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DRRX: Highly Compelling Initial Ph2a DUR-928 Alcoholic Hepatitis Data. Final Data Later This Year Could Be Value Inflection Event

By Brian Marckx, CFA



Q1 Financial Results and Operational Update
Last week Durect Corp (DRRX) reported financial results for their first quarter ending March 31st and provided a pipeline development update. The development update was extensive and included highly compelling results of the first 10 patients enrolled in the DUR-928 Phase 2a alcoholic hepatitis trial. We detail these results, along with the other pipeline updates, below.

Relative to the financials, total revenue of $4.1M included $2.6M in product sales, mostly related to ALZET mini pumps and LACTEL biodegradable polymer products, as well as $1.5M in collaborative revenue. Total revenue was ahead of our $3.3M, as a result of higher than anticipated collaboration revenue.

Product sales remain a cash cow. Gross margin was 51% in Q1, flat from the prior year period although down from 62% in Q4’18. Nonetheless, as earn-outs and sales royalties essentially represent 100% margin, we continue to expect that both product sales and margins will further benefit from;

- the commencement of PERSERIS-related commercialization 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. Analyst U.S. sales estimates of PERSERIS have recently been upwardly revised

- Methydur sustained release capsules (for ADHD), Taiwan regulatory approval of which Orient Pharma received 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

Operating expenses were $9.7M, down about 5% from Q1’18 and inline with our estimate. While DRRX anticipates that SG&A expenses will fall in the near term they expect an increase in R&D expense as a result of continued progress of DUR-928 in several of the ongoing clinical trials.

Financial position remains very healthy and with a recent amendment to terms of the $20M term loan, which pushed back the initial principal repayment and final maturity dates by 18 months (to June 2020) and 27 months (to Nov 2022), respectively, DRRX’s cash runway is substantial. Cash balance was $27.6M at quarter-end. Operating burn was $5.7M (or $6.5M ex-changes in working capital) in Q1. Durect expects their current cash balance to be sufficient to fund operations through at least the next 12 months.

As it relates to the operational front…

- DUR-928 is where we continue to believe most of the upside value lies in DRRX. As a reminder, DUR-928 could have platform-like utility and is being investigated in several formulations and potential applications including oral, intravenous and topical formulas and in indications such NASH, alcoholic hepatitis (AH) and psoriasis. Recent progress on these programs include (also see our detailed description of DUR-928 programs later in this report);
◦ AH Phase 2a study with IV DUR-928
     • Includes two patient cohorts;
          ∙ Part A: moderate AH at three dose levels; 30mg, 90mg and 150mg (n=4 per dose cohort) and
          ∙ Part B: severe AH at 30mg, 90mg and possibly a 150mg dose (n=4 per dose cohort)
     • Preliminary data on first 10 patients (8 30mg: 4 moderate, 4 severe and 2 90mg: 1 moderate, 1 severe) was reported on May 7th. Results in our opinion are highly compelling, indicating a potentially potent efficacy signal and lack of toxicity. Our enthusiasm is further bolstered by supportive comments from AH KOLs (which joined the call)
     • Results were compared to ongoing Univ of Louisville (UL) study (led by Dr McClain) as a proxy comparator arm. UL study patients’ (n=15) therapy consisted of either supportive care or supportive care with corticosteroids
     • Baseline average MELD scores (i.e. AH severity) were similar among 10 DUR-928 patients and 15 UL patients
     • Results showed (data was available for 9 of initial 10 DUR-928 patients). Along with safety, which showed no issues through the first 10 patients, results included;
          ∙ Lille scores: used in clinical practice to assess AH prognosis after 7 days of treatment. Studies have shown Lille score below 0.45 is associated with 85% 6-month survival rate and above 0.45 is associated with 25% 6-month survival rate
          ‣ DUR-928 (n=9): median Lille score of 0.04 (range 0.01-0.19) at Day 7
          ‣ UL (n=15): median Lille score of 0.41 (range 0.02-0.96) at Day 7
          ‣ The differences (i.e. DUR-928 lower Lille scores vs UL) were statistically significant (p=0.002, Wilcoxon’s Rank Sum)
          ∙ Bilirubin levels: bilirubin is a determinant for liver functioning (lower is better) and is used in practice as a marker for clinical outcomes of AH patients
               ‣ DUR-928: median bilirubin fell from baseline by 16% at Day 7 (n=9) and by 41% at Day 28 (n=8)
               ‣ UL (n=15) median bilirubin fell from bassline by 3% at Day 7 and by 35% at Day 28
               ‣ The change from baseline with DUR-928 was statistically significant (p=0.04) at both days (and was not statistically different with UL at either day)
          ∙ Model of End-Stage Liver Disease (MELD) scores: used in clinical practice as an assessment of severity of AH and patient prognosis
               ‣ DUR-928: median MELD fell from baseline by 4% at Day 7 (n=9) and fell by 21% at Day 28 (n=8)
               ‣ UL (n=15): median MELD increased from baseline by 4% at Day 7 and fell by 6% at Day 28
               ‣ The change from baseline differences with DUR-928 was statistically significant at Day 28 (p=0.03) and trended towards significant reduction by Day 7
          ∙ Among the comments from the KOLs on the call that lend support for these results as well as the potential market for DUR-928 in AH include;
               ‣ Regarding unmet need for effective AH therapy (for context, given the lack of better alternatives, corticosteroids are currently used as a first-line therapy for AH)1
                    ◦ “There really are no therapies for this [i.e. AH]. Corticosteroids, I'm not convinced they work at all actually.”
                    ◦ “There was a recent randomized controlled trial that really did not show statistically significant benefit with [corticosteroids] product. And it's been out for 40 years, and we rarely use it at all at Northwestern.”
                    ◦ “And liver transplant, which is the other way you can save people who are on liver failure, these patients are in general contraindicated from liver transplant.”
               ‣ Regarding these preliminary results (relative to safety and efficacy)2
                    ◦ [These results are from] “[s]mall number of patients but give us tremendous hope in this study drug.”
                    ◦ “And the beautiful thing about it so far is the safety. We went from the 30-milligram dose to the 90, and we have -- we haven't seen any significant signals of any safety issues.”
                    ◦ “And so far, every patient we've put in my group that had a response to the treatment. And the main response we see bilirubin improving. Once bilirubin is improving, everything starts to change. The MELD score changes. The MELD rate changes. Whatever scoring system you use, bilirubin is a key element in this disease, and we have been seeing improvement in the bilirubin within the first few days.”
                    ◦ “Actually, this is my first time to see the collected data together. So I'm very enthusiastic.”
          ∙ Next steps
               ‣ Complete the 90mg cohort
               ‣ Advance into 150 mg cohort
               ‣ Hope to complete the trial this year
                    ◦ DRRX noted on the Q1 call that if the data from the remaining patients is positive that they will plan to present the data at AASLD in November
                    ◦ We also note that if the full study data further supports the safety and effectiveness of DUR-928 and largely confirms the findings from these initial nine patients, we think that could represent a value inflection event for the share price
               ‣ If all goes well, following completion of the study, DRRX will meet with FDA regarding pivotal trial design and commence the pivotal program in 2020
               ‣ The severity of AH, high mortality rate and lack of effective therapies for the disease could bold well for FDA fast-track designation of a pivotal program

