DURECT Corp

NASDAQ:DRRX

Earnings Call Analysis

DURECT Corporation's Promising AH Drug Potential

In 2023, DURECT Corporation faced a revenue decline to $8.5 million from $19.3 million in the previous year, mainly due to the absence of a one-time milestone payment received in 2022. Their R&D and SG&A expenses also decreased from reduced clinical trial expenses and lower employee costs. Despite this, the cash and investments stood at $29.8 million with a cash burn of $38.1 million, allowing operations to continue through end of 2024. A highlight was the positive results of the AHFIRM Phase IIb clinical trial of larsucosterol, showing a notable reduction in 90-day mortality for alcohol-associated hepatitis patients, with excellent safety profiles. These results are expected to support a potential Phase III trial and NDA filing, with updates anticipated in the second quarter.

Financial Review and Cash Position

DURECT Corporation faced a downturn in finances in 2023, with total revenues declining to $8.5 million from $19.3 million in the previous year, partly due to the absence of a significant $10 million milestone payment from 2022 related to their POSIMIR agreement. The fourth quarter of 2023 followed this trend with a decrease to $2.7 million from $3.3 million year-over-year, attributed to lower collaboration revenue. Research and Development (R&D) expenses fell from $36.9 million to $29.4 million as the company completed the AHFIRM trial, reducing clinical, manufacturing, and employee-related costs. Selling, General & Administrative (SG&A) costs also saw a reduction to $14.4 million from $15.9 million, due to decreased patent and employee expenses. Despite a substantial cash burn of $38.1 million in 2023, the company's cash and investments totaling $29.8 million, down from $43.6 million at the end of 2022, are projected to sustain operations through the end of 2024.

Larsucosterol Shows Promise in Clinical Trials

DURECT's investigational drug, larsucosterol, demonstrated a significant reduction in mortality among patients with alcohol-associated hepatitis (AH) during their AHFIRM Phase IIb trial. Larsucosterol arguably outperformed the placebo group, with the 30-milligram dose achieving a 41% reduction and the 90-milligram dose a 35% reduction in mortality at 90 days. Remarkably, the U.S. subset observed even higher reductions in mortality at 57% and 58% for the respective doses. Although statistical significance was not met, the favorable safety profile and robust efficacy indicators are compelling, offering considerable optimism for the drug's future and its potential as the foundation for a confirmatory Phase III trial and a subsequent New Drug Application (NDA) filing with the FDA. An update on this matter is expected by the second quarter.

Market Opportunity and Unmet Need in AH

AH leads to over 150,000 hospitalizations annually in the U.S., with roughly a 30% mortality rate, signifying a high unmet medical need and a potential market opportunity for larsucosterol should it be successful in later-stage trials and gain FDA approval. Costs associated with AH hospitalizations can range between $60,000 to $160,000 per patient, tallying approximately $10 billion in annual costs to healthcare facilities. Larsucosterol's significant market potential within the U.S. is hence recognized as a multibillion-dollar opportunity, considering its potential to cut down healthcare expenses through the reduction of AH-related hospitalizations and improvement of patient outcomes.

Global Impact and Support from Medical Community

The promising results of the AHFIRM trial, which enrolled 307 patients with severe AH from top clinical sites globally, have fueled positive sentiments within the hepatology community. There is considerable anticipation for larsucosterol to become the first effective therapy for this disease in over 40 years, with leading physicians and healthcare professionals voicing extensive support for the drug's continued development. This enthusiasm underlines the drug's potential both as a life-saving intervention and as a solution that addresses a pressing global health issue, indicating alignment with the community's goal to improve treatment options for AH patients.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings, and welcome to the DURECT Corporation Fourth Quarter and Full Year Earnings Conference Call. [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, Tim. You may begin.

[Timothy Papp, executive]

Good afternoon, and welcome to DURECT Corporation's Fourth Quarter 2023 Earnings Conference Call. This is Tim Papp, Chief Financial Officer of DURECT. Before we begin, 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.

