DURECT Corporation

Greetings and welcome to the Direct Corporation Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Ehrenberg, Chief Financial Officer. Thank you. You may begin.

Good afternoon, and welcome to our fourth 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 on our programs. 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 products and development, expected high 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 the SEC filings, including our 10-K and 10-Qs under the heading Risk Factors. Before I get into the financial results, it will be helpful if I explain how the sale of the Lactel product line is reflected in our financials. We sold the product line to Evonik for what we feel was an attractive price of $15 million in cash resulting in a gain on the sale of approximately $12.8 million. This gain is reflected in net income for the fourth quarter and net loss for the full year. As of December 31, the $15 million was shown on the balance sheet as cash held in escrow and it was released after a few days. Operating results related to the LACTA product line have been excluded from the continuing operations and presented as discontinued operations in the relevant financial statements for all periods presented. The total revenue in Q4 2020 was $2.2 million compared to $9 million in Q4 2019. Q4 2019 included the recognition of $6.1 million in deferred revenue from an upfront fee and milestone payment So excluding that, the comparison is $2.2 million versus $2.9 million. Product revenue, now largely from the all-debt pumps, was $1.9 million in Q4 2020 as compared to $1.7 million in Q4 2019. Our gross margin from product revenue was 78% in Q4 2020. Product revenue continues to be strongly cash flow positive. R&D expense was $6.7 million in Q4 2020 as compared to $9.3 million in Q4 2019. primarily due to lower expenses for DUR 928 and POSMIR-related expenses. SG&A expenses were $3.4 million in Q4 2020 as compared to $3.7 million in Q4 2019. Our underlying burn rate during the quarter was $7.9 million. At December 31, 2020, we had cash, cash in escrow, and investments of $56.9 million as compared to $64.8 million in December 31, 2019. In Q1 2021, we strengthened our balance sheet by raising net proceeds of $47.8 million from an underwritten public offering and sales under our ATM program. With that, thanks again for joining our call, and I will now turn the call over to Jim for an update on certain of our programs.

Thank you, Mike. Hello, everyone, and thank you for joining us today. Since the start of the fourth quarter, we have made tremendous progress. Most importantly, we initiated patient dosing in Affirm, our Phase 2b study of DOR928 in patients with severe AH. We have been steadily adding clinical sites for our firm. We currently have more than a dozen sites up and running with a plan to have 40 to 50 sites in total. The FDA granted DOR928 fast-track designation for the treatment of AH. We presented biomarker data from our NASH trial at the AASLD meeting that further supports the potential of DUR928 for this indication. The FDA approved Posimer for post-surgical analgesia for up to 72 hours after arthroscopic subacromial decompression. We appointed two highly successful and experienced biopharmaceutical executives to our board. We sold the Lactel absorbable polymers product line to Evonik for $15 million. And in February, we further strengthened our financial position through an equity offering that raised $47.8 million. Now let's move to our programs. I'll begin with the opportunity for DUR928 in the treatment of alcohol-associated hepatitis, or AH. DUR928 is an endogenous sulfated Osteosterol that acts as 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 mitochondria, reducing lipotoxicity, regulation of inflammatory or stress responses, and promoting cell survival. We announced earlier this year that we are dosing patients in the AFIRM trial. AFIRM is our 300-patient phase 2B efficacy and safety trial. It is a placebo-controlled double-blind multinational study. The primary endpoint is 90-day survival. There are over 122,000 hospitalizations per year in the United States for AH. There is no approved therapy for AH. We demonstrated 100% survival at 28 days in our DUR928 phase 2A AH trial. The average historical 28-day mortality rate for AH is 26%, and the 90-day mortality rate is 29%. Based on the results from the Phase IIa A8 trial and the fact that survival is the primary endpoint for the affirmed trial, 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 the new drug approvals between 2005 and 2012 were based on a single pivotal trial, and 42% of the new drugs launched in the United States in 2018 were approved based on just a single trial. AH is an acute form of alcoholic liver disease, or ALV. It is characterized by long-term heavy intake of alcohol, 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. While the majority of AH patients are between 40 and 60 years old and also have liver cirrhosis, approximately 20% of the AH population are in their 20s and 30s and may not have cirrhosis. Eighty-nine percent of hospitalized AH patients have insurance. Unfortunately, during the pandemic, alcohol consumption in the United States has increased. In 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. As I said earlier, there is no approved treatment for AH. What physicians have available for them today primarily involves abstinence and supportive care, which includes nutrition and hydration. An analysis of 77 studies published between 1971 and 2016, which included data from more than 8,000 patients, showed the average overall mortality for AH was 26% in 28 days and 29% at 90 days and 44% at six months. 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 cancers. According to the AA-SLV guidance, steroids may be used in certain patients with severe AH. However, steroids have shown only minimal effect and may increase infection rates with AH patients. In the SCOP-AH trial, a study of more than 1,000 AH patients, steroids significantly increased the infection rate. The SCOP-AH trial also convincingly demonstrated that steroids did not improve the survival rate over placebo at 90 days or at one year. Many AH patients are not eligible for steroids. In fact, according to one recent study, less than half of severe AH patients are eligible for steroid use. 