DURECT Corporation

Thank you. Greetings and welcome to Direct Corporation's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Mike Ehrenberg, Chief Financial Officer. Please go ahead, sir.

Good afternoon, and welcome to our third quarter 2020 earnings conference call. This is Mike Ehrenberg, Chief Financial Officer of Direct Corporation. I will provide a brief review of our financial results, and then Jim Brown, our President and CEO, will provide an update of our program. 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 Direct'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-Q under the heading Risk Factors. Let me now turn to our financials. Total revenue in Q3 2020 was $2.7 million compared to $10.8 million in Q3 2019. Q3 2019 included the recognition of $6.2 million in deferred revenue from an upfront fee and milestone payment. So excluding that, the comparison is $2.7 million versus $4.6 million. Product revenue, largely from the sale of Allzet pumps and Lactel polymers, was $2.4 million in Q3 2020 compared to $3.0 million in Q3 2019. The gross margin for these combined product lines was $55. continue to be strongly cash flow positive. R&D expense was $7.0 million in Q3 2020 compared to $7.9 million in Q3 2019, primarily due to lower expenses in partner-funded R&D programs and lower POSMIR-related expenses. SG&A expenses were $3.5 million in Q3 2020 as compared to $3.8 million in Q3 2019. Our underlying burn rate during the quarter was $7.6 million, In Q3, we raised $6.1 million net of expenses by selling about 2.7 million shares through our ATM facility at an average price of $2.32. At September 30, 2020, we had cash and investments of $49.8 million as compared to $51.3 million at June 30, 2020, and $64.8 million at December 31, 2019. With that, thanks again for joining our call, and I will now turn the call over to Jim for an update of certain of our programs.

Thank you, Mike, and hello, everyone. Thank you for joining us today. I hope you're all doing well. During the quarter, we made exciting progress on a number of fronts. We announced the design of a firm, the DUR928 Phase 2B Alcoholic Hepatitis Trial, and we are now initiating clinical sites and expect to begin dosing patients very soon. We started dosing in the Phase 2 trial for DUR928 in hospitalized COVID-19 patients with acute liver or kidney injury. After reporting positive top-line data from the Phase 1b NASH study with DOR928, we announced that additional data from this trial will be presented at the upcoming AASLD liver meeting. We continue to work with the FDA on the POSMR NDA. And today, I'm pleased to announce our hiring of Dr. Norman Sussman as our Chief Medical Officer. DUR928 is an epigenetic regulator that modulates the expression of multiple clusters of master genes that are involved in many important cell signaling pathways. DUR928 up and down regulates more than 1,000 genes, involving functions that include stabilizing the mitochondria, reducing lipotoxicity, regulation of inflammatory or stress responses, and promoting cell survival. I'll begin with an overview of the opportunity for DUR928 in alcoholic hepatitis, or AH. There are 122,000 hospitalizations per year in the United States for AH. There are no approved therapies for AH. We demonstrated 100% survival at day 28 in our phase 2A AH trial. The historic 28-day mortality rate for AH is 26%. Currently, we are initiating sites and are on the cusp of starting patient dosing in AFIRM, the 928 Phase IIb AH Safety and Efficacy Trial. AFIRM is a 300-patient, placebo-controlled, double-blind, multinational study. The primary endpoint will be 90-day survival. Based on the results from the Phase IIa AH Trial and the fact that survival is the primary endpoint for AFIRM, we are optimistic that if we are able to demonstrate a robust survival benefit in this trial, it may support an NDA filing. Approval based on a single trial is not uncommon. In fact, 37% of new drug approvals between 2005 and 2012 were based on a single pivotal trial. And 42% of new drugs launched in the United States in 2018 were approved based on a single trial. AH is an acute form of alcoholic liver disease, or ALD. It is characterized by long-term heavy alcohol intake, a recent period of increased alcohol consumption or binge drinking, as well as jaundice, fever, fatigue, weakness, nausea or vomiting, loss of appetite, and a depressed or negative mental state. The AASLD guidelines provide the following criteria for the diagnosis of AH. An onset of jaundice within the past eight weeks. Ongoing consumption for at least six months of more than 40 grams