Greetings. And welcome to the DURECT Corporation Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Tim Papp, Chief Financial Officer. Thank you, Mr. Papp. You may begin..

Good afternoon. And welcome to our second quarter 2022 earnings conference call. This is Tim Papp, Chief Financial Officer of DURECT Corporation. 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 product 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 second quarter financials. Total revenue in the second quarter of 2022 was $2.1 million, compared to $2.3 million in the second quarter of 2021. R&D expense was $8.8 million, as compared to $7.4 million for the prior year.

The increase was primarily due to higher clinical trial expenses for AHFIRM and higher employee benefit costs which are partially offset by lower contract manufacturing costs for larsucosterol.

SG&A expenses were $4 million in the second quarter of 2022, as compared to $3.2 million for the prior year, primarily due to higher employee benefit costs, patent expenses and consulting expenses.

At June 30th, we had cash and investments of $54.3 million, as compared to $70 million at December 31, 2021, and our cash burn during Q2 was $10.1 million. With that, let me turn the call over to Jim for an update on certain of our programs..

Thank you, Tim. Hello, everyone. Thank you for joining us today for our second quarter 2022 update. I want to take this opportunity to welcome Tim to the DURECT team. It’s a pleasure having Tim on board and he’s hit the ground running since joining as our CFO just last month.

Tim brings more than 20 years of investment banking experience to DURECT, with more than 15 years of that focused in biotechnology. This has been a busy time for DURECT. Our primary focus at DURECT is on completing the Phase IIb AHFIRM clinical trial of larsucosterol for the treatment of alcohol-associated hepatitis or AH.

We continue to add sites and enroll patients at a strong pace in AHFIRM and have now reached the milestone of enrolling 170 out of the 300 patients planned for the study.

Through a Type C meeting, we proposed and the FDA agreed to a modified primary endpoint for the AHFIRM trial that we believe better reflects the current state-of-care for AH patients. Just this week, we were issued a new patent covering POSIMIR out to 2041.

Under our agreement with Innocoll, this triggers an $8 million milestone from Innocoll to DURECT. As I mentioned, we’re primarily focused on completing enrollment in our Phase IIb AHFIRM trial for larsucosterol in hospitalized patients with severe AH.

AHFIRM is a placebo-controlled double blind multinational study targeting 300 patients with two dosing arms and a placebo arm of 100 patients each. We are pleased with our progress on enrollment and have now reached a milestone of 170 patients dosed.

Our patient enrollment continues to accelerate, with more patients being enrolled in the second quarter of this year than in any prior quarter. We currently have over 60 sites open, including leading hospitals in the United States, Australia, the EU and the U.K.

We continue to expect to complete enrollment in the middle of 2023, which will allow us to report topline data from AHFIRM in the second half of 2023. The FDA has granted our larsucosterol AH program Fast Track designation and a positive result in AHFIRM could support an NDA filing.

With this in mind, larsucosterol has the potential to be the first FDA approved treatment for AH where there is a substantial unmet need for patients. Today we announced that following a Type C meeting, the FDA has concurred with DURECT’s proposal to modify our primary endpoint in the AHFIRM trial.

The updated primary endpoint will be the difference in outcomes, either death or liver transplant between the treated and control patients at day 90.

We believe this primary endpoint, which now includes liver transplantation, in addition to mortality, better reflects the ability of a therapeutic such as larsucosterol to improve upon the current state-of-care for AH patients. As a reminder, AH is a lethal and costly disease that represents an unmet medical need with no approved therapy.

AH results in about 137,000 hospitalizations per year in the United States and hospitalized patients have a 90-day mortality rate of approximately 30%. While AH patients who are fortunate enough to receive a liver transplant generally see a survival benefit. A liver transplant also represents a serious medical event for patients.

Transplanted patients face significant health consequences, including the need for immunosuppressive drugs for the rest of their lives. Therefore, we believe that including transplanted patients, as well as mortality in the primary endpoint better reflects the most severe outcomes for AH patients.

As the landscape for liver transplant has evolved, due in part to improve treatment of HCV reducing the need for liver transplantation in these patients, we have seen some impact on the state-of-care for severe AH patients in recent years to include more liver transplants.

Even so there are fewer than 10,000 liver transplants performed annually in the United States, with the majority going to patients with other ailments, meaning that only a small fraction of the 137,000 AH patients who are hospitalized annually in the United States are able to receive a liver transplant.

These numbers startlingly highlight the continued unmet need for treatment options in AH. AH continues to represent a significant cost burden to both the patients and the healthcare system. For those selected few patients who receive a liver transplant, the average cost is $875,000 for transplant in the United States.

For the vast majority not receiving the transplant, the average cost of treating a hospitalized AH patient can range from $53,000 to $147,000. With this in mind, larsucosterol represents a potential multibillion dollar opportunity in the United States, while simultaneously providing substantial cost savings to the overall healthcare system.