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, and the cost of a liver transplant exceeds $875,000. The average hospital stay for an AH patient is approximately seven days, with many staying significantly longer. In our DUR928 phase 2A trial, 14 of the 19 patients were discharged in less than four days after receiving only one IV infusion of DUR928. All of the 19 patients in our phase 2A trial survived through the 28-day follow-up period of that trial. Twelve of these 19 patients were classified as severe based on the MELD scores, Also, 15 of the 19 were classified as severe based on a scoring system that is specific to AH called Modry's discriminant function score. Prognostic scores, including Leal and Meld, as well as Dilly-Ribbon, serum creatinine levels, and INR were all improved in this Phase IIa trial. EOR928 was well tolerated by all the patients at all doses that were evaluated in this trial, including in all of the severe AH patients. There were no serious drug-related adverse events reported in this trial. To summarize the DUR928-AH program, we have initiated dosing in the AFFIRM trial for patients with severe AH. The AFFIRM trial is a 300-patient double-blind randomized placebo-controlled multinational trial. The AFFIRM trial will evaluate three treatment arms, 30 milligrams and 90 milligrams of DUR928, and a placebo arm. As with the Phase 2A trial, patients in the affirmed trial will receive an infusion of DUR928 or placebo on day one, and if they are still in the hospital on day four, they will receive a second infusion. The primary endpoint of the affirmed trial will be 90-day survival. We have more than a dozen clinical sites actively recruiting patients. We expect to have approximately 30 clinical sites in the United States and 20 sites in Europe and Australia. We were granted fast track designation by the FDA for our AH program. We expect that if we achieve a robust survivor benefit, this study may support an NDA filing. Next to COVID-19. Today, we announced that we are discontinuing our clinical trial for DOR928 in critically ill COVID-19 patients. Because of the rapidly evolving state of the pandemic, we were not able to expand beyond the original three clinical sites or enroll a meaningful number of patients in this trial. As a comparison, we have more than four times the number of clinical sites up and running for our AFIRM trial. The people and resources that we are using to support the COVID-19 trial are now being redirected to support the AFIRM trial. Next, I will update on the DOR928 NASH program. In May of 2020, we reported positive top-line results from our Phase 1b trial of DOR928 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 per dose group. Key endpoints included safety and pharmacokinetics, clinical chemistry, and biomarkers, as well as liver fat content and liver stiffness by imaging. This includes both MRI, PDFS, and FibroScan. DURNA28 treatment in this trial resulted in reductions from baseline of liver enzymes, liver fat, liver 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 milligrams per deciliter. Forty-three percent of the patients in this trial had at least a 10% reduction in liver 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. CUR928 was well-tolerated, all three doses evaluated. There were no serious adverse events reported during this study. Pharmacokinetic parameters after repeat dosing were comparable to those after a single dose from a prior NASH study, indicating no accumulation after repeat dosing. Also, drug exposure was dose-dependent. A poster reviewing additional data from this trial was presented at last November's AASLD conference. This poster showed reduction in biomarkers from baseline, including full and cleaved cytokeratin-18, C-reactive protein, plasmidogen-activated inhibitor 1, interleukin-1 beta, interleukin-6, interleukin-17, interleukin-18, tumor necrosis factor, and adipotectin. These biomarkers moved in concert with reduction of liver enzymes, liver stiffness, and serum lipids. This is particularly impressive when you consider the patients were only dosed for four weeks. These results, together with the continued safety profile of DUR928, supports further evaluation of DUR928's potential in NASH. We are currently planning our next steps for NASH. Next, to the POSMIR program. This quarter also marked the FDA approval of POSMIR. Posimer is a novel, non-opioid, sustained-release local analgesic that is approved to produce post-surgical analgesia for up to 72 hours following arthroscopic somochromial decompression. This approval provides an important new option to orthopedic surgeons in their effort to minimize opioid use while managing acute pain for up to 72 hours after this painful surgery. We are in discussions with potential commercial partners for Posimer. Our plan is to use the proceeds from the partnership to help fund our epigenetic program and our flagship product, DUR928, for the treatment of alcohol-associated hepatitis. Osmer is the only approved sustained-release bupivacaine product indicated for up to 72 hours of post-surgical analgesia from a single administration. Infusion pumps were the first systems to enable sustained delivery of bupivacaine within a surgical wound to treat post-operative pain. The infusion product literature indicates that the minimal bupivacaine exposure needed to maintain sustained postoperative analgesia is approximately 10 milligrams per hour. Based on this, the product would need to contain approximately 720 milligrams of bupivacaine hydrochloride in order to provide up to 72 hours of post-surgical pain relief. Cosimer contains 660 milligrams of bupivacaine base, which is equivalent to 743 milligrams of bupivacaine hydrochloride. We believe this is enough bupivacaine to