Matt Hogan – CFO Jim Brown – President and CEO.

Annabel Samimy – Zack's Research Jason Napodano – Zack's Research Nick Farwell – Arbor Group Jeffrey DeSeibert – KB Advisors Rajesh Patel – Red Acre Investments.

Greetings, and welcome to the DURECT First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow with the formal presentation. (Operator Instructions) I would now like to turn the conference over to your host, Matt Hogan. Thank you. You may begin..

Okay. Good afternoon. Welcome to our first quarter 2014 earnings conference call. This call begins with a brief review of our 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 session. Before beginning, I'd 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, our 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 our 10-Q fused under the heading 'Risk Factors.' Let me briefly turn our financials. Total review was $6.3 million in the first quarter of 2014 as compared to $4.2 million in the first quarter of 2013.

If you exclude all differed revenue recognized for fees from our agreement, like Zogenix and Impax, revenue from our R&D collaborations was $4.4 million in the first quarter 2014 as compared to $0.9 million in the first quarter last year.

And revenue from this source always fluctuates from quarter-to-quarter, depending on the state of development under the various programs and what our role is in those programs.

Product revenue from the sale of ALZET pumps and LACTEL polymers were approximately $2.8 million in the first quarter of 2014, as compared to $3 million in the first quarter 2013. Our gross margin on these products was around 62% in the first quarter of 2014. These product lines continue to be strongly cash flow positive for us.

R&D expense was $5.5 million in the first quarter 2014 as compared to $4.8 million in the first quarter last year. SG&A expenses were $3.4 million in Q1 2014 as compared to $2.9 million in the first quarter of 2013.

And as a result of the above, our net loss for the first quarter of 2014 was $3.6 million compared to a net loss of $5.2 million for the same period in 2013. Our net cash consumed during the quarter was $2.6 million. In March 31, 2014, we had cash and investments of $21.8 million, which compares to $24.4 million at the end of 2013.

And we have essentially no debt other than normal liabilities associated with running the business. As a brief reminder, we have multiple programs and they potentially be partner over the next 12 to 18 months.

This include POSIDUR where we have worldwide rights, TRANSDUR-Sufentanil, ORADUR-ADHD and various feasibility studies that we hope may mature into development deals, agreements much like Relday did. With that, thanks for joining the call and I'll it over to Jim..

rapid onset of action, long duration for once-a-day dosing, a smaller capsule size when compared to leading products in the market, and of course the tamper resistance due to our ORADUR technology.

Orient Pharma, our partner in Southeast Asia met with the Taiwanese FDA to outline their Phase III program and they developing plans for their other Asian and South Pacific territories. In the U.S. and Europe and Japan the rights are retained by DURECT.

Now that we have the formulation in hand with supporting PK data, we are initiating licensing discussions. Our ORADUR technology could be and could have utility for a number of potential ADHD products, which is maybe the basis for future licensing opportunities. Let's review financial key drivers for DURECT over the next 12 to 24 months.

For POSIDUR we've been meeting with the FDA to determine the next steps to addressing the complete response letter and then pursuing development and commercialization of POSIDUR and the program including a potential licensing deal.

For REMOXY, it's Pfizer conducting the required studies in completing the BE and abuse-potential studies and then with the resubmission targeting the middle of 2015 and followed by a six month review of the FDA. And then once approved, the product launch.

For ELADUR, its initiation of Phase III by Impax in late 2014, which also triggers a milestone payment for us. And for Relday, its initiation of a multi-dose trial by Zogenix in the fourth quarter of 2014, potential for PTI ORADUR program advancing into late stage development in this timeframe.

Also, the potential for new collaborations around POSIDUR, our Sufentanil Patch, the ORADUR-ADHD program or from our feasibility programs. We as well have the potential to move a new program into development this year. With that, I'd like to thank you again for joining our call and we'll now take any questions you might have..

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question is from Annabel Samimy..

Hi. Thanks for taking my question. I just want to get a little bit more color on -- you said you have some further communications of the FDA regarding the safety issues on POSIDUR. Honestly, other than the imbalance between the bupivacaine arm and the POSIDUR arm that you've cited before, which seems pretty minor discoloration.

I think it was from pruritus. It seems unusual that given the urgency that the FDA is under the deal with this whole narcotics issue and reduce this narcotics that they would make such an issue out of this small points.

Is there any more color around some of the safety issues that we're talking about through your discussions? Unless you have any better idea about the timeline you could always state about that, that would be great..

Yeah. I don't really have any more color on the safety issues. We're still obviously preparing ourselves for the face-to-face meeting. We just wanted to get some further clarification with regard to the way the letter was constructed, and the like, and we did get back a very positive feedback actually from them.

