DURECT Corporation

Greetings and welcome to the Direct Corporation fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow a formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to our host, Tim Papp, Chief Financial Officer. Thank you. You may begin.

Good afternoon and welcome to Direct Corporation's fourth 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 fourth quarter and full year 2022 financial results. Total revenues in 2022 were $19.3 million compared with $14 million in 2021. 2022 revenues included $10 million of milestone payments related to our POSIMR agreement with Inacol, while 2021 included approximately $5.2 million of revenue attributed to an upfront license payment and sale of manufacturing supplies and excipients. Inacol commercially launched POSIMR in September 2022. For the fourth quarter of 2022, revenues were $3.3 million compared with $7.3 million for the prior year. This decrease is due to the INICOL upfront license revenue we recorded in Q4 2021. R&D expense was $36.9 million in 2022 as compared to $31.8 million for the prior year and $10 million for the fourth quarter compared with $8.4 million for the prior year. The increases were primarily due to higher clinical trial expenses for our ongoing Affirm trial, contract manufacturing expenses for Larcico Sterol, and employee benefit costs partially offset by a decline in R&D spending on Posimer. SG&A expenses were $15.9 million as compared to $14.4 million for the prior year, primarily due to higher employee benefit costs and patent expenses. For the fourth quarter, SG&A revenues were $4.3 million compared with $4.5 million for the prior year, so relatively flat. As of December 31st, 2022, we had cash and investments of $43.6 million as compared to $70 million at December 31st, 2021, and our cash burn for 2022 was $26.4 million. We also completed a registered direct offering in February 2023, raising $8.8 million in net proceeds, bringing our pro forma cash to $52.4 million. We believe our cash on hand is sufficient to fund operations into the first quarter of 2024. Now, I would like to 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 fourth quarter 2022 update. The fourth quarter was a strong one with consistent forward progress on our affirmed trial. We are excited to remain on track to announce top line results from our Phase IIb AFIRM trial in the second half of this year. Enrollment continues to progress nicely. We have now dosed more than 260 patients out of our target of 300. We continue to expect completion of enrollment in the second quarter of 2023. If successful, we believe AFIRM has the potential to support an NDA filing. Our goal is to advance losuclosterol as quickly as possible to approval in AH, an indication for which there are no approved therapeutics. The primary focus of the company is on completing enrollment in our Phase IIb AFIRM trial for losuclosterol 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 currently have over 60 sites open, including leading hospitals in the United States, Australia, the EU, and the UK. We are working with renowned liver centers and some of the world's preeminent thought leaders in AH. The FDA has granted our Larcico-Sterile AH Program Fast-Track designation and a positive result in a firm could support an NDA filing. With this in mind, losucosterol 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 over 40,000 deaths in the United States each year from AH. We estimate that in the U.S. alone, on average, more than 100 people die every day from this disease. Our goal as a company is to bring a safe and effective treatment to these patients to help alleviate the suffering and save lives. 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 approximately $50,000 to approximately $150,000. For those patients who receive a liver transplant, the average cost is approximately $875,000 per transplant in the United States, and these patients are subject to a lifetime of immunosuppression. Our sucrosterol represents a potential multi-billion dollar opportunity in the U.S. alone, while simultaneously providing substantial overall cost savings to the healthcare system. AH is also a global concern, allowing our sucrosterol the potential to serve ex-U.S. AH patients and their healthcare systems. These ex-U.S. markets represent additional attractive market opportunities. Our confidence that the affirmed trial will be successful is driven by our compelling Phase IIa study data, the mechanism of action of larciclosterol, 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. In summary, We continue to make great strides with Affirm and have enrolled more than 260 patients to date and have over 60 clinical sites open. We are on track to complete dosing the last patient in the Affirm trial in the second quarter of this year, which would enable reporting of top-quality results in the second half of this year. If successful, we believe Affirm has the potential to support an NDA filing. We would now like to take any questions you may have.

Thank you. And ladies and gentlemen, at this time we will be conducting our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star followed by the number two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Francois with Oppenheimer. Please state your question.