provide sustained analgesia for up to three days without the need for a pump and catheter system. And Posimer was indeed approved for post-surgical pain reduction for up to 72 hours following surgery. Posimer contains more bupivacaine than any other approved single-gose sustained relief bupivacaine product. We believe this may be an important differentiator in the market. Another potential differentiator for Posimer is the ease of application. At the end of surgery, Posimer is administered into the subacromial space under direct arthroscopic visualization, where it continuously releases bupivacaine for 72 hours or more. Posimer is applied directly into the surgical wound, the primary source of post-surgical pain. The FDA approval is based on positive data from a randomized placebo-controlled clinical trial in patients undergoing arthroscopic subacrobial decompression surgery with an intact rotator cuff. The primary outcome measures were mean pain intensity and total opioid rescue analgesia administered, both evaluated over the first 72 hours after surgery versus placebo. Coggenberg demonstrated a statistically significant improvement in both primary outcome measures. A 1.3 point reduction in mean pain intensity on a 0 to 10 point pain scale. This represents a 20% reduction in pain and is statistically significant at 0.01. This trial also demonstrated a 67% reduction in IV morphine equivalent rescue opioid use, from the median of 12 milligrams in the placebo group to 4 milligrams in the Posner group. This is also statistically significant to 0.01. When we started the post-operative pain control program that led to Posner, we did so because of the opioid epidemic. Stories of the families impacted by this epidemic are heartbreaking. Unfortunately, the opioid epidemic in our country has not improved over the years. It has gotten much worse. Today in the United States, approximately 200 people die every day due to opioid abuse. The objective of the POSIMR program is to give healthcare providers and in turn their patients a non-opioid alternative for post-operative pain control or at a minimum, a way to reduce the amount of opioids required to reduce post-surgical pain. Osimer is a product that can provide up to 72 hours of pain relief, and in the pivotal trial demonstrated a statistically significant reduction of both pain and the use of opioids. Double-chromial decompression is a shoulder surgery used to treat impingement syndrome, a common repetitive use injury that causes pain when the arm is raised over the head. The procedure is typically performed arthroscopically, meaning that several small incisions are made in the skin and muscle of the shoulder through which a camera lens called an arthroscope and surgical instruments are inserted during surgery. Arthroscopic subacromial decompression is generally considered outpatient surgery, and most patients go home within a few hours of surgery. The recovery period may extend from weeks to months, but the most intense pain typically occurs during the first three days after surgery and is often managed with oral opioids. There are over 600,000 surgeries involving arthroscopic subacromial decompression performed each year in the United States. We view subacromial decompression as a beachhead to get POSMAR on the market, and we believe the opportunity to expand the label to cover a broader group of surgical procedures represents significant upside. To summarize, we believe there are a number of product features that have the potential to differentiate POSMAR on the market. POSMAR is the only sustained-release bupivacaine product indicated for up to 72 hours of post-surgical analgesia from a single application. Posimer contains more bupivacaine than any other approved single-dose sustained-release bupivacaine product. And according to investigators in our clinical study, Posimer's ease of application will be a welcome benefit. In addition to these attractive features, we believe there are a number of potential avenues available to expand the label to include more surgical indications going forward. Regarding the business development process, we have multiple interested parties, and the process is underway. We are working to put a deal in place in time for our partner to launch in the second half of this year and expect that the deal would include an upfront license fee and royalties. Moving on to other accomplishments. This quarter, we also appointed two new members to our board of directors, Gail Medeiros, MBA, and Mohammad Azab, MD, Master of Science and MBA. These two senior industry veterans bring extensive drug development clinical research, and medical experience. Their addition to our board is part of the evolution of DIRECT. In summary, since our last quarter's call, we initiated dosing and affirmed our Phase 2B study of DOR928 in patients with severe AH. The FDA granted fast-track designation for the use of DOR928 in the treatment of AH. Based on the results from the Phase 2a AH trial with survival as the primary endpoint for AFIRM, we are optimistic that if we are able to demonstrate a robust survivor benefit in this trial, it may support an NDA filing. We presented biomarker data from our NASH trial at the AASLD meeting that further supports the potential of DOR928 for this indication. Since coming on board in November, our new CMO, Dr. Norman Sussman, and his team have greatly expanded the number of clinical sites for the affirmed trial in the United States and are on track to initiate sites in Europe this year. The FDA approved Posner for post-surgical analgesia for up to 72 hours after arthroscopic subacromial decompression. We appointed two highly experienced biopharmaceutical board members. We sold the Lactel absorbable polymers product line to Evonik for $15 million, which we believe was a very attractive price. And in February, we further strengthened our financial position by raising $47.8 million in equity, so we now have a strong balance sheet as we focus on the affirmed trial. With that, we'd now like to take any questions that you may have.