the point where we’re ready to bring things into development, and that’s why we’re talking about it at this point in time.

Certainly, DNMTs are important targets for various cancers in the hematology space. Currently, we think we have potential advantages over the azacitidines and decitabines in the world because of tolerability, because of dosing, because of a whole number of advantages that we see, at least to date. And we think we can expand the use of DNMTs into beyond liquid tumors but into the solid tumor space as well.

Operator: Our next question comes from François Brisebois with Oppenheimer.

Francois Brisebois: Can you maybe remind us the differences in trial design between the Phase IIa and the Phase IIb?

James Brown: That’s a great question. Good to hear from you, by the way. Yes, there really aren’t many. The — first, if you look at dosing, it’s the same. We dose the patients on day 1 and then they get another dose on day 3. In the first trial, we allowed steroids to be used. In this trial, we didn’t want the confusion — potential confusion of steroid side effects to be laid upon the shoulders of larsucosterol. So we’ve set up this double-blind, double-dummy arrangement so that if I get placebo, then I get a capsule that would have active steroids. If I get 1 of the 2 doses of larsucosterol, then I would receive a placebo capsule instead. So that is 1 difference. The other difference is the severity of the illness of the patients.

In the first study, we had 2 components. We had the moderate patients, which were MELDs up to 21, and then we had the severe, which were 21 to 30. In this trial, all 301 patients that were dosed received — excuse me, had MELD scores that started at MELD of 21 and could go as high as MELD of 30. And we followed for 90 days versus 28 days. So 90 days versus 28 days, all severe, and absolutely no steroids in larsucosterol group. And if the physician wanted, they could give steroids to their placebo patients in a blinded fashion.

Francois Brisebois: Can you just remind us the mortality rate at 28 days, what’s historically known versus 90 days? And has that changed in the past?

James Brown: No, it really hasn’t changed really in the last 40 years, and it’s been confirmed with this — what was that 8,000 — 7,000, 8,000 patients publication?

WeiQi Lin: Yes. 1 in 2,000, 2,800.

James Brown: Yes, yes. So that’s right. Yes. Yes. 2,800, okay. And so there was a 2,800-patient large publication that kind of spoke to it. But the mortality rate at 28 days has been historically 26%, and at 90 days, 30%. So you can see you’re only adding another 4% over the last 2 months. So it’s — the majority of the damage is done, and the majority of the deaths occur early on.

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

Antonio Arce: Can you hear me okay?

James Brown: We can.

Antonio Arce: Great. Okay. So first, I wanted to ask about your commercialization plans. The focus rightly has been for several years now on the development. And now that we’re on the cusp of a readout, potentially enabling a filing, I wanted to ask if you could provide a little more details on your preparations at this stage? In particular, you mentioned moderately-sized, hospital-focused sales force. Are there any investments? I know you also mentioned the website. Any investments now into awareness for physicians or other things to sort of prime the market? And then I have 1 more.

James Brown: Yes, we certainly are, and I’ll let Keith speak to that.

Keith Lui: Yes. Thanks, Jim. Thanks for the question, Ed. On the commercialization front, surely, we’ve been doing — we’ve had a number of efforts there. We have personnel that have launch experience, both on the medical affairs side and the marketing side, even though we are a small but mighty team. Jim mentioned in his remarks, the Explore AH Epigenetics, the disease awareness site that we launched late last year actually. And then we certainly, in the past couple of years, have had a live presence at the major international liver conferences. We’re just coming off of presenting a poster actually at EASL in Austria just last month. We’ve been at both EASL and AASLD with booths. And last year, really, the focus was on AHFIRM awareness recruitment.

Now that that’s closed, we really have shifted gears into disease education. But we’ve certainly invested in various market research and market landscaping, understanding the unmet medical needs where a drug with larsucosterol’s product profile could sit. And we explained some of those top line results when I presented at the KOL event in New York back in May. But we continue those launch readiness efforts. Really, it’s about putting plans in place internally to ensure all of our cross-functional groups are singing off the same hymn sheets on timelines, on budget, on expectations. And we certainly have a fully-integrated launch readiness plan that we work with both internal and external consultants on to ensure that everybody is moving at the same pace with the same expectations because every launch is different, every launch has its own challenges and obstacles.

And really, it’s going to take a village, both the folks at DURECT as well as our outside consultants. But right now, between now and top line results, it’s really about preparation and not overpreparing, if you will, but preparing at the right pace and having plans in place after top line results and after our interactions with FDA to execute what could be a very short time launch, if everything, .