Hi, thanks for taking the question, and congrats on staying on track here. I was just wondering, in terms of the potential of the data to have an NDA filing, what gives you that confidence that you wouldn't need another trial before filing?

It comes from a couple of directions, but the primary one is that they're are no approved therapies today for this disease. And the mortality rate is so high. You know, the 90-day mortality is 30%. And depending on your MELD score, it can be even higher. You know, if it's up, I'll let Norman speak to this as well, but I think it's north of 25 MELD, it gets significantly higher. So, you've got a very high mortality and no therapy out there. That being said, we've had some communications with the FDA that have indicated as well the potential for that, but they will never commit to anything until, you know, they have the data in hand, quite frankly, until they have the submission in hand. But that's where we sit right now, both with the FDA and the EMA. But, Norman, would you want to add anything to that?

No, I think, hello, Frank. I think that covers it all. It is one of the FDA regulations. There's a specific, sorry, that topic is specifically addressed and FDA confirmed that it does qualify under the circumstances that Jim just mentioned.

Maybe a second one here, Norman. In terms of the eligibility of patients here for getting a liver transplant, can you just maybe discuss the percentage of patients with age that aren't even eligible just because of how recently they have been consuming alcohol?

So it's It's a moving target because until a few years ago there was an absolute rule that was observed by most centers that people had to be abstinent for six months. That started to fall away and centers increasingly have dropped the requirement, the absolute requirement for six months. And so even the ASLD changed their guidance to say you could consider it in a severe patient Having said that, you know, it's never going to be a solution to the problem because there are only about 9,000 transplants available. Half of those are for things other than alcohol. If you see 4,500 transplants and, you know, 160,000 admissions, it is a huge imbalance. We'll never be able to solve it through transplant. But the time factor has become Less rigid, it comes down more now to numerous social factors and behavioral factors.

Understood. And then, oh, go ahead, Jim.

No, I was just going to say, Norman already mentioned it, but the social factors, whether or not you have the insurance, whether you can pay for it also comes to play, unfortunately.

And is there a percentage of people that you would expect would be insured to be treated here?

Well, patients who have AH, there's over 85% or so have insurance, but one needs that in order to get a transplant pretty much.

Right. Yeah. The trial, there are a lot of experts who work in transplant centers, but a lot of patients get admitted to places where transplant isn't an option unless the patient gets transferred out of there.

Gotcha. Okay. And then lastly, just as we're, this is the year where the data is coming here. So it's very exciting for, I guess, the old DER 928, like it's a sterile now. But any thoughts on commercialization? It's just in terms of the U.S., you talked about the ex-U.S. opportunity as well, which is unfortunately a large opportunity. But I was just wondering any thoughts about Maybe, you know, the amount of reps or just the commercial bill that would be necessary if able to file off this data in order to get ready, just to get a better feel for what will be necessary to take this on your own. And, you know, are the thoughts to take it commercial on your own in the EU, in the U.S.? Or just, you know, any color on commercial thoughts would be helpful. Thank you.

Thank you. Yeah, first off, yeah, ex-U.S., we would expect that we would have a partnership in place, and so that's a process that's ongoing. Within the U.S., we look forward to doing it ourselves, and there are some long-tail things that Keith Louie, who's our head of commercial here at Direct and business development as well, already has underway, and he can speak to some of his initiatives.

Yeah, it's a good question. Thanks, Francois. I would say... As far as commercial activities at this point in the development process, we're certainly looking into the market access aspect of things, given that this is likely going to be delivered under the inpatient system and under DRG. We've done a lot of landscaping work on current status of care and those processes. As far as marketing strategy, we have various launch readiness review processes already underway to ensure that all of our cross-functional teams are aligned on the same plan going into top line results and as soon as we turn that card. So I can't give you specifics on Salesforce sizing and all that work is ongoing right now, but surely by the time we get to top line results, I think we're in the right preparation state of mind and at the right level to be able to move very quickly upon positive results. Yeah, I think it's safe to say it would be under 100 reps, don't you? Yeah, yeah, for a hospital product like this. And, again, you know, we always start with somewhere on every launch I've worked on somewhere between 50 and 100. And for a hospital-based product like that, I think, you know, that range is still applicable. Yeah.

