Good afternoon, everyone, and welcome to the DURECT Corporation Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today's event is being recorded.

And at this time, I'd like to turn the floor over to Tim Papp, Chief Financial Officer. Please go ahead..

Thank you. Good afternoon, and welcome to DURECT Corporation's third quarter 2023 earnings conference call. Before we begin, I would like to remind everyone of our forward-looking statement.

During the course of this call, we will make forward-looking statements regarding the results and clinical data from the AHFIRM trial, development plans for larsucosterol, expected product benefits, market potential, regulatory plans, potential regulatory approval, and the company's financial projections.

These forward-looking statements involve risks and uncertainties that can cause actual results to differ materially from those in such forward-looking statements, including the risk that future trials of larsucosterol do not confirm the results from the AHFIRM trial.

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. To begin, I would like to review our third quarter 2023 financial results.

Our total revenues in the second quarter -- or third quarter, were $1.7 million compared with $12 million for the third quarter of 2022. This difference was largely due to the recognition of $10 million of milestone revenue related to our licensing deal with Innocoll that we recognized in 2022.

R&D expenses were $7.2 million compared with $9.9 million for the prior year. The decrease was primarily due to lower clinical trial and contract manufacturing expenses for larsucosterol and the elimination of feasibility programs, offset partially by an increase in spending on other R&D projects.

SG&A expenses were $3.8 million compared with $3.9 million for the prior year, so essentially unchanged year-over-year. As of September 30, 2023, we had cash and investments of $39.1 million compared with cash and investments of $43.6 million at December 31, 2022.

During the third quarter, we completed a registered direct offering raising $13.9 million in net proceeds. Our cash burn in the third quarter was approximately $9.7 million excluding proceeds from the offering. We believe our cash on hand is sufficient to fund operations through at least the middle of 2024.

Now, I would like to turn the call over to our CEO, Dr. Jim Brown, for an update on our programs..

Thank you, Tim. Hello, everyone. Thank you for joining us today for our third quarter 2023 update. Last week, we announced the unprecedented topline results from our AHFIRM Phase 2b clinical trial, which evaluated larsucosterol and alcohol-associated hepatitis.

The AHFIRM results showed a clinically meaningful reduction in the key secondary endpoint of 90-day mortality for larsucosterol compared with standard of care. To my knowledge, no previously controlled trial has demonstrated an improvement in mortality of this magnitude in this devastating disease.

We also saw an encouraging safety profile for larsucosterol with a low number of adverse events for the active arms as compared with the standard of care. We have reviewed the AHFIRM data with many renowned hepatologists and AH thought leaders. These physicians are excited by the compelling reduction in mortality at 90 days in the larsucosterol arms.

They were especially impressed with the data from the U.S. patients and the safety data from the trial. Our Phase 2b AHFIRM trial was a placebo-controlled, double-blind, multi-national study with two active arms dosing 30 milligrams and 90 milligrams of larsucosterol and a standard of care arm of approximately 100 patients each.

By comparing against the standard of care, we allowed the physicians to utilize their standard practice for treating AH patients, which allowed for the use of corticosteroids in addition to supportive care such as fluids, nutritional support, and antibiotics for infection. In total, we randomized 307 patients with severe alcohol-associated hepatitis.

These were patients with MELD scores ranging from 21 to 30 and Maddrey's Discriminant Function scores greater than or equal to 32. We enroll patients in AHFIRM through a global network of clinical sites, including leading hospitals in the United States, Australia, EU, and the UK.

Our sites included renowned liver centers, and we had the honor of working with some of the world's preeminent thought leaders in AH.

The topline results in the key secondary endpoint of mortality at 90 days showed a 41% reduction with a 30-milligram dose of larsucosterol and a 35% reduction with a 90-milligram dose of larsucosterol as compared with the standard of care.

We also reported a numerical improvement in the primary endpoint, a reduction in mortality or liver transplant at 90 days. So, neither the primary or secondary -- key secondary endpoints -- endpoint achieved results that were statistically significant. Impressive results were found in the U.S.

population, which comprised three-quarters of the total enrollment in AHFIRM. That was 232 out of 307 patients. In the United States -- in the U.S. patients, we saw reductions of mortality at 57% and 58% for the 30 and 90 milligram arms, respectively, compared with the standard of care.

