Greetings. Welcome to the DURECT Corporation Third Quarter 2021 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Mike Arenberg, Chief Financial Officer. Thank you. You may begin..

Good afternoon and welcome to our third 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 revenues in Q3 2021 were $2.2 million compared to $1.8 million in Q3 2020. Collaborative R&D revenue increased by approximately $137,000 year-over-year; product revenue, essentially from the sale of ALZET pumps increased from $1.5 million in Q3 2020 to $1.7 million in Q3 2021, with a gross margin of 79%.

Product revenue continues to be strongly cash flow positive. R&D expense was $8 million in Q3 2021 as compared to $6.9 million in Q3 2020. The increase was primarily due to higher clinical trial expenses and higher contract manufacturing costs for DUR-928. SG&A expenses were $3.2 million in Q3 2021 as compared to $3.4 million in Q3 2020.

Our underlying burn rate during the quarter was $7.6 million. At September 30, 2021, we had cash and investments of $80.9 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..

Thank you, Mike. Hello, everyone. Thank you for joining us today for our 2021 third quarter update. We are proud of the enrollment rate and affirm our Phase 2b study of DUR-928 in patients with severe alcohol-associated hepatitis.

We made excellent progress in opening additional clinical sites with the addition of 10 new clinical sites since our last earnings call. We now have 36 sites enrolling for a firm, which represents more than 50% of our goal.

Several of these new sites are in Australia and we are closing in on getting clinical sites up and running in Europe and in the UK. With strong interest from U.S. and ex-U.S. thought leaders to join the trial, we have decided to expand the number of clinical trial sites to 60 or more.

The United States Adopted Names Council, USAN, has approved larsucosterol as the nonproprietary or generic name for DUR-928. We are making good progress in our POSIMIR partnering negotiations. DUR-928 was also the topic of a podcast on regenerative medicine and the epigenome with Moira Gunn from NPR’s TechNation.

The link to this podcast can be found on TechNation radio podcast Episode 21-37. The title is One-way Streets in Pompeii. We are the third segment of this podcast. And the DURECT interview starts at 38 minutes, 42 seconds in. Let’s now move to our most important program.

DUR-928 now called larsucosterol in alcohol-associated hepatitis or AH and the AHFIRM trial. AHFIRM is our ongoing Phase 2b efficacy and safety study. It is a placebo-controlled, double-blind, multinational study targeting 300 patients. There are three treatment arms, 30 milligrams and 90 milligrams of larsucosterol and a placebo arm.

As with the Phase 2a trial, patients in the AHFIRM trial receive an infusion of larsucosterol or placebo on Day 1. And if they are still in the hospital on Day 4, they receive a second infusion. The primary endpoint for the trial is 90-day survival.

We have been enrolling patients since the end of January and have been continuously adding new clinical trial sites. We now have opened 36 sites, which represents more than 50% of the 60 plus sites we have planned for this international study.

We now have sites opened in Australia and are closing in on getting clinical sites up and running in Europe and in the UK. During the quarter, we expanded the target number of clinical trial sites to more than 60. This was due to interest from U.S. and ex-U.S. thought leaders to participate in the trial.

We continue to be pleased with the enrollment rate. We expect the overall rate to accelerate as newer sites hit their strides. We look forward to providing an update to our expected completion date once this latest wave of COVID-19 passes and the hospital environment at our clinical trial site stabilizes for a few months.

Based on enrollment so far, we are hopeful that we will be in a position to guide to a shorter timeline to trial completion. The main focus of the company is to execute this trial to the highest level of quality and in a timely fashion. AHFIRM is the highest priority in the company.

There are approximately 132,000 hospitalizations per year in the United States for AH and there is no approved treatment. What physicians have available to them today primarily involves abstinent and supportive care, which includes nutrition and hydration.

Corticosteroids are used in some cases, but have been shown to have no survival benefit at 90 days or at 1 year. The average overall mortality for AH across clinical trial is 26% at 28 days, 29% at 90 days, and 44% at 180 days and has not improved in the last 50 years.

Unfortunately, prior to the COVID-19 pandemic, the incidence of AH was increasing in younger patients. And during the pandemic, alcohol consumption in the United States increased by about 30%. This has led to a dramatic increase in hospitalizations for AH as well as many more AH patients being listed for a liver transplant.

This dilemma has been described in the literature, including a recent article in JAMA Network Open. This paper notes approximately 6% of severe AH patients are listed for liver transplant. During the pandemic, the percentage of patients waiting for a transplant due to AH increased from 1.4% to 2.4%. This represents a 71% increase.