of alcohol a day for a woman or 60 grams of alcohol a day for a man. To put this type of alcohol consumption into perspective, this means approximately three standard drinks per day for a woman and four for a man for the last six months. A 12-ounce beer, a glass of wine, or one and a half ounces of spirits is considered one standard drink. Also, less than 60 days of abstinence before the onset of jaundice, serendipity levels greater than 3.0 milligrams per deciliter, and these patients also typically have elevated liver enzymes. If you think this disease did not affect people you know, you're wrong. While the majority of AH patients are between 40 and 60 years old and have liver cirrhosis, approximately 20% of the AH population are in their 20s and 30s and may not have cirrhosis at all. 89% of hospitalized AH patients have insurance. Unfortunately, during this pandemic, alcohol consumption in the United States has increased. According to a September publication in the Journal of American Medical Association Network, on average, alcohol was consumed one more day per month by three of four adults in the United States. For women, there was a more significant increase of 0.18 days of heavy drinking with a 95% confidence interval, from a baseline in 2019 of 0.44 days. This represents an increase of 41% over baseline and equates to an increase of one day for one in five women. In my conversations with physicians who treat this disease, they have told me the incidence of AH has also increased. According to many of these doctors, they are also seeing a larger number of younger AH patients. there is no approved treatment for AH. What physicians have available to them today primarily involves abstinence and supportive care, which includes nutrition and hydration. An analysis of 77 studies published between 1971 and 2016, which include data from more than 8,000 patients, showed the overall mortality from AH was 26% in 28 days, 29% at 90 days, and 44% at 180 days. The high one-month mortality rate from the time of diagnosis is similar to some ferocious cancers, such as AML and advanced breast or pancreatic cancer. According to the AASLD guidance, steroids may be used in certain patients with severe AH. However, steroids have shown only minimal benefit and may increase the infection rate in AH patients. In the STOP-AH trial, a study of more than 1,000 AH patients, steroids significantly increased the infection rate. The STOP-AH trial also convincingly demonstrated that steroids did not improve survival rate over placebo at 90 days or at one year. And many AH patients are not eligible for steroids. In fact, according to one recent study, less than half of severe AH patients were eligible for steroid use. The hospitalization costs for AH are more than $50,000 per patient in the first year. Alcoholic liver disease is becoming a leading cause of liver transplants in the United States. The cost of the liver transplant exceeds $800,000. Regarding hospital stays in AH, the average hospital stay for an AH patient is approximately seven days, with many staying significantly longer. In our DUR928 Phase IIa AH trial, 14 of the 19 patients were discharged in less than four days after receiving only one infusion of DOR-928. All of the 19 patients in the study survived through the 28-day follow-up period of the trial. Twelve of these 19 patients were classified as severe based on their MELD score. Also, 15 of the 19 were classified as severe based on the scoring system that is specific to AH called Madre's discriminant function score. DOR-928 was well-tolerated by all of the patients and at all doses evaluated in the study, including in all of the severe AH patients. There were no serious drug-related adverse events reported in this trial. AH patients have greatly elevated bilirubin levels. The minimum bilirubin level to be diagnosed with AH is 3, which is about 2.5 times the upper limit of normal. Patients in our Phase IIa trial had an average bilirubin of over 14. Significant early, that is, Day 7, reductions of bilirubin levels from baseline are a critical factor in determining a patient's prognosis. AH patients treated with DOR928 in our study had significant Day 7 reductions in bilirubin. Diagnostic scores, including LEAL and MELD, as well as serum creatinine levels and INR, were also improved in this trial. To summarize the DUR928-AH program, during the quarter we announced the design of the AFFIRM trial for patients with severe AH. AFFIRM is a 300-patient, double-blind, randomized, placebo-controlled, multinational trial. AFFIRM will evaluate three treatment arms, 30 mg and 90 mg