Antonio Arce: Great. That’s helpful, Keith. And maybe just a little bit further, wondering if you can discuss how you view the initial ramp of the launch? In particular, I know this is a very specific call point really dealing with hospital ICUs, and there’s a lot of inertia with physicians changing therapies in general, but in particular, in high-stress situations like this. But on the other hand, you potentially have a therapy that is life-changing, could save lives. So I’m just wondering in the mix of that, how you think about the speed of ramp in regards to not only physicians but also payers?

James Brown: Yes. I’ll start and then I’ll certainly have Keith continue. First of all, you’re right and that these are hospitalized patients, oftentimes in the ICU. But these aren’t patients who are typically going to die in the very, very near term or their outcome is going to be determined in the next 12 hours kind of thing, as you would get with stroke and sepsis and things like that. That was the reason we selected AH as the first acute indication for larsucosterol because one could take the time. And when you look at these other diseases that — for which we’ve done a lot of preclinical work, there have been a history of more challenging clinical trials because of the variability one gets with patients. And here, we have the time to talk to these patients because — and their families, because they’re on a very slow, unrelenting train ride that leads to death in 30% of them.

And just to witness on our first — in our Phase IIa trial that was a man in his 30s at the San Diego site who was at another hospital for a month and was sent home on hospice to die, enrolled in our trial. The study coordinator commented how good he looked just a week or so after dosing. And last time I talked to Dr. Hassanein, he was just a gentleman who’s alive 2 years — more than 2 years later. So certainly, one has the time in the circumstance to be able to evaluate the patients. As far as the ramp and the like, we — obviously, if you want more information on some of this information that Keith presented during our KOL event, we have what he discussed from ClearView, which is off of our website. But I’ll let Keith kind of give a description of thoughts with regard to that.

Keith Lui: Yes. Ed, good question. As it relates to physicians, one of the outputs that we had from our commercial assessment earlier this year when we were looking at blinded target product profiles with data that we would assume would hit statistical significance for AHFIRM, we had very high willingness in that qualitative study from physicians to that product profile with a statistically significant overall survival or transplant primary end point, especially given a disease area like AH, where there are no drug approved and the SATO’s standard of care being steroids that are only applicable in about 50% of patients that, that is suboptimal, never shown any kind of survival benefit past 28 days. So the willingness to prescribe from the physician standpoint, particularly in the AHFIRM patient population, the severe AH, MELD 20 to 30 range was very high.

And so we think that the willingness to prescribe there and the ramp there could be significant. But we also cross-check that with the reality of the reimbursement environment and the DRG-driven reimbursement of hospital inpatient delivered drugs. So we’ve done quite a lot of work as it relates, again, to the commercialization plan, particularly on the market access, understanding the landscape, looking at other, like, acute care in-hospital delivered products, and learning from what’s worked and where the challenges have been understanding those obstacles and internally, working on developing strategies to positively influence those factors, understanding what we’re — what we have up against us for launch, and what we can do now to better understand that environment and what strategies we can deploy early.

And certainly, after top line results, market access will be the initial focus for our commercialization strategic efforts. We can get out now, given some of the changes in the commercialization regulatory environment, that allows us to interact with hospitals and certain payers prior to the launch. And building those value propositions, those health economics and outcomes research models, that will be on top of mind for our commercial team to develop those and start those efforts even prior to our launch.

Antonio Arce: That’s great. If I can, I’d like to squeeze 1 more in, and that is regarding your new expansion into oncology. I’m just wondering, given this platform, there’s — you already produced several NCEs and you’ve mentioned that they could apply to both solid and liquid tumors. So I guess a couple of questions here is what would be your preference? And how would you decide that, sort of what criteria are you looking at to help best decide sort of which would be your first candidate that you nominate to go into the clinic by the end of next year?

James Brown: Sure. I think we’re going to let the science really drive it, but I will let WeiQi give a brief.

WeiQi Lin: Well, I think the criteria is really would be determined by many multiple aspects of lead compounds that have generated. And then the indications, including also the trial designs, including the populations, including the — so it’s really not a 1 single factor what is driving in the process. And it’s quite — we also need to talk to various experts — people with expertise in oncology and then get their input. So it’s really driven by multiple, multiple factors. So I think we will be happy to talk about that more information in the future time.

