Durect (DRRX) Matt Hogan, CFO, Discussed the Remoxy Situation at the Marcum Conference
The opioid analgesic oxycodone is marketed by Purdue Pharmaceuticals (a privately owned firm) in an extended release formulation called OxyContin ER; it has current sales of over $3 billion. Abuse of OxyContin ER is a major health concern. Durect developed Remoxy as an abuse resistant formulation of oxycodone. It was then licensed to Pain Therapeutics (PAIN) which sub-licensed it to King Pharmaceuticals which was subsequently acquired by Pfizer (PFE). Currently Pfizer is responsible for Remoxy's clinical development and commercialization.
So far, the FDA has refused to approve generics for OxyContin ER so that if this continues and Remoxy is approved, these would be the only two oxycodone products on the market. This represents a major commercial opportunity for Durect as it is entitled to receive a royalty on Remoxy sales that escalates from 6.5% of sales up to 11.5% as sales increase. Management has indicated that Remoxy sales of $200 million would result in a royalty rate of 6.5% and royalties of about $13 million. At Remoxy sales of $600 million, the royalty rate would be 7.5% and the royalty would be about $45 million. Achievement of $600 million of Remoxy sales would seem achievable and the resultant $45 million royalty, assuming a 35% tax rate, amounts to about $0.30 per share for Durect. The company feels that patents on Remoxy could prevent generic competition until 2031.
Remoxy received a Complete Response Letter in June 2011 and Pfizer has been working on a response. Following a meeting with the FDA, Pfizer gave an update on the regulatory status of Remoxy on May 10 that resulted in Durect's stock price dropping nearly 50% from about $1.60 to the current price of $0.83. Pfizer said that it received written guidance from the FDA that additional clinical trials would be needed to address the CRL. PFE said "Based on this guidance, we are considering our options with respect to Remoxy. If we elect to continue development of Remoxy, we would not expect to submit a response to the complete response letter before mid-2015."
Mr. Hogan added some additional perspective. He said that the additional trial required would likely be a bioequivalence trial that could be conducted in 80 to 90 patients, not a new Phase III trial. Pfizer tweaked the formulation of Remoxy in order to improve its drug properties and the FDA wants to see evidence that the new formulation is bioequivalent to the one used in Phase III trials. He also said that Pfizer was speaking to Pain Therapeutics and Durect about changing the terms of the contract on Remoxy. I read this as Pfizer will continue to develop Remoxy if PAIN and DRRX will accept a lower royalty.
If the parties don't agree, Remoxy would be returned to PAIN, which has indicated that it would conduct the bioequivalence study, which is estimated to cost about $15 million. The bottom line on this is that there does seem to be a clear path forward for Remoxy. I think this is a win for Durect whether Pfizer continues to develop Remoxy or PAIN takes over development. There now seems to be a clear path forward to approval in 2015. Of course, there is uncertainty as to whether the bridging study will be successful.
This could be an interesting opportunity for long term and patient investors. I am not actively recommending the stock, but I do intend to do more work on the company
$10 mil sounds a little high for a 80-90 pt study but so be it. If I were in Remi's shoes I would offer to cover the cost of that trial - but, only after there was an approval by FDA. If PTIE caves in and lowers the royalty rate with Pfizer they could get in a legal tussle with shareholders. But if they get FDA approval, most shareholders would probably be okay with PTIE making a one time kickback, despite not being required to by contract.
There is a precedent here for a royalty concession: When PFE was in the process of acquiring KG, Barbier did agree to fix the Remoxy royalty for non-US sales at 10%flat in perpetuity. In return, the $100million cap on Remoxy development costs that would be borne by KG/PFE was waived. Was this a case of pro quid quo? Even fgnoms ultimately came to see this as a stroke of genius on Barbier's part.
I'm not saying that the present situation is analogous, but my gut tells me that this is where this current impasse is headed.