Greetings and welcome to the DURECT Corporation Fourth Quarter and Full Year 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Arenberg, Chief Financial Officer for DURECT Corporation. Thank you. You may begin..

Good afternoon and welcome to our fourth quarter 2018 earnings conference call. This is Mike Arenberg, Chief Financial Officer of DURECT Corporation. I will provide a brief review of our financial results and then Jim Brown, our President and CEO, will provide a business update. We will then open up the call for a question-and-answer 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 in 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 can be found in our SEC filings, including our 10-K under the heading Risk Factors. Let me now turn to our financials.

Total revenues were $3.6 million in the fourth quarter of 2018 compared to $19.5 million in the fourth quarter of 2017. The Q4 2017 figure included $15.4 million in deferred revenue from the $20 million upfront fee associated with our Sandoz agreement.

If one excludes all deferred revenue from upfront fees already received by the company, then revenue from our R&D collaborations was $775,000 in Q4 2018 compared to $841,000 in Q4 2017. Product revenue, largely from the sale of ALZET pumps and LACTEL polymers, was $2.9 million in Q4 2018 compared to $3.3 million in Q4 2017.

For the year as a whole, product revenues from ALZET and LACTEL were $10.4 million as compared to $13 million in 2017, which was a record year. The gross margin for the combined ALZET and LACTEL product lines was 62% in Q4 2018. These product lines continue to be strongly cash flow positive.

R&D expense was $5.9 million in Q4 2018 compared to $6.6 million in Q4 2017, primarily due to lower R&D costs associated with POSIMIR, partially offset by higher costs for DUR-928. SG&A expenses were $3.5 million in Q4 2018 as compared to $3.3 million in Q4 2017.

At December 31, 2018, we had cash and investments of $34.5 million compared to $36.9 million at December 31, 2017. With that, thanks again for joining our call. And I will now turn the call over to Jim to discuss non-financial matters in further detail..

long-duration of up to 72 hours, driven by the fact that it contains 660 milligrams of bupivacaine in a controlled delivery formulation. And it’s easier to administer into a surgical wound, to the site where the nerves have been cut, not injected blindly around the wound.

Last week, we held an investor call, in which we announced that we are planning to submit in the first of half of this year a response to the complete response letter we received for the POSIMIR NDA. You can access a recording of this call from the direct website. We hired Dr. Lee Simon of SDG LLC to lead this response submission process. Dr.

Simon formerly served as the FDA’s division Director of analgesic anti-inflammatory and ophthalmologic drug products, the forefather of the division that is reviewing POSIMIR.

In summary, we believe that the present data package, which includes multiple adequate and well-controlled trials, addresses the issues raised in the FDA’s complete response letter and other correspondents as well. The filing requires only a modest incremental investment and a small team focused in this program.

We believe that this investment makes sense given the significant upside of a potential approval for POSIMIR. If successful with this strategy, we would work to partner the commercialization rights to POSIMIR thereby creating shareholder value and providing financial resources that would be directed toward the develop of our lead asset, DUR-928.

In summary, the strategy to accelerate the DUR-928 alcoholic hepatitis Phase 2a trial was successful with the rapid enrollment of the 30 milligram cohort in the severe AH patients. We are excited about advancing this study into the next cohort of severe AH patients at the 90 milligram dose level.

We are pleased and encouraged by the reductions observed in bilirubin in MELD as well as the Lille scores in both moderate and severe AH patients dosed at the 30 milligram level. We are gratified by the strong encouragement from our key expert advisers and clinical investigators to advance the study into the next dosing cohort.

The DUR-928 28-day NASH trial is on track to begin enrolling this quarter, with initial data to be expected by the end of the year. The DUR-928 Phase 2a topical proof-of-concept trial in psoriasis is on track to start dosing this quarter as well and to have top line data by the end of the year.

Indivior launched PERSERIS in the United States in Feb as planned. They maintain their peak annual sales projections of $200 million to $300 million, and we are pleased to be receiving quarterly earn-out payments associated with the product sales of PERSERIS.

And last week, we announced our plan to submit a response to the POSIMIR complete response letter in the first half of the year. If successful, this could lead to the FDA approval of the product this year. We would now like to take any questions that you may have..

Thank you. [Operator Instructions] Our first question comes from the line of François Brisebois. Please proceed with your question..

Hi guys. Thanks for taking the question. So just to double check this, on AH, you mentioned that you’re transitioning the program in Dr.

McClain, the University of Louisville, I was just wondering, is that did you always think of kind of keeping it going on your own? And can you talk about the parallel trial for him again? And then in terms of the results so far, in terms of MELD score or bilirubin, would you disclose these results anywhere in the future?.

To answer the last one, first, yes, as we get a few more patients. Right now, we have 8 patients. So, as we finish the next cohort, once we get a, enough of a critical mass that we feel good about we obviously feel very good about it already, but with only 8, we don’t feel comfortable disclosing it yet.

