Matt Hogan - CFO Jim Brown - President and CEO Glenn Chertow -.

Jim Malloy - Laidlaw & Company.

Greetings. And welcome to the Fourth Quarter 2015 DURECT Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Matt Hogan.

Thank you Mr. Hogan, you may begin..

Good afternoon and welcome to our end of year earnings call, as well as the program update. This is Matt Hogan, the CFO with DURECT Corporation. The 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 will then open up the call for Q&A session.

Before beginning, 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 are included in our SEC filings, including our 10-Q under the heading Risk Factors.

So let me now turn to a few comments on our financials. Total revenue was $5.2 million in the fourth quarter of 2015 compared to $4.3 million in the fourth quarter 2014.

Excluding all deferred revenue recognized for upfront fees from our agreements, revenue from our R&D collaborations was $2.1 million in the fourth quarter 2015, as compared to $1.2 million in the fourth quarter last year.

Revenue from this source always fluctuates from quarter-to-quarter depending on the stage of development under various programs and our role on those programs. Product revenue largely from the sale of ALZET pumps and LACTEL polymers was $2.9 million in the fourth quarter of 2015 as compared to $3 million in the fourth quarter of 2014.

Our gross margin on these products was 66% in fourth quarter 2015 and these product lines continue to be strongly cash flow positive for us. R&D expense was $6.7 million in the fourth quarter of 2015 as compared to $5.4 million in the fourth quarter last year.

SG&A expenses were $2.8 million in the fourth quarter 2015 as compared to $3 million in Q4 2014. Our net loss for the fourth quarter 2015 was $5.8 million as compared to $5.9 million in the fourth quarter last year. And at December 31, we had cash and investments of $29.3 million, compared to $34.9 million at December 31, 2014.

We also had $19.7 million of long term debt. Our cash burn rate in the fourth quarter was $5.8 million, excluding fund raising. And during the fourth quarter we did utilize our ATM facility to raise 2.7 million net by selling 1.2 million shares at an average exercise price of $2.33.

We also sold a few shares in late December that didn't close until early January that totaled another $0.5 million in net proceed from sales at an average exercise price of $2.25. With that, thanks again for joining the call. Let me turn over to Jim to discuss some other matters..

Thank you, Matt. On this call I will briefly review 2015 and then update on our progress from the beginning of this year. We're also pleased to have a guest speaker today who I will introduce in a minute to share his perspective on one of the areas where we’re targeting with DUR-928, that is kidney disease.

2015 was a strong year for DURECT and some of the highlights from the year are initiation of our PERSIST trial for POSIMIR, progress towards resubmission of the REMOXY NDA filed for this quarter by our partner Pain Therapeutics, introduction of our Epigenomic's Regulator Program and the Lead Molecule DUR-928, positive data from 8 animal models, 4 for chronic and 4 for acute disease using DUR-928, excellent safety data from more than 75 subject in our Phase 1 safety study in the oral and the injectable programs for the DUR-928, and lastly good progress with our earlier stage drug delivery programs and our LACTEL and ALZET product lines.

I'll now provide update with regard to progress we've made this quarter beginning with DUR-928. The discovery of DU-928 is a potential major advancement for medicine. DUR-928 is a lead molecule from DURECT's Epigenomic Regulator Program.

It is an endogenous small molecule, the first in the family of newly discovered endogenous oxysteroid that are activated by sulfation. DUR-928 is an Epigenomic Regulator of lipid homeostasis, inflammation and cell survival. We are pursuing 2 distinct programs with DUR-928.

The first is an old program that is targeting chronic metabolic diseases and then we have as well an injectable program that is targeting acute organ injury. Today, we are very fortunate to have Dr.

Glenn Chertow to give us some perspective on the problems of kidney disease and the limited therapeutic options available to nephrologists and their patients. As well as the potential of the DUR-928 to aid in this area of unmet medical needs. Dr. Chertow has agreed to step out of another meeting to participate for few minutes in our call.

We are fortunate to had Dr. Glenn Chertow consult for us for the better part of the last year. His time is very much in demand, so we are very appreciative when he looked at our DUR-928 program and he deemed it worthy of his investment of his time.