So we're going forward into this with our eyes open. And I totally agree with what you said given what Dr. Hamburg had said and given the whole focus of the agency.

It seems that a product by which in two clinical trials, in the hernia trials which have 21% patients being opioid free and a shorter trial which is more painful trial cured 24 more patients. So if we can look at those and say, the potential is here for at least in those two studies. One in five patients aren't taking any narcotics.

That's a huge difference. I have some friends who work for drug enforcement, and the like, and I don't know what -- you can look at different trials or different studies and get the percentage of people who have that predisposition for abuse. But it's in that range of kind of mid-single digits, let's say, 4% to 6% kind of thick of the population.

And if we can talk about maybe hundreds of thousands of patients not having to get a script written, the potential there is, I think, really strong and really requires cost consideration. As far as the timing goes, we're going to submit the request next week for a meeting this summer. And I don't know, Matt will be confirming--.

After that, we'll be able to communicate more about the longer term timing. I mean, we sort of sense a little bit of frustration here because these issues don't seem us to be life-threatening. But nonetheless, the arbiter is the FDA. So until we have that meeting, it's hard for us to say much more..

And we feel like we have a substantial leg up over what POSIDUR has with their product. They have really nothing beyond 24 hours in true reduction of pain and substantial narcotic reduction. And we think we can fit that on that need with their 24 to 72 hours. And so that's going to be part of what we focus on..

Thank you. The next question comes from Jason Napodano..

Hey guys, thanks for taking the question. If you go to clinicaltrials.gov, again you see the two studies that you mentioned. But there's two other smaller studies on there. I think those proportionality study and then a small food effect study. All of these are going to have data soon. I think three of them say June and one of them says April or May.

I'm just curious as to -- if Pfizer has given any clue to you guys on how they will present that data? Will we see it? Will you see it? When would investors kind of get a good sense of how these four trials turned out?.

Unfortunately, I don't have any insight into it in Pfizer's communication. They are their own masters for sure. We do have the right to understand the clinical data that comes out. But to that end, I think that they'll be giving that to us when they see fit. And so the time we have will be I think later rather than sooner.

So I think we'll be waiting along with the rest of the world to kind of see when they decide to present this data.

They may hold off on a lot of this until just -- I mean if it was me and I were Pfizer, I would wait until right when I'm ready to launch the product and then I'd be out of the congress talking about the abuse potential reduction, and all of those kind of things. But until then, why start to talk..

I think in chatting with our colleagues, the Pain Therapeutics, their kind of phrases that (indiscernible) is good news. They really don't expect Pfizer to say much. But as long as they're moving forward with things, the (indiscernible) is actually probably a positive..

Yeah..

The next question comes from Nick Farwell..

Matt, I unfortunately missed what you said the differed revenue recognized in the quarter was so that we can determine exactly what research and development revenues were..

So I don't think I can give you the differed revenue number. But if you strip it out, you'll either kind of call it the real revenue was from collaborations was $1.4 million compared to….

Yes, go on..

We talked about half a million from the first quarter of 2013.

Were you able to hear that, Nick?.

I’m sorry, sir. The next question is now from Jeffrey DeSeibert..

Good afternoon.

Coming back to POSIDUR, can you share with us a little bit what the reaction in the consultants we gather you've been working with since the CRL? And what kind of feedback you've gotten from them in terms of the somewhat should pricing areas the FDA chose to focus on in the CRL? I mean for those of us who are not intangibly involved with this kind of activity, it'd be very helpful to get a little bit of feedback as to what the experts had told you..

Yes. I think in general, not even general, to a person, they've been very supportive. And along the lines of what you have suggested, somewhat surprised and somewhat feeling like the rates -- I think I said this in my talk.

The rates of which you see the side effects is really no different in their hands as it was in this trials or as one can see in the literature. And so, this is the information that we're pulling together..

All right. And following on the POSIDUR topic, we certainly have the feeling that over the last months in leading -- we're certainly leading into the POSIDUR day that you are involved in a number of discussions with perspective partners for POSIDUR.

Can you give us any sense of the level of intensity of interest in a possible deal? I mean we're sensing from your comments that at the moment you're looking at two possible roads to borrow from Mr. Frost (ph). But which one you travel, we don't know yet. But the face is one of them is the partner path.

And I guess apart from my question is, are you getting very much a sense of, "Well, we'll talk to you once the FDA is applying.

This is something maybe later this year, early next year we can talk about"? Or are you finding a more active level of engagement?.

I think you see the full gambit. There are a number that -- we're actually engaged in talking to a number of people, post of the letter. But the letter does provide and it does have some clarity. The market opportunity, I think, is substantial for this. We see that with Fisera (ph).

