DURECT Partnerships Bolster Long-Term Cash Flows

You’ve probably passed it many times on Bubb Road in Cupertino. Standing across the railroad track lies the familiar DURECT Corporation complex.

Cupertino born-and-raised CEO James Brown nostalgically remembers the agricultural relics preceding his company.

“Before Bubb Road was put through, there was an orchard here,” Brown said. “I can recall a time when there was a tomato cannery just off the railroad tracks.”

Founded in 1998, DURECT Corporation has endured the boom and busts of many startups in the Bay Area, as well as the perils of being a small fish in the big pond of the pharmaceutical industry.

“There’s more and more consolidation in big pharmaceutical companies—they lay off a lot of people and typically just keep the products from the acquired company,” Brown said.

DURECT spun out of drug-delivery pioneer ALZA Corp. and found its niche treating chronic pain, an area in which Brown says there is a significant amount of unmet need.

“Probably 70 percent of chronic pains sufferers don’t like the medications they are on today,” Brown said.  

DURECT's latest earnings announcement on March 2 shows the company of 130 employees is making slow strides in profitability as its products near launch. It generated its first positive cash flow in 2010 and increased its cash and investments by 19 percent to $49.6 million in 2010 from $41.6 million in 2009. With a modest cash burn rate of $10 million per year reported by the company for the last six years, DURECT has funding available to sustain itself against a negative cash flow while developing its product pipeline, especially important in this recessionary environment.  

DURECT’s quarterly burn rate (prior to POSIDUR™ deal) was around $6 million, providing nearly two years of resources, said David Windley, analyst at Jefferies, in a note dated Aug. 5, 2010. DURECT gave guidance that it would consume between $23-$27 million in cash for 2011.

Net loss in the fourth quarter was down 38 percent, to a $5.3 million loss from a $8.6 million loss in the fourth quarter 2009. DURECT’s revenue rose by 73 percent to $8.5 million, from $4.9 million in the year-earlier quarter.

Annual figures tell a similar development story. Net loss in 2010 decreased 24 percent to a loss of $22.9 million, from a net loss of $30.3 million in 2009. Revenues in 2010 increased 29 percent to $31.6 million, up from $24.5 million in 2009.

However, overall industry trends may work against DURECT.

“I’d say there’s a little less interest in the pain market than there was once, say 10 years ago,” said Damien Conover, associate director at Morningstar. “There have been a lot of high-profile failures in pain medicine. Pain is a very difficult endpoint, because some of the expectations can be pretty high in pain drugs, and then also there is a central placebo problem, depending on the power of the pain medication.”

DURECT’s partnerships with big pharmaceuticals are critical to buck the trend and boost investor confidence. Two of its seven upcoming products, Remoxy® and Posidur, partner with larger companies Pfizer, with and Hospira and Nycomed, respectively.  

“You are much better positioned when you partner while launching a new drug, especially in the pain market where you really need more of a primary care sales force or a very strong CNS (Central Nervous System), both of which Pfizer has,” Conover said. “I think they have a good partnership there.”

DURECT has three other potential ORADUR®-related products in the pipeline in partnership with Pfizer.

Remoxy is the product closest to market, with the FDA reviewing it and expected to announce its decision on approval by June 23. If approved, the product could be launched this year by Pfizer and would compete with OxyContin®, a $3.7 billion market as of 2010, of which DURECT could get between 6-11.5 percent in royalties, depending on sales. Remoxy treats moderate to severe pain and is designed to resist drug abuse with its gel cap technology and gradual release of the drug over 12 hours.

There are high hopes that Remoxy will be a runaway success for DURECT.

“This is a very important product for us,” Brown said.  “If Pfizer can get 30 percent penetration of the current market, then DURECT would have royalties of 70 million dollars. If Pfizer gets 50 percent, it’s 140 million dollars for DURECT. So it’s a big thing for us.”

Another big development for DURECT is Posidur, an injectable drug used to numb a post operative wound for three days and block pain locally. It will ideally have NDA (New Drug Application) submission in 2012. DURECT is in partnership with Hospira to commercialize the drug in the U.S. and Canada, and with Nycomed abroad in Europe.  Brown said DURECT has “the potential for new collaborations with Posidur in Japan and Korea” as well.

The multiple collaborations are likely beneficial in the long term, tapping into the two biggest geographies for drug sales, Europe and America. But the near term outlook for 2011 may be challenging, particularly internationally.

“There are a lot of austerity measures implemented by governments in Europe,” Conover said. “Governments tend to pay for the majority of the drugs there, and the deficits that these governments are facing are causing them to do a lot of cutbacks on spending and one area where they are cutting back is spending on drugs.”

With both partnerships, DURECT has received $49.5 million to date for Posidur, with a potential of an additional $365 million after potential milestones. The Hospira partnership provides cash burn mitigation, analyst Windley said in his August 2010 note.

“The Posidur upfront payment and savings from shared development could either hold over the company through FDA filing or provide resources to advance other pipeline candidates,” Windley said. “We prefer certain cash sooner, even if it is lower than management’s hopes, than potentially higher amounts down the road.”

Given the many years DURECT has spent developing its products in trials and testing, the potential launch of these two drugs will be critical for its viability. Their partnerships are promising and lucrative for investors, but they face headwinds in the economy.

Brown admits that it has generally become harder to develop new drugs, with skyrocketing costs and increasing regulatory delays.

“Procedures get added in for every step of the way,” Brown said. “The industry is seeing less money being spent on new companies coming out because the returns aren’t really there and the costs are too great.”

Nevertheless, Brown says DURECT “is doing fine.” After 13 years in Cupertino, Brown says the Bay Area has made recruiting locally possible, with a good population of people having specialized training and prior experience in the industry. It is no doubt a company to watch while it makes its first forays into launching live products.

DURECT’s stock closed at $3.50 on Thursday, down 3¢.