Greetings, and welcome and to the DURECT's Third Quarter Conference Call. [Operator Instructions]. Please note this conference is being recorded. It is now my pleasure to introduce your host, Mike Arenberg, Chief Financial Officer of DURECT. Please go ahead..

Good afternoon and welcome to our Third Quarter 2019 Earnings Conference Call. This is Mike Arenberg, Chief Financial Officer of DURECT Corporation. I will provide a brief overview of our financial results and then Jim Brown, our President and CEO, will provide an update on our programs. 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 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 those and other risks can be found in our SEC filings, including our 10-K and 10-Qs under the heading Risk Factors. Let me now turn to our financials.

Total revenue in Q3 2019 was $10.8 million compared to $8.0 million in Q3 2018. Q3 2019 revenue included $6.2 million recognized from our deferred revenue associated with the Gilead license agreement. And Q3 2018 included the $5 million milestone payment Indivior paid us upon NDA approval for PERSERIS.

Adjusting for those, total revenue was $4.6 million in Q3 2019 versus $3.0 million in Q3 2018. Product revenue, largely from the sale of ALZET Pumps and LACTEL polymers, was $3.0 million in Q3 2019 compared to $2.3 million in Q3 2018. The gross margin on our product revenue was 76% in Q3 2019. These products continue to be strongly cash flow positive.

R&D expense was $7.9 million in Q3 2019 as compared to $6.5 million in Q3 2018, primarily due to higher cost of DUR-928 and our depot injectable programs, which are largely covered by revenue from partners, partially offset by lower costs associated with POSIMIR. SG&A expenses were $3.8 million in Q3 2019 as compared to $2.9 million in Q3 2018.

Our underlying burn rate during the quarter was $6.0 million. At September 30, 2019, we had cash and investments of $57.1 million compared to $34.5 million at December 31, 2018.

Of course, subsequent to quarter end, we received a $10 million development milestone associated with our Gilead license agreement, so including that, our pro forma cash position would be $67.1 million. With that, thanks again for joining our call, and I will now turn it over to Jim for an update on certain of our programs..

alcoholic hepatitis or AH by injection, non-alcoholic steatohepatitis or NASH by oral dosing, and psoriasis by topical administration. I'll begin with our alcoholic hepatitis program.

During the quarter, we completed the Phase IIa open-label, dose-escalation clinical study, evaluating the safety and pharmacokinetics of 30-, 90- and 150-milligram doses of DUR-928 in patients with moderate and severe alcoholic hepatitis as determined by their initial MELD score. This was a multicenter study that was conducted in the United States.

AH represents a significant unmet medical need with no approved therapies. The near-term mortality for -- rate for AH can be up to 40%. In this study, patients with moderate and severe AH were treated with 1 or 2 doses of intravenously administered DUR-928.

Study objectives included assessment of safety, pharmacokinetics and pharmacodynamic signals or response to treatment, including liver chemistry, biomarkers and a prognostic score by virtue of the Lille model. On September 17, we announced completion of the trial and positive data.

The final enrollment for the trial consisted of 12 severe patients that had MELD scores between 21 and 30, with 4 of these from each of the dose groups and 7 moderate patients that had MELD scores between 11 and 20, for a total of 19 AH patients.

The Model of End-Stage Liver Disease or MELD score is a scoring system developed for staging patients for liver transplantation and is also used to assess the severity and prognosis of AH patients.

Patients treated with DUR-928 have statistically significant reductions from baseline of serum bilirubin levels on Day 7 and Day 28 and statistically significant reductions in MELD scores on Day 28. We used a University of Louisville study as a historic comparison.

And there was -- in that patient population, there was no statistically significant reduction in the -- in this historic patient -- in this historic control patient -- bilirubin levels or MELD scores on Day 7 or Day 28. This historic control study consisted of 15 patients with a similar baseline of liver evaluation scores and severity of disease.

Lille scores are used to -- in clinical practice to help determine the responses and prognosis of AH patients after 7 days of treatment. The lower the Lille score, the better the prognosis or probability of survival for that AH patient.

Patients with the Lille score of below 0.45 have a 6-month survival rate of about 85% versus those with Lille scores above 0.45, who would have only a 6-month survival rate of 25%.

When compared with the historical group from the University of Louisville alcoholic hepatitis trial, the DUR-928-treated patients had statistically significantly lower Lille scores. In the DUR-928 study, the median Lille score for the 18 alcoholic hepatitis patients who were treated 928, who returned for their Day 7 visit, was 0.10.