Now let’s review why we are so optimistic about the use of larsucosterol in the treatment of patients with severe AH. As I mentioned before, AH patients face a 90-day mortality rate of approximately 30% and there was no approved treatment for this disease.

Therefore, we were excited by the data from our Phase IIa trial of larsucosterol in moderate to severe AH patients. All 19 patients including the 12 severe AH patients survived. Additionally, 14 of the 19 patients were discharged in less than four days after receiving only a single IV infusion of larsucosterol.

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

In addition to the clinical trial results, we’ve generated supporting preclinical data from numerous in vivo animal models that demonstrates larsucosterol protection against the multi-organ failure, which is the primary driver of mortality in AH patients.

Larsucosterol mechanism of action as an endogenous epigenetic regulator helps us to better understand the remarkable results we’ve observed and its impact on AH patients. Larsucosterol binds to and inhibits the activity of three DNA methyltransferases, DNMT-1, 3a and 3b.

These three enzymes regulate the epigenome by adding methyl groups to DNA in a process called DNA methylation. In one example, stressed liver cells whose DNA was hypermethylated had methylation levels of the DNA returned closer to those observed in healthy liver cells after being treated with our larsucosterol.

Furthermore, prior studies of AH patients published in the medical literature have demonstrated that these DNMT are elevated in AH patients, suggesting a mechanistic path for larsucosterol potential benefit for these patients. And now I’d like to move on to POSIMIR, one of our last remaining legacy products.

POSIMIR is a novel non-opioid sustained release local anesthetic that is FDA approved to provide post-surgical analgesia for up to 72 hours following arthroscopic subachromial decompression. We announced last year that we license the development and commercialization rights to POSIMIR in the United States to Innocoll Pharmaceuticals.

We selected Innocoll as our commercial partner because of their strong commercial team and because they are focused on the post-surgical pain. On August the 2nd, we were issued a new patent by the U.S. Patent Office, extending our U.S. Patent coverage of POSIMIR to 2041. Under our agreement with Innocoll, this triggers an $8 million milestone to DURECT.

We also receive a $2 million payment upon first commercial sale, which we believe is approaching.

Following these two payments and the initial $4 million upfront payment, DURECT is eligible for up to $122 million in additional commercial, regulatory and intellectual property milestone payments, as well as tiered low-to-mid double-digit royalties on net product sales in the United States.

In summary, we continue to make great strides with AHFIRM and have reached the milestone of 170 patients dosed with over 60 clinical sites up and running. We are on track to complete dosing the last patient in AHFIRM in the middle of 2023, which would enable reporting of topline results in the second half of 2023.

Our confidence that the AHFIRM trial will be successful is driven by our compelling Phase IIa study data, the mechanism of action of larsucosterol which ties directly into the biology of AH, our multiple preclinical animal studies where we observed a profound survival benefit in multiple relevant acute organ injury models.

We expect that if we achieve a positive outcome in the AHFIRM trial, this could support an NDA file. Beyond AH, the mechanism of action for larsucosterol provides further scientific rationale for developing larsucosterol for other acute and chronic disease. With that, we’d now like to take any questions you may have..

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

Good afternoon. This is Rick on for Kristen. Thank you for taking my questions.

Given all the KOL diligence your team has done in the AH space, what can you say about, how the addition of liver transplant endpoint fits in with what you’ve heard from physicians in the space? How do you think physicians in space think about the kind of relative importance of the mortality and liver transplant aspects?.

That’s a very good question. I appreciate that. And as you can imagine, we did spend a lot of time talking with our KOLs about that and I think I’ll just let Norman address that question..

Yes. Thanks very much for that question.

As Jim said, we spent a lot of time with a lot of KOLs discussing it, eventually came to the conclusion that patients that are doing very poorly seeing, say, continued in either arm, who would then be rescued by a transplant, looking purely at 90-day mortality gives you an artificial sense of the value of the treatment.

And so we were pleased when FDA agreed with that viewpoint. And I would say, the majority of our KOLs agreed with it..

I would say, our second half [ph]..

Understood. And maybe one more, so on your last call, you talked about increasing the total site target in AHFIRM to 70 sites from 60 to 65 was the original guidance, I believe, due to the availability of certain U.S. sites that were appearing to be available. Could you give us an update on the specific U.S.

sites that you were talking about here, the decision to kind of look at those and kind of where are they in the process of being up and running?.

Yeah. We definitely we like these sites. They were part of the NIH consortium that had a trial, unfortunately, that failed. And we’ve been working with these sites and we’re getting close. But once, again, I think, Norman, maybe you can speak to the specifics of bringing on these additional U.S. sites..

Yes. So they’re all very high visibility sites with excellent investigators and we are one of them, I would -- I think is probably a matter of weeks away, a few of the others will take a little bit longer. But they’re going to come on board fairly soon and we think that there’ll be very productive sites..

Yeah. These are excellent sites. It’s just -- and unfortunately, most of them are universities and larger centers and the process -- the legal process just take some time..

Understood. And maybe just one more really quick one about the $8 million milestone….