In particular, he has played a helpful role in advancing the design of our upcoming trial in Austria for DUR-928 in renal impaired patients. By way of background, Dr. Chertow is an MD with the masters in preventive health. He is the Norman S.

Coplon Satellite Healthcare, Professor of Medicine and the Chief of Division of Nephrology in Stanford University School of Medicine, [partly] [ph] joined the faculty of Stanford, Dr. Chertow served with distinction on the faculties at UCSF, at Brigham and Women's Hospital, and Harvard Medical School. Dr.

Chertow has established a successful career as a distinguished clinical investigator, a compassionate nephrologist, and a great mentor with more than 300 pre-review publications. He has received numerous awards throughout his career, including the National Torchbearer Award by the American Kidney Fund and the Nephrologist of Year Award.

Among many of his leadership roles and appointment, he has been elected to the American Society of Clinical Investigation and American Academy of Pediatrics. Last year, Dr. Chertow received the Belding H.

Scribner Award from the American Society of Nephrology for his outstanding contributions to the care of patients with renal disorders and for a substantial influence in the clinical practice of nephrology. With that, I'd like to turn the call to Dr. Chertow..

Thank you very much. With the little bit of time remaining after that introduction, I'll take a couple of moments just to familiarize listeners on the call about acute and chronic kidney disease, focusing a little bit more on acute kidney injury. Now, acute kidney injury is a fairly common condition.

It affects somewhere on the order of between 5% and 15% of all patients hospitalized in the United States. When severe and particularly when severe enough to require a dialysis, acute kidney injury is associated with exceptionally high mortality rates and exceptionally long hospital length of stay and costs.

And in contrast to some other acute organ injuries such as myocardial infarction where we have seen dramatic improvements over the last three or four decades, if one thinks about the mortality rate assisted with acute MI dropping from somewhere in the 40% range down to 5% or 6%, over that same time frame mortality rates for acute kidney injury that's severe enough to require dialysis have dropped from about 50% to about 46% or 47%.

So we have seen none of the major advances that we have seen in for instance in cardiovascular disease. And I have been practicing for over 20 years now, and we unfortunately have made no advances in the management of acute kidney injury.

And we treated virtually the same way that we treated it 20 years or 25 years or 30 years or more years ago, which is basically watching and waiting for endogenous recovery and intervening with dialysis when one of the number of clinical condition intervene that we may be able to improve, for instance, electrolyte disturbances or acid-based disturbances, that we can correct with dialysis.

But still mortality and associated morbidity is extremely high. I was extremely excited to learn that DURECT was going to be focusing the epigenetic regulator program in part on acute kidney injury.

It is one of the greatest unmet medical needs in medicine, I would say among in-patient problems and particularly among in-patient problems in critically ill patients. It is probably the one most feared complication and the one for which there is really zero effective therapy.

So the potential for an agent even to modify the course, to shorten the course if not to completely prevent or reverse the disease is enormous. I should also make a comment or two about chronic kidney disease.

Now, we have done a little bit better with chronic kidney disease, but as many of you know there are nearly 500,000 persons in the United States with end-stage renal disease either receiving dialysis or following kidney transplantation. Kidney transplantation is a very effective therapy for kidney failure, dialysis is much less though.

It as I often say sustains life, but does not restore health. And for persons with kidney failure, life is quite diminished, the energy levels, their health-related quality of life and functional capacity is seriously diminished. We have one class or two related classes of agents that can slow the progression of chronic kidney disease.

Those are the Angiotensin II, converting enzyme inhibitors and the angiotensin receptor blockers commonly prescribed medications for hypertension and heart failure, which have been shown to moderately slow the progression of chronic kidney disease.

Yet in most patients they do not, they can forestall, but they don't prevent the development of progressive kidney disease. So we know that some of the actions of DUR-928 are operatives in patients with acute and chronic kidney disease.

Chronic kidney disease is the 7th or 8th leading cause of death in the United States, and just to throw out a couple of other figures about 50% of all Medicare expenditures are spent on persons who carry a diagnosis of chronic kidney disease.