That compares to a median Lille score of 0.41 for the patients in the Louisville study. Additionally, 89% or 16 of the 18 patients treated with DUR-928 had a Lille score below 0.45 as compared to 53% or 8 of 15 in the Louisville study.

DUR-928 was well tolerated at all -- in all patients and at all doses level tested, with no drug-related serious adverse events reported at any dose level. Drug exposures were dose proportional and uninfluenced by the severity of the disease.

After being discharged on Day 2, one patient did not return for the scheduled Day 7 or Day 28 follow-up visits, therefore, the Lille, the bilirubin and MELD data that I just reported were based on 18 patients.

It should be noted, however, that all 19 patients treated with DUR-928 included the one that did not return for its follow-up -- for her follow-up visit, survived the 28-day follow-up period. By contrast, 2 of the 15 patients in the Louisville historic control group died in the first month.

We look forward to data from this trial being presented at the American Association for Study of Liver Disease meeting in Boston beginning later this week. A poster on comparative data analysis will be presented by Dr. Craig McClain on November 10 at the Hynes Convention Center, Hall B. The publication number for that poster is 1376.

Our late-breaking oral presentation will be given at 8:30 a.m. Eastern Time on November 12 in the main auditorium of the Hynes Convention Center by Dr. Tarek Hassanein, one of the trial's principal investigators. And the publication number for this is L09. Dr.

Hassanein will also present his slide and will be available for questions and answers on a Webex at noon Eastern Time on that same day. The Webex will be accessible from our website. The results from this study were also selected for inclusion in the Best of the Liver Meeting summary slide presentation in the alcoholic-related liver disease category.

We look forward to Dr. Hassanein and Dr. McClain's presentations of the results from this trial at this year's Liver Meeting, which is among the large -- one of the largest gatherings of scientists and healthcare professionals who are dedicated to preventing and curing liver disease.

AH is a devastating, acute condition with high mortality rates and a lack of effective therapeutic option. These trial results are exciting and provide valuable data to help us select doses for the Phase IIb study we plan to start next year.

AH is an acute form of alcoholic liver disease and is associated with long-term heavy intake of alcohol and often occurs after a recent period of increased alcohol consumption. AH is typically characterized by recent onset of jaundice and hepatic failure.

There were over 117,000 hospitalizations for patients with AH in the United States in 2016, resulting in hospitalization cost of $50,000 or more per patient. And in some cases, AH can lead to a liver transplant, the cost of which exceeds $800,000. In summary, AH represents a significant unmet medical need with near-term mortality rates as high as 40%.

Positive clinical data from patients dosed with DUR-928 has shown early reduction of serum bilirubin level and reductions of MELD and low Lille scores. Data from this trial have been accepted for a poster and late-breaking oral presentation at the AASLD meeting in Boston, which begins this week.

In addition, the late-breaking abstract was selected to be included in the Best Of The Liver Meeting slides. We believe that DUR-928 has the potential to be life-saving in AH patients, and we plan to start a Phase IIb placebo-controlled trial next year. The next program I'll update on is the DUR-928 NASH program.

We have passed the halfway point in enrollment in our U.S. NASH trial. The trial is a Phase Ib randomized, open-label clinical study evaluating the safety, pharmacokinetics and biological activity of DUR-928 in NASH patients with Stage 1 to 3 fibrosis.

In this study, we are evaluating DUR-928 at doses of 50 milligrams and 150 milligrams once a day or 300 milligrams twice a day. These NASH patients are taking DUR-928 orally for 28 consecutive days and are followed afterwards for 28 days.

There will be approximately 20 patients per dose group with a target of at least 15 evaluable patients per group for a total of approximately 60 patients in the trial. Key endpoints from this study include safety and pharmacokinetics and clinical chemistry and biomarkers as well as liver fat content by MRI-PDFF imaging.

We expect to complete this trial in the first half of next year. Now to the DUR-928 psoriasis program. During the quarter, we completed enrollment in our Phase IIa psoriasis trial.

This trial is a randomized, double-blind, vehicle-controlled, proof-of-concept clinical trial, in which DUR-928 is applied topically once daily for 4 weeks in patients with mild to moderate plaque psoriasis. After the treatment period, patients are followed up for an additional 4 weeks.

Each patient serves as their own control, applying DUR-928 to the plaque on one arm and vehicle to a similar plaque on the other arm. Trial is being conducted at multiple sites in the United States.

The primary efficacy endpoint is change in local psoriasis scores from baseline in the DUR-928-treated plaques as compared to that of the vehicle-treated plaques. Over 20 patients have been enrolled with the goal of obtaining approximately 15 evaluable patients. We expect to announce top line data from this trial by the end of this year.