To begin, I would like to review our fourth quarter and full year 2023 financial results. Total revenues in 2023 were $8.5 million compared to $19.3 million in 2022. 2023 revenues were lower primarily because 2022 revenues included $10 million of milestone payments related to our POSIMIR agreement with Innocoll. For the fourth quarter of 2023, revenues were $2.7 million compared to $3.3 million for the prior year. This decrease is due to lower revenue for collaborations in 2023.

R&D expense was $29.4 million in 2023 as compared to $36.9 million for the prior year and $5.6 million for the fourth quarter compared with $10 million for the prior year. The decreases were primarily due to lower clinical trial-related expenses as we substantially completed the AHFIRM trial, lower contract manufacturing expenses and lower employee-related costs. SG&A expenses were $14.4 million in 2023 as compared to $15.9 million for the prior year and $2.7 million for the fourth quarter compared with $4.3 million for the prior year. These decreases were primarily due to lower patent expenses as well as lower employee expenses.

As of December 31, 2023, we had cash and investments of $29.8 million as compared to $43.6 million at December 31, 2022, and our cash burn for 2023 was $38.1 million, excluding net proceeds from financings. We believe our cash on hand is sufficient to fund operations through the end of 2024. Now I would like to turn the call over to Jim Brown, our Chief Executive Officer, for a business update.

[James Brown, executive]

Thank you, Tim. Hello, everyone. Thank you for joining us today for our fourth quarter 2023 update. .

Last November, we announced top line results from our AHFIRM Phase IIb clinical trial, which evaluated larsucosterol in alcohol-associated hepatitis. The key takeaway from these results is that patients treated with larsucosterol had lower mortality at 90 days compared with patients that received placebo. We're excited about the results and believe they show the potential for larsucosterol to provide a clinically meaningful survival benefit in these severe AH patients.

To our 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 lower number of adverse events for the active arms as compared with placebo. We are in ongoing communications with the FDA about the design for a potential confirmatory Phase III trial that could serve as the basis for an NDA filing. We expect to provide a further update in the second quarter.

We continue to be encouraged by the overwhelming support of AH thought leaders and the broader hepatology community who have had no effective therapy for these patients. Our Phase IIb AHFIRM trial was a placebo-controlled, double-blind, multinational study with 2 active arms of 30 milligrams and 90 milligrams of larsucosterol and a placebo arm of approximately 100 patients each. We allow physicians to utilize their standard practice for treating AH, which allow for the use of corticosteroids in addition to supportive care such as fluids and nutritional support as well as antibiotics for infection.

In total, we randomized 307 patients with severe AH from a global network of clinical sites, including leading hospitals in the United States, Australia, the EU and the U.K. 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 top line results in the key secondary endpoint of mortality at 90 days showed a 41% reduction with the 30-milligram dose of larsucosterol and a 35% reduction with the 90-milligram dose of larsucosterol when compared with placebo.

We also reported a numerical improvement in the primary endpoint of reduction in mortality or liver transplant at 90 days, though neither the primary or key secondary endpoint results achieved statistical significance. Even more impressive results were observed in the U.S. population, which comprised 3/4 of the total enrollment in AHFIRM, that was 232 out of the 307 patients. In the U.S. patients, we saw reductions in mortality of 57% and 58% with a 30 and 90-milligram arms, respectively, as compared with placebo. Although not part of the original 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 in the severely ill patients.

Ultimately, these clinically meaningful reductions in mortality, coupled with the reduction in adverse events in these severely ill patients reinforce a compelling risk reward proposition for larsucosterol. We are in active communication with the FDA about the design of a confirmatory Phase III trial in AH. We continue to believe that the AHFIRM data provide compelling evidence that larsucosterol could represent a safe and effective therapy with life-saving potential for AH patients.