But just to explain to you all because I know it’s confusing, we started the year with the strategy to transition to dose the remainder of this 30 milligram cohort and then to transition the study over to Dr. McClain.

But based on the strength of the data that we have seen from these our next 4 patients, these 4 severe AH patients dosed at 30 milligrams, based on that, based on the fact that we enrolled so quickly and also on the strength of the push from the people conducting the trial, based on the responses they’ve seen in their patients, we decided that we, DURECT, are going to continue the study forward as well.

And so, we’re going to be working with Dr. McClain. His study will be a parallel, and really is basically the same protocol design but just a few subtle differences. So that study will be going on based on the NIH support and other support at the University of Louisville, and we will continue our trial.

And our trial then is now continuing with the dosing of severe patients at the 90 milligram level. So, I hope that explains it..

No, no, that’s great. That’s helpful.

And then when can we expect data from different dosing for that?.

It’s hard to say. I mean, obviously, the last cohort went very quickly, but past projection’s never good for future past performance and future projections and all that. But we’ll be updating as we go along.

One thing that I did want to mention is the Lille scores, because that’s a very important score, and people think about MELD and they think about bilirubin, but Lille is really important. It’s been meant to be, if you look at the literature, even a better prognosticator of survival than MELD scores.

And we’re very impressed by the Lille data that we have with this drug and we look forward to collecting more. So, but Lille is not given as a difference. You just basically take my measurements prior to dosing and then I’m dosed over a week’s time.

Seven days later, you take my measurements again, and that change is then calculated as a Lille measurement. And then that projects your probability of survival going forward..

Understood, understood. Okay.

And there’s no surprise here, the PSC is discontinued, correct?.

Yes, with regard to PSC, we aren’t doing any work in that trial at this point. We are discontinuing that study. It may be that we open that up again in the future, but only from a lot of strength within the company. We don’t have the resources to be able to do that as well. But we do have the resources to be able to pursue the AH indication.

And the AH indication is really exciting. It’s confirmatory of the animal work that we’ve done, of the NASH responses we’ve seen and then from some of the other patient population, so it fits very well with what we have. It fits well with the mechanism of action, how we know, where we know this molecule binds.

And we’ll fill you guys in more on that later. But I think there’s a lot of stars are lining up..

Okay, great. And then lastly, this might be more for Mike, with AH kind of going forward, I’m just looking more at the OpEx numbers. The R&D came down quite a bit, but the SG&A came up from the third quarter.

Just wondering how to think about this going forward now that you guys are bringing back AH full force?.

Yes, thanks for the question. With the trial infrastructure all up and running, IRB approvals in place and CROs in place and everything, the cost of doing a few extra patients to run through this next cohort is incremental compared to the cost of starting up a trial. So, it won’t have a huge impact on the R&D spend..

Okay, alright great. Thank you. That’s it for me..

Thank you. Our next session comes from the line of Adam Walsh. Please proceed with your question..

Hi guys. This is Neil Carnahan on for Adam. Just a quick question on the NASH truck, can you just talk to us a bit about the enrollment criteria that was used for that study? Thanks..

Well, we actually will have an investor call after we’ve dosed the first patient, and we’ll go through a lot more details on it at that point in time as to the stage of NASH and that kind of thing. But right now, we are just saying 60 patients, 3 different dose cohorts, but not getting into specific details.

But it should be remembered from the Phase 1b study that we did, we had 10 NASH patients per group. There were two different dose groups and 4 of those 10 were severe patients. They had psoriasis excuse me, cirrhosis. They had cirrhosis.

And we saw some pretty nice reductions in the CK-18s, the greatest reductions in the various scores that we had were in the patient that had the more severe disease. So, we do think this being a stress hormone that there’s an opportunity to help the more severe patients..

Great. Thanks for the time guys..

Sure..

Thank you. Our next session comes from the line of Ed Arce. Please proceed with your question..

Hi guys. This is Thomas Yip asking a couple questions for Ed. So, first question about the Phase 2 AH trial.

So, is the goal to move to the highest dose as in 15 milligram in the severe patients as well? And if so, are there any specific group of data that you’ll be looking at with the 90 milligram group?.

Well, what we’re doing is, with any dose escalation study, you dose and you look. And so, you look at first at safety and pharmacokinetics, and we didn’t see any signal there. And so, then you also look, obviously, at the biomarkers. And we are seeing some things that are very encouraging there and in the scores like Lille and MELD.

And so, we’ll collect data from the 90 milligram patients. We’ll start to get a sense of is there a difference between those two groups. And if we see something then we will go to the higher dose. The nice thing about this molecule, it seems like their high-end wise, we feel fairly comfortable. We have dosed patients at quite high doses by injection.