Psoriasis is an inflammatory skin disease that causes the body to replace skin cells in days rather than weeks. Psoriasis affects an estimated 7.5 million Americans. And according to the International Federation of Psoriasis Associations, nearly 3% of the world's population or about 125 million people have some form of psoriasis.

Psoriasis causes itchiness and irritation and may be painful. There is no cure, but currently approved treatment can ease symptoms. Approximately 80% of patients with psoriasis have local disease, which can be treated with topical therapy. As such, topical agents remain the mainstay of psoriasis treatment.

Now to our drug delivery business, where we had 2 important announcements during the third quarter, the most recent being the Gilead HIV, hepatitis B deal. In July, we announced that we had licensed Gilead the rights to develop and commercialize a long-acting injectable HIV investigational product utilizing our SABER technology.

Gilead also received exclusive access to the SABER platform for the treatment of HIV and hepatitis B and for -- and exclusive option to license additional SABER-based products directed to HIV and hepatitis B.

Gilead made an upfront payment of $25 million, with the potential for an additional $75 million in development and regulatory milestone as well as an additional $70 million in sales-based milestone and a tiered royalty on product sales.

In September, we earned the first milestone payment under this program, for which we received a payment of $10 million in October.

Gilead has the exclusive option to license additional SABER-based products directed to HIV and hepatitis B for an additional $150 million per product in upfront development, regulatory and sales-based milestones as well as tiered royalties on sales. Gilead is a global leader in products to treat HIV and hepatitis B virus.

In fact, Gilead sold $14.6 billion in products directed to HIV treatment last year. They have been treating HIV patients for many years, and we are proud to be able to help them in this mission.

Our SABER technology, which is sucrose acetate isobutyrate extended release, is a patented technology that is designed to provide sustained release for long-acting injectable product. As a reminder, the SABER technology is also the basis of POSIMIR. With that transition, I'll now move to POSIMIR.

POSIMIR is an investigational, postoperative pain relief depot product that utilizes our SABER technology. It is designed to be administered directly into the surgical site to deliver bupivacaine for up to three days after surgery. In July, the FDA agreed to file our POSIMIR NDA submission.

The FDA has tentatively scheduled an Advisory Committee meeting for January 16, 2020. Dr. Lee Simon, who led our efforts to prepare the NDA submission -- resubmission is now leading our preparation efforts for the Advisory Committee meeting. Dr.

Simon is a physician and research scientist who served as the FDA's direct -- Division Director for analgesic anti-inflammatory and ophthalmologic drug products from 2001 until 2003 and is now a principal in FDG LLC, an FDA advisory firm.

As a reminder, in 2 adequate and well-controlled clinical trials conducted in patients undergoing inguinal hernia repair and subacromial decompression or shoulder surgery, POSIMIR demonstrated a significant decrease in pain and opioids consumed over the 0- to 72-hour period following the surgery as compared to placebo.

We believe these trials support the safety and efficacy of POSIMIR in postoperative pain and meet the requirements to be considered pivotal clinical trial. In all, the company has completed 16 clinical trials in the POSIMIR program, involving over 1,400 patients, with over 850 of whom have received POSIMIR and the remainder being control patients.

We believe this is a sufficiently sized safety database. The current FDA submission includes extensive new data and analyses that were not included in the original NDA, such as the PERSIST trial that included an additional 380 patients.

We believe that with safety data from the PERSIST trial included, there are now sufficient data to address the FDA's any concerns that might have raised in the CRL.

Regarding the market opportunity, there is insufficient postoperative pain control today, and it remains a significant problem, with studies indicating that approximately 65% of patients experience moderate to severe pain after surgery.

No -- excuse me, new non-opioid pain products are much needed in the postoperative pain setting, and we believe that POSIMIR could be an important contributor if approved. If approved, we would plan to license POSIMIR to a partner with excellent commercial capabilities in the hospital space.

Given the potential value of POSIMIR, we believe this deal could garner significant economic term. Final product I'll provide an update on today is PERSERIS. As a reminder, as part of our agreement with Indivior, we've received quarterly earnout payment based on a single-digit percentage of U.S.

net sales of PERSERIS, a long-acting injectable antipsychotic. This product was launched at the end of February this year by Indivior, with a field force of 50 representatives. And as one might expect for product so early in its launch, we've received modest earnout payment so far.

Indivior have previously announced that they expect peak annual revenue to reach between $200 million to $300 million. And this quarter, they stated net revenue is consistent with the group's expectations.

