Matt Hogan - CFO Jim Brown - President & CEO.

Andrew Ang - Stifel Nicolaus.

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 the formal presentation. [Operator Instructions] As a reminder, today's conference is being recorded. It is now my pleasure to introduce your host, Matt Hogan. Thank you Mr.

Hogan, you may begin..

Hi, good afternoon and welcome to our first quarter earnings 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 the business. We will then open up the call for a 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 and 10-K under the heading Risk Factors. Let me now turn briefly to our financials.

Total revenue was 3.6 million in the first quarter of 2016 compared to 4.8 million in the first quarter last year. Excluding all deferred revenue recognized for upfront fees from our agreement, revenue from our R&D collaborations was around 310,000 in the first quarter of 2016, as compared to 1.6 million in the first quarter last year.

Revenue from this source always fluctuates from quarter-to-quarter depending on the stage of development under the various programs and our role in those programs. Product revenue largely from the sale of ALZET pumps and LACTEL polymers was 3.2 million in the first quarter of 2016 as compared to 3 million in the first quarter of 2015.

Our gross margin on these products was 62% in Q1 2016. These product lines continue to be strongly cash flow positive for us. And I would also note that we generated revenue of about 280,000 during the quarter from the sale of excipients that are included in REMOXY to our partner Pain Therapeutics. R&D.

expense was 6.6 million in Q1 2016 as compared to 5.4 million in Q1 2015. SG&A expenses were 3.1 million in Q1 2016 as compared to 2.8 million in Q1 2015. Our net loss for the first quarter was 7.9 million as compared to 4.9 million in the first quarter of last year.

Turning to the balance sheet at March 31, 2016 we had cash investments of 24.3 million which compares to 29.3 million at December 31, 2015. We had an underlying cash burn rate of around 6.3 million in the first quarter but we offset 1.3 million of that by selling 857,000 shares through our ATM facility at an average exercise price of $1.60.

After the end of the first quarter we raised net proceeds of approximately 17 million through the sale of additional shares. So, including these proceeds our pro forma cash and investment would have been 41.3 million at March 31st. We also have 19.7 million in long-term debt.

With that thanks again for joining the call and I'll turn it over to Jim for more comments..

Thank you, Matt and welcome everyone. This is a very exciting time at DURECT's history. Over the remaining eight months of this year we could see Phase 1b data from DUR-928 dosed NASH patient. Additionally we could see some Phase 1b data from DUR-928 dosed kidney patient.

The approval of REMOXY which would be DURECT's human pharmaceutical product approved and as of September 25th PDUFA date. The submission of DUR-928 IND or INDs for one or more indication, as well as the initiation of DUR-928 Phase 2 studies in one or more indication.

Between now and the end of 2017, we could potentially see the launch of REMOXY into the U.S. market bringing a true twice-a-day next-generation abuse-deterrent opioid to a society in desperate need of a better alternative.

Multiple DUR-928 Phase 2 studies are underway -- would be underway data from PERSIST the POSIMIR Phase 3 trial data from one or more proof of concept studies with DUR-928, resubmission of the POSIMIR NDA as well as potential for business development deal both on a regional and on global basis. DURECT has a great portion of having a rich pipeline.

Consisting on a novel endogenous new chemical entity as DUR-928 that may have brought actability for orphan diseases, acute organ injuries such as acute liver failure and acute kidney injury and chronic metabolic diseases such as NAFLD and NASH, we also have two late state pain products that are being developed for large market opportunities in post surgical pain and chronic pain.

We could have our first product REMOXY approved this year our second POSIMIR we submitted in 2017 and initial proof-of-concept data in humans with DUR-928 over the next 15 to 18 months. With an approximately $200 million valuation DURECT has more multiple ways for us to generate a substantial return based on this programs.

I'll now review our major programs in greater detail. Beginning with REMOXY, the NDA for REMOXY was resubmitted in March of this year and PDUFA date has been set for September 25th. REMOXY has excellent abuse deterrent property. It can eliminate or reduce abuse by snorting, injecting, smoking, chewing, crushing and mixing with various drinks.

