Special Report

TICKERS: DRRX

Making Old Drugs New Again with Specialized Biotech: DURECT Corp.'s James E. Brown

Source: George S. Mack of The Life Sciences Report  (1/27/16)

James Brown Sometimes wonderful ideas live on and create value for the ages. Alza Corp. was a pioneer in the field of drug delivery, and that illustrious heritage continues in its spinout, DURECT Corp., which has leveraged the technology to enable highly innovative, value-added products that may soon be on the market. In this interview with The Life Sciences Report, DURECT cofounder and CEO James E. Brown discusses his company's pipeline, and how DURECT is evolving into a high-margin, blockbuster biotech.

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Management Q&A: View From the Top

The Life Sciences Report: Jim, you helped found DURECT Corp. (DRRX:NASDAQ) back in 1998. It was spun out of Alza Corp. (acquired by Johnson & Johnson [JNJ:NYSE] in 2001), a pioneer in the field of drug delivery formulations. You went public in 2000, and have endured a lot of market cycles through the years. As we speak, the capital markets are in the throes of global volatility resulting from a confluence of factors including the disturbing selloff in China, North Korea detonating an atomic bomb, diplomatic unrest between Saudi Arabia and Iran, and the U.S. Federal Reserve signaling it will continue to raise short-term interest rates. What have you learned about holding a business together during this kind of disruption?

JB: My experience in biopharma tells me that a company like DURECT is somewhat divorced from the hiccups occurring in China or in the broader economy. I'm not focused on anything but moving our pipeline along and bringing meaningful new drugs to the marketplace. If we do that successfully, then we're going to be successful for both shareholders and patients. In 2016 we have the potential to see our very first product come to market. This turmoil is a tough way to start the new year, for sure, but the U.S. and European economies seem to be in good shape.

Once things settle down, as they always do, it seems to me investors will come to realize that our sector, biopharmaceuticals, is a wonderful place to invest. This sector is the place to be because, at the end of the day, how small can your phone be, or how large can that screen be, or how much data can it store? Biopharmaceuticals go to the most basic needs of humankind.

TLSR: In early November, you filed an SEC Form S-3 registration statement of shares you may offer to the public. These global disruptions could affect how much money you could raise. What do you do in a case like that? Do you wait until things settle down?

JB: We try to balance what we're doing as far as raising money. We do have a shelf offering out there. We also have what they call an "at-the-market" (ATM) facility. Last year, in Q2/15, we were able to pull down around $11 million ($11M). From time to time we can go into the market, either with an offering or with the ATM procedure, to bring money in.

"2016 is going to be a great for POSIMIR and Remoxy, and we think they are both going to be best in class."

But another way we can raise money is with partnerships. That's always a nice opportunity. We have the great fortune of having our long-acting, post-surgical pain product POSIMIR™ (SABER®-bupivacaine) in its last stages of clinical development; it should be on the market in 2017. This is a very mature product and a very strong opportunity, with a lot of value already created. We own the worldwide rights to POSIMIR, and we are in discussions with a number of potential companies about whether we would like to license or co-market the product. Under the right terms, we may well do that, but it would have to be the right terms and the right kind of partner.

We also have a couple of product lines that bring in reasonable funds for us. Financially, I think we're in great shape.

TLSR: Even if an investor knows nothing about DURECT, he or she can appreciate your stock performance. Although your shares have been weak during this downturn, I can't find many specialty pharma, biotech or medtech companies—and you are a combination of all three—with the kind of share price appreciation you have had over the past 52 weeks. As I look back over your press releases, I don't see any major market-moving events. Did I miss something? What was it that propelled your stock in 2015?

JB: I think it was three things, and I'll go through them in order. The most substantial was the announcement of our epigenomic regulator program with DUR-928. We just announced positive Phase 1 safety data, and then initiation of a Phase 1b dosing study. We made a lot of progress on DUR-928 last year.

Next, we're making the shift from being a specialty pharma company to a biotech company, as we move into the metabolic disease area. We announced this DUR-928 program in March, and that's when the stock started to get more biotech investors interested.