I think they announced this year that their first quarter sales were $34 million, up 13%. After being up 50% to two previous quarters. So a nice continued momentum there. So they were the product that is a 12 to 20-hour product can achieve an access of $100 million and maybe an excess of $150 million on an annual basis.

We should be able to do better than that. It's easier to apply and it's simpler and no risk of injections intravenously and all that kind of stuff. So we feel like we've got a safer product. And so, the decision will be one that we'll be making overtime.

And we certainly have the partners there and we're doing all of our work as if we were going to launch ourselves. Hence, we work for the posters and all of the abstracts they're working on to continue to pay that runway and prepare for this product. So we hope at the end of the day, whatever decision we make, it will make all the difference, Jeffrey..

Thank you. The next question comes from Rajesh Patel..

Hi guys. Thanks for taking the question. I would just ask about ALS II which is their other abuse resistance to Oxycodone.

And so what I'm wondering is have you guys, either from Pain or from Pfizer have any color about how (indiscernible)?.

Pfizer doesn't share their strategic thinking with us. Their product ALS II has been around a long time. The technology has been around a long time. And in fact, it's been a real challenge.

If you look at (indiscernible) it was withdrawn voluntarily, I think, a number of times taken off the market because of issues of manufacturing and leakage of the antagonist.

I think the whole concept of giving what is effectively a physiological qualities and along with the medicine that you might give to my grandmother is I find it actually disturbing to say the least. There are patients who have been product risk who work from this kind of technology all to prevent somebody from abusing it.

When an alternative is out there, such as our order technology, which is something makes it more difficult to extract and much more difficult to abuse from that perspective in much more difficult to abuse from that perspective without having to put any additional risk. So I think that Pfizer has that to deal with if they want to consider that.

I think they're just moving all the facts forward. This was a program, as I said, was underway by O Pharma. King kind of continued it and Pfizer has kicked up the effort. The other side of it is from a pure business standpoint.

Purdue Pharma actually control the patent space here and King had to get a license from Purdue in order to launch the morphine product in beta. They didn't. Purdue did not give them a license for oxycodone. And so, Pfizer would still have to deal with that as well prior to launching that product..

That's helpful. Thanks..

Sure..

The next question comes from Michael Gottlieb. Hi gentlemen. I have a couple of questions about the timeline for REMOXY also.

If the bioequivalence study is done in April and three more other studies are done in June, what else does Pfizer have planned in terms of -- we don't know?.

We do know. They actually have committed the update that they are doing. In fact, they are in the middle of a stability trial which is basically -- it's under ICH guidelines. So I wonder if you make any changes formulation you have to setup a new stability trial.

And they're running those samples for a full year and those are setup kind of around the end of the year. And so they meets the one year point at the end of this year and they have to write those reports up and I think that's how they're getting to the mid next year. I think the potential exist that they might be able to do it quicker.

But in my experience, Pfizer doesn't do much quickly. I think they quite deliver it and quite precise. And so I would expect that in the middle of the year is when they'll be resubmitting if they do it better, that's awesome. But I think the most important part is you can feel that it'll be completed and in bullet proof by the time that they submit..

Okay. Thank you..

And the final question comes from Nick Farwell..

Matt, I got cut off. I was just curious. I noted that R&D sequentially gained. The first quarter was up 600,000 bucks. I'm curious, as I recall, and I'm not sure if it's accurate that you include all expense under R&D.

Does that include only company R&D or does that include company plus collaborative and then submit it out up above?.

Fair point. It's both. So to some extent, as we would have geared up some activities with Pain Therapeutics around those other opioids..

Yes..

Or with Zogenix on Relday so that they can get ready to start the multi-dose study in the fourth quarter, that R&D expense does go into R&D..

Right. If they repay you, it would have show up above under revenues..

Correct..

Okay. So to show a 600,000 dollar delta, first -- I'm sorry, towards the first quarter, suggest you ramping up on something in terms of….

Yeah, those are two items. And then I think with respect to POSIDUR, even though we don't have trials underway, we're spending a fair amount of money, medical affairs falls into that bucket and various consultants we're working with prepared and don't have this FDA meeting, all that falls into R&D..

And also, we were preparing for the potential launch as well. So there's certain amount of effort that's associated with that..

Okay. And secondarily, I think I misinterpret what you were saying, Jim. There are three orders of programs.

Has Pain actually committed to proceed with one or two of them yet or they're still thinking about committing to proceed?.

It's hard to say at the end of it all. But they have actually. We have plans in place. I'd say they have committed to at least once..

Okay. That's what I was curious at. Okay. Thank you very much..

Sure. Okay. I think the operator had mentioned that was the last call. We're always happy to take other questions, if you just call us directly at the company. And we thank you for your participation in this call. Thank you..