And even for persons who don't experience progressive chronic kidney disease, but manage to forestall dialysis, the risks of associated cardiovascular disease and impaired functional capacity frailty, fractures, other complications, cognitive impairment, many others are also extremely common.

So any therapeutic that could potentially improve the care of chronic kidney disease above and beyond the ace inhibitors and ARBs, and any therapy that could begin to change the horrendous outcomes that we see with acute kidney injury are extremely important.

And I've been involved with a number of programs in both acute and chronic kidney disease, and frankly, I've not seen although it's early and these are Phase 1 studies, I'm very excited to see the results in patients with impaired kidney function but I've seen no data from early stage experiments either animal or human experiments that look better than those for DUR-928.

So the introduction was a little over the top, I am really busy like most doctors and most investors and scientists and business owners and so forth, but I am so enthusiastic about doing my part to help bring a drug like this to the literally millions of patients with acute and chronic kidney disease.

I can't tell you how enthused I am and very much looking forward to continuing to work with DURECT over the coming months and years to see that we do our best to get the very best trial designs, the very best studies completed and get this agent and related-agent into the hands of doctors who can finally treat these diseases.

It's been a frustrating in years or so. But I’ve got a lot of hope..

Okay Glenn, thank you very much, and we do respect your time and I know you’ve stepped out of another meeting. So, thank you very much..

Okay. I’m really happy to talk with any of your colleagues off the call another time if that would be helpful..

Okay. We might set that up. Thank you so much..

Okay. Bye now..

Bye, bye. Okay. So, I appreciate that. Now, let me just back up a little bit to provide some more background and information on our DUR-928 effort, as well as our next steps. Just want to go back a little bit to our animal data, as Dr. Chertow mentioned that briefly. Our animal data is very important.

So I'd like to briefly summarize it Our animal data can be divided into two main categories, safety, and efficacy. Regarding safety, in a pharmacokinetic and toxicology study conducted in mice, hamsters, rats, dogs, and monkeys, DUR-928 has been found to be safe at all the doses that we've tested to-date.

These non-clinical results supported the initiation of our DUR-928 studies in human safety trials. Regarding efficacy, the biological activity of DUR-928 has been demonstrated in eight different animal disease models involving three animal species.

Four of these models represent chronic disorders of liver lipid accumulation, lipid dysfunction, inflammation, and fibrosis, such as those associated with NAFLD and NASH.And four of these models represent acute toxicity or ischemic organ injury that has been demonstrated in the liver, kidney, and brain.

Just to summarize quickly on the chronic side, we have shown in a high fat mouse and a high fat hamster models, that we've improved liver morphology, and reduced the lipid in six weeks.

In the NASH model, we were able to reduce the NASH organ fibrosis in only four weeks, and then leptin deficient genetically damaged animal, we saw an improvement in hepatic, triglycerides, cholesterol, and free fatty acids in only three week.

On the acute side, for chemical injury against Acetaminophen and ethanol toxicity, we saw in just a single shot, in some cases 90% of the animal lived with DUR-928, 90% died on vehicle. Endotoxin lipopolysaccharide the biological injury model, 100% lived on 928, 50% died on vehicle.

Then of course the ischemic damage that we saw in the brain and the kidney showed dramatic protection as well. Regarding our human safety study, we did a substantial amount of work in 2015. The Phase I studies for both our chronic metabolic disease and acute organ injury program. In total, over 75 healthy volunteers were treated with DUR-928.

And the high doses resulted in plasma levels that were far in excess about 100 fold higher than our endogenous levels, the amount that we walk around with everyday in our blood. We saw no food effect. We saw that it was well tolerated on all doses. There were no serious or drug related adverse events.

No accumulations of plasma concentrations were observed with repeated dosing, and dose related increases within plasma concentration were also observed. With regard to our chronic metabolic disease program, we initiated Phase 1B, our initial patient study in NASH patient. This trial was started in January of this year in Australia.

It will involve three successive cohorts that are evaluating different levels of DUR-928, that will be administered orally. It’s a single side. It’s an open label study with dose ranging safety and pharmacokinetic. There'll be three doses, low, medium, and high dose.

