Greetings, and welcome to the DURECT Corporation First Quarter 2021 Earnings 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.

It is now my pleasure to introduce your host, Mike Arenberg, Chief Financial Officer. Thank you. You may begin..

Good afternoon, and welcome to our first quarter 2021 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 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 these 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 Q1 2021 was $2.2 million, compared to $1.6 million in Q1 2020. This year-over-year increase of approximately $600,000 was driven by the combination of an increased in collaborative R&D revenue and reversal of deferred revenue related to the now terminated Gilead Agreement that occurred in Q1 2020.

Excluding deferred revenue year-over-year increase in collaborative R&D revenue for Q1 was about $140,000. Product revenue, which is primarily from the sale of all debt funds was $1.6 million in both Q1 2021 and Q1 2020. Our gross margin from product revenue was 79% in Q1 2021 as compared to 76% in Q1 2020.

Product revenue continues to be strongly cash flow positive. R&D expense was $8 million in Q1 2021, compared to $7.6 million in Q1 2020. The slight increase was primarily due to higher expenses for DUR-928. SG&A expenses were $3.5 million in Q1 2021, as compared to $3.4 million in Q1 2020.

Our underlying burn rate during the quarter, excluding net proceeds from the equity financings was $7.4 million. In Q1 2021, we strengthened our financial position by raising net proceeds of $47.8 million from an underwritten public offering and sales under our ATM program.

At March 31, 2021, we had cash in investments of $97.2 million, as compared to $56.9 million at December 31, 2020. With that, thanks again for joining our call. And I will now turn the call over to Jim for an update on certain of our programs..

a 1.3 point reduction in mean pain intensity on a zero to 10 point pain scale. This represents a 20% reduction of pain and it’s historically significant. This trial also demonstrate at 67% reduction in IV morphine equivalent rescue opioid use, from a median of 12 milligrams in the placebo group to 4 milligrams in the POSIMIR group.

This is also a statistically significant. The opioid epidemic in our country is responsible for approximately 200 deaths every day.

The objective of the POSIMIR program is to give healthcare providers and in turn their patients a non-opioid alternative for post-operative pain control or at a minimum way to reduce the amount of opioids required to reduce post-surgical pain.

Subacromial decompression is a shoulder surgery used to treat impingement syndrome, a common repetitive use injury that causes pain in the arm is raised over the head. There are over 600,000 surgeries involving arthroscopic subacromial decompression performed each year in the United States.

We’ve used subacromial decompression as a beachhead to get POSIMIR on the market. And we believe the opportunity to expand the label to cover a broader group of surgical procedures represents significant upside. To summarize, we believe there are a number of product features that have a potential to differentiate POSIMIR in the market.

POSIMIR is the only approved sustained release bupivacaine product indicated for up to 72 hours of postsurgical analgesia from a single application. And in the pivotal trial demonstrated a statistically significant reduction in both the level of pain and the use of opioids.

POSIMIR contains more bupivacaine than any approved single dose administration controlled release bupivacaine product. And according to the investigators in our clinical studies, POSIMIR ease of application will be a welcome benefit.

In addition to these attractive features, we believe there are a number of potential avenues available to extend the label to include more surgical indications. We are in discussions with potential commercial partners for POSIMIR.

Our plan is to use the proceeds from a partnership to help fund our epigenetic program and our flagship product DUR-928 for the treatment of alcohol associated hepatitis. We are working to put a deal in place in terms of our partner to launch this year and expect that the deal would include an upfront license fee and royalties.

This quarter, we also appointed two new members to our Board of Directors, Gail Maderis MBA, and Mohammad Azab, MD, Master of Science and MBA. These two senior industry veterans bring extensive drug development, clinical research and medical affairs experience to our board.

In summary, this was an impressive quarter with the initiation of dosing in AHFIRM with robust clinical site startup and patient enrollment. Additionally, AHFIRM remains on track to initiate dosing in the UK, Europe and Australia later this year.

With approval of POSIMIR and the commercial partnership process underway with the strengthening of our balance sheet at any of the quarter with over $97 billion in cash and investments with the addition of two highly experienced board members.

