Advertisement
U.S. markets closed
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • Dow 30

    39,807.37
    +47.29 (+0.12%)
     
  • Nasdaq

    16,379.46
    -20.06 (-0.12%)
     
  • Russell 2000

    2,124.55
    +10.20 (+0.48%)
     
  • Crude Oil

    83.01
    +1.66 (+2.04%)
     
  • Gold

    2,241.50
    +28.80 (+1.30%)
     
  • Silver

    24.99
    +0.24 (+0.96%)
     
  • EUR/USD

    1.0790
    -0.0040 (-0.37%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • GBP/USD

    1.2620
    -0.0018 (-0.15%)
     
  • USD/JPY

    151.3860
    +0.1400 (+0.09%)
     
  • Bitcoin USD

    70,707.75
    +1,811.95 (+2.63%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

DRRX: Protocol Amendment Speeds DUR-928 Ph2 AH Trial. PERSERIS FDA Approval Adds New Revenue Stream

By Brian Marckx, CFA

Q3 Financial Results and Operational Update

NASDAQ:DRRX

READ THE FULL RESEARCH REPORT HERE

Last week Durect (DRRX) reported financial results for their third quarter ending September 30th and provided a business update. Relative to the financials, revenue of $8.0M benefited from a $5.0M milestone payment from Indivior related to FDA approval (July 27th) of PERSERIS (risperidone), a once-monthly subcutaneous long-acting injection for the treatment of adults with schizophrenia.

DRRX is also eligible for single-digit percentage earn-outs based on U.S. sales of PERSERIS. Indivior indicated that they expect to have initial quantities available in Q4 ’18 and, based on the outcome of an appeal by Dr. Reddy’s lab (DRL) challenging the U.S. District Court of New Jersey’s preliminary injunction (PI) prohibiting DRL from importing or selling its generic buprenorphine/naloxone sublingual film product, expect to commence a full product launch. A favorable outcome (i.e. appeals court upholding the PI) would be a significant positive for DRRX given the sizeable U.S. market opportunity for PERSERIS. Indivior estimates annual peak sales could be as much as $200M - $300M, which could translate into earn-outs in the several millions of dollars of incremental annual revenue to DRRX.

Meanwhile, product sales, which primarily consists of DRRX’s ALZET mini pumps and LACTEL biodegradable polymer products, was $2.3M in Q3, down 15% sequentially and about 11% lower than the prior-year period. The yoy decline was attributed mostly to lower LACTEL unit sales. Product sales remain a cash cow, with gross margin at the 61% level for the second straight consecutive quarter. Product gross margin averaged 58% through the first nine months of 2018, compared to 43% in the comparable prior-year period and 49% in all of fiscal 2017. As earn-outs and sales royalties essentially represent 100% margin, both product sales and margins will further benefit from;

- the impending commencement of PERSERIS-related commercialization earn-outs (which represent 100% margin)

- Methydur sustained release capsules (for ADHD), Taiwan regulatory approval of which Orient Pharma received in September. Orient anticipates launching ORADUR-ADHD in that country in 2019 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

Operating expenses fell nearly 18% from the year earlier period to $9.4M, which is up about 6% from Q2’18. The yoy decline reflects lower R&D spend related to certain programs, such as POSIMIR, ORADUR-ADHD and REMOXY ER, partially offset by an increase in costs associated with development progress of DUR-928. Management is guiding for flattish SG&A in Q4’18 and R&D expense to tick up as compared to Q3, again reflective of further progress of the DUR-928 program.

Cash
Financial position remains very healthy and with a recent amendment to terms of the $20M term loan, which pushes 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 further extended. Cash balance was $41.3M at close of Q3. Operating ($4.6M/qtr) plus capex ($2.3M/qtr) burn averaged approximately $6.9M per quarter through the first nine months of 2018. We think that run-rate likely steps up into (at least) Q4, however, given the lack of significant near-term development milestones to offset operating cash usage as well as accelerating activities of the DUR-928 program.

As it relates to the operational front…

There were several highlights in Q3 including;

- FDA approval of PERSERIS. On July 30th 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. That triggered a $5M milestone payment to DRRX. DRRX will also receive single-digit royalties on sales by Indivior. Risperidone (branded and unbranded) remains one of the most widely used anti-psychotics. PERSERIS addresses low compliance rates among individuals prescribed oral risperidone (taken daily), which has been shown to be a significant risk factor related to inadequate treatment of schizophrenia. As PERSERIS is the only long-acting risperidone-containing injectable, it represents the only available option that directly addresses lack of dosing adherence – which is particularly problematic among individuals with psychosis given their cognitive handicaps (Nielsen et al.). This long-acting benefit could draw significant interest upon launch and drive early adoption, particularly for those patients that struggle with adherence to oral risperidone therapy. Indivior expects to have initial product available in Q4’18 and, assuming favorable outcomes of Dr. Reddy’s legal action (i.e. PI is upheld on appeal), Indivior noted that they expect a full launch in 2019 supported with a sales force of between 40 and 60 U.S. reps. We currently model initial royalty revenue from sales of PERSERIS to DRRX commencing in 1H’19.