Each dose strength will test ten biopsy came from NASH patient, and six matched control subject. The results are expected in the first half of this year. And this will enable and inform our multi-dose studies in NASH and other liver function impaired patients in 2016.

With regard to our acute organ injury program, the Phase 1B initial patient study will be in renal impaired patients, the study that Dr. Chertow would help us put together, and some other colleagues as well. This is an injectable formulation. The protocol has been submitted to the Investigational Review Board.

The study will be conducted in Australia, and is expected to initiate if all things work as we hope this coming month in March. It’s a single site, open label, dose ranging safety in PK study. It will also involve three cohorts, low, medium, and high dose. It will have ten renal impaired patients, and five matched control subject per dose.

With results expected in 2016, it will enable and inform subsequent studies in acute kidney injury and/or other kidney function impaired patients. I will now move on to POSIMIR. We reported last quarter that we had initiated the PERSIST trail. PERSIST is a Phase 3 trial consisting of over 300 patients undergoing laparoscopic gallbladder removal.

It’s a randomized parallel group double blind placebo control multi-center trial being conducted in the United States. The primary efficacy endpoint will be paying intensity on movement over the first three days after surgery.

We believe the data from this trial will be confirmatory of the data we’ve seen in our hernia repair and shoulder surgery pivotal trials, and that these three surgical models will together support a robust NDA resubmission. There are number of reasons we like the surgical model and the trial design.

First of all, Laparoscopic gallbladder removal is one of the most common general surgeries that are performed each year in the United States. There are about 800,000 of them done every year and is mostly done on an outpatient basis.

With the trend towards less invasive surgical procedures, this would give us additional efficacy data in laparoscopic procedures. Lastly, our confidence is based on the positive experience we've had with this surgery, in a previous 50 patient cohort trial comparing POSIDUR to bupivacaine hydrochloride.

Using the same statistical methodology we will employ in this new study, we saw a 25% pain reduction over the first three days after surgery and a P value of 0.0235. In terms of timing, the study is on-track and we believe we'll complete the enrollment this year.

After the last patient enrolls, we believe it'll take a few months to get the topline data and then a few more months to finalize reports and prepare the NDA resubmission, which should occur in the first half of 2017. After resubmission, there will be a six months review per PDUFA guidelines for the NDA. POSIMIR has some wonderful benefits.

POSIMIR has the potential to be the first product to have proven to provide 72 hours of clinically significant post-operative pain control across multiple surgical models. The NDA is planning to include efficacy data from three common surgical models, that is, hernia, shoulder, and gallbladder removal.

Our aim is to be the first product to demonstrate efficacy in laparoscopic procedures. The first product to also deliver 660 milligrams bupivacaine changes control of our SABER technology, to provide fast, convenient, and targeted administration, a simple and rapid administration into the wound under visual supervision.

This puts more drug closer to the impacted nerves, and facilitates the use in laparoscopic procedures with multiple port, and enables the reduction, delay, or total avoid of the use of opioid. I now want to move on to REMOXY.

Pain Therapeutics, has been focused on the REMOXY-NDA resubmission, and it’s our understanding, Pain Therapeutics expects to resubmit the NDA in the first quarter of this year. After resubmission, there should be a six months review by the FDA. As such, we look forward to the approval of REMOXY in the fall.

Based on those timelines, REMOXY would be eligible for approval in the third quarter, at the end of third quarter or early fourth quarter of this year. So, we potentially are about two quarters away from having our first approved pharmaceutical product.

Given the very recent highly publicized attention to the opioid abuse from the United States, as is evidenced by preannouncement from the FDA and Government official, we feel the timing is right for the approval and launch of REMOXY. U.S. sales of oxycodone in 2014 were $2.4 billion. So it remains a very large market opportunity.

REMOXY has the opportunity to be a highly differentiated product. REMOXY takes a straightforward approach to [indiscernible], by not requiring the addition of a second agent that may be detrimental for the patient. It is an oral capsule with formulation that is highly viscous. It isn’t just another tablet that may be harder to crush.