But most importantly, with the publication of the mechanism of action for DUR-928, which helps explain the efficacy signals, including survival with patients and our Phase 2a AH trial, as well as the encouraging results from our Phase 1b NASH trial, and provides further scientific rationale for developing DUR-928 for the treatment of multiple other acute organ injury and chronic diseases.

Many diseases negatively impact the epigenome. DUR-928 is the first molecule in development that repairs the epigenome, restoring its functionality and it has done this today without significant side effects. This is a novel seemingly safer approach to medicine and Durect is at the cutting edge of this new field.

With that, we now like to take any questions that you may have..

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Francois Brisebois with Oppenheimer. Please proceed with your question..

Hi, thanks for taking the questions. I just wanted to hit on the AHFIRM trial here.

I think, can you just remind us in terms of duration maybe the comparison to Gilead’s previous effort and how similar or different it is so we can kind of gauge when to expect data here?.

Yes. I think we can – first of all, Francois, it’s good to hear from you. But I think we’ll have a – I know we’ll have a much better sense of all this as we get into the summer – a couple months into the summer as we hopefully it’s the last wave of the pandemic in the United States and as we get into Europe as well.

And we get the hospitals, they have a couple of months of normal functioning to get a sense of what the enrollment rates will look like when beds become free and that type of thing. But if one looks at the at the Gilead study, they did a trial where they dosed 100 patients, it was different from ours in a couple of fronts.

First of all, they followed the patients for six months and we’re following for three months. They also required biopsy, which limits the number of patients and we are not and they also required steroids of all of their patients and we are not. We’re leaving it to the individual condition to a treating.

And so all of those things should make our enrollment go faster, if you look at a comparison of, if they had three month duration versus ours, they would have completed their 100 patients in about 13 months, but with all those things I just described, it should be much faster.

And also, unfortunately, we’re seeing a lot more of this during pandemic we’re seeing more AH out there and AH because of increasing even prior to that. But I think we’ll be able to give a better sense of it all, probably in the summertime when it got a little more normal T under our belt.

Having said that though, we’re really happy with what’s going on right now. We’ve got about 20 sites up and running the patient enrollment’s going really well. So I’m really happy with where we are now quite, quite happy..

Okay. Okay, great. And just to switch the pause and mirror quickly, you talked about a partnership here in terms of the potential for label expansion. That could be very important.

Is this something that you would like to figure out before the partnership and then potentially launch this year? Or is this something that maybe the partner would actually deal with working on the label expansion afterwards? Because I assume be hard to get a label expansion before partnership and then even launch this year. What are your drive..

I think, right now, one should look at expected the launch this year would be on the current label as it exists. But the expansion efforts can take many fronts and there are – there is an opportunity for gain expansion in an easier path, which could be quicker, but still wouldn’t occur – I wouldn’t think this year, I think it would be in August.

And that end, we’re starting these processes now at the same time in parallel working on the partnerships. And so at some point as a partnership is established, then we would hand off to the partner interactions with the agencies..

Okay, great. And just I’ll sneak in one last one here. Congrats on getting the manuscripts published. I think that’s a lot of people have been waiting for it. Obviously, the epigenome is complex. The science behind it is still probably in early stages.

Can you just give us an idea of the reception of the MOA when you’ve spoken to, whether it’s the medical community, the scientific community or the investment community?.

I think it’s been very positive and I’ll let maybe WeiQi and Norman also can speak to this as well. But yes, it’s been – we have different levels of scientific background with investors. You have some investors who have a certain perspective and then you’ll have others that have more and more depending on their backgrounds, right.

And I think the ones that are MD-PhD based in their backgrounds are quite impressed. And it also, as I tried to allude to in our conversation today, it really helps to explain the remarkable results we saw to have the results we see that that there’s a reason for it. And so I think that does help as well.

But I don’t know, WeiQi, do you want it to or Norman speak to the reactions you get when you talk to people..

Go ahead, Norman..

Okay. WeiQi, this needs to speak first so that you can correct me afterwards. I think what was really as an empiric observation, the 2a study really stood on its own. It was truly remarkable, but it’s interesting how this epigenetic change has been percolating through the literature. And it’s still very new.

It’s less, less so for scientists, they’ve been aware of this and it’s a lot more work. But the two papers that Jim mentioned are really a very important one in NASH and the other one that Argemi paper on – in the pain alcohol-associated hepatitis. And so this really felt it forms the foundation.