Although not a part of the original trial statistical analysis plan, the p-values for these results were both approximately 0.01.

Very importantly, larsucosterol exhibited an excellent safety profile with no serious adverse events in either arm and greater than 20% reductions in the number of treatment emergent adverse events for both active arms of the severely ill patients when compared with the standards of care.

Ultimately, these clinically meaningful reductions in mortality coupled with the reduction in adverse events in these severely ill patients reinforce the compelling risk-reward proposition for the continued advancement of larsucosterol as the first approved treatment for AH.

We look forward to meeting with the FDA in the first quarter of 2024 to discuss the AHFIRM data and the path forward to seek approval of larsucosterol in AH, including design for a potential registrational Phase 3 trial using mortality as the primary endpoint. As a reminder, the FDA has granted our larsucosterol AH program Fast Track Designation.

AH is a cause of more than 158,000 hospitalizations each year in the United States with a 90-day mortality rate of approximately 30% and is responsible for tens of thousands of deaths each year. There are no effective treatments for AH.

If we were able to gain approval for larsucosterol, it would likely be the first FDA-approved treatment for this disease. In addition to its high mortality rate, AH represents a significant cost to the U.S. healthcare system.

Hospitalizations attributed to AH incur costs of $62,000 to $167,000 each, a total cost to hospitals of approximately $10 billion annually in the United States. As a result, larsucosterol represents a potential multibillion-dollar opportunity in the U.S. alone and could simultaneously provide overall cost savings to the healthcare system.

We look forward to the possibility of bringing this potential lifesaving therapeutic to patients with no effective therapies available today. We attended the AASLD conference in Boston, this is the U.S.

liver meeting, over the weekend and had the opportunity to discuss the topline results with many of our investigators from AHFIRM and with more than a dozen influential KOLs. The reaction of this physician community has been overwhelmingly positive and enthusiastic about larsucosterol's prospects.

These physicians expressed their frustration with a lack of effective treatment. They recognize that the type of mortality benefit and safety profiles suggested by the larsucosterol from our AHFIRM data would potentially bring a major advancement in the standard of care for these severely ill patients.

We now like to take any questions you might have..

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from François Brisebois from Oppenheimer. Please go ahead with your question..

All right, thanks for taking the question. Just a couple here. So, in terms of the mortality seen, can you remind us what it was the mortality that was seen in the trial? I know there was a fear that maybe the trial would not -- or AH patients did not have quite the mortality that people expected.

Can you just maybe remind us what you saw in the trial? And was it in-line with what you thought?.

Absolutely. Yes, for the overall trial, the global trial, we saw about -- we saw a 25% mortality. And we had powered it for about 30% mortality. So, it was a little bit lower than we had expected. And that was, in all likelihood, the primary reason why we slightly missed that endpoint.

Our biostatisticians tell me if we had X number of -- 15-plus more patients or something, we would have been able to possibly hit that endpoint.

It's interesting when we look at the subset of the data, which is three-quarters of the data from the United States, we see a mortality endpoint of -- a rate of 28% in the United States, as compared to 12% in the two active arms. So that certainly was almost 60%. So that was highly significant. So, in the U.S., it hit right.

When we look globally, it didn't. And that's unfortunately, it's -- we moved from this small four-patient per group study to 100 patients per group in the 2b, but it gained so much information.

And to have a trial that had this kind of signal -- and when we spent the weekend, as you know, Frank, in Boston with these investigators, they were quite excited about the data we have..

Okay, great. No, that's great. And then, in terms of the -- speaking to a lot of physicians over the weekend and whatnot, was there -- what are the thoughts in terms of their hypothesis to maybe there were differences in the U.S. versus the ex U.S.

population? Is it too early to see? Anything you can share there? Or should we wait for more information about the potential differences there? Thank you..

Yeah, certainly. There certainly were some things that they focused on, and we are investigating more thoroughly. And the first thing that they focused on was the differences in age. We saw the age of the U.S. population of 43 and to a person they were saying, yeah, these are the patients we're seeing. They're younger.