In summary, data from the DUR-928 alcoholic Phase IIa trial is compelling, and comparison to a historic control data suggests that the drug may be life-saving for patients that have no good therapeutic option in a condition with a high mortality rate. And when compared to historic controls, the Lille scores are most impressive.

We look forward to the poster presentation on Sunday and the oral -- late-breaking oral presentation on Tuesday 12 at the Liver Meeting in Boston. We are honored that these data were selected for a late-breaking oral presentation and for inclusion in the Best Of The Liver Meeting.

We are thankful for the support and strong encouragement from our expert advisers and clinical investigators. The DUR-928 28-day NASH trial is more than halfway enrolled, and we look forward to completing the trial in the first half of next year.

The 928 Phase IIa topical proof-of-concept trial in psoriasis has completed enrollment and is on track to have top line data by the end of this year. We look forward to the January Ad Com and to the potential approval of the POSIMIR NDA and a potential commercial partnership.

We're excited to be working with Gilead on a long-acting injectable HIV investigational product as well as the prospect of additional SABER products with them directed towards HIV and hepatitis B.

Most of all, we're excited to be getting a glimpse of what DUR-928 may be able to do in helping patients with devastating condition such as alcoholic hepatitis. And with that, we'd like to now take any questions you might have..

[Operator Instructions]. Our first question comes from Juliana Merle with Cantor Fitzgerald..

This is Ellie Merle from Cantor. Congrats on all the progress.

Just on DUR-928, can you give us a little bit more color on what endpoints or aspects of the data we'll learn more about at AASLD, I guess, versus what was in the top line release? And then secondarily, I guess, just in terms of the data, what are the endpoints that you think physicians will be most focused on in this detailed data path?.

There's a lot of good data that's been put together and calculated, and I don't want to jump the gun as far as -- I guess, we're so close to having that release in the embargo kind of thing. But with regard to that, you will see comparative data for the -- comparing the AAR, alcoholic hepatitis trial data as compared to the Louisville control.

And then we'll also get a good analysis, the breakdown of the various doses and how they performed, and also, the severity of the liver disease that the people came in with as compared. So you can look at average scores, different levels of bilirubin coming in and/or MELD scores and helping to keep. So that's the kind of thing we'll be looking at.

And as far as the clinicians and what they might be looking at, I'm a veterinarian, but if I were there looking at this stuff, I'd be looking at bilirubin, and I'd be looking at Lille. I don't know, WeiQi, if you would add anything to that..

Yes. I think the early change of -- or early reduction of bilirubin is very, very important, particularly for this group of patients. And of course, Lille, although it's developed for looking at a response rate of the patients to steroids, but then it's a still -- it's a response to the treatment.

And then -- so that's why it's also using a large part of the early change, the dynamic value of bilirubin, that's the most critical parameter..

True. And then, I think, about the prognostic indicators, they also take into account other things like creatinine for kidney and other functionalities of the liver as well. So all those things add up..

Got it. Looking forward to the data..

Thank you. We are, too..

And our next question comes from Adam Walsh with Stifel..

I appreciate all the detail and the update. Just a couple of questions. First one is on the DUR-928 in psoriasis, with those data coming by the end of the year.

Can you help us understand what you would need to see, kind of given the treatments that are out there for psoriasis? What would, in your mind, be a go-forward set of data, more of the parameters kind of thresholds that you're looking for there? And then a quick one on POSIMIR. I know that you had said in your press release that Dr.

Lee Simon was helping to prepare for the Ad Com.

Will -- as a consultant, will he also be presenting on behalf of the company at the Ad Com?.

I'll take the last one first. He'll definitely be at the Ad Com. I don't know whether he'll be presenting data or not. That's hard to say, but he's definitely as he's working with the team constantly, doing mock meetings and all that. So he's guiding the process, for sure.

As far as the psoriasis, more than 80% of patients who have psoriasis just simply have -- not simply, it's horrible if they've got it, but they've got these local lesions. They don't have systemic disease to the point where they need to go on immune modulators, and yet, they have disease that definitely is disruptive.

And to that end, the best thing they've got today are the topical agents, and there really hasn't been anything new in that arena for more than 50 years, I would say. It's been steroids and coal tar.

And so what 928 offers is a potential new opportunity for those patients to be able to treat themselves locally, perhaps without some of the issues that those things cause. And so we'll see how it goes. We're looking at the local severity index of these.

And I don't know, Michael, WeiQi, you want to add something to add a bit?.