Some of this abuse data will be shared at the American Pain Society Meeting in Austin, Texas on May 11th through the 14th of this year. REMOXY will be entering a large market via us the sales of REMOXY in the United States are about $2.4 billion.

DURECT will receive a royalty on sales that are between 6% and 11.5% so if REMOXY sales are able to achieve in the 10% to 20% market share of penetration our royalties would be somewhere between 16 million to 35 million per year. We have patterned to at least 2031 so this product should benefit direct shareholders for a long time.

Our NOL petition is 290 million of federal and more than 200 million for state which means we won’t have taxes on these royalties for some time to come.

REMOXY has five dosage drinks strength including 5 milligrams drink which would be the lowest extended release dose of oxycodone available and is consistent with the FDA’s desires to start patient at the lowest dose possible and may allow for some of the immediate released oxycodone patients to be converted over to extended release.

REMOXY is a true twice a day dosage form. I'd like to call our investors attention to an interesting article in today's LA Times, it was written by Harriet Ryan, Lisa Girion and Scott Glover. The title of it is a Troubled History oxycodone's 12 hour problem. I though it very interesting reading I think that you will as well.

We are launching maybe an alternative to oxycodone, which has a stigma to subscribers and patients. This product is heavily discounted by investors today and therein lies the opportunity. Next I will briefly discuss POSIMIR. As a non-opioid, for post surgical pain propane POSIMIR offers a big market opportunity.

It would compete with Exparel which has given Pacira a nearly $2 billion valuation. We are running a Phase 3 study in laparoscopic gallbladder removal. We started this trial in November of 2015, but at the recommendation of the FDA we are now amending the protocol to move to an active control arm which will be Bupivacaine.

We feel this will produce a stronger NDA resubmission and will offer potential commercial advantages as no competitive non-opioid product has been Bupivacaine in a well controlled study.

We have confidence in this trial based on our prior 50 patient trial in this venture removal the gallbladder where we saw a 25% reduction in pain, which was significant using the same statistical methodology we will use in our current trial.

We are working at the logistic of amending this trial and we are currently estimating that we will complete enrolment around middle of 2017 have top-line data a few months later and resubmit hopefully in later part of 2017, with a possible approval six months later. POSIMIR offers multiple differentiating features.

The NDA could include efficacy from three common surgical procedures that would be hernia, shoulder, and gallbladder, gallbladder just as an example are over 800,000 gallbladder surgeries per year in the United States. POSIMIR could potential be the first product with efficacy in laparoscopic procedures.

By far the more common ways by which surgeries are done today. POSIMIR could be potentially the first product to show efficacy against standard Bupivacaine in a controlled trial. We also expect to have extended duration a true 3 day product.

And I think a very important feature of POSIMIR is our simple and rapid administration one simply just puts into the wound, so you have got 3 or 4 holes it takes less than a minute to export it into the various wounds rather than injecting blindly around these which takes much more time. And we require no cold same storage.

We own the worldwide rights on this valuable asset and are in discussions with multiple companies regarding commercialization rights. Last but certainly not least is DUR-928. DUR-928 is an endogenous small molecule we unlicensed it four years ago. It's the first representative of a new class of hormonal therapy which are sulfated oxy-sterile.

It acts as a regulator, as an Epigenomic Regulator. DUR-928 is involved in the regulation of lipid inflammation and cell survival. DUR-928 has been taken forward in two programs. The first is for chronic metabolic disorders and this will be in oral dosage form and the second is for acute organ injuries and this is an injectable dosage form.

We are also actively exploring another condition for which we may initiate a clinical this year, but we are not ready to disclose any further detailed quite yet on that program. We have compelling data from eight different animal models that suggests the efficacy potential for DUR-928.

We demonstrated safety at very high doses in these animal models as well we have Phase 1 safety information from 75 healthy volunteers. Our first Phase 1b safety/pharmacokinetic trial is underway and in this case we are giving a single-dose orally to NASH patient.

And our second Phase 1b safety/PK trial is about to start giving a single-dose by injection to kidney functionally impaired patient.

Data from these trials are expected to be available later this year, while they are primarily for safety and efficacy and pharmacokinetic, we are nationally also looking at biomarkers that will be associated with diseases.

These studies will enable in this form subsequent proof of concept study either multiple-dose for the chronic indication or acute indications which would involve a single-dose. If DUR-928 demonstrates biomarker changes in the patient, together with the combined animal efficacy and our safety data, we should see the program revalued.

Further staged programs at other companies have achieved some impressive valuations as Big Pharma is highly interested in molecules that may address lever diseases and then may affect inflammation.

Some examples of these includes the March 2016 Gilead’s Nimbus deal where the nimbus program was in Phase 1, that deal was 400 million upfront with another 800 million in potential milestones or in milestones that could be achieved.

In January 2015, the Gilead Phoenix deal that molecule was in Phase 1/early Phase 2, 90 million upfront, 390 million in milestone.

And in February of last year February of 2015, Merck NGM did a deal, this was for a pre-clinical molecule 94 million upfront plus 106 million for a 15% equity stake in NGM that would inspire about $700 million value for the company and also committed $250 million from Merck for the initial five year term with that deal.

It should be remembered that in addition to DUR-928 potential in lever disease, it has the added potential to be a new therapeutic for acute kidney injury as well as other indication and could be a game changing opportunity for DURECT shareholders.

To summarize, between the potential approvals of REMOXY, DUR-928 clinical data, POSIMIR Phase 3 data potential resubmission and visit development opportunity, we have a lot to look forward to. With that we would like to take any questions you may have..

Thank you. We will now be conducting a question-and-session. [Operator Instructions] Our first question comes from the line of Annabel Samimy. Please proceed with your question..

Hi this Andrew Ang for Annabel.

Just a quick question, first on POSIMIR, could you say that the completed and what would have be mid 2017 with data there as per filing possibly by the end of the year?.

Yes that’s our objective right now. And the way….

Okay and so I understand the FDA you are amending protocol to aid an active control but I was wondering why you opted out of using Bupivacaine from the beginning for the PERSIST trial given the outcome from your earlier best study?.

It is a good question. It was just simply just to you always want to have the odds in your favor as much as possible and certainly going against staying is a much easier road than going with Bupivacaine hydrochloride nonetheless we did have a 50 patient study as the pilot for that and so we feel very comfortable going forward with that.

And we do like the end result if we talk to our commercial people, our business people and potential partners the opportunity to be the only product out there with a control trial in our label we are able to be successful again Bupivacaine hydrochloride we think that is going to put us in a very strong submission vis-à-vis the competition..

Okay, so.

And do you envision taking POSIMIR along through regulatory view? By what point would you want a partner to come into the picture?.

That is a good question, yes I mean we are talking to people now and so it's always about what the offer looks like first is the value that we put on the product so we are in constant communication with people, so it could be something that occurs between now and the end of the year or it might be later..

Okay..

So it is up the year, yes..

And so would you cash position your pro forma cash position is this enough to take your development through or would you, you said you needed additional cost for the program so would be would that sufficed?.

Yes it would just depend if I think actually our preferred scenario would be to get the right partner to POSIMIR on the argument that then they could have plenty of time before launch to prepare for a successful launch plan for Phase 4 studies, plan of publication strategy all those kinds of preparatory things would be to their advantage to sign with us early as well as ours.

If we were successful at getting such a partnership and I think financially we are in a different place. If that takes longer to come together or it doesn’t just doesn’t come with terms that we would want to take as we think it's undervaluing the asset then at some point in the future we may need to ask more equity in place.

I would also comment though on that score if REMOXY is in fact approved later this year, that's another royalty stream coming in that's a pretty intangible asset and I think there are a lot of financing opportunities that come with that so I think that's also a part of our financing strategy down the road..

Got you, and just a few more questions, so what is the market looking like for partnering opportunities and kind of the market in general for your pain franchise and mainly the POSIMIR and the REMOXY products?.

I think the REMOXY product that's Pain Therapeutics’ partner and I know that they are working in that direction so I think the opportunity is I think it's quite large for REMOXY if you just want to focus on REMOXY for a second if you have a chance look at that LA Times article you will see that there is a significant problem out there with produced product and it's not just the additional abuse ability of the thing but rather the fact that we've been talking about this for many years the fact that we are true acute twice a day and they typically have to be dosed more frequently than that.