I had a number of them quote back to kind of numbers we've been talking about 20-some-odd-percent of their patients are young women in their 20s and 30s without cirrhosis. And we certainly saw it in our trials. We saw younger people, 43% -- excuse me, 43 was the mean age in the United States, and ex U.S., it was 50. Even higher in Europe.

I think it was 52. So -- and there was a physician from Southern California from USC, who we spoke to, who talked about some papers that he had written showing that if you were over the age of 44, you have a much greater chance of dying from this disease. So, we know in a lot of diseases, the old you are the more susceptible you are to dying.

And certainly, in this population, that's the case. And so that was one component that we learned. The other thing that they focused on was the amount of cirrhosis. The U.S. population had 76% cirrhosis, which means it fits with being younger, you have less cirrhosis. But the ex-U.S.

population was -- especially for the EU with biopsy confirmed 90% cirrhosis, which means much -- basically it means much less liver available to respond to the drug, unfortunately.

So, we're still easing out the differences because the other differences there were a much smaller population of patients, and they were divided and randomized across Australia, the U.K. and the EU. And so, you can also get into mismatching of a balancing of that as well, which can lead to greater variability..

Thank you..

Sure..

And our next question comes from Carl Byrnes from Northland Capital Markets. Please go ahead with your question..

Great. Thanks for the question. I'm wondering if there's any rationale for the FDA to not allow mortality as a primary endpoint in the Phase 3 trial, considering the limited number of liver organs available for transplantation, the mortality benefit that you saw, particularly in the U.S.

population, and then the safety profile, which was clearly better than the standard of care, which is something we simply don't see? Thanks..

Yeah. I think, first of all, the FDA is happy to -- from the corresponds that I've been associated with them, they would prefer mortality over anything else, quite frankly. And that will be -- if another trial is required for approval, we will do a trial looking at survival. So, if you look at the secondary endpoint, if you look at the U.S.

population, those would be good surrogate populations and analyses that we would do if we were required to do another Phase 3 or a Phase 3 trial for this drug because you're right, the mortality is horrific. And transplant, there's only -- there's less than 2% of these patients are going to be transplanted in the U.S.

There are a quarter of liver transplants, but that's about 2,000 livers, and there are 158,000 of these hospitalizations as of a couple of years ago, probably growing at about 4% or 5% a year. So, they always lag behind the actual data with the -- with what we can get from the government literature.

So, there are probably 98% of these patients in the United States never have a chance to the liver. And their only option then is what is out there today. So, their only option is to potentially die at a rate of what we saw in this trial in the U.S., 28% or 30% depending on how you look historically. So, it's a horrible circumstance.

And these physicians were so excited about the data we have. And the ones who were involved with the trial were telling us stories about patients that they just really -- after having the week where we had to talk about the data that we had, it was really heartening and really lifted up the spirits of everyone who's there, it really did..

Great.

So, on that thought, then I'm wondering, is there any possibility or do you think there's any possibility that larsucosterol can be used on a compassionate basis given the safety profile in the meantime?.

I don't -- compassionate use is a possibility. But what we'll do is we'll go have a conversation with them. We'll talk about the potential for an accelerated review as a possibility as well. So, we're just going to have a conversation with the FDA about what we have. This is certainly a highly lethal condition with no therapy.

As you said, it's got a very clean profile. If not -- I just -- I would just say it at that, leave it at that, from just a very nice profile from an adverse event standpoint. So, we'll have that conversation with the FDA in the first quarter and find out what the next steps will be..

Got it. Thanks. And then just one last question. There's been some concern about not seeing a dose response. But if we look at the U.S.-only population, again, you explained some of the nuances with respect to mismatching. But clearly, you did see a dose response. I think it was like 58% of the 90-mg dose versus 57.1% in the 30-mg dose.

So, is that correct? And what's your thought on some of the comments that are out there in terms of not seeing dose response? And that's my final question. Thank you..

Yeah, thank you, Carl. I think what we can glean first from the fact that both doses showed very well is, first off, both doses showed very well, right? So that means you grab a population of 100 people, dosing with the drug, phenomenal result, almost 60%.