The percentage of patients who received a deceased donor liver transplant increased from 1.6% to 3%. This represents an 88% increase. AH has a significant economic cost to the healthcare system. The average hospital stay for an AH patient is approximately 1 week, with many staying significantly longer.

The average hospitalization cost for an AH patient is more than $50,000 in the first year. Alcoholic liver disease is becoming a leading cause of liver transplants in the United States and the cost of liver transplant exceeds $875,000. Let’s now review why we are so optimistic about the use of larsucosterol in the treatment of patients with severe AH.

In our first trial of larsucosterol and AH patients, all 19 patients, including the 12 severe AH patients, survived. Additionally, 14 of the 19 patients were discharged in less than 4 days after receiving only one IV infusion of larsucosterol.

The prognostic scores from the AH patients in this trial, including the Lille, MELD, bilirubin and other biomarkers were improved compared to baseline. Larsucosterol was also well tolerated by all the patients and at all the doses evaluated in the Phase 2a trial. There were no serious drug-related adverse events reported in this trial. Dr.

McClain from the University of Louisville, or UL, conducted a comparative analysis of the 8 severe AH patients treated with larsucosterol in the 30 and 90 milligram cohorts from our Phase 2a trial, with 13 severe AH patients from the UL study. The UL patients received supportive care, including steroids.

Both groups had similarly high initial MELD scores and high moderate discriminate function scores. The larsucosterol-treated patients had substantially lowered legal scores as compared to the UL group and all of the larsucosterol patients survived the 28-day follow-up period, while 3 of the UL patients did not survive past 28 days.

This analysis was presented by Dr. Craig McClain at the 2019 AASLD Liver Meeting. A slide of this comparison can be seen in our corporate deck on the DURECT website.

In addition to the clinical trial results, we also have numerous in vivo animal models supporting data that demonstrates larsucosterol’s potential against multi-organ failure, which can occur in AH patients. Larsucosterol’s mechanism of action helps us to better understand the remarkable results we saw in the treatment of AH.

Larsucosterol is an endogenous epigenetic regulator. It binds to and inhibits the activity of DNMT1, 3A and 3B. DNMTs are epigenetic regulating enzymes that add methyl groups to DNA in a process called DNA methylation.

Treatment with larsucosterol in stressed liver cells can lead to decreased DNA hypermethylation and modulated expression of more than 1,000 genes that are associated with multiple crucial cellular signaling pathway. In July of 2019, Argemi et al published a study in Nature Communications.

In this study, the gene transcription patterns of AH patients were found to be distinctly different from the control subjects and the patients with other liver diseases. In the AH patients, there was DNA hypomethylation, ultra transcriptomics and liver cell dysfunction.

The expression of DNMT1 and DNMT3A were found to be profoundly increased in AH patients, but not in control subjects or patients with other liver diseases. Larsucosterol binds to and inhibits these DNMT, which adds to the strong rationale for evaluating larsucosterol as a therapeutic agent for patients with AH.

The results of this study suggest that inhibition of the DNMTs could be a novel therapeutic approach for AH.

In conclusion, the results from our Phase 2a study, the comparative analysis with the UL severe AH patient data, the in vivo animal model results and the correlation of larsucosterol mechanism of action with the epigenetic dysregulation seen at AH patients, all together make us optimistic regarding the potential for the AHFIRM trial.

Given the high unmet need for hospitalized AH patients, the lack of current treatment options, and the high mortality rates, we believe a robust survival benefit in the AHFIRM trial will support an NDA filing. In addition, the FDA has granted fast track designation for larsucosterol in the treatment of AH.

42% of new drugs launched in the United States in 2018 were approved based on a single trial. Next, I will update on the larsucosterol NASH program. In 2020, we reported positive results from our 28-day Phase 1b trial of DUR-928 in 65 NASH patients with stage 1 to 3 fibrosis.

This was a randomized, open-label multicenter study of larsucosterol and NASH patients conducted in the United States. Larsucosterol treatment in this trial resulted in a reduction from baseline of liver enzymes, liver fat by imaging, liver stiffness by imaging and biomarker with serum lipids and insulin resistance.

Many of these reductions were statistically significant. A statistically significant 24% reduction from baseline of plasma to growers, or TG, was seen in 16 patients who had baseline TG levels above 200 milligrams per deciliter. Larsucosterol was well tolerated at all three doses evaluated.

There were no serious adverse events reported during the study. The clinical results we’ve observed with larsucosterol and NASH patients, together with the continued safety profile in patients with severe chronic liver disease and its mechanism of action, all support further evaluation of larsucosterol potential in NASH.