Sometimes most frequently I think it's about three times a day and that gets up the patients in a very difficult circumstance and complete to higher doses and more problems down the road and it's laid out there very nicely unfortunately it is very difficult circumstance.

And some of the competition have use those same pharmacokinetic strategies to get approval and obviously I'm talking about the league here they followed the, for due pharmacokinetic profile in order to gain approval without having to do a substantial clinical work and so that puts them probably in the same position of being required from a dosing standpoint it's basically kind of a pain to themselves in a corner and I think REMOXY is not going to be there.

So I think that REMOXY is I think a really nice opportunity and having the 5 milligram dosage strength also is a nice opportunity and so I think that will have – we will see how times goes how it unfolds overtime as far as POSIMIR is concerned we think we have some nice advantages over the competition out there as it exists today are much easier to use you don’t have to inject it directly to the tissue and it's much faster to use our drug we've seen greater durations in more substantial surgery and now will have the potential to have data from a positive control and so with given all that I think we are going to be in our partner there that are being in a really strong position..

Great and one last question on your 928 product, I know you talked about it before but what kind of partnership structure you are looking for that and if you were more looking to have a stronger foothold than the oral versus injectable kind of what kind of structure were you looking at there I think could we seen him talked about it?.

Yes we -- there are a number of possibilities with regard to I think here I think our preference right now would be to do something on a more regional basis kind of ex-U.S. and maintain the U.S.

rights certainly the product affords itself to be segmented should we want to do that in another words you can have an oral product relationship and take the acute forward ourselves there are many different opportunities they want to do a pharma kind of the deal we've got all people have talked to us about all of these things and remember as well it's one of their family of molecule so there are number of molecule behind it and so I think that's a it's an amazing asset which will unfold overtime for us..

Thank you. Our next question comes from the line of Li Chang. Please proceed with your question..

My question is by referencing previous years, do you suggest that opened licensing opportunities after getting some initial data from DUR-928 for NASH or can they enter indications or you are more likely open to opportunities when you get to kind of mid to late stage and get a higher valuation?.

Those are good questions and it all the devil is in the details on any of those. The opportunity may afford itself for an ex U.S. opportunity, sooner rather than later and if that’s the case that is something we might do. As far as an earlier deal versus the later deal it really does depend.

Right now we are -- we really we want to make sure that this product line are they are that it is exploited appropriately.

And so the kind of relationship we’d want to put in place would be one, where we could ensure that the resources were there, and that’s why I purposely referenced the pharma type of deal, so if we did one of these type of deals where we actually would bring the cash in and be able to control it. I think they had 60 some odd 62 I think.

Phase 2 trials ongoing or clinical trials ongoing near the end there. We can certainly see an opportunity for 10 to 12 at least at this point with this molecule and so we think they are great opportunities.

The acute use is we are just now exploring that and the potential for a rapid time to approval is there for that and so that might be something that might be better for us to keep ourselves internally and the chronic just takes a bit longer, even though we think it will take less time than some of the products that are out there today because maybe -- we may well see some of these reduction in the inflammatory components of this things more rapidly than talk about national.

That’s nonetheless those are still longer trials and more costly so..

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

You had discussed earlier the recent deals that we have done in the NASH space as it relates tremendous and Merck in evaluation as we have several companies that are publically traded that are targeting other receptors.

I was wondering if you could comment on the receptors that being your stat side, company either involved in the recent deals or that are public versus the receptors that you are looking at the target, you are looking with DUR-928? And is there any overlap is there any complementary nature to it or they totally differ? Thank you..

Yes, I think that’s a great question. And there actually is a lot of overlap and I’ll let [indiscernible] who is the project leader on this so..

Yes, actually a lot of companies out there are public traded, I think there are so many companies are working on the national NASH field and on the chronic lever metabolic disease. So when it [indiscernible] like say the company earlier as Jim mentioned is the Nimbus deal. And the Nimbus compound as we know carboxylase inhibitor.

