For Durect Investors, Cash and Revenues Limit Downside

Last week we published an article commenting on how DURECT Corp. (DRRX) offered investors "Two Shots On Goal, 100% Upside" based on Remoxy and Posidur. All of what we noted in the article was confirmed on the DURECT conference call held on February 28, 2013 - i.e. Pfizer (PFE) plans to meet with the U.S. FDA in late March to discuss Remoxy, and the Posidur NDA will be filed in the next few weeks.

Now we're focusing on the existing cash cushion and the revenues generated by commercially available ALZET Pumps and LACTLE Polymers. We'll also touch briefaly on the rest of the pipeline, which includes TRANSDUR-Sufentinil, Eladur, Reldy, and ORADUR-AHDH.

ALZET & LACTLE

DURECT currently manufactures and distributes ALZET miniature implantable osmotic pumps and accessories used for experimental research in mice, rats and other laboratory animals. The company controls the rights to these products on a worldwide basis. DURECT markets the ALZET product line through a direct sales force in the U.S. and through a network of distributors outside the U.S.

ALZET pumps continuously deliver drugs, hormones and other test agents at controlled rates from one day to four weeks without the need for external connections, frequent handling, or repeated dosing. In laboratory research, these infusion pumps can be used for systemic administration when implanted under the skin or in the body. They can be attached to a catheter for intravenous, intracerebral, or intraarterial infusion or for targeted delivery, where the effects of a drug or test agent are localized in a particular tissue or organ. DURECT acquired the ALZET product line from ALZA in April 2000. For 2012, we estimate ALZET sales at $7.5 million. We model similar amounts for 2013 and 2014.

The company also designs, develops and manufactures a wide range of standard and custom biodegradable polymers based on lactide, glycolide and caprolactone under the LACTLE brand for pharmaceutical and medical device clients for use as raw materials in their products. These materials are manufactured and sold directly from DURECT’s facility in Alabama and are used both internally and by third-party customers for a variety of controlled-release and medical-device applications, including several FDA-approved commercial products.

All polymer production is in accordance with the International Pharmaceutical Excipients Council (IPEC) Good Manufacturing Practices guidance for Bulk Pharmaceutical Excipients. Production is conducted in ISO 8 clean rooms with controlled temperature and humidity. Both Drug and Device Master Files (DMFs) are maintained with the FDA to support regulatory filings for customers. LACTLE contributed approximately $3.7 million in revenues to DURECT in both 2011 and 2012. We model a similar amounts in 2013 and 2014.

…What’s It Worth…

Combined sales of ALZET and LACTLE products have been consistently growing over the past several years. The chart below is taken from the company’s historic filings and shows the growth in revenues from ALZET and LACTLE and the gross margin for the business.



These product lines have been pretty steady over the past few quarters. ALZET and LACTLE contribute revenues to the top-line and solid cash flow to help reduce operating burn. We see this business worth approximately $25 to $30 million in value based on 2.5x to 3.0x revenues. Below we have modeled out projected ALZET and LACTLE sales for the next ten years and arrived at a net present value of $28 million based on discounted cash flow. This equates to a value of $0.29 per share.



Revenues and Cash Position Limit Downside 

In our article last week, we concluded that DURECT should be trading at $2.00 per share based on probability adjusted discounted future cash flows on Remoxy and Posidur, with Remoxy worth $1.67 per share and Posidur worth $0.30 per share. But the addition of $0.29 per share for ALZET and LACTLE helps limit the downside to investors. These are commercial assets that provide real positive cash flow to DURECT. There is a base business at DURECT beyond Remoxy and Posidur. Value investors should appreciate that.

Likewise, DURECT exited 2012 with $28.9 million in cash and investments. This equates to another $0.29 per share. The company will likely burn only $14 million in 2013, meaning the current cash balance, a deal notwithstanding, is enough to fund operations through 2014. DURECT raised nearly $12 million in December 2012 with six institutional investors. Risk of additional dilution is low for the foreseeable future. That reduces downside risk. Remove Remoxy and Posidur, and DURECT is still worth $0.58 per share.