In addition, we have our two late-stage programs. I mentioned POSIMIR; the other is our abuse-deterrent opiate Remoxy (oxycodone), which would be competing with Purdue Pharma's OxyContin (oxycodone). These are big market opportunities. Remoxy is a more-difficult-to-abuse version of oxycodone, and OxyContin recorded sales of $2.4 billion ($2.4B) in the U.S. during 2014. We have the potential to improve the product and make it safer for patients. I think 2016 is going to be a great for these two products, and we think they are both going to be best in class. Remoxy could get approved this year, and we could see POSIMIR approved next year.

TLSR: It's hard to miss how upbeat you are about DUR-928. I understand it's an epigenetic inhibitor. Can you elaborate?

JB: Yes. It is the lead molecule from our epigenomics regulator program. It's a new, really exciting program for us.

DUR-928 is an endogenous small molecule that could give us opportunities to treat chronic metabolic diseases such as nonalcoholic fatty liver disease and nonalcoholic steatohepatitis. It also looks to have wonderful therapeutic potential in acute organ injury, such as the damaging of kidneys during open-heart surgery or the brain post-stroke, or in a number of potential orphan indications. We've reported compelling data from eight different animal models with this molecule, and we completed Phase 1 safety studies that we reported on Jan. 6. We've seen no safety or adverse signals.

TLSR: It's interesting that you stressed the point that DUR-928 is an endogenous molecule. Would you explain why?

JB: The wonderful thing about this product is it's in all of us. It's similar to corticosteroids, insulin, growth hormone, erythropoietin and products like that. Because it's a small molecule, it's orally bioavailable. It can also be injected. DUR-928 modulates the activity of various nuclear receptors that play an important regulatory role in lipid homeostasis, inflammation and cell survival. It has been shown to alter the activity of more than 240 genes.

TLSR: So, if you administer DUR-928 to the patient, it frees up the genes to express whatever proteins are essential in managing the targeted metabolic diseases. Is that what you're saying?

JB: Exactly. This year, we're all about treating patients with these metabolic diseases with the compound. So far DUR-928 has been tested in 75 healthy volunteers to assess safety. We think this program is about to take off in a big way. You can look at companies like Intercept Pharmaceuticals Inc. (ICPT:NASDAQ) with obeticholic acid (OCA/INT-747) or Genfit SA (GNFT:EPA) with elafibranor (GFT505), and you can see the potential upside of where we're going. That's what got investors' attention.

TLSR: You are obviously excited about DUR-928, but I don't imagine it as a real value driver right now, because you're just completing your first Phase 1 trial.

JB: It is an early-stage asset—you're right about that. But we have a consultant, Dr. Thomas Bersot, who is Director of the Gladstone Lipid Clinic at the University of California, San Francisco, where he's been for 37 years. He coauthored a chapter on lipid-lowering drugs in the Goodman & Gilman's pharmacology textbook so many physicians rely on. He has been associated with getting drugs approved for helping children with super high cholesterol—hyperlipidemia orphan diseases. Tom has told me that DUR-928 is the most interesting molecule he's seen in more than 30 years because it's endogenous. It's actually in a class of molecules that we are developing; DUR-928 is the first one. It is an epigenomic regulator. The fascinating thing is you inherit it from your mother, because it's made, in part, in association with the plasmid in the mitochondria.

TLSR: Moving on to POSIMIR, there are some bupivacaine local anesthetic products in the marketplace that are formulated in liposomes and are being injected into the surgical wound closure site to prevent pain. The liposomes are of different sizes, and they release the bupivacaine over time. However, I detect from our conversation that POSIMIR is not a liposomal formulation. Is that right?

JB: You're absolutely right. We are using our SAIB (sucrose acetate isobutyrate) technology. It's a sugar; a disaccharide that has esters around it. It's like honey that doesn't like water. We put the drug—in this case it's bupivacaine, a relative of Novocaine (procaine) that the dentist gives—into the SAIB formulation, and it slowly diffuses out over time and allows for beautifully controlled release. We also use SAIB in the oral dosage form of Remoxy to make it more difficult to abuse.