So it's so called ACC inhibitor and then they got a kind of positive Phase 1b data and then interestingly, our DUR-928 also inhibiting ACC the enzyme during triglyceride I think it is of fatty acid synthesis. So as you can see the overlapping here, however, for 928 is not just software. So the ACC is the first step during the fatty acid synthesis.

And the offshore the fatty acid of ACC action that will be another fatty acid synthesis complex, responsible for the final formation of the fatty acid, 928 also inhibiting fatty acid synthesis on top of inhibiting the ACC. And also fatty acid being synthesized there is another step to assemble all the fatty acid into the triglyceride.

And then that requires MTT inhibitors to put into the particles. So 928 also as we know in our data also inhibit MTT proteins for the particle to be assembled.

So there is a lot of things going on and then, so 928, we say it's modulate as Jim mentioned to modulate lipid metabolic pathway, modulating inflammatory pathways, modulating cell survival pathways.

So there are many companies they individually working on either one pathway in methane backed metabolism or one pathway in inflammation such as taubira the TTR2, TTR5 and then as Jim said tipha, alpha, delta dual inhibitors and also lot of company working on the cell survival pathways such as [indiscernible] they were just a reason to look part of successful base to a data on the national NASH patient that’s on the cell survival pathways.

So 928 essentially covering all these pathways all together whether one simple compound so that's why we feel like it's a actually there is a tremendous overlapping but at the same time our coverage is way broader..

Thank you very much..

I think that's very important in if you notice if you look at the Phase 1b study that NIMBUS did they used obese patients they gave them regular label precursors and way to were showing the just a paper last week that I thought that was interested they [Multiple Speakers]..

That is a good point, yes that is a very good point, yes so the ACC inhibition only inhibit such as the novel fatty acids into this and the novel fatty acid synthesis under the normal patient only accounts for 26% of the total fatty acid synthesis study and under novel NASH situation the percentage actually dropped only account for 16% to 19% of the total for fatty acid synthesis..

And I think that's why they didn’t use NASH [Multiple Speakers]..

And also their Phase 2/1b trials design if you look at their trial design actually it's a very unique very different from [indiscernible] and they have to give [exaggeration] acetate as well as fructose, so induced the novel fatty acid synthesis..

It is a very-very non realistic kind of fruit..

Yes..

Further question?.

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

I've got three questions so I can go back in the queue after the first one if you would like.

Regarding 928 can you give us any sense whether we might be able to get some indication of efficacy on the Phase 1b’s and more generally when would you expect to tell us something about the results for the Phase 1b? So, I should reorder the question when would you expect to tell us the results of the Phase 1b’s and what can you say about any efficacy signals and if you did see them would you share about information with us?.

Okay so the data our there will be coming at this year as the we expect actually data this summer and as far as do we expect to see but we are looking at for initially is pharmacokinetic and safety.

But we won't be surprise if we see biomarkers move and will be looking at biomarkers in the NASH patients associated with metabolism and also inflammation and in the kidney patients we are building kidney function inflammation.

And so we have same things like this move in the inner models even after a single dose whether or not that will happened to people we don’t know yet but will see and may take more than one dose if it does and well obviously they are moving to that but if we do then I think it's kind of positive to our success..

Right and that information you would share as you release the Phase 1b data?.

Right yes will be sharing that definitely. Go ahead Jeffery with any, ask your questions..

Okay as far as POSIMIR is concerned if I follow the dates correctly I mean broadly speaking there is about a six month delay as a result of this FDA changing into the goal post is that roughly correct?.

Unfortunately that's correct..

And could you put a ballpark range as to what the additional cost of this goal post changes is?.

Yes well it's about $3 million, let's say right now maybe a little less than that but I think in that range..

Well for those of us who have been long-term followers of the company I suppose it could be a lot worse..

But I think what's really helping is here from a standpoint as we have the site already in place and what's taken in my opinion a long time is initiation of these clinical site there has been a tremendous amount of consolidation in healthcare industries in general.