◦ New NASH Phase 1b program
     • Ph1b open label, multi-site, U.S. study to evaluate safety, pharmacokinetics and signals of biological activity of orally-administered DUR-928 over 28 consecutive days in NASH patients with stage 1 – 3 fibrosis
     • Three doses; low (50mg QD), middle (150mg QD) and high (300mg QD). Each cohort n= 20 patients (60 patients total)
     • Key endpoints: safety and pharmacokinetics (PK), clinical chemistry and biomarkers (e.g., bilirubin, lipids, liver enzymes, CK-18s, and inflammatory cytokines) as well as liver imaging (with MRI-PDFF) for fat. Note that, aside from liver imaging, all of these endpoints are similar to those used in DRRX’s initial Ph1b NASH study (conducted in Australia) which showed that a single dose of DUR-928 was associated reductions in all of these biomarkers and did so with no safety issues
     • Patient dosing commenced in late-March 2019 (i.e. inline with expectations)
     • Initial data from this study expected in 2H’19

Psoriasis with topical DUR-928
     • Phase2a proof-of-concept study with topical DUR-928 in patients with mild-to-moderate plaque psoriasis
          ∙ U.S., multi-site, randomized, double-blind (patients serve as own control)
          ∙ Primary endpoint is change in local psoriasis scores
          ∙ Targeting enrollment of 20 in order to obtain data on at least 15 patients
          ∙ DUR-928 applied topically once-daily for four weeks with four-week follow-up
     • Dosing commenced in March 2019 (inline with expectations)
     • Topline data expected in 2H’19

- U.S. launch of PERSERIS. On July 30, 2018 Indivior announced that FDA approved their NDA for PERSERIS (risperidone), the first once-monthly subcutaneous risperidone-containing, long-acting injectable for the treatment of schizophrenia in adults. On February 27, 2019, Indivior announced the U.S. launch of PERSERIS. DRRX will receive single-digit royalties on sales by Indivior.

- Regulatory approval of Methydur sustained release capsules (for ADHD) in Taiwan. Orient Pharma received notice of regulatory approval in Taiwan in September 2018. Per DRRX’s recent filings, Orient Pharma has stated that they expect to make Methydur commercially available in Taiwan in 2019. 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.

- POSIMIR CRL response anticipated. As a reminder, DRRX submitted an NDA (via 505(b)(2) pathway) to FDA for POSIMIR in April 2013. FDA responded in February 2014 with a Complete Response Letter. Following interaction with the agency, Durect conducted and completed a Phase 3 clinical trial of POSIMIR (PERSIST trial). As reported in October 2017, while results favored POSIMIR, the trial failed to meet its primary endpoint of a statistically significant reduction in pain on movement over the first 48 hours after surgery as compared to standard bupivacaine HCI. Durect has now completed a total of 16 clinical studies with POSIMIR.

DRRX recently engaged Dr. Lee S. Simon, a physician and previous (2001 – 2003) Director of FDA’s Analgesic, Anti-inflammatory and Ophthalmologic Drug Products division, to evaluate potential next-steps with POSIMIR. Based on his review of the PERSIST data, Dr. Simon advised the company to formally respond to the Complete Response Letter. As such, DRRX expects to make a full response to the CRL in Q2’19 (i.e. within the coming weeks). Given an anticipated six-month FDA review period, Durect should have an answer from the agency before current year-end. As we had removed POSIMIR from our model, a ‘favorable’ response from FDA – most notably, a reasonably efficient pathway to U.S. marketing approval, would likely provide upside to our estimates.

We cover DRRX with a $6/share price target. See link for free access to our most recent report on the company.

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1 Professor of Medicine and Surgery with the Division of Hepatology at Northwestern University, a Feinberg School Of Medicine. He also serves as the Chief of Transplant Hepatology. Dr. Flamm has published and speaks widely in the field of hepatic diseases.
2 Dr Tarek Hassanein. Professor of Medicine at University of California San Diego School of Medicine. Dr. Hassanein was instrumental in establishing three major liver transplant programs.