As a reminder, AH is the cause of more than 150,000 hospitalizations each year in the U.S. and with a 90-day mortality rate of approximately 30%, it's responsible for tens of thousands of deaths each year. There are no effective treatments for AH. Larsucosterol meets our expectations in Phase III, and we are able to gain approval, it would likely be the first FDA-approved treatment for this disease. In addition to a high mortality rate, AH represents a significant cost to the U.S. health care system. Hospitalizations attributed to AH typically incur costs ranging from $60,000 to over $160,000. This results in a total cost to hospitals of approximately $10 billion annually. As a result, larsucosterol represents a potential multibillion-dollar opportunity in the United States alone. It could simultaneous provide overall cost savings to the health care system. We would now like to take any questions you may have.

[Operator]

[Operator Instructions] Your first question comes from François Brisebois with Oppenheimer & Co.

[François Brisebois, analyst]

Can you help us understand maybe a little more of the timing of when the discussions with the FDA took place? How long? And maybe how long after that you intend on updating the market?

[James Brown, executive]

Frank, right now, we're right in the middle of the communication, so I don't have a sense. I'm going to have some sense, but I really can't share much from where we are now. I think we'll have to wait for the process to complete. And then once we have clarity from them, then we will communicate that in a very rapid fashion.

[François Brisebois, analyst]

Understood. And then can you help us understand maybe a little bit of the feedback you're getting from physicians from the, obviously, the public cut of the data that you released?

[James Brown, executive]

Yes, it's been just extremely positive. As we all know, this disease hasn't had really any major breakthrough as far as being able to help these patients out in more than 40 years. And in our U.S. population, which was the 232 out of the 307, we had a 28% mortality, which fits right into that 30% we've been talking about that's been in the literature. The 150,000 hospitalizations, we're talking 40-plus thousand people dying every year in the United States. That's about as many as die from breast cancer, and it's a horrible circumstance, and there's nothing out there. So when they see these data, and they see 40%, 50%, 60% reduction in mortality and what appears to be a safer alternative to what they're giving today, certainly, we're not seeing anything in the way of increased side effects and potentially fewer, that matters a lot to them. So we've got tremendous grassroot support from the physicians to treat these patients, and they are looking forward to getting the product out there and have a great number of them volunteering to help out. I guess, I would let Norman, maybe Norman, what are you hearing from your colleagues with regard to that?

[Norman Sussman, executive]

Frank, it's overwhelmingly positive. One of the -- I think you were at you're at the big meeting in Boston. And one of the leaders who were one of the very first overall papers on AH, when I showed it to him, he said, man, this is the first positive result in over 30 years. It gives you some idea of the level of enthusiasm.

[François Brisebois, analyst]

Great. And then maybe can you share how involved with the FDA communications are thought leaders? Or just anything about that process? Or can you not disclose that?

[James Brown, executive]

Yes, probably not. I mean, typically, the communication between FDA is between the FDA and the company. But we do involve the thought leaders to a large extent, as we're looking at work in the additional study would look like, the Phase III trial. They're sort of involved heavily there. And we're also having people involved -- thought leaders involved as we analyze the data because this is -- I've heard a number of people say this is the most comprehensive study that's probably been done in AH. We're talking over 300 patients. We're learning a lot about how this disease is diagnosed and treated globally as well as here in the United States. And so as every week or so goes by, we end up learning more for this database and more about this disease and how to approach the disease. So it's really been just a wealth of information.

[Operator]

Your next question comes from Carl Byrnes with Northland Capital Markets.

[Carl Byrnes, analyst]

Congratulations on your progress here. I'm wondering if this is kind of on the heels of the prior questions. Do you have any comments in terms of the FDA's enthusiasm, considering the urgent unmet medical need to treat AH and the compelling U.S. subject subgroup analysis for larsucosterol, along with the profound safety profile? And then I have a follow-up as well.

[James Brown, executive]

Yes. I wouldn't want to be trying to state what the FDA feel. I think they're very clinical in their approach and very logical and rational. And so they're certainly -- there are -- I know at least 2 physicians in this division that have treated liver patients. So I'm sure that this matters a lot to them, but I couldn't speak to anything beyond that.