And this is especially the case in the surgical centers until for example of center that we may have worked in Texas in prior studies when we were putting a legal contract in place the guys have been running, surgeon been working there for many years and had a lawyer that he worked with just down the hall or in the same building and now that after consolidation the lawyer of the legal department is now in Delaware let's say and so for that person to try and get something done instead of pretty going down the hall and talking to a colleague he has done for many years is basically pushing out a rope and it's been taking us many months to get this contracts in place and get these surgical centers up and running and so we didn’t want to lose that and so that's one of the reasons for the process that we are going through now was simply just a -- to make an amendment to the protocol itself and then we can just hopefully just go back to the IRBs and then be up and running in the same centers..

And my last question on REMOXY given that it may at last to be approaching the point of commercial reality.

I'm sure you've spent considerable time looking at the competitive environment aside from OxyContin in terms of new entrants which ones do you think are potentially either might be or on the cusp of being competition for REMOXY, aside sight from OxyContin?.

Well I think we do have the great suggestion -- great portion although it has taken forever for sure to get here, of really being a state of the art abuse deterrent we can reduce abuse for temp resistant, enhanced temp resistant and with all those five methods that we always talk about.

And that’s challenging for others to be able to get to that point.

And if you look at that LA Times article I encourage you to have a look at that and you will see the challenge, the two challenges that are brought about by virtue of OxyContin being more closely aligned to possibly an eight hour dosage form than a 12 hour and so there is some amount of time after which the patients not only have their pain come back but then because it's an narcotic they have, they start to want and need the narcotic from a such an extent point.

And so we have the narcotic cravings and the pain coming back and this drives a real negative file for this patient. And one of the competitive product is recently got approved is [indiscernible] and anyway that’s something that they all have to address them [indiscernible] and what is the dosage frequency and what are the [indiscernible]..

So to summarize you don’t see any of the new entrants as being in the same league in terms of product quality as REMOXY?.

Let me try that and I think we would be wrong of us to talk too much about other companies. We should focus most of our comments on our own product and our own company. I think it's safe to say that there will be more companies out there with abuse deterrent products, trying to take share from [indiscernible].

[Indiscernible] is approved, so you have to assume there will be out there. In addition, Pfizer’s ALO-02 has an FDA advisory committee meeting sometime in June, so they could potentially be on the market with a very different approach in technology. So I think you have to assume that there will be multiple players out there.

Now a context though is we are talking about roughly $2.5 billion market for multiple players to compete against. And I also think just as a personal comment it may not necessarily be just us against one of these other entrant, the question might be how [indiscernible] actually.

[Indiscernible] an OxyContin have a bit of a stigma among prescribers and among patients, and the world has been kind of waiting for small targets to be introduced.

And so I think there is an opportunity for multiple people to take share potentially rapidly from [indiscernible] and be very successful and so it's not going to be one of this new entrance as a win and all the other don’t it very well. It will play out over time.

So we think that REMOXY will be a very valid compare to during that space and it's a big market and there will be a lot of difference features that people emphasis when they are out their marketing. And I guess maybe that’s all we should comment on..

Yes, probably right..

So in summary one of the interesting questions might be is 30% of the OxyContin market at risk or is it 70% of the OxyContin market, that is potentially to be had and obviously the proof of the footing will be as new products come to market but that’s a very broad variable?.

That’s right, I think you are absolutely right and I think people will have to look at things like Matt was talking about how [indiscernible] works and what are the components are, what are the pharmacokinetics for these other products, and all that stuff has to come to play as these things are unfolding..

And a final question if I may, coming back to POSIMIR, how do you find the business development environment now post the FDA’s goal post change, do you find the people you are talking are still as engaged that they used to be? Or did you sensing that this kind of turned people off?.

No, I think they are actually just as engaged in fact the marketing people actually like the opportunity of being able to have a significant advantage over the competition.

To be the second to market possibly what maybe just a superior -- or at least -- we will certainly have a very nice list of surgeries that we vis-à-vis competition and if we have beaten an active competitor versus the competition out there. I think that puts us a very nice position to be in. so it's actually -- probably more exciting now than it was..

There are no further questions at this time. I would like to turn the floor back over to management for closing comments..

Okay well, thank you all for participating and your interest in the company. If you do have further questions overtime, as you well know we are happy to answer, so please call in. Thank you..

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