So as I’m speaking to colleagues and saying, are you aware of this paper? And are you aware that this is the mechanism of action and getting a lot of very positive feedback, because people like to understand not just that it works, but why it works..

Yes, I probably will just add to that. When we talk to the scientific community or the medical community about our mechanism of action, many people, they would say, now we know how to categorize your compounds.

So for example – many times we saw people actually have a landscape of NASH, not so much for the AH, as we know, there’s not much companies are developing AH product. But in NASH is very crowded field commonly see those competitive fields on the diagram to categorize different compounds in development.

And then based on their mechanism of action frequently, no one knows how to play DUR-928. So now with the publication of the manuscript about the proposed the mechanism of action, I hope that eventually now to help people to place DUR-928 that’s one.

And a second, after it’s published, but just in the short month we were told that this paper is one of the three most read publications in general. So that tells us a lot about the interest about this mechanism of action epigenetic regulator..

Okay. Thank you very much. That’s it for me..

Thanks, Francois..

Our next question comes from the line of Kristen Kluska with Cantor Fitzgerald. Please proceed with your question..

Hi, good afternoon, everybody. Thanks for taking the question. The first one, so the President of AASLD recently discussed that his institution and others are citing 30% to 50% increases in hospitalizations and deaths related to some form of alcohol related liver disease over the past year.

So I wanted to ask if this is consistent with what you’ve been hearing from your colleagues across the space.

And also, how are you thinking about this trend moving forward in light of bars and restaurants and social gathering, starting to open and expand across the country?.

Great question. And I think Norman is the best person since he was most recently in practice to address it and so involved in setting up this trial..

Thanks, Kristen. Let’s say – so as I think, I was practicing until November of last year and we had seen a rising incidents of alcohol associated liver disease, both the chronic form where you see cirrhosis and the acute form where you see this alcohol associated hepatitis, this acute inflammatory condition.

It definitely seems to spike up from during the COVID – during the pandemic and a couple of papers have addressed that there was a paper in JAMA and one very – in a very similar time saying in the last shift. It affected different people differently. And so people with alcohol use disorders, some of them drank less than others drank a lot more.

And the ones who drank less, we don’t see of course, but the – I noticed, and then in speaking to my colleagues, as we’re setting up this trial, there is just a flood of people with acute alcohol, every patient, every hospital, we are speaking to the same thing that our hospital is full of these people frequently much, much younger group.

So as Jim mentioned, there’s an old – sort of an older group of lungs and drinkers, and then these group of young people that have started drinking fairly recently, but drink very heavily. And what you said is exactly true. We are just seeing this massive number of people with this acute illness that is frequently faced..

Okay. Thanks. And then trends about moving forward in light of the country opening up a little bit more..

Yes. That’s purely conjecture. I don’t think we know – I think people we can expect that some people will say, thank goodness. I can see my friends and will sort of become moderate drinkers or one of the dangers is people at home get bored and have a lot of alcohol lying around the house.

So sometimes social interaction increases the amount of drinking sometimes it decreases, I think we will continue to see something very similar, but this is honestly, it’s purely conjecture. I don’t think we know how it’s going to affect people..

Okay, fair enough..

Let me just add one thing. And that is even before the pandemic, we were just seeing how our hospital, my inpatient service was more than 50% acute alcohol. It was just this unbelievable thing. We had never seen anything like it..

Okay. Thank you for that.

And then has there been any work or will you consider evaluating the specific elevation of DNMT-1 and 3a across the AH, excuse me, patients, and whether there’s any correlation with the disease severity, MELD score, bilirubin or any other of the key measures you look at?.

That’s a great question. Probably, WeiQi, you might be the best to speak to that one..

Sure. As you know, this AHFIRM trial, we are not requiring patients to – we are not requiring the biopsy. So in order to determine DNMT-1 and 3a, as people have reported in the AH patients, we will need to do the liver biopsy to determine that.

And then in order to correlate whether MELD score of the responses to the treatment, as such as Lille score that’s one step further and then you’ll have to logical path patients. And then because this published paper, they only did the small number of patients subjects.

So to correlate with disease scores, then you have to validate the elevation of that DNMTs and then with a disease scores that will be a huge undertaken. So the AHFIRM trial was not designed for doing that in order to run the trial, we basically did not required you thought about..