We have achieved plasma concentrations that are 1,000x our native level. So, we think we can give quite a bit, but it remains to be seen in this patient population. So, I know that will be defined as we go forward..

Okay, that makes sense.

And then a question for the Phase 1b in NASH, so there is no trial are all three dose groups enrolling simultaneously or are they going to enroll in sequence? So, therefore, for those initial data readouts in second half of ‘19, should we expect data from all three dose levels?.

Yes, we are going to be enrolling that all three cohorts simultaneously. So as far as the data, that will depend on the enrollment rate for sure. But I am encouraged by what I see so far. So, we will see..

Okay, that’s helpful. Thank you..

Sure. Thank you..

Thank you. Our next question comes from the line of Doug Adams. Please proceed with your question..

Thank you, but my questions have already been answered..

Thank you. Our next question comes from the line of Robert Manning [ph]. Please proceed with your question..

Can you foresee whether you are likely to go to the 150 milligram dose for the severe AH patients in parallel with the University of Louisville or is it too early to know about that? It seems to me a positive that you’re going ahead with the 90 milligram dose..

I think yes, Bob, it’s very much a positive that we’re going forward. We’re not going to be waiting for what’s going on in Louisville. Louisville will be a separate trial going on in parallel to ours, but not they want be beholden to one another.

So, if we dose the 90 milligram dose, we’ll see what kind of results we get and how they compare to the 30 milligram dose. At that point, we’ll make our decision if we decide to go to 150 milligrams or not. So that it will be kind of look at the data and then make a decision.

Likewise, with regard to letting some of this information out as we go forward in time. But so far, it looks very promising..

So, this means you’ll have 2 trials going ahead, which presumably means a higher rate of treating patients than we all would have thought 2 days ago?.

Yes, but they are, remember, they are different studies now.

And so eventually, one can look at the data across both studies, but one can’t in other words, if they do 3 patients and have something I mean, I’m just saying this, if they get the x number of patients in a given cohort and we haven’t had some patients, then you can’t combine those for any kind of scientific evaluation.

You can, from just across the board, look and see kind of thing, and that’s the nice thing about this drug, it has the tendency to when it talks, it lets you know and pretty much in black and white. So..

But it will be the same trial.

Your 90 milligram trial is the same as their 90 milligram trial or are there differences between those two?.

Only subtle differences and maybe collecting a little bit of additional data, they can do some additional blood chemistries and things that are more research kind of focus, they’ll do that. But other than that, it’s pretty much the same..

Great thank you..

Sure..

Thank you. Our next question is a follow-up question from the line of François Brisebois..

Yes, just a quick follow-up.

Can you just mention to people why you clearly had the Phase 1b data that you presented at EASL in April of ’17? Why, come back and do another Phase 1b? What’s the thought process there?.

In NASH patients, yes, the reason we are doing it is that first Phase 1b study was a single-dose study, albeit two separate doses given 2 months apart. And from the poster that will come out in Boston in April, you’ll see that 8 of those 10 patients actually repeated. So, there’s some interesting information that we can glean from that.

But those data demonstrate just a trend, not really a dose response, just a trend, a separation between the 50 and the 200 milligram.

But the responses showed a really nice reduction in those inflammatory markers CK-18 and excuse me, IL-18 and C-reactive protein and then of course, the functional marker of bilirubin being down and then the cell marker, CK-18 full-length clean. So, we saw those pieces.

The reason we’re doing this next Phase 1b trial is to understand what happens on repeat dosing in patients 1 day after another. So, we’re going to do 28 days of continuous dosing. The reason we are doing only 28 days is because that’s the coverage we have right now from a tox standpoint.

Remember, this molecule hasn’t shown any toxicity in any of the nonclinical studies so far. So, in order to do the chronic tox, we’ve had to scale up a tremendous amount. We actually had to make 18 kilograms of drug in order to conduct those studies because they had to be given just a massive amount of drug.

And we did scale it up, it took a little bit of time, we paid that price and we started those studies, and those studies will complete near the end of this year.

So as this year ends, we should have the data from this current NASH trial, which is that 28 days of continuous dosing, which will give us a sense of those 2 biomarker changes and we’ll also look at imaging of liver fat and the like, and so we’ll have some other additional data points that we can look at to help us understand what doses we would pick for a fulsome Phase 2 that would then be able to be started sometime next year.

And at that point, we’ll have the tox in place to be able to dose patients indefinitely, so we can do a 1-year study if we wanted, if we so wish, that kind of thing. Which we have to follow the new guidelines the FDA put on December for NASH studies..

Excellent. Thank you..

Sure..

[Operator Instructions] There appear to be no further questions at this time. I’d like to turn the floor back over to management for closing comments..

Okay. Well, thank you, everyone, for participating. And looking forward to talking to many of you over the coming weeks. And feel free to reach out, happy to talk..

Thanks. Bye-bye..

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