The Overlooked Pipeline 



Over the past article and a half, we've built a case that DURECT is worth at least $2.00 per share based on Remoxy and Posidur. Add in ALZET, LACTLE, and the cash reserves, and the stock is worth at least $2.50. The downside has been identified at $0.58 per share. Below we briefly touch on the rest of the pipeline, which we believe offers some downside protection, and even modest upside, albeit at a less predictable rate.

...Eladur...


DURECT is developing Eladur, a transdermal bupivacaine patch based on the company’s proprietary TRANSDUR technology. Eladur provides continuous delivery of bupivacaine for up to three days from a single application. The patch is being designed as a superior alternative to Endo Pharmaceuticals  (ENDP) Lidoderm (5% lidocaine patch). The clinical data to date suggests that Eladur provides longer duration of action, faster onset of efficacy, and potentially deeper tissue penetration of bupivacaine versus lidocaine with Lidoderm. Endo sold $948 million of Lidoderm in 2012, up 15% from the $825 million posted in 2011.

DURECT generated impressive phase 2a data with Eladur in post-herpetic neuralgia (PHN). The data was presented at the 27th Annual Meeting of the American Pain Society in May 2008. In fact, the data was strong enough to attract Alpharma to license the patch, which brought $20 million in an upfront payment in September 2008. Unfortunately, when King acquired Alpharma, development plans for Eladur changed, which results in a failed phase 2b study in lower back pain in April 2011. We believe this was a flawed trial and indication, clearly outside the capabilities of a topical pain patch designed for indications like PHN. As a result, the partnership ended and DURECT has been searching for a new partner to move Eladur forward ever since.  




Pfizer, who acquired King, walking away from Eladur was not a surprise. Eladur should be developed for PHN, and PHN is a niche indication. Lidoderm dominates the market with nearly $1 billion in sales in 2012. NeurogesX’ capsaicin (8%) patch, Qutenza, for PHN has been a commercial failure due to poor tolerability and reimbursement. Eladur looks clearly superior to Qutenza, but the range in sales of PHN patches creates uncertainty. Therefore, we believe additional data is necessary head-to-head versus Lidoderm before the true market opportunity for Eladur can be assessed. It is possible that DURECT may look to conduct some of these studies alone, especially if Remoxy is approved. However, ultimately the company is seeking a development partner to move back into a phase 2b for PHN. Management has not given any timeline for a partnership, only saying that discussions are ongoing. We view any deal for Eladur in 2013 as pure upside to investors.  




...Sufentanil Patch...

DURECT has successfully completed phase 2b clinical studies with TRANSDUR-Sufentanil patch (TSP). TSP utilizes the same TRANSDUR delivery technology as Eladur, only delivering sufentanil instead of bupivacaine. DURECT designed the product to provide continuous delivery of sufentanil for up to seven days from a single application for the treatment of chronic pain. The product is similar to Johnson & Johnson's (JNJ) former billion-dollar transdermal patch Duragesic, but may offer distinct advantages in terms of size (~1/5th the size of Duragesic) and length of application (7 days vs. 3 days). 




DURECT is actively seeking a development partner for TSP on the backs of phase 2b data first reported in March 2009. The data showed that patients currently on Duragesic (transdermal fentanyl patch) can switch over to sufentanil without experiencing any clinically relevant serious adverse events. The product also has demonstrated rapid onset of action and improved pharmacokinetics over generic fentanyl patches. Based on this data, we believe TSP is phase 3 ready.  




Securing a partner for TSP remains a challenge for the company. In our view, we see this as only a niche product. Duragesic is available generic and although TSP provides some interesting advantages in terms of size and dosing, partners may question if peak sales are meaningful enough to support an expensive phase 3 program and NDA filing. Still, DURECT reports being in discussion with potential interested parties, and similar to Eladur, any deal would be pure upside for shareholders.




...Relday...




In July 2011, DURECT and Zogenix, Inc. (ZGNX) entered into a license agreement to develop and commercialize a proprietary, long-acting injectable formulation of risperidone using DURECT’s SABER controlled release formulation technology in combination with Zogenix’s DosePro needle-free, subcutaneous drug delivery system. The product is called Relday. Zogenix is handling the clinical work for Relday. DURECT received an upfront fee of $2.25 million, and can earn up to an additional $103 million in total future milestone payments, along with mid-single-digit to low double-digit royalty on annual net sales.