TLSR: Tell me the advantage of POSIMIR versus a liposomal formulation of bupivacaine?

JB: There are several advantages. The first is that POSIMIR is easier to use than the current market leader Exparel (bupivacaine liposome injectable suspension; Pacira Pharmaceuticals [PCRX:NASDAQ]). POSIMIR is applied into the wound, not infiltrated by injection like Exparel. Also, Exparel works only for 20–24 hours, while our product is delivering three days of pain relief. The reason we dialed into three days is that after talking to surgeons, they told us that's what they wanted to see post-surgically.

"We think the DUR-928 program is about to take off in a big way."

At Alza, they showed that if you inject a drop of medicine under the skin, by the time it diffuses a centimeter—about the diameter of a pea—it goes down in concentration by three orders of magnitude. You have to be lucky to get next to a tiny nerve ending if you're blindly injecting tissues. In our case, if you have three or four incisional holes, as in laparoscopic-assisted surgery, you can squirt a little POSIMIR in each of the holes and sew them up. The drug diffuses through the tissues and reaches those cut nerves at the margins of the wound. That's one of the reasons we're seeing such great efficacy.

There's something else. Because POSIMIR diffuses out of this honey-like matrix, we're actually delivering two-and-a-half times more drug than Pacira, and yet we never see higher plasma concentrations, which means our drug is sustained two-and-a-half times longer. In our shoulder and hernia pivotal trials, we saw 20–30% less pain and 60–80% fewer narcotics used—all statistically significant. I think POSIMIR will provide an advantage for doctors and for patients.

TLSR: Jim, the FDA sent DURECT a complete response letter (CRL) to your NDA for POSIMIR in February 2014. What issue are you addressing in the new, 306-patient, Phase 3 trial now underway? Is it the fact that the technology is new?

JB: I think that's part of it. Even though we didn't get approval with our first NDA, there was a lot of value in the NDA review, and in the feedback and information we got back from the FDA. I think it's fair to say the agency likes the efficacy, likes the 20–30% reduction in pain and the reduction in use of narcotics by 60–80%. The FDA had no questions with regard to chemistry, manufacturing and controls. We were able to lay a lot to rest with regard to that. Any adverse events we saw were minor and transient.

We also demonstrated there are no cardiovascular effects, which has always been a concern with local "caine" anesthetics, such as procaine, lidocaine and cocaine, which is also a local anesthetic. If you give too much, you can cause cardiac arrhythmias or even cardiac arrest. We tested POSIMIR in 300 older patients who had colon cancer surgery, diverticulitis laparotomies or large abdominal surgeries. These were older, sicker patients. All 300 wore Holter monitors post-surgery, and we demonstrated no cardiovascular changes. It was very important to lay all that to rest.

"We are in partnering discussions with a number of companies with respect to POSIMIR and other programs."

I think it came down to this: The FDA wanted more with regard to the control arm of our historical studies, because the majority of the double-blind work we had done was with a control arm using the POSIMIR vehicle—our SAIB formulation without the bupivacaine—as our placebo. We ran a few smaller trials where we tested POSIMIR against something that did not contain our SAIB formulation. These trials were typically run against standard bupivacaine, which has been on the market for many years. The bottom line is that the FDA insisted on seeing more data from a trial that compares POSIMIR against a true placebo. That's what we are doing now.

TLSR: Your other near-term product is Remoxy, and I'd like to get your take on its growth proposition. Do you think the revenue growth potential is related to the fact that clinicians won't be as afraid to prescribe the product because it has less abuse potential?

JB: That's it in a nutshell. I spoke at a conference where this was discussed among representatives from the U.S. Department of Justice, the Drug Enforcement Agency, local educators, local physicians, and also parents—mostly mothers—who'd lost college kids to illicit drug use. We heard about 20-something age kids who'd gone off to college, gotten drunk, taken a single OxyContin, and then had not made it through the night. The stories bring tears to your eyes. It's just so sad. To be able to produce a dosage form that could reduce that risk is what we've been working on for many years. I think we are going to get Remoxy over the goal line this year.