But we’ll learn something from it. There might be a few patients that are biopsied, as you said, there were only 27 in that one study, but still it was interesting to learn and very important. And I do think eventually someone will do a study in maybe retrospective in a thousand plus patients.

And that’s what you’ll need to really start to draw correlations..

Yeah.

That’s actually a good point, that I cope with a public patient of the mechanism of action and then whether endogenous sulfated oxysterol as the epigenetic regulator, it would inspire a lot of other labs around the country or around the world to get involved into the study of AH well, or not just the AH or even just sulfated oxysterol with epigenetics and then with associated with the human disease under a disease.

That was basically, we all generate more data from multiple labs, and then many, many people will be interested in to the study of this mechanism..

I think you’re right, WeiQi, and I think that you made a point that just it’s worth emphasizing again that this paper has been screened. There’s a lot of interest in this paper and it’s been highly read and almost at record amounts.

And so to that, that we are at the cutting edge and so hopefully others will start to join and we’ll see an expansion of this field of understanding the epigenome so much better..

Okay. Thank you.

And then the last question that I have is, well, I know you’re focused on your current pipeline and program, but since you’ve done a lot of work here around the mechanism of action, and you’ve seen some data to validate that in the clinic, how are you starting to think about future opportunities around DUR-928 in light of these findings?.

Yes, that’s a great question. And the team is actually spending a lot of time looking at the next steps for not only DUR-928, but we also have an SAR what they call it structure activity relationship program ongoing as well looking at analogs and the like.

So we’ve got a lot of research going on and my expectation is that in the future, we will be able to communicate you know what, where we’re going next with our epigenetic program, but DUR-928 is a great place to start, but not the only place, and there certainly are multiple things that can be played with this DUR-928 instruments..

Thanks, everyone..

Thank you, Kristen..

Our next question comes from the line of Ed Arce with H.C. Wainwright. Please proceed with your question..

Great. Thanks for taking my questions..

Yes. Hey Ed..

Hi, congrats on the important milestones reached in this first quarter. Few questions for me, first on your AH study, you mentioned very early days, of course, but already half or more than half the sites in the U.S. that you plan to have opened are now opened.

So wondering how your early enrollment, I know you mentioned there were some patients already as enrolled as well. How has that fit with the target at this time with your internal projections and related to that is, as you think about the challenges and the successes that you’re seeing early on and enrolling patients in the U.S. hospitals.

What do you think is going to translate as you expand into sites ex-U.S.?.

Well, we’re certainly learning a lot and maybe I’ll take the second one first and I’ll let – let me just say first, I guess I’ll start with the first one. As far as patient enrollment goes, it’s going very well. Actually, faster than I had thought we would. And so I’m really pleased with where we are with patient enrollment.

And as far as sites in the U.S. kind of comparing getting started here versus starting in Europe, I know there’s a lot of planning going on in enormous group. So maybe I’ll let you address that one moment..

Yes. So we’re visible, as Jim says, we’re very pleased with the rate of enrollment. One of the big mistakes people frequently make is thinking enrollment will be easier. It’s always harder than you expect. I think in our case, we are more or less to on track as anticipated. The centers in the U.S.

are truly the top centers nearly all of the best known investigators in the best centers are in trials. So I’m very pleased with a group of investigators. The Europe will be very interesting, because some areas are still facing some COVID problems, but I think we’re hoping that by the time the – we start to work there.

So then the a little later this year that we’ll start to see that tailing off with more vaccinate. And then where we’re targeting potentially Australia as well, where that should be its a little further, but distance is no longer an issue with not resume with everything. And we have very good investigators.

So we were excited about the potential to expand into the different areas. And I think the diverse data will make the study that’s much better..

All right, great. And then turn into POSIMIR, I know you mentioned that you’re still comfortable with the timeline of reaching a collaboration agreement sometime later this year. I’m wondering what areas of label expansion are under consideration either and/or by you and your potential partners..

I think if you look at what we’ve done with the drug, right, we did work in both soft tissue and hard tissue, the soft tissue trial being hernia and the hard tissue being subacromial decompression, we got approval for subacromial decompression.

