Matt Hogan – CFO Jim Brown – President and CEO.

Jason Napodano – Zack’s Research.

Greetings and welcome to DURECT second quarter 2014 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Matt Hogan.

Thank you, Mr. Hogan. You may begin..

Okay, good afternoon. Welcome to our second quarter 2014 earnings conference call. 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 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 could cause actual result to differ materially from those in such forward-looking statements. Further information regarding these and other risks and included in our SEC filings including our 10-Q under the heading risk factors. Let me now turn briefly to our financials.

Total revenue was $4.6 million in the second quarter of 2014 as compared to $3.9 million in the second quarter of 2013. If we exclude all deferred revenue recognized for upfront fees from our agreements, revenue from our R&D collaborations was $1.7 million in the second quarter 2014 as compared to $0.8 million in the second quarter last year.

Revenue from this source always fluctuates from quarter to quarter depending on the stated development under the various program 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 second quarter this year as compared to $3 million in the second quarter last year. Our gross margin on these products was around 62% in the second quarter 2014 and these products continue be strongly cash flow positive for us.

R&D expense was $6.1 million in the second quarter of 2014 as compared to $4.8 million in the second quarter last year. SG&A expenses were $2.9 million in the second quarter this year as compared to $3.2 million in the second quarter last year.

So as a result of the above, our net loss for the second quarter this year was $5.5 million compared to a net loss of $5.1 million for the same period in 2013. Excluding our debt financing, which I’ll touch on in a minute, our net cash consumed during the quarter was $4.3 million. So let me make a few comments about the debt.

It’s very straightforward and simply. There are no warrants. There are no second drawdowns that might be tied to some performance test. The coupon’s below 8% and there are no financial covenants.

So just to walk through a few of those key terms again, we raised $20 million which is a meaningful amount of capital representing well over a year’s worth of additional cash burn.

It’s got a four year maturity and although it’s not contractually obligated by any means, a number of Oxford clients have subsequently extended their maturity which Oxford’s incented to do since they only make money when they have loans outstanding.

There is an 18 month interest only period which takes us into 2016 before principle payments need to be started, which just coincidentally happens to tie to when we would expect REMOXY to be approved and watched. The coupon, as I mentioned, is under 8%.

There was an upfront fee of $150,000 and there’s an additional payment and maturity equal to 8% of the principle that if you really calculate it out brings the all-in true cost of capital on an annualized basis to about 10.5%.

There are no financial covenants to worry about and what Oxford got is a first security interest on our hard assets and a negative pledge on our intellectual property. But I’d emphasize we have total freedom to license our intellectual property in connection with partnering deals. Lastly, we can prepay the loan, if we wish.

There are prepayment penalties but they’re not that onerous and they decline over time. And Oxford, if you’re not familiar with them, is a leader in the field of entered debt for life science companies and the terms we received are consistent with the last several deals that Oxford’s financed including for some much larger cap companies.

And I guess lastly I would comment that the concept of life science companies utilizing a structure like this is now quite common. Oxford alone has done over $2 billion in loans to healthcare companies over the last few years.

So with all that, at June 30, 2014, we had cash and investments of $37.3 million compared to $21.8 million at March 31st of this year and $24.4 million at December 31, 2013.

And lastly, as a reminder, we have multiple programs that we’re in discussions about partnering over the next 12 to 18 months including POSIDUR, where we have worldwide rights, (inaudible) with worldwide rights, ORADUR ADHD where we have US and Europe and various feasibility studies that we hope are going to mature into development agreements much like Relday did about a year ago.

And with that, I’d like to turn it over to Jim Brown to discuss some of these non-financial matters of the company in greater detail..

rapid outset of action, a long duration with one a month dosing, small capsule size relative to the leading products that are on the market, it’s also tamper resistant due to our ORADUR technology. Orient Pharma met with the Taiwanese FDA to outline the phase three program and they’re developing plans for their Asian and South Pacific territories.