On July 12, 2012, Zogenix announced that it has initiated its first phase 1 clinical trial for Relday. Results were released in early January 2013. The data showed a favorable safety and PK profile demonstrated with the 25 mg and 50 mg once-monthly doses of Relday. In fact, Zogenix elected to continue the current study to include a 100 mg dose of the same formulation. We expect that Zogenix will push forward with a phase 1b multi-dose clinical trial, which would provide the required steady-state PK and safety data prior to initiating Phase 3 development studies, sometime during the second half of 2013.

Relday is designed to compete with Johnson & Johnson's (JNJ) long-acting formulation of risperidone called Risperdal-Consta, or Consta for short. The FDA approved Consta in 2007 for both schizophrenia and bipolar I disorder. J&J sold approximately $1.6 billion worth of Risperdal Consta in 2012. Dosing is with a 21 gauge needle every two weeks. A 21 gauge needle is 0.8192 mm thick (outer diameter). Zelday would offer both less frequent dosing and a less painful needle-free injector that utilizes Zogenix DosePro technology. If successful, we see Relday as a potential $500 million product. But even before commercialization, we think it is fair to assume that DURECT will collect another $10 to $20 million in milestone on Relday between now and 2015 (estimated phase 3). The market is largely ignoring this potential for non-dilutive cash in our view. Relday only further supports our belief that downside in DURECT is limited at today's price.

...ORADUR-ADHD...

DURECT is developing a drug candidate for the treatment of Attention Deficit Hyperactivity Disorder (ADHD) using its ORADUR tamper-resistant technology; this is the same technology used in Remoxy. DURECT is seeking a way to provide once-a-day dosing with added tamper-resistant characteristics to address common methods of abuse and misuse of a widely used (undisclosed) ADHD drug. ADHD drugs act by stimulating chemical neurotransmitters in the brain such as dopamine and epinephrine. However, stimulants such methylphenidates (Concerta, Daytrana, and Ritalin), dextroamphentamine (Adderall), and lisdexamfetamine (Vyvanse) are often misused and abused by teenagers as a means to perform better in school.

MonitoringTheFuture.org reports that 6.4% of 10th-graders and 6.8% of 12th-graders used prescription amphetamines non-medically in 2008. In the study, amphetamines ranked 3rd among 12th-graders for illicit drug use. A National Survey on Drug Use and Health (NSDUH) showed that in 2006 and 2007, about 6.4% of full-time college students reported using such stimulants as Adderall or Ritalin non-medically. A 2009 investigation tracking calls to the American Association of Poison Control Centers from 1998 to 2005 showed that teenaged victims of prescription ADHD drug abuse rose by 76% over that eight-year span.

In August 2009, DURECT entered into a development and license agreement with Taiwan-based Orient Pharma Co., Ltd. Under terms of the agreement, DURECT granted to Orient Pharma development and commercialization rights in certain defined Asian and South Pacific countries to ORADUR-ADHD. DURECT retains rights to North America, Europe, Japan and all other countries not specifically licensed to Orient Pharma. The goal of the collaboration is to generate a clinical data package through a phase 2 study. DURECT is responsible for formulation and study design of the phase I and phase 2 clinical trials, which Orient Pharma will fund and execute. Orient Pharma is responsible for all remaining development and commercialization activities in its licensed territory. If commercialized, DURECT will be entitled to receive a royalty on sales of ORADUR-ADHD by Orient Pharma. Orient Pharma has committed to supply a portion of DURECT’s commercial requirements for ORADUR-ADHD in all territories other than the U.S.

DURECT and Orient are currently progressing in a phase 1 pharmacokinetic (PK) analysis with multiple formulations. DURECT plans to continue to optimize the formulation and prepare for the next steps in development. The market opportunity for ORADUR-ADHD is attractive in our view. A successfully developed product could have blockbuster sales potential and works as a logical line-extension for large pharmaceutical companies that currently sell ADHD products, such as Shire’s Adderall and Vyvanse and J&J’s Concerta. However, the market is assigning little to no value for ORADUR-ADHD as long as ORADUR-oxycodone (Remoxy) remains unapproved. We think once Pfizer files on Remoxy the market will begin to appreciate the ORADUR technology and start to value the next iterations of the platform. It's yet another pipeline product that we believe helps support the downside on DURECT for investors.