Grabbed another 100 people, checked them against standard of care, once again, another phenomenal response, almost 60%. You can't really tease out the difference between 57% and 58%, nor can you really between 35% and 41%. These are -- what they're showing is the drug is having an effect.

And so, most likely, biologically, we're probably -- if you think about a curve, we're probably at the asymptotic component of the curve, where we're just near the top of it. So one dose versus another dose is not going to make an appreciable difference there. And so that will be a conversation with the FDA.

We certainly know a lot more about how the drug works in various animal models and other studies we've done. We know it's an inhibitor of DNMTs, DNA methyltransferases. We know it reduces hypermethylation. We know these patients have elevated levels of these enzymes.

And so, all of that is well understood from a scientific standpoint and that -- the finer points of which dose to be selected will be a conversation we have with the agency at the end of the day, and we're prepared to use either dose going forward..

Great. Thanks, again..

You're welcome. Thank you..

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

Hi, everyone. This is Thomas Yip asking a couple of questions for Ed. Thank you for taking our questions.

Perhaps first question based on what you've learned from AHFIRM so far, can you discuss what are some inherent variability of the liver transplant endpoint in the study?.

Well, there are -- there's -- when you look at transplant, it's just inherently variable, and that's the reality of it. It's available, as I said earlier, to less than 2% of the patients who have this disease. And the administration of the transplant is very variable as well. It depends on which center you're at.

It depends on what is your level of insurance coverage, whether or not you have a match, how aggressive your surgical team is. And it also depends on how sick you are. There are a number of patients who are too sick when they first come in to get a transplant. So, we think about the use of larsucosterol in this setting.

Certainly, in a survival trial, a trial where you're looking at mortality, there are a certain number of patients who would be in the standard of care group who would get a transplant and survive, and that's true. But witness the fact that we had a safety -- no, safety was fine, but we had a mortality signal even considering those.

And I believe from talking to some of the people and understanding the path for some of the patients in this trial. So, what we're also seeing is, for lack of a better term, a bridge to transplant, where some of these patients are severely ill at the beginning, may not be alive long enough to get a transplant.

But because they were dosed with larsucosterol, they were then potentially able to get a transplant six or eight, 10 weeks later. So that's another component of it all. And rather than try and separate that out and tease it out, it would be very difficult to do. We're simply just going to look at mortality and let transplants fall where they may.

So that's how we're going to deal with that, because there are so many factors that influence transplant that the drugs can't influence. The only thing the drug really can do towards transplant is keep you alive and make you a little healthier so that you might be still around if the liver by chance, came up as rare as it is..

Understood. That makes sense. And then perhaps just one more question from us. So, you discussed a little bit earlier how the U.S. operations with lower mean age and also a low percentage with cirrhosis. So, I wonder how do you look at potential of U.S.

markets, perhaps discussions with the EMA, is that on the table?.

No. I mean we will be talking with the EMA as we go forward. We're just now starting to take the additional cuts of the data and look at that.

And we will look at the data for a number of different reasons -- for all these different characteristics and try to understand how it responds, because I'm certain that both the FDA and the EMA will want to understand that. My sense is that we'll be able to help patients.

We dose this in [CHOP UC] (ph) patients who are dying or their livers were failing and for other indications orally and saw some nice improvements in these patients, just single-dose safety studies that saw some interesting biomarker changes and the like. So, I do think there's the potential to help these patients.

That being said, we're going to drive forward for approval in the U.S. based on the U.S. data, and then we'll take on the rest of the world in these more severely ill patients as time goes on. That's where we sit today. We've got a long way to go, and it's early days in analysis..

Okay, yeah, thank you taking our question. Definitely look forward to the FDA meeting in the first quarter..

As do we. Thank you..

Ladies and gentlemen, with that, we will conclude today's question-and-answer session. I'd like to turn the floor back over to Jim Brown for any closing remarks..

Yes, I just would like to thank you all for your time today and for your support. And as always, if you have any further questions, please reach out to Tim and myself or others on the team that you know, and we're happy to get on the phone and talk to you. Thanks a lot, and take care..

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines..