Greetings. And welcome to the DURECT Corporation Third 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. Tim Papp Good afternoon. And welcome to our third 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.

I would like to review our third quarter financial results. Total revenues in the third quarter of 2022 were $12 million compared to $2.2 million in the third quarter of 2021. Revenues for the quarter include $10 million of milestone payments earned pursuant to our POSIMIR agreement with Innocoll.

R&D expense was $9.9 million as compared to $8 million for the prior year. The increase was primarily due to higher clinical trial expenses for our ongoing AHFIRM trial, contract manufacturing expenses, and employee benefit costs.

SG&A expenses were $3.9 million as compared to $3.2 million for the prior year, primarily due to higher employee benefit costs, patent expenses and consulting expenses. As of September 30, 2022, we had cash in investments of $52 million as compared to $70 million at December 31, 2021, and our cash burn during Q3 was $2.3 million.

Before I turn the call over to Jim, I would like to remind shareholders about the upcoming shareholder meeting scheduled for November 22. By now, all shareholders should have received their proxy statements and voting instructions.

The purpose of this meeting is to approve a potential reverse split, which would enable DURECT to maintain our NASDAQ listing. We strongly encourage shareholders to vote in favor of this proposal as keeping the listing is vital for the company's success.

Given that not voting your shares is essentially the same as voting against the proposal, it is important that all shareholders return your proxy cards at your earliest convenience. As always, we appreciate the continuing support of our shareholders. And 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 third quarter 2022 update. We had a strong third quarter with a number of positive developments across our product portfolio. We recently announced that we expect to complete enrolment in our Phase IIb AHFIRM trial in the second quarter of 2023 ahead of our previous guidance.

Enrolment continues to progress nicely. We have now dosed more than 200 patients out of our target of 300. We continue to expect to report top line data in the second half of 2023. If successful, we believe AHFIRM has the potential to support an NDA filing.

Our goal is to advance larsucosterol as quickly as possible to approval in AH, an indication for which there are no approved therapeutics. On the POSIMIR front, we're excited that our commercial partner Innocoll launched the product in the United States last month.

As Tim mentioned, we earned a total of $10 million in milestones from the Innocoll agreement in the third quarter, and we look forward to seeing the launch progress over the coming quarters. The primary focus of the company remains on completing enrolment in our Phase IIb AHFIRM trial for larsucosterol in patients hospitalized with severe AH.

AHFIRM is a 300-patient, placebo controlled, double blind, multinational study with two active dosing arms and a placebo arm of 100 patients each. We are pleased with the progress on enrolment and have dosed more than 200 patients to date. We now expect to complete enrolment in the second quarter of 2023.

This is ahead of schedule despite the challenges relating to enrolling trials during the COVID Pandemic. We now look forward to reporting topline data from AHFIRM in the second half of 2023. We currently have over 60 sites open, including leading hospitals in the United States, Australia, the EU, and the UK.

We continue to open new sites, including renowned liver centers, where we have the opportunity to work with some of the world's preeminent thought leaders in AH. 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. As a reminder, AH is a lethal and costly disease that represents an unmet medical need with no approved therapy.

AH results in about 158,000 hospitalizations per year in the United States and hospitalized patients have a 90-day mortality rate of approximately 30%. This suggests that over 40,000 deaths in the United States occur from AH. We estimate in the United States alone, on average, more than a 100 people die every day from this disease.

AH continues to represent a significant cost burden to both patients and the healthcare system. For the vast majority not receiving a transplant, the average cost of treating a hospitalized AH patient can range from $53,000 to $147,000.

For those patients who receive a liver transplant, the average cost is approximately $875,000 per patient in the United States, and they are subject to a lifetime of immunosuppression.

With this in mind, larsucosterol represents a potential multi-billion dollar opportunity in the US alone, while simultaneously providing substantial overall cost savings to the healthcare system. We also believe that AH is a global concern and that ex-US markets represent additional attractive market opportunities.

