DURECT Corporation

Greetings and welcome to the Direct Corporation third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Tim Papp, Chief Financial Officer. Thank you, Tim. You may begin.

Good afternoon and welcome to Direct Corporation's third quarter 2022 earnings conference call. This is Tim Papp, Chief Financial Officer of Direct. 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 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-Qs under the heading risk factors. To begin, 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 positive year agreement within a call. 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 affirmed 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 and 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 direct 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 enrollment in our Phase 2b affirmed trial in the second quarter of 2023, ahead of our previous guidance. Enrollment 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 Affirm has the potential to support an NDA filing. Our goal is to advance our suco-sterol as quickly as possible to approval in AH, an indication for which there are no approved therapeutics. On the POSIMR front, we're excited that our commercial partner, Intercol, launched the product in the United States last month. As Tim mentioned, we earned a total of $10 million in milestones from the inter-call 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 enrollment in our Phase 2b AFIRM trial for leucocesterol in patients hospitalized with severe AH. AFIRM 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 enrollment and have dosed more than 200 patients to date. We now expect to complete enrollment in the second quarter of 2023. This is ahead of schedule despite the challenges related to enrolling trials during the COVID pandemic. We now look forward to reporting top line data from Affirm 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 Leucocesterol AH program fast-track designation, and a positive result in a firm could support an NDA filing. With this in mind, paraciclosterol 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 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, varicosterol represents a potential multibillion-dollar opportunity in the U.S. alone, while simultaneously providing substantial overall cost savings to the healthcare system. We also believe that AH is a global concern and that ex-U.S. markets represent additional attractive market opportunities. Now we'd like to reemphasize why we are so optimistic about the use of laucicosterol in 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 leuciclosterol in the moderate to severe AH patients. 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 leuciclosterol. The prognostic scores from the AH patients in this trial, including LEAL and MELD scores, bilirubin, and other biomarkers were improved as compared to baseline. Lorsuclosterol 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 lorsuclosterol'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 Larcucosterol's potential to provide a benefit in multiple indications in addition to AH. Larcucosterol'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. Our sickle sterol binds to and inhibits the activity of three DNA methyltransferases, DNMP1, 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, the rate of DNA methylation is abnormally high, resulting in severe, even life-threatening consequences. In treating stressed liver cells whose DNA is hypermethylated, Larciclosterol returned 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 Larciclosterol's potential benefit for these patients. And now, I'd like to move on to Posenberg, one of our last remaining legacy products. POSMR is a novel, non-opioid, sustained-release 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 POSMR in the United States to Intercall Pharmaceuticals. We selected Intercall 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 Intercall during the third quarter. In August, we were issued a new patent by the US Patent Office, extending the US patent coverage for Posenberg to at least 2041. Under our agreement with Intercall, this triggered an $8 million milestone to direct. 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, Direct remains eligible for an additional $122 million in commercial, regulatory, and intellectual property milestone payments. We also received 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 Affirm and have enrolled more than 200 patients to date with over 60 clinical sites up and running. We are on track to complete dosing the last patient in the Affirm 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 Affirm trial will be successful is driven by our compelling Phase IIa study data, the mechanism of action of leucocosterol, which ties directly into the biology of AH, and our multiple preclinical animal studies, where we observed a profound survival benefit in multiple relevant acute organ injury models. We expect that if we achieve a positive outcome in the affirmed trial, this could support an NDA filing. We would now like to take any questions that you may have.