Even after crushing, REMOXY’s viscosity makes it practically impossible to inject through a needle, not can one snort it. If one mixes it with common drinks in an attempt to release the drug more quickly, the oxycodone does not burst out.

So we believe REMOXY has the potential to be a best-in-class product, providing the pain relief you'd expect for the legitimate chronic pain patients while deterring multiple common modes of abuse. As a reminder, we have seven patents issued that go out to at least 2031.

And we will receive a royalty that begins at 6% and goes up to 11.5% on product sales. So even if the sales ultimately peak in the $3 million $500 million range, out of $2.4 billion market, our royalty stream would be quite good. With that, we’d happy to take any questions you might have..

Tim, do you want to handle any questions that might come in?.

[Operator Instructions] Our first question comes from Annabel Samimy. Please go ahead..

Hi, this is Andrew in for Annabel. I just had a couple of questions, first on your 928 product. Can you give us a timeline of when you plan to initiate the Phase 2 and so on studies that those will be conducted in the U.S. or do you plan on pursuing more ex-U.S. development for the time being? And I have a few more to follow up on partnered products..

Sure. Well, with regard to 928 right now as you know we are doing all the work out in Australia and we may well be conducting some Phase 2 work in Europe this year if possible. We are looking at it.

We haven't yet moved in the United States simply as a way of saving cost quite frankly, but we will most likely after we have some Phase 2 data would be my guess. Probably I would say '17 is year for an IV with this product. Let's think, change, I mean there is always the possibility.

And if we get some initial peaks out of things right now that look dramatically different and are touch that we wanted to tolerate that. That's right now. We are going to assume that would be in Australia and in Europe..

Okay, great.

And on your partner products for the Orient partnership in Taiwan, what are the next steps for that and on Relday? What would be DURECT's role once Zogenix chooses a partner for it?.

So with respect to our ADHD program that Orient Pharma is our licensee for Asia, certain territories in Asia. They are currently conducting a Phase 3 trial in Taiwan. They expect to have results from that this year. Our expectation is if those results are good, it will sort of de-risk the program.

We have retained the rights to Europe and Asia and the United States, which are the bigger commercial opportunities for us and we will then use that data to sort of go talk to additional partners about the U.S. territory and about Europe. So that's the Orient Pharma ADHD program.

The Relday program, if Zogenix stated strategy is to try to get a partner to take it to Phase 3, which will be the next clinical step and then drive the program forward from there. We would continue to support any formulation work associated with the program and we are also in-charge of the manufacturing for it.

So we would assist whoever that next partner is on moving the program forward, including manufacturing. We commercially, if they license it to a partner, we get a percentage of what they get in terms of upfront license fees and milestone payment and then we've got a series of milestone payments for clinical development ahead of us as well..

Got it. Thank you..

Our next question comes from the line of [indiscernible]. Please proceed with your question..

Thank you very much and thank you for having Dr. Chertow on giving explanation, given his preeminent decision in the field of nephrology. I think that's tremendous.

I was wondering on a comparable basis, if you could tell us in the field of NASH and hepatology giving that that’s the area that’s probably more well known to Wall Street, if you have a similarly preeminent thought leader involved in the hepatology study and if so if you can identify that person perhaps have them on in a subsequent call.

And secondly if you could go through a little bit with any opinions you’re getting back from hepatologists in terms of what they see with DUR-928 that Dr.

Chertow only next from my perspective, the two leading companies in NASH I believe both their drugs will not succeed in NASH and so even though people may think of them as being well ahead, the drugs actually don't succeed, that's not the case. And so your timeline on getting on the market may be very close to win other drugs get on the market.

And I was just wondering how those doctors were perceiving 928? Thank you..

I appreciate the statements and the sentiments. Actually, we did it when we first talked about and I think this was maybe a little before you were involved with kind of following DURECT along. We had Thomas O, who is an MD PhD out of the Gladstone, at UCSF, and he is - he coauthors the chapter and look for building drugs with Goodman & Gillman.