Now, we'd like to reemphasize why we are so optimistic about the use of larsucosterol and the treatment of patients with severe AH. As I mentioned before AH patients face a 90-day mortality rate of approximately 30%, and there is no approved treatment for this disease.

Therefore, we were excited by the data from our Phase IIA trial of larsucosterol in the moderate to severe AH patient. All 19 patients, including the 12 severe AH patients survived the 28-day trial. 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 the 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 the doses evaluated in the Phase IIA trial. There were no serious drug-related adverse events reported in the trial.

In addition to the clinical trial results, we have generated supporting preclinical data that demonstrated larsucosterol's protection against multi-organ failure in numerous in-vivo animal models.

This is important to highlight as multi-organ failure is not only the primary driver of mortality in AH patients, but also reflects larsucosterol's potential to provide a benefit in multiple indications in addition to AH.

Larsucosterol's mechanism of action as an endogenous epigenetic modulator helps us to better understand the remarkable results we've observed in its impact on AH patients. Larsucosterol bias 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 some diseases, including AH, rate of DNA methylation is abnormally high, resulting in severe even life threatening consequences.

In treating stress liver cell whose DNA is hypermethylated or sickle sterile return DNA methylation levels closer to those observed in healthy liver cells.

Furthermore, prior studies of AH patients published in the medical literature have demonstrated that these DNMTs are elevated in AH patients suggesting a mechanistic path where larsucosterol's 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 not opioid sustained released local anesthetic that is FDA approved to provide post-surgical analgesia for up to 72 hours following arthroscopic subacromial decompression. Late last year, we announced that we licensed the development and commercialization rights for 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 market. Through this partnership, we earned a total of $10 million in milestone payments from Innocoll during the third quarter.

In August, we were issued a new patent by the US Patent Office extending the US patent coverage for POSIMIR to at least 2041. Under our agreement within Innocoll, this triggered an $8 million milestone to DURECT. We also earned a $2 million payment upon the first commercial sale, which occurred in September.

Following these two payments and the initial $4 million upfront payment DURECT remains eligible for an additional $122 million in commercial, regulatory and intellectual property milestone payments. We also receive tiered low double digit to mid teen royalties on net product sales in the United States.

In summary, we continue to make great strides with AHFIRM and have enrolled more than 200 patients to date with over 60 clinical sites up and running. We are on track to complete dosing in the last patient in the AHFIRM trial in the second quarter of 2023, which would enable reporting of top line 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, and our multiple preclinical animal studies where we observed the 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 filing. We would now like to take any questions that you may have..

Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Thank you. Our first question is from Kristen Kluska with Cantor Fitzgerald. Please proceed with your question..

Hi. Good afternoon, everybody. Thanks for taking my questions. The first one I had for you is we've noticed that other nations are putting out some research suggesting similar trends to what's been observed in the US in terms of number of cases for severe AH rising.

So I wanted to ask how you're starting to think about maximizing the opportunity here, given it is a global study and perhaps working with other regulatory agencies down the line?.

That's a great question, Kristen. Thank you for asking and I'll start it, but then I'll also hand it over to Keith Louie, who is responsible for both business development and commercialization here at DURECT. But you're absolutely right.

It's a worldwide problem and especially if one looks on at the EU and at Western Europe in particular, I think the patient numbers from everything we've going to date are pretty similar to what we have seen here in the United States and so it's a major problem.

Some of the best thought leaders on this disease actually come from the UK and from France and Europe and general who we're working with already.

So I think it certainly is a -- there's a substantial unmet need out there and we're looking to position ourselves to be able to get to these patients and help them, and obviously also help the local healthcare systems and turn our shareholders by bringing this to market internationally.

We started some of the regulatory processes but we aren't going to be commercializing this ourselves overseas. We will most likely be putting a partnership in place.

So Keith, you want to maybe speak to some of the potential?.

Sure. Thanks Jim. Thanks Kristen for the question. This is Keith Louie. I lead our commercialization efforts and business developments, as Jim had stated. And it's true, we've seen the 2020 data as you saw that Jim talked to in today's call is up to 158,000 discharges here in the US and we're seeing similar trends in Europe as well.