[Carl Byrnes, analyst]

Okay. Fair enough. And then do you have any comment on whether or not you continue to expect that the Phase III would be a U.S.-only enrollment type study? Or has there been any change in terms of that thought process?

[James Brown, executive]

No, I don't think so. I think we would still be looking to conduct it in US because of the homogeneity of health care provision in the United States. We've got a large population here, a huge problem here. And the disease is, although it certainly is a global disease and it influences people, unfortunately, everywhere around the world where alcohol is consumed. But in the United States, we do have our population. I think we've talked about this. Generally speaking, they were a bit younger than the outside regions of the world. Also, we tend to have a number of metabolic issues from the diets that we have. When you combine that with alcohol, you end up with patients that I think are maybe a bit more predisposed to this disease. But that being said, I do believe once this drug has a chance to be tested again, there'll be a nice opportunity for it, both inside the U.S. and outside U.S., because this disease is a global problem. .

[Operator]

Our next question is coming from Ed Arce with H.C. Wainwright.

[Wing Yip, analyst]

This is Thomas Yip asking a couple of questions for Ed. So first, just to clarify, that the communications that you're describing with the FDA. Is this the end of Phase II meeting. And also, assuming a path for this identified from this meeting, can you just talk about a rough time line to data readout, specifically how many months for the trial to begin and also how long the study will be able to finish?

[James Brown, executive]

Yes. I wouldn't want to comment on that until we have finished our communication with them around the protocol. But certainly, what we're discussing is a path forward for a Phase III to obtain approval for this drug. And that much, you can take home. But beyond that, I would wait until we finish the communications.

[Wing Yip, analyst]

Understood. Then perhaps as you are -- as you pointed out here in communications with the agency, can you share some preliminary thoughts? Just internally, what will you consider to be key elements of this pivotal study, specifically the -- some key endpoints that you will focus on? And also, how large do you anticipate the study would be?

[James Brown, executive]

Yes, I would want to wait until we finish with our dialogue with them. But it will be similar, I think, to what we have seen. I mean if you look at the trial that we just had, we looked at the 232 patients that we dosed within the United States, and we saw this near 60% reduction, statistics of below 0.01, [ 20% fewer ] adverse events, those kind of things. So I think we've got a good basis to build from as we look for a Phase III design, but a little wait until it's done before we talk about it. But I think if you consider that trial, you're going to be in the ballpark.

[Wing Yip, analyst]

Understood. Perhaps one more question from us. This one regarding the ALZET agreement with Charles River. Just wondering if you can share some financials to do or any licensing fee there? And how is your profit share structure between the 2 companies?

[James Brown, executive]

Yes. I don't know how much we would share on the financials, but I would -- we have Keith Lui on the line, and Keith is our Head of Commercial and Business Development and ALZET reports into him. So I'll let him kind of speak to the relationship with Charles River and the excitement that we have for being able to work with them. Keith, please?

[Keith Lui, executive]

Yes. Thanks, Jim. I don't think we discussed the financials in particular, but this is the first ever sales and marketing and collaboration for the ALZET product line that we've had in the U.S. and Canada. So we are certainly excited about that. And with that important collaboration with as quality of an organization as Charles River, that is a well-known organization worldwide and partnering, particularly with their research models and services group. They have a pretty robust sales force out there. It's a presence that we've never had in U.S. or Canada for the ALZET product line. So we are really looking forward to the partnership, which kicked off just on January 1. Sales force is trained. And I think we can report some of the positive findings from that relationship in subsequent calls.

[Wing Yip, analyst]

Got it. Thank you, again, for questions, and we look forward to your -- the conclusion of your discussions with the FDA for larsucosterol.

[Operator]

Thank you so much. It appears we have no additional questions at this time. So I would like to pass the floor back over to Dr. Brown for any additional closing remarks. .

[James Brown, executive]

With that, I just want to thank you for your time. And as always, if you have additional questions, please reach out to us, and we look forward to catching up. Thank you all. Take care.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation, and you may disconnect your lines at this time. .