And he has been - he is a real forward. He was a FDA advisor person with regard to drugs for liver therapies. And then he was actually -- we had him on a call, about little for year ago. And we also have Arun Sanyal as one of our consultants and others. So we have a number of them.

As to whether or not we will bring, we could bring another one on to speak at some point of future. I think what we prefer to do just in the near term is as we look into new areas that the investors haven't heard about yet, that's why we wanted to have Dr.

Chertow here to be able to get people little perspective on - really on the unmet need on the renal side, which is huge and hope we finally able to talk with that..

Great. Thank you..

Our next question comes from the line of [indiscernible]. Please proceed with your question..

Thank you for taking my questions.

Can you give us a general idea of how their R&D and SG&A expenses likely look like for 2016?.

To be honest with you, [indiscernible] we don't give kind of a forward looking projection, especially down by line item like that. I think the biggest hint could be last quarter we burnt - we really think of it as in terms of a total corporate burn. We burned about $5.8 million and may be that will notch up a little bit this year.

As the POSIMIR trial moves forward and as the various studies with DUR-928 proceeds, well, we historically haven't given much guidance that goes down to revenue and SG&A and R&D. As you can see if you look at it, historically though, SG&A is certainly not trending up. Our fourth quarter was down a little bit.

So if there is an increase in our burn rate, it's because we are funding these trial for POSIMIR and for DUR-928..

Got it. Thank you..

Our next question comes from the line of Jim Malloy. Please proceed with your question..

Thanks for taking my question. I had a question on the POSIMIR enrollment trial.

How is enrollment going, give us an update on that, I know you said, you expect to enroll by the end of the year, any chance for that to accelerate some things hidden? Is cash a very limiting factor? You've got a pretty good chunk of cash in the balance sheet to have enough cash on there to see through all these programs where we need to be?.

I'll speak to the enrollment piece and I let Matt talk to the cash piece. Certainly, cash isn't limiting at all. It's just regard to enrollment where enrollment gets a good pace. We don't want to give like a quarter-by-quarter breakdown of the count, because then they look faster, people get overexcited, smaller people get over the negative.

And the bottomline is we are cranking along really as I had hoped and we should lead it this year. I think we are moving along Matt –.

I guess in terms of financial resources, if you include that $0.5 million that I mentioned fell into January. It's in the end of year balance sheet. Conceptually, we started the year with just under generating $30 million in cash, which is okay. I think we have to monitor it.

Our preferred strategy financially would be, as you know, we are on the world-wide rights to POSIMIR, as well as to a couple of other asset. And our preferred strategy is if we can get good partnerships done around POSIMIR, some of these other things than may be that would albeit the need to raise any more capital.

If we did have to raise some more capital, we are mindful of delusion. And so we were advised toward making that as small as possible. Later in the year REMOXY is approved and there is a partner in place for that.

Of course it puts us in a different place as a company, because then we could monetize either by selling part of that royalty stream or just borrowing some small portion of the net present value. So our picture could change by the end of the year with that asset as well. So right at the moment, we don't have any firm plans.

We are just going to have to constantly monitor where we are with partnering efforts, news flow, milestones and then make some judgments. But I think our bias is we raise more equity as we have done in the past as to make it small amount, because we are all sourced sensitive to delusion..

As you mentioned partner for POSIMIR, did you mention something any – I know their partnership in there until there. It's hard to guide when it may or may not happen.

With that being said, any guidance when it may or may not happen?.

Well, as you just rightfully said we never set a timetable on it, because you never know we have got a number of people who seemed very interested in the program. So one day you may wake up and there is a news announcement on it. On the other hand, we think it's a valuable asset. We are not going to undersell it just to announce we have a deal.

And so if we wind up carrying it through the end of the clinical trial that we are running now and then announced data and then that leads to the partnership, so be it. But on the other hand, we may well get something done before them. So it's just hard to predict. And we want to do the right thing with the assets for the shareholders..

Excellent. Thank you again for taking the questions..

At this time, we have no further questions in the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks..

Well, thank you all for participating. We hope you have found our guest speaker interesting and useful. And as always, if you have further questions about the company, please feel free to reach out to us. We'll be happy to talk to. Thank you very much..

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