We are planning our next steps for NASH.

Next, to the POSIMIR program, POSIMIR is a novel, non-opioid sustained-released local anesthetic that is approved to produce post-surgical analgesia for up to 72 hours following arthroscopic subacromial decompression, POSIMIR contains more bupivacaine than any other approved single-dose sustained release bupivacaine product.

We believe this may be an important differentiator in the marketplace. Another potential differentiator for POSIMIR is the ease of application. POSIMIR applied directly into the surgical room, the primary source of post-surgical pain.

At the end of surgery, POSIMIR is administered into the subacromial space under direct arthroscopic visualization where it continuously releases bupivacaine for 72 hours or more. FDA approval is based on the pivotal trial in arthroscopic subacromial decompression surgery with an intact rotated cost.

The primary outcome measures were mean pain intensity and total opioid rescue analgesia administered, both evaluated over the first 72 hours after surgery versus placebo. 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 in entering their patients a non-opioid alternative for postoperative pain control, or at a minimum a way to reduce the amount of opioids required to reduce post-surgical pain.

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

We view subacromial decompression as the beachhead to get POSIMIR on the market, and we believe the opportunity to expand the label to cover a broader group of surgical procedures represent significant upside.

POSIMIR partnering discussions are advancing nicely, and we are on track to license the United States rights to a partner with an existing hospital sales force. Our plan is to use the proceeds from this partnership to help fund our epigenetic program and our flagship product, larsucosterol, for the treatment of alpha-associated hepatitis.

In summary, we are making great strides with the firm. We have 36 sites up and running. We are pleased with the patient enrollment rate. With 36 sites recruiting patients, we now have opened more than half of the 60-plus sites planned for the trial. We have sites now open in Australia, and remain on track to initiate sites in the UK and Europe.

Elevated the DNMT expression and DNA hypermethylation reported in the liver samples of AH patients fits with our super steroids mechanism of action and helps to explain the efficacy signals, including the survival of patients observed in our Phase 2a AH trial.

Since the pandemic, alcohol consumption has increased by 30% in the United States, and the percentage of AH patients waiting for and receiving liver transplants have increased substantially. We have fast track designation by the FDA for our AH program. We expect that if we achieve a robust survival benefit, this trial would support an NDA filing.

The commercial partnership process for POSIMIR has advanced, and we are on track to put a partnership in place. The United States Adopted Names Council, or USAN, has approved larsucosterol as the nonproprietary or generic name for DUR-928.

DUR-928 was the topic of a podcast on regenerative medicine and the epigenome with more recon from NPR’s Tech Nation. Beyond AH, the mechanism of action for larsucosterol provides for further scientific rationale for developing treatments for other acute organ injuries and chronic diseases. We’d now like to take any questions you might have..

Thank you. [Operator Instructions] Our first question comes from Kristen Kluska with Cantor Fitzgerald. Please, proceed..

Hi, good afternoon, everyone. Thanks for taking my questions..

Sure.

How are you doing?.

Great. Thank you. So the first one, you noted there was strong demand from hepatologists to join the study, which was one reason for expanding the number of sites. What I wanted to ask – it would be interesting to hear more about this, particularly how they have learned about the program.

Are these physicians who are aware of the progress being made, particularly in light of the late breaker at AASLD 2 years ago? And then would you say that the increased rates on some of these publications, including the one you cited, are making physicians starting to look more at the drawing board in light of this heightening demand?.

Well, there certainly is more awareness of the disease in the general population. And there is no, unfortunately, good therapy out there today. But I think it’s more just kind of grassroot with – people either were at the talk or have heard about it and listen to it. But I’ll let Norman, the one fielding these calls address that..

Hi, Kristen, this is Norman Sussman. I think the presentation at AASLD in 2019 was really a turning point. And it was extremely well attended, one of the most popular sessions at the meeting and the presentation that Dr. [indiscernible] did was really well received and generated a lot of interest.

Then secondly, today is actually my 1-year anniversary of starting at DURECT. But a lot of those people I know personally having been a hepatologist and worked in the field for many years.

And so a few of them, I would call, but they were all aware and sort of the combination of a personal contact and awareness of the program, along with the real lack of efficacious therapies has spurred a lot of interest. And we have had practically nobody who didn’t want to be in the trial and a lot of unsolicited calls for people wanting to get in..

Thank you for that.

And with the updated guidance today that you’re looking at 60 plus total sites, could you please breakdown or are you able to comment on how the split is going to be amongst the three continents?.

We can give a range of that, Kristen..

Yes. Yes. So the vast majority are in the U.S. because we started here earlier, and we’ve had a lot of run time to get them up. We have – we’re planning I would say, 8 to 10 in Australia and somewhere between 14 and 18 in the UK and Europe..

Okay, thanks. And then the last question for me. In some of prepared remarks, you noted that you’re hopeful you could potentially be in a position to have a shorter time line to trial completion.

Is this based off of how you kind of internally thought about the guidance, especially in light of some of these uncertainties with COVID-19 or are you perhaps looking at it from the standpoint of what was done in some of these other late-stage trials?.

I think it’s a bit of both. I mean we set our initial patient per site per month estimates based on the – our own experience in the Phase 2a trial and some of the work that Gilead and others have done. But then certainly, COVID has had an effect, as we all know because it’s taken steady coordinators out of hospitals not being considered essential.

And it’s reduced or eliminated transfer of patients between hospitals and the like. So it’s definitely changed the environment, which is now starting to change back more towards normal. So I think it’s probably both.

I don’t know if Norman, you want to comment further on that?.

Yes. It’s sort of a mixed response because altar consumption increased that the pandemic made a lot of hospitals and especially research – the research side. So research is sometimes considered less essential in addition to which many hospitals wouldn’t allow coordinators into the hospital.

So you have sort of higher demand, but sort of a limitation on the supply side. That is improving, and we’re starting to see a lot more sites coming back into what I would call normal study maintenance..

Great. Thank you all..

You are welcome..

Our next question is from Francois Brisebois with Oppenheimer & Company. Please, proceed..

Hi, thanks for taking the question.

I was just wondering in terms of the improvement of the pandemic situation coming back to normal, and the more sites, can you just help us figure out a little bit what would give you confidence to give us more of a precise study completion time or data rollout time? Is it just the pandemic or is these more sites or just any color on when you say potentially shorter with more sites, what were the prior expectations and how does that get impacted by more sites versus the pandemic slowing down?.

Yes. Well, the prior expectation was the September of ‘23 and the fall of ‘23, which is the number to-date excuse me we have at – on the clinicaltrials.gov site. And so we are always seeing whether or not we can’t move that date back to the left and get it done sooner. As you know, we have always said, and it’s still true.

I think we have to wait for a number of months post-Delta. Now, to clear through the hospital to really get a good sense of who they bring back, who – what staff has been vaccinated versus not receiving some of these kind of things and all of that come to pass.

So, we know – get a sense of what is the reasonable estimate of the patient per site per month, that plus some of the newest sites that we are adding on, may well accelerated. But we want to wait until we have that experience before we make that projection..

Okay, no, that’s helpful. And then, in terms of timeline, just on the POSIMIR side, you said continued progression? Just a question there, it’s kind of two-fold.

Is the potential money that can come in from that? Are you speaking more on the royalty side, or is this a strong focus on an upfront payment? And with that money, just help with a firm, or is there a certain amount of money, let’s say that could help you go after other acute indications with DUR-928? Thank you..

I will let Mike speak to invest me, the money coming in will be not selling shares, which is always a natural way to bring money into a company. And so that would be our preference to be able to do that to look to drive forward the epigenetic program, certainly for our firm, but hopefully, potentially for others as well.

Mike, if you want to speak to that more specifically..

Sure.

So, Frank, your first question was related to the timeline?.

Yes, just the timeline? And are you mostly focused on an upfront or more on a royalty kind of side with potential partnership?.

So, with regard to the deal structure, we don’t want to comment too much in the middle of negotiations. But I would expect it will have an upfront payment and milestones and royalties. I don’t really want to get into how much money to expect from the deal..

Understood. Thank you..

[Operator Instructions] Our next question is from Ed Arce with H.C. Wainwright. Please proceed..

Hello, everyone. This is Thomas Yip asking a couple of questions for Ed. Congratulations on your progress this quarter.

First question, regarding the AHFIRM you mentioned 10 new sites have been added? Can you tell us what some approximate geographical breakdown of the remaining 25 sites? And what are some mitigation activities against potential COVID delays as you mentioned the Delta surge?.

I think Norman kind of laid that out.

But I think we are saying that these initial sites are in Australia and we are getting closer in the UK and Europe, I think he said between 14 to 18 in the UK and Europe and some additional sites, another 5 to 7 or so maybe in Australia and I guess the second part of your question was the effect of Delta on the enrollment?.

What are some mitigation measures that…?.

Mitigating measures?.

Yes.

Due to...?.

Yes, Norman, any mitigating measures that one could put in place?.