And for some of the longer tail things like the codes and the like, you know, we've already got the process in motion. Yeah. Yeah. Good. Good.

Okay, great. And in terms of awareness, you know, for MSOs and whatnot, is age something that liver transplant docs are very much aware of, or is it something based on the fact that there's nothing really that's been working and the steroids haven't really been working for a long time, that there's a lot of education that's still needed?

Well, maybe Keith, you can speak, and then Norman can follow up on that, because two different perspectives about the same.

Yeah. No, it's a very good point, and... One that we certainly took to heart and actually it's a great entry point for our new disease awareness site that we actually just launched. It's called Explore AH Epigenetics. And so there is awareness of AH, particularly over the past couple of years, we've seen an increase in the incidence of AH, unfortunately, over the course of the past couple of years of the pandemic. So it has become higher on folks' radar screens for gastros and hepatologists. But the intersection between AH, the current treatment paradigms, which we all think and hepatologists think are subpar, and why they're still high in the medical need, the intersection between AH and the role that epigenetics may play is the reason why we developed this educational website that's an unbranded, just purely looking at, again, that intersection of epigenetics and alcohol-associated hepatitis. So I would encourage you and others to peruse that website, but between now and top line results and until we actually are able to launch the product, certainly education around AH and the role that epigenetics may play in that is a high priority for us.

Absolutely. And Norman, maybe you can speak to it from the clinician's perspective and awareness of this molecule.

Yeah, especially for the patients that get admitted, so for the hospitalized patients you know, AH can be a pretty broad spectrum from very mild disease with very low risk to the sort of admission level where people come into hospital and we expect, you know, somewhere between a 30 and 50 percent death rate. For people who work in hospitals, it's no surprise. It's completely overwhelmed most transplant hepatology practices and most transplant programs. It's sort of It's a crisis in many ways. I can't, having not worked in a community hospital, most of the people we see with severe AH are transferred from somewhere else. So that's sort of second level where you have, you know, hospitals that take reasonably high acuity patients. I'm pretty sure those people know because, you know, in my practice, I would get called from hospital. It's not always gastroenterologists saying, hey, I've got this patient with AH. So I think there's very wide recognition in hospital practices. To add to Keith's comment, in terms of hepatologists, there is, I would be prepared to say there is not a hepatologist in the United States who is unaware of either AH or of this product. It has received extremely close scrutiny. People are very excited about it, and I hope the results are as good as we expect them to be, but awareness is not gonna be a big issue. And to the site that Keith mentioned, that's really sort of for the next level of people that need to know more about AH. So it's really designed to spread the word downstream, as it were.

Great. Thank you very much, and congrats on staying on track here. Thank you. Thanks.

Our next question comes from Kristen Kloska with Cantor Fitzgerald. Please state your question.

Hi, good afternoon. Thanks for taking my questions, and you're getting very close to that finish line. So the first question I had was, what is your understanding on whether or not there are different histopathological phenotypes of these patients? And even if that is indeed the case, would you expect a 928 to behave differently across different populations, or is the mechanism quite broad to address this?

Yeah, definitely a lot. Norman speaks to that for sure, but, you know, there are maybe some subtle suggestions of certain genetic components with certain populations. I saw someone speak once about a population in South America where that's a possibility, but I think generally there isn't much known. But, Norman, what do you think?

Yeah. The histopathological diagnosis has more or less, well, you know this from our previous discussion, In the US, practically no one biopsies these patients. Some people actually, including me, object to the term of this biopsy proven. It's really just, there's a constellation of findings. There's no classic histologic finding that defines AH. It usually shows a number of features. It's a mixed number. And the diagnosis in, I would guess, 95% or more of cases is clinical. The prognostic value of the biopsy, there have been a few papers that refer to it, but my opinion and the opinion of several of my senior colleagues is that the biopsy gives very little additional prognostic or diagnostic value. There are people who really believe the biopsy shows some value, and I don't mean to denigrate those people's opinions, but a lot of people do not think that the biopsy adds much in any regard.