of DUR928 and a placebo arm. As with the Phase 2A trial, patients in the AFIRM trial will receive an infusion of the UR928 or placebo on day one, and if they are in the hospital on day four, they will receive a second infusion. The primary endpoint for AFIRM will be 90-day survival. We are currently initiating clinical sites and expect to dose the first patient soon. We expect that if we achieve a robust survival benefit, the study may support the NDA filing. Next, I will update on the DUR928 Phase II trial in hospitalized COVID-19 patients with acute liver or kidney injury. DUR928 is not an antiviral agent. It's a naturally occurring epigenetic regulator that has tremendous potential to treat acute organ injury, including the systemic inflammation, such as is the case of sepsis. Phase IIa clinical evidence in patients with acute alcoholic hepatitis And preclinical evidence in a number of multi-organ injury models, which demonstrate protection of the lungs, liver, and kidneys, as well as demonstrated safety in AH patients in our Phase IIa studies, suggest that DUO928 may be able to help COVID-19 patients. In addition to lung injury, patients with severe COVID-19 can develop multi-organ injury, including acute kidney, liver, and or cardiac injury, resulting from direct viral infections or complications from the viral infections. These may contribute to poor outcomes in patients with COVID-19. From a safety perspective, DOR928 has been well-tolerated in nearly 300 subjects, both healthy volunteers and patients, in multiple Phase I and II studies. Most relevant to COVID-19 are the results from our Phase IIa study of DOR928 in AH patients. As I described earlier, all 19 patients treated with DOR928 survived the 28-day study. while one-month mortality in AH clinical trials is on average 26%. Besides multi-organ injury, one of the main complications associated with the death of AH patients, similar to those patients with COVID-19, is sepsis. Therefore, if acute organ injury could be effectively treated or prevented in hospitalized patients with COVID-19, lives could be potentially saved. This Phase II trial is a double-blind, placebo-controlled, multi-center study to evaluate the safety and efficacy of DOR928 in hospitalized, severe, or critically ill COVID-19 patients with acute liver or kidney injury. This study is an 80-patient trial with a 3-to-1 ratio of accurate to placebo. The dose of DOR928 is 150 mg by intravenous infusion on day 1 and day 4. The primary efficacy endpoint is a composite of survival and being free of acute organ failure at day 28. It is our hope that DOR928, in combination with a standard of care, will be able to help COVID-19 patients with acute liver or kidney injury, which, if successful, ultimately could save the lives of some of these patients. We dosed our first patient in this trial in September. We now have drug at multiple sites, and we are in the process of adding more sites. Next, I will update on the DUR928 NASH program. In May of 2020, we reported positive top-line results from our Phase 1b trial of DUR928 in NASH patients with stage 1 to 3 fibrosis. This was a randomized, open-label, and multi-center study of DUR928 in NASH patients conducted in the United States. DUR928 was dosed orally for 28 consecutive days at 50 milligrams or 150 milligrams once a day or 300 milligrams twice a day. and followed up for an additional 28 days. A total of 65 patients completed the study, and there were at least 20 patients for dose group. Key endpoints included safety and pharmacokinetics, clinical chemistry and biomarkers, as well as liver fat content and liver stiffness by imaging that includes both MRI, PDFF, and fiber scan. EUR928 treatment in this trial resulted in a global reduction from baseline of liver enzymes, liver fat, stiffness as measured by imaging, and serum lipids. Many of these reductions were statistically significant. A statistically significant 24% reduction of plasma triglycerides was seen in the 16 patients who had baseline triglyceride levels above 200 mg per deciliter. 