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DRRX: Gilead Agreement, Near-Term Value-Inflection Opportunities Make DRRX Particularly Attractive at Current Valuation

By Brian Marckx, CFA

NASDAQ:DRRX

READ THE FULL DRRX RESEARCH REPORT

Q2 Financial Results and Operational Update
Durect Corp (DRRX) reported financial results for their second quarter ending June 30th and provided a pipeline development update. Major highlights on the operational front include:

‣ Gilead, HIV/HBV-SABER licensing agreement: on July 22nd DRRX announced an out-licensing agreement with Gilead Sciences, Inc (GILD) related to their SABER (controlled drug delivery) technology in the development of a long-acting injectable HIV product. GILD also receives exclusive access to SABER for HIV and HBV and the exclusive option to license additional SABER-based products for HIV and HBV. The agreement, which will pay DRRX $25M upfront and potentially up to another $145M in development and sales related milestones (in addition to tiered royalties on sales) for the initial injectable HIV product, comes after ~two years’ worth of feasibility related work between the parties. Additionally, DRRX is eligible to receive another $150M per product (in upfront, development, regulatory and sales milestones) as well as sales royalties for each additional SABER-based HIV or HBV product that GILD may decide to pursue

◦ Our comments: we view this as significant for DRRX not only for the substantial upfront capital and potential subsequent related income, but also as further validation of the utility and diversity of the SABER platform technology. We think is particularly noteworthy given GILD’s leading position in the HIV therapeutic space – a fact that will also hopefully bode well for chances of eventual development and commercial success of the products covered under this licensing arrangement

‣ Capital raise: DRRX beefed up their cash balance with the June sale of 29M common shares (@ $0.52/share) which netted ~$15M. Pro forma for the $25M upfront payment from GILD, cash balance (incl ST investments) at Q2 quarter end was approximately $63.0M (up from $34.1M at March 31, 2019). Assuming cash burn continues at the recent rate of ~$2.0M per month, Q2’19 pro forma cash balance represents over 2.5 years’ worth of operating funds
◦ Our comments: we, however, do expect the burn rate to increase upon further development progress of DUR-928 and debt maturities, beginning in August 2020, could also affect the length of the cash runway (although there presumably would be an option to refinance the debt and/or extend their maturities). Nonetheless the cash balance provides significant breathing room and creates additional flexibility in terms of optimizing the capital structure. We also note that increasing cash needs may be at least partially offset by new or increasing contribution from POSIMIR (if FDA-approved), PERSERIS earn-outs and ORADUR sales royalties (in addition to the potential for development milestones under the new GILD SABER/HIV agreement)

Encouragingly, as it relates to the pipeline update, development progress of all DRRX’s programs appears unimpeded, remains on-track with prior expectations and is expected to lead to several important milestones before current year-end.

Among the development-related highlights (see further below for more detail on each of these programs) since DRRX reported Q1’19 earnings (May 7th) were;

‣ DUR-928 Ph2a trial in Alcoholic Hepatitis (AH)
◦ Severe cohort:
• 90mg severe cohort (n=4) dosing completed in June
• preliminary 90mg severe cohort results: while DRRX has not yet disclosed specifics (eg. PK, liver chemistry, biomarkers), they did note in a June 18th PR and the Q2 earnings call that preliminary data showed that response in the 90mg severe cohort was consistent with that of the first 10 patients (a total of eight 30mg patients: n=4 moderate, n=4 severe and a total of two 90mg patients: n=1 moderate, n=1 severe). As a reminder, we characterized results of the first 10 patients, which were reported in early May (and which did include specifics in regards to Lille scores, bilirubin levels and MELD scores, in addition to supportive commentary from KOLs including that the data “…give[s] us tremendous hope in this study drug”) as ‘highly compelling and indicative of a potentially potent efficacy signal as well as lack of toxicity’
• per the June PR, “after reviewing safety and pharmacokinetic (PK) data from the completed cohorts, the Dose Escalation Committee (DEC) has approved commencement of dosing at the 150 mg level in severe AH patients”
• 150mg severe cohort (n=4) is now enrolling. This is the final group of severe patients, following completion of which is expected to be followed by DRRX meeting with FDA to discuss details related to a pathway for U.S. regulatory approval