James Brown: Yes, I think so. I think we’ll be taking the same filter that we use when we selected an indication for larsucosterol. So we’ll be looking at unmet need, time to market, time to proof of concept, in this case. Obviously, with oncology, it’s different. So that kind of thing.

Operator: Our next question comes from Sean Kim with JonesTrading.

Sean Kim: My first question is, could you please remind us whether the statistical plan for the AHFIRM trial has been submitted? And if you have provided any detail on the statistical powering for the trial?

James Brown: Yes. It certainly has been submitted, but we haven’t really provided a great bit of color to that. Suffice to say, we’ve designed it such that 300 patients — should the trial proceed as we hope, and the placebo group perform as history has dictated and we’re in the range of events that would allow for that, then we’ll have a statistically significant trial. But it all remains to be seen, as always. Data will dictate at the end.

Sean Kim: Okay. And about the physician survey that you did recently, could you share some more color on the excitement expressed by the doctors from the survey, maybe specifically around their willingness and intent to prescribe…

James Brown: I’d love to, but I’ll let Keith do that. Yes, that was certainly quite nice.

Keith Lui: Yes. This is Keith. So on the market assessment that we did earlier this year, we worked with a group called ClearView who’s well known in the space, and with the physicians that we recruited for the study. Again, they had very high willingness to prescribe. This is based off of a blinded target product profile, just a 1-page profile of what our drug may look like and what those statistical parameters would look like for safety efficacy based on a presumed positive AHFIRM trial. Again, it was blinded to the company and to what the product name is, so physicians had no idea of that. . But again, their affinity for the product and pleasure with something that would have a statistical significant difference versus standard of care and especially how we designed the trial, where it really is physician discretion on whether or not steroids are used in that placebo arm really mimicked their current standard of care.

And with that kind of an improvement with what they considered as the highest order endpoint of survival or transplant, particularly in 90 days for an acute disease like this, would be very significant for them. And so we did see that — it was nice to see that their preference share that they have signed to this product mix was quite high, particularly in that severe patient population that we are testing for — that we’re testing in AHFIRM with MELDs between 20 and 30.

James Brown: Yes. I think it’s — it is exactly what one would have hoped if you have a disease where 30% of the patients are dying and there’s no therapy that’s able to change that. Yes, so it was well-received.

Keith Lui: And maybe just 1 more point. I mentioned that there was high affinity for prescribing product X or larsucosterol in that study with the AHFIRM patient population. But given that we’re not sure what the final label would be, but there also was a willingness to prescribe this product for MELDs greater than 30. There are no products approved at all, and there’s certainly high unmet medical need for those who are extremely severe with MELDs rate greater than 30. So again, reassuring to hear that unbiased take from our key hepatologists. That would be our target from a commercial standpoint.

James Brown: Sean, just 1 other additional piece. If you have a MELD of 30, you’ve got — the mortality expected 90 days is 50%. So it gets — goes up very quickly.

Sean Kim: Okay. Got you. And my last question for today is, as you look to move cancer programs in the clinic by end of next year, just curious to hear your thoughts on strategic prioritization and resource allocation between these upcoming cancer programs and potential expansion into other hepatological indications for larsucosterol?

James Brown: Yes, it’s a great question. The first and the primary focus is AH. That’s where our efforts are certainly, and we already discussed because 1 of the questions earlier to find a partnership. So if the data comes out as we hope and we have a successful trial with AHFIRM, we’ll be looking to partner it for ex-U.S. to advance to submission as quickly as possible. We here at DURECT will be all hands on deck to move that forward. And then as well, we’ll be looking at the next indications for larsucosterol. And then — but that — the oncology effort that WeiQi is running is not a very large budget item. As most of you who’ve been involved with research know, it just takes time, but it doesn’t take a lot of money. It doesn’t cut costing any reasonable amount of money at all to get into the clinic.

And so as the year unfolds, we’ll be obviously preparing for that, and that will take its own course. But the primary focus will be AHFIRM and meeting with the FDA, deciding if 1 trial will be sufficient for submission of an NDA and commercialization partnerships, and all the rest of those kind of things.

Operator: There are no further questions at this time. I would now like to turn the floor back over to Jim Brown for closing comments.

James Brown: Just want to thank you all for your time. And as always, we are here. So if you have a follow-up question, just reach out. We look forward to talking to you. Thanks a lot, and take care.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.