I think we are taking the time to work with European data vendors to better understand both primary and secondary diagnoses of AH in Europe.

And we are taking efforts on the medical affairs side to also educate around identification of AH and severe AH and ensure that physicians and across Europe are aware of our trial and aware of our timelines as well as we hope to report data by the end of this year or by the end of 2023.

So we are taking strides to educate the market as well as better understand and quantify that opportunity in Europe..

Thank you for that. And would love to get more color around thinking about the 60-plus sites that you have up and running, and also the ones that you plan to open in the near term. If you just look@clinicaltrials.gov, it does seem that they're pretty spread out, but also in major cities as well.

So, would love to get your thoughts about, this particular strategy and where you chose sites given that this is a problem all over the country and not specialized centers necessarily.

And then also how you think this could translate should you see the data you want in terms of getting these centers to be early users if it is commercialized?.

That's a great question, and I think I think I'd like to hear both from Norman and from then follow up with Keith on this, but certainly we have looked to expand this to thoughts where initially where we had relationships with thought leaders and then spreading out to where the patients were and across not only the United States, but obviously in Australia, Europe, and the UK.

But normally, do you want to speak first to the breadth of the sites and maybe a little bit of initially on how we'll reach out to the thought leaders, their post approval, and then Keith, you can follow up..

Yeah. Hi Kristen. So, running a clinical trial requires experienced clinicians, and so that's why we have focused for this trial on high volume sites. Patients who are admitted for AH are frequently transferred to referral centers where they get the usual care, including the possibility of being evaluated for transplant.

So as you point out, there are literally thousands of community hospitals that also see these patients, and I think we see this as Phase 2. So step number one is getting this behind us. You know, how easy the drug is to use and so if it is approved, we would definitely want to expand that to a much broader base.

But currently, it's just much easier for us to do a clinical trial and assure high quality data by doing this in very experienced centers..

Thank you. And then a last question from me wanted to ask if you had -- if you were planning to have a presence this weekend at the liver meeting, I know the trial's obviously enrolling right now, but in the past you've shared metrics around some of the market research you're conducting as well..

Right. Well, I'll let Keith finish up answering a little bit of the last question and then also address ASLD. So Keith..

Yeah, maybe on the last question, I would say that agree with Norman that the nature of the disease is not one that's specialized, just the tertiary care centers according to our conversations with thought leaders and just tracking the data both in the US and in Europe.

And just given that the dosing and administration nature of our super sterile, given that it's only given on days one and day four, it's the patient is still hospitalized, that it's a six dose, so very non-complicated dosing and administration protocols.

Our side effect profile as we've seen the Phase IIA is fairly straightforward that we feel like because of those attributes and because AH is diagnosed anywhere, it's not just referrals to tertiary care centers, that there is the opportunity that any hospital that admits patients with AH, could potentially be prescribers and treaters with larsucosterol following positive top line results.

So we do think that it will be potentially large opportunity and that any hospital that admits patients of this nature could stock and prescribe the drug. As it relates to ASLD, in fact, we had worked on some -- worked on a poster and abstract that was admitted, and we were presenting that on Sunday at ASLD.

It looks at some CMS data as it relates to AH and cost and healthcare utilization showing that the healthcare utilization rates for patients diagnosed with AH within particular DRG codes are costly than those who don't have an AH diagnosis either in the primary or secondary position.

So we're excited to bring that data to light and we will have a 10 by 20 booth there medical affairs staffed booth just providing education around our AHFIRM trial as well as around alcohol associated hepatitis as well..

Great. Thanks everyone. And didn't mean to cut you off on the previous answer, so sorry about that..

Thank you, Kristen. Great questions..

Thank you. Our next question is from [indiscernible] Oppenheimer. Please proceed with your question..

Hey, thanks for taking the question. Just quickly on the mortality or liver transplant endpoint that was changed, I was hoping you maybe could just go over that again just to make it clear here..

Sure. Thank you. Well I'll let definitely Norman speak mostly to this, but it really is in looking at the world today because what's happened is there are more livers available now for AH patients that weren't available back when hepatitis C was raging as hot as it was.