The US, European and Japanese rights are retained by DURECT and we’ve initiated licensing discussions now that we have the formulation in hand with our supporting PK data. Let’s review the potential key drivers for DURECT over the next 12 to 24 months.

For POSIDUR, it’s meet with the FDA in late September to clarify and address the issues with the complete response letter and then to continue development and commercialization of POSIDUR program including a potential licensing deal.

For REMOXY, it’s Pfizer completing the required studies that is the (BE) in these potential studies and resubmission, which is targeted for the middle of 2015 followed by a six-month review by the FDA and then product launch. For ELADUR, it’s initiation of the phase three by Impax, which also triggers a milestone payment for us.

For Relday, it’s initiation of the multiple dose trial by Zogenix in the fourth quarter of 2014 with data in the third quarter of 2015. For ORADUR hydromorphone, it’s starting phase one this quarter and advancing it to phase three in 2015.

As Matt said earlier, we have the potential for new collaborations around POSIDUR, Sufentanil patch, ORADUR ADHD or some of our feasibility programs. Last would be the potential for a new program to enter clinical development this year for DURECT. With that, I’d like to thank you for your time and we’d like to take any questions you might have..

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) The first question is from the line of Jason Napodano..

Good afternoon, guys..

Hi..

Just a question on POSIDUR for your FDA meeting in September.

I’m wondering if you guys have kind of thought out a design for the next clinical trial that you might potentially be running and if you’re prepared to kind of show that design to the FDA or is that a little advanced from where you are now? Are you going to basically talk with the FDA before you kind of get into a design of a trial?.

Yeah, I think at this point we’re so close to the meeting I don’t want to speculate kind of on anything with regard to the meeting. I just assume have the meeting and then get back to you on that because we’re just very short time away. So I’ll just have to say we’re… look forward to updating you after we meet with them..

Okay.

From a modeling standpoint, the milestone from Impax for the initiation of the phase three in the fourth quarter, how should we be kind of thinking about that milestone? Is that meaningful, something we want to make sure that we have in our model?.

Well, it is meaningful in that it’s definitely bigger than the upfront payment that we received from them. And the only hesitancy I have at the moment is we really need to let Impax kind of guide to when the phase three is going to start.

I just don’t feel comfortable speaking to that right at the moment since they are in charge of the program and they’re driving it. I know they want to meet with the FDA and talk about what the phase three is going to look like. So timing I don’t want to comment on but the amount is definitely very helpful for us given the size of our burn..

Okay. And if I recall, the upfront was $2 million..

That’s correct..

Okay, so the initiation of phase three is bigger than that..

Yes..

Okay. And then just last question, I noticed that I’ve been tracking the efforts on clinicaltrials.gov. I’ve noticed that some of these studies have completed bio availability study. They believe that the dose proportionality study have completed.

I noticed the new study about the effects of ethanol and I guess they’re trying to dissolve the product and I’ve noticed that the abuse potential study is still recruiting, although an update on that is in July.

So just do you have any sense on when all of these studies will complete?.

I think they’re pretty well on track, I mean, within a month or so. And then the nice thing is they’re repeats of studies that have already been conducted and there were very minor adjustments made to the formulation in order to get that assay to run smoothly.

So I wouldn’t expect anything we’ve looked at with regards to alcohol extraction, those kind of things, it shouldn’t change appreciably anything you’ll see from the clinical standpoint. So and they’re very small trials.

The last one you just mentioned, the alcohol extraction, I don’t… is it 30 patients or less?.

18. I don’t have it in front of me..

Yeah, it’s a small number of patients. So I would expect the timing from those is not going to be critical path to this resubmission. I think those will be done in the near term and written up. I think they’ve said they’re doing another ICH stability. That’ll be wrapped up at the one year point and then those reports put together.

So I think that’s probably the critical path to resubmission..

Good. I would assume they need 12 months of stability..

Exactly, yeah. They don’t need it but I think that’s what they want to do..

Got you, okay. Thanks for taking the questions..

Sure..

Thank you. (Operator Instructions) At this time, there are no questions in the question queue. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..

Thank you..

Thanks..