According to prescription data aggregated by Evaluate Pharma, U.S. and WW sales of risperidone in 2017 were approximately $380M and $1.0B, respectively. While forecasts suggest U.S. market contraction into 2019, the introduction of PERSERIS is expected to push total U.S. risperidone sales back to positive growth beginning in 2020. In fact, PERSERIS is expected to be the majority driver of U.S. risperidone sales as soon as next year (see chart below). Average analyst estimates forecast PERSERIS (purple bar) U.S. sales of $19M in 2019 and growing to $172M in 2024. While this implies a healthy 55% CAGR over that period, it may still be slightly more conservative than that anticipated by Indivior, which is guiding for peak annual sales of $200M - $300M. We base our PERSERIS sales related earn-out estimates on analysts’ forecasted U.S. sales of the therapy (and apply an assumed 4% royalty rate) and currently look for DRRX to recognize ~$760k and $2.5M of PERSERIS earn-outs in 2019 and 2020, respectively.



View Exhibit I

- Regulatory approval of Methydur sustained release capsules (for ADHD) in Taiwan. Orient Pharma received notice of regulatory approval in Taiwan in September. 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. While we do not expect significant royalty-related revenue from sales in Taiwan (population ~24M), we do view this as meaningful as it may be a harbinger for accelerated development and regulatory activities in other, more meaningful markets, such as China

- DUR-928 is where we continue to believe most of the upside value lies in DRRX, particularly following the latest CRL received (August 2018) for Pain Therapeutics’ NDA for REMOXY ER. 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), primary sclerosing cholangitis (PSC) and psoriasis. Recent progress on these programs include (also see our detailed description of DUR-928 programs later in this report);

o AH Phase 2a study with IV DUR-928

• Low-dose (30mg) cohort (n=4) completed among Part A (i.e. moderate AH) patients. Following safety and PK review, high-dose (90mg) will begin in Part A
• Protocol amended with the goal of speeding trial completion. Protocol now allows for Part B (i.e. severe AH) to commence enrollment (initially with low-dose) following review by trial oversight committee, while simultaneously continuing to enroll Part A. Management noted that the trial sites have screened many AH patients that would have been eligible for enrollment for Part B but were too severe for Part A. This protocol modification, once effective, will allow investigators to immediately enroll these higher MELD-score patients. That should speed overall completion time of the trial

o Primary Sclerosing Cholangitis Phase 2a study with oral DUR-928: five patients have been enrolled of an expected total of 30 to 40 (i.e. two arms, n=15 - 20 per arm). DRRX noted that this trial is enrolling at a rate similar to that of other PSC studies sponsored by Shire, Gilead and others. DRRX expects to report data when a sufficient number of patients have been dosed

o NASH study with oral DUR-928

• Anticipate commencing initial NASH clinical trial in 1H’19
• DRRX expects to announce additional details of the study design as initiation nears

o Psoriasis with topical DUR-928

• Plans underway for a Phase2a proof-of-concept study with topical DUR-928 in patients with mild-to-moderate plaque psoriasis
• Anticipate dosing starting in Q1’19
• Targeting enrollment of 20 in order to obtain data on at least 15 patients

Valuation

We value DRRX using sum-of-the-parts, with most of the value related to DUR-928 based on pricing of recent
NASH-targeted M&A transactions as a proxy. Our methodology also includes discounted cash flow of DRRX’s current cash-generating products and earn-outs.

DUR-928 valued at between $750M and $1B
Examples of some of the higher-profile NASH-related acquisitions include Allergan’s (AGN) September 2016 purchase of Tobira Therapeutics. The deal, valued at $1.7B (inclusive of potential development and commercial milestones), brought two NASH candidates; Cenicriviroc, an oral CCR2/5 inhibitor in phase 2 and Evogliptin, an oral DPP-4 inhibitor in phase 1.

Earlier in 2018 Gilead bought Nimbus Therapeutics for $400M upfront and $800M in potential development milestones. NDI-0107976, an ACC inhibitor in phase 1 for the treatment of NASH was the main attraction for Gilead. Preclinical and phase 1 candidates have commanded as much as $450M and $1B+, respectively, in buyouts.

We think frothiness of the NASH space coupled with the potential versatility of DUR-928 as it relates to formulations (oral, IV and topical) as well as its applicability in various conditions, including NASH, acute liver disease, PCS and even psoriasis warrants potential premium pricing. Initial human proof-of-concept in phase 1 studies for various formulations demonstrating a strong safety and drug interaction profile, in addition to compelling efficacy signals, further supports the relative value of DUR-928. Based on recent M&A transactions, DUR-928 has a relative value of between $750k and $1B. Further positive clinical trial progression would likely move valuation closer to the $1B mark.

Current cash-generating products and earn-outs worth ~$90M
We estimate cash flow of DRRX’s legacy products (Actel and Lactel) and PERSERIS earn-outs of approximately $85M over the next seven years. Discounting back to present at 12%, results in NPV of approximately $60M. We assign a 50% premium to the NPV value to reflect the likelihood of additional licensing, collaboration and earn-out opportunities materializing over the same period. We also note that this NPV value ($60M x 1.5 = $90M) may be conservative as it does not consider any assumed contribution from POSIMIR andy only minimal contribution from ORADUR. Upside to either of those programs (such as ORADUR launch in, and meaningful revenue from, China or a viable development strategy for POSIMIR), could result in relative upside to our NPV calculation.

Our sum-of-the-parts methodology values DRRX at approximately $965M, or $6.00/share

SUBSCRIBE TO ZACKS SMALL CAP RESEARCH to receive our articles and reports emailed directly to you each morning. Please visit our website for additional information on Zacks SCR.

DISCLOSURE: Zacks SCR has received compensation from the issuer directly or from an investor relations consulting firm, engaged by the issuer, for providing research coverage for a period of no less than one year. Research articles, as seen here, are part of the service Zacks provides and Zacks receives quarterly payments totaling a maximum fee of $30,000 annually for these services. Full Disclaimer HERE.

Advertisement