Sure..

… from Innocoll, should we be thinking about that are being recognized in 3Q?.

Tim, I’ll let you address that..

Yeah. That’s right. We would expect that to be included in our revenue for the third quarter..

Great. That’s all we have. Thank you very much..

Thank you..

Our next question comes from Francois Brisebois with Oppenheimer. Please proceed with your question..

Hi. Thanks for taking the questions. This is Dan [ph] on for Franc Brisebois. Just a couple from me.

Regarding the primary endpoint amendment, firstly, just based on your conversation with KOLs, is there any concern about whether these endpoints are correlated in any way? And as a follow up, the question is, if the trial is successful and approvable isn’t either or endpoints or is it both endpoints have to hit for it to be successful and approvable? Thanks..

Both endpoints are the same, the end point -- the -- it’s an event and the event would be either death or transplant.

So we’re considering transplant to be equivalent to death, because if a patient is -- if they’re transplanted then the probability them living for the next year, so it’s quite very, very high 99 or whatever it is, very high percentage.

And so we wanted to make sure we were able to capture that for patients who were transplanted, who otherwise might have died.

And I should also let you know that, in the United States, it’s more common practice to do this transplant, this trial we are conducting globally and in Europe, there are many fewer of these patients transferred, even though in the United States, not many of these patients get transplant anyway, just because the availability of livers and the cost of all this thing.

But maybe Norman if you want to add anything to that,.

No. I agree the -- we consider the two points equivalent. In other words, people don’t usually get a transplant if they’re doing better. So the typical practice is the patient comes in, is doing poorly, is -- there’s a serious concern that the patient will die and therefore gets transplanted. And so that’s why I think transplant is equivalent to get.

Just so the -- we will also analyze death as an -- as a single endpoint as a secondary analysis..

Okay. Makes sense.

And just one more question from my end, are you able to provide any update on the timeline of when the first commercial sale of POSIMIR will be?.

We just know that it’s getting close. But we can’t provide anything more than that. So we would expect it soon. That’s all I can say at this point..

Okay. Thank you. Thanks for taking the questions..

Sure. Absolutely..

Our next question is from Ed Arce with H.C. Wainwright. Please proceed with your question..

Hi, everyone. This is Thomas Yip asking conversions for Ed. We’re very happy to see AHFIRM steady continual progress in a quarter. So, first question, as -- it was just updated today in addition to death and liver transplant and as we all know, Lille score improvement was shown with larsucosterol earlier.

What are your thoughts on this potential use in regular progress either with the FDA or with other agencies that are ex-U.S., and perhaps, what are some potential use for Lille score perhaps as a pre-treatment screening tool?.

Well, Lille score is generated seven days after the patient is in the hospital.

And so, Lille is a good prognostic indicator of the patient’s potential for survival post-treatment, because by that time, if they remain in the hospital the whole time, they would receive two doses of larsucosterol, if they went home, they would still received one dose of larsucosterol.

So it’s a good prognostic indicator, but for this trial, where we’re looking at 90-day survival or transplant as the -- and the difference between that event occurring versus with between the treatment groups and the placebo group. So, I think, Lille will be something we look at, but it won’t be the primary driver of approval..

Yes. That….

I hope that answers your question. Yeah..

Yes. It does. Yeah..

Okay. Yeah..

That’s clearly liver transplant and that’s a first and foremost most useful indicators. So for AHFIRM and as you outline with the continued addition of new sites globally, what are your thoughts on your commercial approach, perhaps, for the ex-U.S.

market? So what are some top pockets in your view for now?.

It’s a very good question. There are a large number of patients in Europe probably equivalent or maybe a bit larger than the U.S. So certainly is a problem on a global basis. And so it’s more likely than not we won’t be commercializing ourselves outside the U.S., so we are exploring possibilities there as well as we get closer, certainly..

Got it. Perhaps one final question from us, regarding POSIMIR, can you give us an update on the U.S.

launch? What’s the latest progress by Innocoll there and when should we expect that revenue to be a meaningful contribution to your topline?.

Well, the -- I think the launch is getting close. As far as the contribution, all pharmaceutical sales, at least most of them have had a couple products in my career that go fast, but most of them are kind of a hockey stick kind of growth. And then there’s a trailing return. So it would -- it will start slow and build over time.

I don’t know what more to add than that.

I think, Tim, would you add anything to that?.

I would just add that we don’t really have any guidance from Innocoll on what their revenue projections look like and they are a private company. So I am not sure we’ll have a lot of visibility into their expected revenue and how that translates into our royalties..

But the nice thing is we do have milestones on sales and we have royalties as well that start in the low-double digits and go to the mid-double digits. So as their sales, like, their sales increase then our return will certainly be to understand..

Right. Understood. It’s only a good way that you guys are focus primarily on AHFIRM for now. To that end we look forward to the progress in coming months and with the complete enrollment in next year..

Thank you..

Thank you again. Thank you so much..

Thank you so much. Yeah. Thank you..

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

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

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