◦ Moderate cohort
• 90mg moderate cohort (n=4) is now enrolling (in parallel with 150mg severe cohort)

‣ POSIMIR
◦ In late-June DRRX submitted a full response to FDA’s Complete Response Letter (CRL)
◦ In mid-July DRRX announced that FDA filed their full response as a ‘complete class 2 resubmission’ and assigned a user fee goal (i.e. PDUFA) date of December 27, 2019 (i.e. 6 months from DRRX’s date of resubmission)

Upcoming milestones include;

‣ DUR-928
◦ Ph2a trial (IV administered) in Alcoholic Hepatitis
• 150mg severe cohort completes dosing
• 90mg moderate cohort completes dosing
• 2H’19
∙ Ph2a trial completion and topline data
∙ Data presentation at AASLD (possibly) in November
• If all goes well, following trial completion, DRRX will meet with FDA and outline a path (potentially including an accelerated pathway) to approval. Management currently anticipates that the next step will be a Ph2b trial which could commence next year

◦ Ph2a trial (topically administered) in Psoriasis (enrollment which began in March)
• Topline data expected in 2H’19

◦ Ph1b trial (orally administered) in NASH (enrollment which began in March)
• Topline data expected in 2H’19

‣ POSIMIR
◦ Anticipate response from FDA by 12/27/19 (i.e. PDUFA date) related to DRRX’s full response to CRL. As we had removed POSIMIR from our model, a favorable response from FDA would likely provide upside to our estimates. The market for POSIMIR could be substantial and, as such, potential revisions to our model could be as well. As such, we will be eagerly awaiting word from FDA.

As it relates to DRRX’s Q2 financials, total revenue of $4.0M included $2.4M in product sales, mostly related to ALZET mini pumps and LACTEL biodegradable polymer products, as well as $1.6M in collaborative revenue. Total revenue was slightly lower than our $4.2M estimate as a ~$300k beat on collaboration revenue (i.e. $1.6M A vs $1.3M E) was not enough to offset a ~$500k miss on product sales (i.e. $2.4M A vs $2.9M E).



Product sales remain a cash cow. Product margin was 63% in Q2, up about 170 and 570 basis points from the prior year and quarter, respectively. Operating expenses, at $9.9M, were about 7% lower than what we had anticipated, up about $1M from the prior year and largely flat from Q1. While we continue to model incrementally increasing opex, mostly on the R&D line, reflecting assumed clinical progression of DUR-928 (and, to a lesser extent, the other pipeline programs), the GILD upfront payment (timing of full recognition of which is currently unclear) should provide some near-term offset (although will not have a cash impact beyond the initial receipt).

We may also see a more significant contribution from PERSERIS-related earn-outs (which represent 100% margin). DRRX receives single-digit royalties on sales by Indivior. In late-February Indivior announced that they had launched PERSERIS with a 50-person sales team. While DRRX noted that PERSERIS earn-outs have been immaterial to-date (through Q2’19) and Indivior (per their Q2 call) expects revenue of the product to be “modest” through the end of 2019, they (i.e. Indivior) also indicated that the roll-out continues to build momentum, noting that physician adoption is “going well”.

Methydur sustained release capsules (for ADHD) represent another potential incremental revenue and margin enhancer. Orient Pharma received Taiwan regulatory approval of the product in September 2018. Orient anticipates launching ORADUR-ADHD in that country this year and is also seeking regulatory clearance and commercialization partners in other Asian countries, including in China. As a reminder, DRRX receives a royalty on sales of the product by Orient and retains rights to it in North America, Europe, Japan and all other countries not specifically licensed to Orient Pharma. DRRX is currently seeking development and commercialization partners in one or more of these territories.

We cover DRRX with a $5.25/share price target. See link for free access to our updated report on the company.

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