Yes. And it’s – so what we have tried to do right from the beginning is have a very broad cover, a very wide range of sites and cities and states, so that if there was a surge in one place, it might be offset by lower COVID problem in others. Offshore, we obviously we can’t control any of that, but we are constantly working with the sites.

Here if one site is temporarily in lockdown, then we just have to focus on others. But in general, I feel as if things are improving, there is especially in some of the biggest cities there is more control and more confidence that they are going to get the patients in.

It’s still being a bit of an issue and – but I don’t think there is much we can do about it. It’s honestly, a pandemic, I wish we had more control over it, but I have to just admit we try to roll our focus to places that have less of a problem until the problem places to open up..

Understood. Perhaps switching gears to larsucosterol potential in NASH.

Can you go over some – what are some possibilities and the indication and when do you hope to make a decision?.

Yes. That’s the – the exercise we are undertaking right now is looking at, we have the nice position in a race at this point, being able to see those in front of us where they stumbled. And so we can get a good, a better sense, I think of which patient populations to look at.

I think the nice thing, really strong thing about 928 is its breath of activity, not only attacks, the accumulation of lipids and the distribution of lipids where some are focusing, but it also deals with the inflammation and the fibrosis. And so it – and allowed for regeneration, so it hits kind of across the board in a very safe way.

And so we know we have tested it in the sickest patients from a liver standpoint, and that’s the issue there. So, I think we have got an open field with regard to how we might want to approach NASH. And now we are working with thought leaders to get more specific on that.

I would like maybe ask Norman to wait see if you guys would like to comment further on that?.

Yes. I would just say it’s a work in progress at the moment. As Jim says, everyone is aware that there have been a lot of drugs that have gone into testing and failed. And so we are learning from those and we are assessing. Everyone knows it’s a big market.

The question is, what can – what segment of it is going to work and what segment is actually druggable? I would say the other major advantage we have is the safety profile, as a number of drugs have proven to have some safety issues. And as far as we can tell, even – and as Jim mentioned, very sick liver patients.

The safety profile of DUR-928 or larsucosterol seems to be very favorable..

Got it. Understood. Thank you so much for this kind of questions and we look forward the progress and commitment..

Sure. Thank you..

Our next question is from Jeffrey DeSeibert with KB Advisors. Please proceed..

Good afternoon, and thank you for taking my call and congratulations on a lot of progress. And also, thank you very much for the very timely, regular updates to ClinicalTrials.gov, it’s very helpful. I have a few questions on UK, Europe. You have shared with us data on the number of hospitalizations in the U.S.

Do you have any data on the number of age hospitalizations in the UK and the EU? I guess they are two different – they are now two different entities given Brexit.

But do you have any data you could share with us? How many people in the UK or the EU are hospitalized for this?.

We are gathering at this point. I don’t feel confident enough to be able to share much beyond we believe that the market is similar in size if you put the two together.

Perhaps Norman, based on your years of experience in the field, could you and certainly I can tell you Jeffrey, we are working with the absolute top of the top thought leaders, both in the UK and in Europe. They are very excited about being able to work with us and have been for a while with this with larsucosterol..

And I would congratulate you because I see you have got the hospital where the Lille score was invented as one of your sites as well as at King’s College, which is Europe’s largest liver transplant hospital, so congratulations.

And I am just curious, is there the possibility that you could be looking at almost a parallel process using the UK Zai Lab and the EMEA’s prime programs for accelerated consideration?.

It is possible. We are thinking of them in terms of being able to help patients and save the healthcare system dollars and be able to have an opportunity for direct shareholders as nearly equivalent in size, actually. And you are absolutely right, we do have thought leaders on both those sites. They are well published and very well respected.

Norman, do you have…?.

So, perhaps next quarter, you might have some information you could share a little bit more the market information you might share with us?.

It’s perhaps, market research comes as it comes. I don’t know, Mike, maybe you can speak to that. When do you think, I don’t know who want to set expectations, but we are working on it..

Yes. We are definitely working on it, Jeffrey. And it’s we are early in figuring that out in terms of the size of the market in those other territories.

But I think your point is well taken and that we could potentially be able to leverage the AHFIRM trial with patients being dosed in all of those countries to – if the trial was successful to potentially be able to file in those territories as well..

That is our hope is to be able to do the submissions in parallel should the trial be successful..

Alright. Thank you..

You’re welcome..

That is all the time we have for questions and answers today. I would like to turn the conference back over to management for closing remarks..

I just want to thank you all. We all want to thank you for your time today. And as always, if you have any further questions, please reach out to us. We look forward to catching up with you. Take care. Bye-bye..

Thank you. This does conclude today’s conference. You may disconnect your lines at this time and thank you for your participation..