With the pharmaceutical therapeutics available to patients now, fewer of those patients of Hep C patients are now being transplanted.

That being said, there's still aren't a lot of livers around and as we heard from Keith, and that has stated earlier, 158,000 hospitalizations per year just for AH, and that doesn't mention all the other potential reasons for liver transplant, the inherited diseases and other conditions.

And they're only 9,000, approximately 9,000 transplants per year in the United States. So it's available to patients, but only a few patients.

That being said, if a patient does get a liver transplant, then their chance for survival is very high and so we wanted to make sure we were able to track that potential in our trial and so now we are having an endpoint that is mortality of the patient that 90 days and/or if they received a liver transplant.

So the way I kind of think about it would be death of the patient or death of the liver but I think Norman can speak this much more eloquently than I,.

I think and Jim more or less summarized that up Frank. It's -- we realized, when the protocol was first written, transplant wasn't quite as big an issue, but it's really grown in popularity and it's a fast alcohol now counts more than transplants.

So the big question was if you have a lethal disease and you're only tracking death and someone was hitting for a bad ending and got transplanted, the chance of being alive in 90 days is super high it's in the US over 90%. And so we felt that that would give us a very, very inaccurate picture.

So although we will be looking at death as an end point as well, we felt that we had to include transplant as a potential outcome. Sort of if you, I know you know the details of this, but if you look at meld our inclusion is 21 to 30. So if you are say 25 and you're getting worse when you get above 30, your chances of a transplant are higher.

If you get start getting better, the lower your melt goes, the lower the risk. So it's almost, we hope it'll be a self-correcting kind of problem. But, we spent a lot of time thinking about this, and we came to the conclusion that including transplant was definitely the better option..

Yep.

I think it totally makes sense, but I'm just trying to clarify here is prior to changing this endpoint, if someone got a transplant where they considered, having survived or did you just have to not count them in the trial?.

Good, good. Good catch. So actually only one patient falls into that category. The remaining -- so the remainder of the trial actually included transplant as an end point. So patients who get to a transplant are considered terminated..

So they -- so they wouldn't be considered having survived, they would just, you'd just have to find another patient?.

No, no. They're considered a failed therapy..

No, I think you answered it, I think -- so they would -- if the mortality is the end point, then it would've failed the therapy. So it basically would bring up the placebo effect. .

It's a surrogate for death, Correct..

Okay. Excellent.

And then just wanted to make sure that potentially you got fast tracked, but any potential for breakthrough therapy designation is that something that can only happen post data here?.

Yeah, I do. What you need for breakthrough is you need to have a control group. And since we didn't have a control group in the Phase IIA, that wasn't possible. We do have, the contemporaneous study, which looks very favorable, so if a firm is positive, then there is an opportunity for us to have breakthrough at that point in time. Thank you, Frank.

I think to be clear on the first question with that one patient who was transplanted, I think the question was would that patient be counted as a death or would that patient then be rolled over? Well, they would be, I guess in either case, right?.

So we are still trying to decide statistically how to deal with that single patient, but as a single event, out of 300, we'll probably have a very minor effect..

Right? I would agree. Thank you..

Thank you. Our next question comes from Ed Arce with H.C. Wainwright. Please proceed in your question..

Hello everyone. This is Thomas [ph] here asking a couple of questions for Ed. Thank you very much for taking our questions. Perhaps first just trying to understand since your update on October 06, can you tell us how many patients were, have been enrolled in the firm since update? It was 200 patients.

And then also trying to understand the timeline better here. As you pointed out in the press release complete enrolment has been pushed up and now is a second quarter 2023 with a 90-day study period.

How long should we estimate for the data to process from that point?.

Okay, well, Norman, speak to that second one, but as far as the first one, we're not going to -- we don't want to give updates every couple weeks because then, we'll start having people being concerned, How many, did we enrol this every week and that kind of thing.

But suffice to say, I think we announced in the beginning of August that we were at 170 and we announced the beginning of October that we were at 200, or we had achieved more than 200.