So it – and so one would hope then to look to expand into other surgical sites that the holy grail would be to have general surgical use. And a step back from that would be some areas of soft tissue gamma surgery those kinds of things. So we’ll have to see how it all unfold..

Okay, great.

Final question just on your recent raise now with the cash level that you have, what are you projected your runway?.

Sure.

I’ll let Mike, you want to speak to that?.

Sure. As we don’t provide cash burn forecast going forward, but this most recent quarter of the burn was about $7.4 million and last year to about $35 million for the year. So certainly have well over two years of cash going forward, comfortable to say that. But like I said, we don’t provide specific cash burn forecasts..

All right, fair enough. Thanks, Mike. Appreciate it..

Yes. And that would be without a positive deal or out any revenue coming from POSIMIR either, so..

Our next question comes from the line of Michael Morabito with Chardan Capital Markets. Please proceed with your question..

Hi Jim, thanks for taking the questions. I want to go a little bit deeper into the AHFIRM, and the potential for a survival benefit. I just wanted to know what – can you remind us what specifically FDA’s communicated to you about potential ability to file for an NDA if the survival benefit is reached.

Does that change with the Fast Track Designation that you’ve had in that, does that impact the timing of when you see that? And just generally, how often are you evaluating survival? Is it just a DSMB meetings or more frequently? If you could just give us a little bit more color there about how often are you looking at that?.

Sure. I’ll let Norman, and of a potential way to comment. I would just say that we do have a DSMB evaluating this and survival is the benefit. And I – the approach that we’re taking right now is that if we see a robust enough survival benefit given the unfortunate circumstance where we’re talking 26% mortality at 28 days and 29% at 90 days.

So we’re talking a very high rate of danger for these patients, and many of them are younger. And so to be able to make a difference there it’s one could, then I think it there’s a potential, there would be – if the data are as, I hope they will be – we would be able to submit an NDA based on this trial.

It would be more, and I think the best analogy that one can consider for this is more like an oncology product where you’re looking at survival benefit. But Norman, do you want to speak to how often the DSMB needs or how does that work, go ahead..

Right. So Michael, very unlikely FDA will not say go ahead and do the trial. We’ll give you approval. It’ll depend on the results.

But speaking to a very sophisticated advisor and when looking at the statistical package, he made the point that if it is as good as the two-way data, and if you were saving patients’ lives, FDA’s enter a lot of pressure not to give you approval, if you have a life saving technology.

So we can’t promise to that that we could file after a single trial. But we’re based on if it looks like a two-way study, then I think it would be a very reasonable decision on our part to do that..

Okay, great.

Just one follow-up, you had mentioned going back and looking at the NASH program, is it possible that we could see initiation of a new NASH trial sometime in the next 12 months and for the data from earlier trial that you mentioned that you’ll be presenting? Do you have any idea when and where you might be presenting that data?.

Yes, I believe that was in the press release.

Was it not Mike?.

Always at the future medical conference [indiscernible] discuss what’s going to be in a poster or a presentation prior to the abstracts getting published. So we’re the same future medical conference..

Okay. So that’s where we sit today. And as far as, the next steps in – working on the next steps right now in that it’s really helpful to have this mechanism of action data and the information out there on the mechanism of action side, because it fits not only variable for age, but also it fits well for NASH.

And so now we kind of can put DUR-928 into a circumstance for how it might help, where and when we see the data coming up with the needs, when some of these – this information is released, you’ll see that we’ve done some work in more severely ill patients within pharmacokinetics and the like, and we’ve learned a lot of interesting information from that.

So right now we’re working with thought leaders in this space of NASH, understanding how we want to approach NASH. There’ve been so many trials out there and so many, unfortunately so many failed circumstances out there.

That I think you need to as an old carpenter thing measure twice, we’re definitely measuring multiple times and evaluating where would be the best place knowing the mechanism of action for DUR-928 and knowing the variabilities that are out there to pick the right patient population and the right study to conduct to get the most information.

And that’s what we’re doing now. So once we have a good sense of that demo, we’ll talk about it more..

Okay. Thank you very much for taking the questions..

Sure, thank you..

There are no further questions in the queue. I’d like to hand the call back to management for closing remarks..

Okay. Well, I want to thank you all for your time today. And as always, if you have any further questions, please feel free to give us a call. And thank you all and take care, bye..

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day..