Yes, I can add a little bit. Your question was what would we need to see from the trial to consider it as a successful trial. And we were able to get some feedback from multiple people in the derm space, companies that would be potential partners, prior to starting this.

And just to confirm that there was strong interest in a topical for psoriasis and to understand what they would want to see.

And so we tried to design the trial to make sure that if it was successful, it would be providing those potential partners with what they would be looking for, which is statistically significant win on the local severity indexes..

[Operator Instructions]. Our next question comes from Ed Arce with H.C. Wainwright..

I have a few on AH. And I guess, before I start, just congratulations on the early data. It does truly look like a breakthrough from the previous data we've seen..

Thanks. Yes, I'm very happy..

So first, as we look at the late-breaker abstract that's now been out for a couple of weeks, all 18 patients achieved the Lille score, including the severe patients, those that're around 30 or 90.

Could you comment, perhaps, on the four patients on the 150 dose? And what your thoughts are there?.

Well, I think -- I don't want to jump the gun with regard to the presentations that are coming next week. So I will just say, we -- definitely, we've looked at 30 and 90 and 150, and we have seen somewhat of a dose response, which is impressive considering you only have 4 patients per group.

It's very difficult to get anything like that out of such a small number of patients. But we definitely see something. I think it's interesting biologically. And from this, we can pick 2 doses, and we have, but we won't talk about that until next week.

But we definitely can select 2 doses that we're going to take forward into the Phase IIb trial next year, for sure. So we've learned a lot, and the drug has performed, to a large extent, as we would have expected. And it's been safe at all levels and shown an effect at all levels. So it's been impressive..

Yes. Perhaps a follow-up on that. Given the recent meeting on alcoholic liver disease, AH recently....

Chicago meeting, yes..

Yes, exactly.

What -- after that, what are your thoughts, perhaps, on what the regulators might think on using historical controls and how that might play into designs of future study?.

They did talk about using historic controls. It's challenging because what you need is -- because the practice of medicine evolves like everything else in life. And so you have to -- they would like, if you were to use the historic control that you have concurrently conducted trial.

So patients were conducted with the state-of-the-art for today as close as possible. And that you -- obviously, we want to match enrollment criteria that patients will be the same patients as much as possible. And then you have to have a very powerful statistically significant difference between that. You have to have enough patients to show it.

And so to that end, we actually match a lot of stuff, quite frankly, but I don't think that one could go with just 12 patients, just -- such a small number of patients and trying to achieve a conditional approval. I'm pretty certain we're going to have to conduct another trial, and that is what I expect we will be doing next year.

But it certainly gives us strength in evaluating the doses and the response that we've seen going into the next trial. I think that's a very important piece.

So I think we can use those data -- these historical control data as a way to help gauge that we're on the right track with the dose and the kind of trial that we want to conduct and the things we want to evaluate.

I don't know, WeiQi, do you want to add anything?.

No, that's clear..

So last question for me, if I may. Jim is just coming out of this. I know you hope to schedule a follow-up meeting with the agency and discuss next steps, especially given such standout data.

Could you perhaps just give us your thoughts on what preliminary Phase IIb design might look like? And is there potential for the Phase IIb to represent a pivotal 1 or 1 of -- or 2 pivotal studies that might be required?.

Well, at the end of the day, we'll be certainly interacting with the FDA as we design this trial. And we're working on the trial as we speak. And we have been for quite a while. The trial will be designed and powered to demonstrate superiority over the placebo. That's the most important thing.

And we would expect that all the patients will be given the standard of care and then either 928 or a placebo on top of it. The exact design and size of the study hasn't been finalized. We know that Gilead conducted a trial that they talked about last year at the AASLD meeting in San Francisco, and they used 50 patients per group for that.

They compared their ASK1 inhibitor against standard of care. And so -- unfortunately, that trial didn't work, but it -- that gives you some sense maybe. And at the end of the day, if -- would this trial be adequate for approval? I think the data will dictate.

If what we have seen with this current trial continues, if that -- so in other words, if we see those same kind of responses that we have seen, then I think there is a potential there that -- for an opportunity for conditional approval because there's an opportunity for this drug to be saving lives in the immediate future.

So that would be -- if we -- at the end of the day, I'm trying to say, we'll let the data dictate. If the data are good enough, then we will look to submit, and we'll obviously be happy to work with the FDA. But that'll drive it. The information will drive it..

Thank you. I would now like to turn the floor over to Mike for closing comments..

Okay. Well, thanks everyone for joining our call, and we look forward to seeing many of you over the weekend and early next week at the AASLD meeting. So exciting times. And thanks, again, for joining the call..

Thank you. Bye..

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