Okay, thanks. Can you remind us what you've shared publicly related to the powering that went into this trial, and what's your latest understanding or expectation on how the placebo arm would behave in light of published findings and natural history around this 90-day point? It sounds like you're citing about 30% mortality at this time.

Yes, we are.

Go ahead.

Okay, so it's a blinded study, so we don't know who's falling into what group. But our observed endpoints are very close to our projected endpoints that the statistician and I and several other people at Durex worked on prior to coming up with the final protocol. So we're more or less on track. Okay, thanks for that. You're referring to this very surprising paper that was published on a surprisingly low mortality, but that is a historic low, and other papers have not demonstrated that number. And for sure, our event rate is well above that.

Okay, and then outside of the primary endpoint 90-day mortality or liver transplant, can you remind us some of the key secondary outcome measures you're going to be looking at as well, and whether you're looking at different markers, cell counts, or other factors that are going to help you understand the contribution to liver injury? Thank you again.

So we have a lot of Secondary endpoints, the two most prominent are looking at 28-day outcomes, so both mortality. So we have in the hierarchical fashion a transplant event, meaning transplant or death, followed by death, followed by 28-day transplant or death, followed by 28-day mortality, and then a variety of biomarkers that I think I can't remember all of them off the top of my head, but things like LIL score, MELD progression, and then we'll also stratify by enrollment MELD.

Got it. Thanks again.

Thanks, Christian.

Thank you. Just a reminder, to ask a question, press star 1. To remove yourself from queue, press star 2. Our next question comes from Ed Arce with HC Wainwright. Please state your question.

Hi, everyone. Thanks for taking my questions. Let me add my congrats on the continued progress and staying on track. I want to ask a couple questions around that pace just to make sure that come June 30th we've reached full enrollment. First, just looking at the pace given, you know, over 200 patients were enrolled on the November 2nd update, and you now have over 260 as of today. So over the last four months, that comes out to about 15 patients a month. And I'm just wondering if that's a fair way of thinking about progression. That would indeed, from the current point, get you to the target of 300 by the end of June. And then the second question, just again along the timelines, but also the activities that are involved from the point of last patient, last dose, you know, if a second dose is necessary for that last patient, to the data readout. What activities are involved in the process of those, you know, number of months?

Sure. First off, yeah, your calculation, I think, is fine. It's It's from where I sit, probably a bit on the pessimistic side. I certainly hope we'll do better than just barely squeaking in. But the team's doing a great job of enrolling. And whenever that last patient, last visit occurs, and it actually isn't from the last dose. It's from when they were enrolled in the study. Day one, they get the first dose. That's when the 90-day clock starts. And so from that last patient dosed, one can count forward 90 days. Then, and as even now, we are doing real-time cleanup. And Norman can give us a specific number, but it's a very high percentage already of the data that we're looking to clean up. And that's a constant process with any clinical trial. To the extent that you can, you'd like to, in real time, keep the data for each of the patients as well organized and query anything that needs to be queried and kind of iron out any discrepancies or any data points that are missing and the like. And so let's just say we have north of 80% of that, you know, wrapped up or in hand by the time we get last patient, last visit. Then you've got another, the team feels very optimistic. They feel two, I'm kind of saying probably closer to three, but it'll be in that two to three month timeframe that we will continue to clean up the data until we get to the point where we feel comfortable enough that we're willing, that we want to go, you know, hands down, pencils down, and we're going to have data lock. And at that point, within just a very short time, within just a few days, we'll have the information and we'll have the data that we look forward to announcing. So it'll come pretty quickly, and it's really just a matter of cleaning up the data to make sure. Because once you lock the database, it's really difficult, and you should never actually go back. If you want to use it as a pivotal trial, you've got to be really done when you lock it. And so that's the most critical piece, actually, is those last few months where you're going through and making sure that you've got everything well understood and well in hand. Norman?