43% of the patients in this trial had at least a 10% reduction in lipid fat as measured by MRI PDFF. In this group of patients, Liver fat, liver stiffness, liver enzymes, and serum lipids were statistically significantly reduced from baseline. B1928 was well-tolerated at all three doses evaluated. There were no serious adverse events reported during the study. Pharmacokinetic parameters after repeated dosing were comparable to those after a single dose from a prior study, indicating no accumulation after repeat dosing. Also, drug exposure was dose-dependent. We believe having multiple important parameters all moving in the desirable direction are particularly impressive when you consider the patients were only dosed for one month. Additional results will be presented in the poster at the upcoming AASLD meeting, which is going to be between November 13th and the 16th. These results, achieved over a one-month course of treatment, together with a continued safety profile of DUR928, are promising indicators of DUR928's potential in NASH. Next, to the POSMR program. POSMR is our investigational postoperative pain relief depot that uses our patented SABR technology and is designed to deliver butyricane to provide up to three days of pain relief after surgery. Since our last earnings call, we have continued to communicate with the FDA regarding their review of the POSMR NDA and believe they are making progress with their review. If approved, we plan to license Fosmer to a partner for commercialization in the United States. We expect that this deal would include an upfront license fee and royalties based on product sales. Today, it's my pleasure to welcome Dr. Norman Sussman as our new Chief Medical Officer. Dr. Sussman is a renowned hepatologist with a proven track record in clinical research of liver diseases. He will provide critical support in advancing our clinical programs, and we look forward to his contribution. Dr. Sussman has extensive clinical experience and expertise in the liver disease field and brings over 30 years of clinical research and development experience in academia and industry. He joins direct from Baylor College of Medicine, where he was an associate professor of medicine and surgery. Dr. Sussman has been a faculty member of Baylor College of Medicine intermittently since 1985. During this time, he has served as a principal investigator for research focused on assessment and management of acute liver failure and artificial liver support. Dr. Sussman has also had leadership experience in industry as the founder and vice president of both Hepatix Inc. from 1993 to 1995 and Amphioxus Cell Technologies from 1995 to 2003. Most recently, he has served in senior leadership roles as a member of the Baylor Faculty Senate and as director of Project ECHO, the telehealth program at Baylor's St. Luke's Medical Center. Dr. Sussman received his MBBCH from the University of Witwatersrand in Johannesburg, South Africa. He then completed his residency at St. Louis University Hospital and his postdoctoral fellowship at Washington University. He is board certified in internal medicine, gastroenterology, and transplant hepatology. Dr. Sussman is also a fellow of the American Association of the Study of Liver Disease, which is a designation that recognizes his superior level of professional achievement in the field of hepatology. He is a thought leader in the field of hepatology, an excellent clinician and communicator, and we're excited to have him with us as a member of our senior team. We are planning a virtual event later this month to introduce Dr. Sussman to our investors. We will announce the details of this event in the near future. In summary, we're excited about the progress on DUR928, the flagship of our epigenetic regulator program. We have begun clinical site initiation visits and are nearing first patient dosing in a firm, our Phase IIb DUR928 trial in severe AH patients. Based on the results, from the Phase II AAH trial and the fact that survival is the primary endpoint for a fund, we are optimistic that if we are able to demonstrate a robust survival benefit in this trial, it may support an NDA filing. We initiated patient dosing and are adding clinical sites into the DUR928 Phase II trial in COVID-19 patients with acute liver or kidney injury. In addition to the positive top-line results we've already announced from our Phase 1b trial of DOR928 in NASH patients with liver enzymes, liver fat, and liver stiffness, as well as plasma lipids all moving in the right direction, we will be presenting biomarker data from this NASH trial at the AASOV meeting this month. When we combine these results with the safety profile of DOR928, we believe it has a chance to play an important role in the treatment of NASH. Today, we welcome Dr. Norman Sussman, Direct New Chief Medical Officer. His experience in patient focus will be critically important for the development of DOR928 in AH and for other indications. And during the quarter, we continue the correspondence with the FDA regarding the Posmer NDA and believe they're making progress on their review. With that, we now like to take any questions you may have.