TLSR: You have mentioned that DURECT has some revenue-generating products: the ALZET osmotic pumps used in animal research; the LACTEL biodegradable polymers used in the manufacture of drugs; and some excipients, one of which is probably giving Remoxy that very bitter flavor that prevents abusers from chewing the soft-gel capsule. Can they fund any of your drug development?

JB: They're helpful. These product lines have been around a long time. They typically generate something in the range of $11–12M a year, of which there is $6M-plus of gross profit for us. Both ALZET and LACTEL are nice, steady, cash-flow-positive product lines for us. They won't grow dramatically going forward, but they're cash cows, and they help keep our burn rate down. They allow us to invest in the more valuable products in our pipeline.

You alluded to Remoxy, which contains one of our excipients, and I can tell you that down the road, after Remoxy is approved, our excipient sales will generate useful revenue. But that will be dwarfed by the potential sales of Remoxy, of which we will get 6–11.5%. If that product does a fraction of the $2.4B that Purdue does with OxyContin, we will be in good shape.

TLSR: Only about 49% of DURECT shares are institutionally owned, but you do have high quality sponsorship, with names like Vanguard and Fidelity owning your shares. There is a still lot of overhead room for institutions to bid up your shares and take a higher percentage of DURECT ownership. What upcoming milestones could be catalysts for upward share price movement?

JB: Our Remoxy new drug application (NDA) should be submitted this quarter (Q1/16), and because it is a resubmission, it should have just a six-month FDA review. I think Remoxy has a very high probability of getting approved, sometime in the fall of this year.

For DUR-928, we'll be in patient studies this year for two different programs, after having done all the Phase 1a work last year. We look forward to reporting data on this program throughout this year.

For POSIMIR, we've had numerous interactions with the FDA, and come away with this plan to complete one additional Phase 3 trial. That trial, treating pain post-gall bladder surgery, is underway now, and should be completed in less than a year. It will take about six months to wrap up those data. We expect to submit the NDA in H1/17. We are hopeful for a six-month review and getting approval by the end of 2017.

In addition, we are in partnering discussions with a number of companies with respect to POSIMIR and other programs where we currently retain commercial rights. That, too, could be a catalyst. We also have other programs that we think will add additional market value over the next 12–24 months, but these are earlier stage.

TLSR: Companies like Ligand Pharmaceuticals Inc. (LGND:NASDAQ) have very powerful licensing models and think of the royalty stream coming in as a 100% margin. It comes in on the top line and drops down to the bottom line unmolested. Is that your vision?

JB: Yes. That was our model at Alza too.

TLSR: Would you have any objection to going into the marketing business and becoming more of a fully integrated specialty pharma?

JB: With the right product and the right opportunity, we would consider that. With POSIMIR, one could actually go that way because it's a hospital-based product. We'd only need 60–80 reps, and so that can be done. There's an opportunity for at least one of the programs to be marketed by us. We have a couple of shots down the road that we might be able to move into the commercial space should we want to. But it requires a substantial investment, and I wouldn't do that kind of dilution to our company right now.

TLSR: Jim, it's been a pleasure. Thank you.

James E. Brown, D.V.M., cofounded DURECT in February 1998 and has served as president, CEO and a director since June 1998. He previously worked at Alza Corp. as vice president of Biopharmaceutical and Implant Research and Development from June 1995 to June 1998. Prior to that, Dr. Brown held various positions at Syntex Corp., a pharmaceutical company, including director of business development from May 1994 to May 1995, director of joint ventures for discovery research from April 1992 to May 1995, and held a number of positions including program director for Syntex Research and Development from October 1985 to March 1992. Dr. Brown holds a bachelor's degree from San Jose State University and a D.V.M. (Doctor of Veterinary Medicine) from the University of California, Davis, where he also conducted post-graduate work in pharmacology and toxicology.

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DISCLOSURE:
1) Dr. George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the company mentioned in this interview: None.
2) DURECT Corp. is a sponsor of Streetwise Reports.
3) Dr. James E. Brown had final approval of the content and is wholly responsible for the validity of the statements. Opinions expressed are the opinions of Dr. Brown and not of Streetwise Reports or its officers.
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