Yeah, I agree with everything Jim just said. The activities, the trial is proceeding at a decent pace. I don't think, I'm more optimistic than your projection because Typically during the holidays, most trials slow down a little bit. So we have picked up the pace again, and I'm pretty confident that we will finish on time. In terms of what to do, we're preparing for the final analysis. So we're, you know, at the moment we're preparing all of the reporting shelves and all of the sort of the tables are ready to be populated. They are, as you can imagine, a trial of this size. There are thousands of data points. And then as Jim says, we want to make sure that we've decided on all of our analyses. You can always do a post hoc analysis, but doing it prospectively gives everyone a lot more confidence. And so we're trying to make sure we haven't left anything out before we do the data lock.

Great. Thank you. That's very helpful. Maybe just a couple more for me, more on the commercial side. And, you know, I'll open it up to anyone, but of course, if Louie wants to give some comments, appreciate that. So, as you had mentioned earlier, I think, Jim, there's a wide recognition of the problem in the hospital, or I think actually it was Norman. And also, no hepatologist in the U.S. is unaware of either AH or Larsu-Costrel, which is also, of course, very encouraging from the prescriber's perspective. So given that background, I'm just wondering if you could comment on the 85% of patients that have insurance. What breakdown? do you think that sits at? And to the degree that you've had any sort of interactions, you know, even just tangentially, what are your thoughts about the degree of receptivity on the payer side? Thanks.

Well, I'll let Keith speak to the payer piece. But as far as the The percentage of patients who have insurance of the 150 some odd thousand hospitalizations per year, I would say the vast majority. From what we can glean, it's north of 80, maybe north of 85% of those patients. And so that would put them in the right place from that standpoint. And the cost of this disease, unfortunately, is horrific. When you take that number of $150,000 and you multiply it by a number that's somewhere between $50,000 and $150,000, you're clearly running up a huge bill. It's in the $5 plus billion range. And that's not taking into account at all the cost of liver transplant, which, as Norman tells us, there aren't that many livers available. There's maybe 4,000 some odd, but that's 4,000 times almost a million each. So that's a very expensive component as well. So you add all this together, and you're talking about a substantial cost to the health care system in the United States. Somewhat less than that in Europe, but not much. It's still quite large in Europe as well, because the patient population is a little bit bigger, I think, and other markets around the world. So we think that sets us up very well to have a product that can save lives. Remember, about 30% of these people are dying. and can be very rewarding to our shareholders as well. So we think that we can create a very successful product for direct, save the healthcare system an equal amount of money in that range, and still be there to be able to save lives. But maybe, Keith, you can speak more specifically to enhancing awareness in payers.

Yeah, hi, Ed. This is Keith. Good question. And of that 80% or so that are insured, I would say it is a mix of Medicare, Medicaid, and private insurance. probably leaning a little bit more heavily towards the Medicare and Medicaid when we look at the NIS 2019 data that we published on previously. But I think the value proposition to the hospitals, we are certainly doing a lot of research around that and building our case. But just going back to the primary endpoint of a firm being a statistically significant reduction in mortality and liver transplant, that in and of itself would be a huge benefit to deter people and have them, you know, take them off the wait list and off the liver transplant list because, as Norman stated previously, there's way too much demand for the limited supply of livers for transplant. But in addition to that primary endpoint, obviously there's a number of market access and reimbursement factors in the hospital that I think Marsucosterol could help offset things like decreasing length of stay, decreasing diagnostics and other healthcare utilization, hopefully decreasing the time spent in ICU that these severe age patients typically comprise. So I think there are a number of potential cost offsets that we are investigating in depth between now and top line data and obviously after top line data. the market access and reimbursement division of our commercial team will certainly be one that is active now and will certainly ramp up after top line results.

Great. Thank you, Keith. Thanks, everyone. Appreciate it. Sure.

You're welcome. Thank you. There are no further questions at this time. I'll hand the floor back to management for closing remarks.

Well, with that, we'd just like to thank you for your time. And as always, please feel free to give us a call or contact us. We look forward to catching up. Take care. Thank you. This concludes today's conference. All parties may disconnect. Have a great evening.