So, people can start to do the math there and estimate that was two months, how many patients did we enrol and kind of project that forward and see that second quarter looks like a very reasonable thing to be able to achieve, but Norman, there was a question, if we can give maybe a general answer on one, the last patient last visit after 90 days approximately?.

Right. So, as you point out to Thomas, there's a 90-day follow up, so that's the so last patient in then ninth plus 90 days gets you to the end. We're collaborating with CTI on this trial, and they have -- they're doing a fantastic job of keeping the records up to date. So we are continuously running it about 80% completion.

So that -- I don't expect, it'll probably take us several months to collate the data. We have to make decisions on analysis before we un blind.

So we'll have a very intense period of discussing, any other analyses we plan to do prior to unblinding and so I don't want to give an exact number, but I think we will be well positioned to use the data within, a few months..

Understood. Thank you so much for the additional details.

And then as you pointed out Jim, that piece of enrolment well, based on the complete enrolment target has been pushed up, can you some underlying reasons that that pace of enrollment seem to be -- seem to have accelerated and can you expand on what are some efforts that are driving that pace of enrolment?.

Thank you. Another good question. Thank you, Thomas. I think there's an overall environmental circumstance going on, and then there's also just the fine effort that Norman and the team together with Keith's team are doing and just getting the word out and driving to trial.

The first is with COVID waning, were hospitals have opened back up again, and so they're more back into a normal circumstance where study coordinators were not considered essential workers and wouldn't be able to be there, and that kind of thing. During the pandemic, it was a greater challenge.

So as hospitals have opened it's been easier for patients and they feel more comfortable going into the hospital for a condition where they may have stayed home too long and become too ill to even qualify for our study during the pandemic.

And so I think that's helpful from an environmental standpoint and from the process standpoint, that really has been the fine work by Norman and the team. So maybe Norman, you can speak to that..

Normally I'm asked in the opposite, so thank you for that positive. From the beginning, COVID was just a huge disruptor, and so we were seeing a sort of slanted view of sicker patients who weren't coming to the hospital. People were delaying, going to see their doctors, and doctors are delaying seeing their patients at this sort of two-sided.

In addition, coordinators were really unavailable and was quite frustrating, and the number of trials suffered from the same problem. With this opening up we're seeing you know, we're seeing people returning back to a much more normal schedule.

We have being very -- we follow the sites very closely and sites that are lagging, we call to make sure that they don't have any issues that we can help them with and then by the initially it took a while to get some of the European sites up the Australian sites have more than pulled their weight and so now we have nearly a full compliment.

There are only a few additional sites that we're adding because they're such high volume. They've produced such high volumes in prior studies. And I just as -- it's always dangerous to make an assumption, but I assume that we'll continue on this on this path and that I think I completely support what Jim said about finishing..

Understood. Thank you again for the details for AHFIRM. Perhaps one final from us related to POSIMIR what would you expect in terms of top line for the fourth quarter and also for the next 12 months from POSIMIR as well and also if there's any initial feedback from the field that would be appreciated. Thank you..

Yeah, Okay. As far as projecting sales that, that's not for us, that would be for our partner to do, and I certainly wouldn't want to do that in front of them, but I know that in talking to Louis, who's the CEO going to call, he's very pleased with the way to launch went.

And I did hear back through him some anecdotal information that the initial feedback from surgeons who used the product were tremendously satisfied with it. They were -- shoulder surgery can be a very painful experience. And we saw good results in our clinical trial where patients had dramatic reductions in narcotic use and in pain.

And seemingly, this is continuing in the everyday use, it's always so rewarding to see a product finally get out on the market, and you get the feedback from everyday users and to hear back from these patients and these physicians. Very positive feedback actually. It's really nice..

Understood. Thank you again for taking questions. Looking forward to progress in AHFIRM..

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Jim Brown for any closing comments..

Thank you, Paul. And we want to thank all of you for your time. And as always, please feel free to reach out. We'd be happy to take your calls. Thank you, and have a wonderful evening..

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