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PropThink: Pfizer Spooks Durect Investors, Creates Opportunity

November 6, 2012 -

By Jason Napodano, CFA
On November 1, 2012, Pfizer (NYSE:PFE) held a conference call (webcast link) to discuss its third quarter earnings and financial outlook with investors. In the past, Pfizer's conference calls have provided the best source of information on the status of Remoxy for DURECT (NASDAQ:DRRX) investors. Pfizer's tone before the call last Thursday had always been upbeat and optimistic on resolving the manufacturing issues that resulted in the two complete response letters for Remoxy. The tone last Thursday was a bit different. When asked about Remoxy during the Q&A session of the call, John Young, Pfizer's President & General Manager, Primary Care Business Unit, responded (35:19):
""Remoxy has been a challenging asset that our teams have been working on very diligently since the acquisition of King. As a result of that work and extensive insights that we've gained around the formulation, we've initiated confirmatory bioavailability studies to assess the pharmacokinetic or PK profile of modified Remoxy formulation compositions. And we expect those studies to read out early in 2013. We think that the results of those studies will provide us a much greater clarity on whether or not we'll be able to adequately address the questions raised in the complete response letter that we received from the FDA. So we're targeting a late March meeting with the FDA to discuss those outputs and agree on a net go or no-go decision. I think one last comment just to make is that I think it's important to remember that our commitment to this area is very strong, and as such we continue to invest in our compound ALO-02, which is an extended release oxycodone, which uses a naltrexone platform technology and it's currently in Phase 3."" 
John Young certainly didn't serve up doom and gloom on Remoxy, but the comments above are a decisively more cautious tone than in the past when we've heard Pfizer say:
""We see it as when, not if."" - Ian Reed, CEO (August 2011)
""We are continuing to make progress."" - Ian Reed, CEO, (November 2011)
""We have a much better understanding of the formulation. We anticipate meeting with the FDA during the third quarter this year [2012] to discuss next steps."" - Oliver Brandicourt, President & GM (January 2012)
""We remain cautiously optimistic. Hoping to meet with the FDA in the fourth quarter of 2012"" - John Young, President & GM (July 2012)
Pfizer conducted two bioavailability (BE) / pharmacokinetic (PK) studies on Remoxy earlier in 2012. The first of these two studies was initiated in March 2012 and completed in June 2012 ( Identifier: NCT01552850). The second study also initiated in March 2012 and completed in August 2012 ( Identifier: NCT01552863). Based on John Young's comments above, it seems as though results of these two studies was not sufficient for Pfizer to schedule a meeting with the FDA before the end of the year. Instead, Pfizer plans to conduct some confirmatory BE / PK studies with a new modified formulation of Remoxy. Management expects read-outs from these studies in early 2013.
As a result, the timeframe for the FDA meeting, guided to take place in fourth quarter 2012 in July 2012 has now been pushed back to March 2013. I note that DURECT's CEO, James Brown, mentioned on their third quarter call on November 5, 2012 (webcast link, 4:29) that, ""You don't run confirmatory studies unless you are confirming something."" Which sounds like DURECT believes the data Pfizer generated was good and just needs to be replicated before they bring it to the FDA. In fact, DURECT said they have seen the data from the second BE / PK study that Pfizer completed in August 2012 and were pleased with the outcome. This suggests that Pfizer is confirming progress rather than failure.
However, just as Pfizer's comments last week cannot be ignored, they should not be considered positive. There is no FDA meeting scheduled in March 2013, this is only the current goal. And there may never be a meeting between Pfizer and the FDA on Remoxy unless Pfizer feels comfortable that it generated the type of data it needs to move forward. As of today, regardless of what DURECT thinks is being confirmed, this has not happened. The facts are, this is the first time that Pfizer has raised concerns on whether or not they will be able to adequately address the questions raised in the complete response letter. The fact that Pfizer is now talking about a ""go / no-go"" decision, versus previous comments on ""when, not if."" certainly spooked investors.
But what has really changed? In the past I've written that Remoxy has a 50/50 chance at approval post re-file. I still believe that to be the case. Perhaps what I should have said is that Remoxy has a 50/50 chance at a re-file. If Pfizer meets with the FDA in March 2013 after running three or four BE / PK studies and then decides to re-file the NDA, the odds of approval are probably better than 50/50.
Finally, Pfizer mentioning ALO-02 in the same breath as Remoxy also raised investor concerns. ALO-02 was acquired by Pfizer when they acquired King Pharmaceuticals in October 2012. ALO-02 was developed by Alpharma, which King acquired in December 2008. ALO-02 is an investigational oxycodone hydrochloride and naltrexone hydrochloride extended-release capsule. In October 2012, Pfizer announced that ALO-02 offered a long-term safety profile comparable to competing formulations (release). However, the 395-patient study showed that about 60% of the patients discontinued taking the drug during a 12-month period, almost 20% due to the drugs side-effects. Pfizer is currently conducting a phase 3 efficacy trial on ALO-02 ( Identifier: NCT01571362) with data expected in the third quarter 2013.
At this point, I'm not yet concerned that Pfizer will scrap Remoxy for ALO-02. ALO-02 has both potential safety and tolerability issues, and intellectual property issues. Based on the formulation, Remoxy looks like a superior option for Pfizer, even with potentially up to 30% royalty payments to DURECT and Pain Therapeutics (NASDAQ:PTIE). I also note the manufacturing of ALO-02 is no slam dunk either, as Pfizer has had trouble with Embeda, a product with a similar drug delivery platform technology. Investors thinking ALO-02 is a competitive threat to Remoxy should temper their fears. As of now, it seems like more of a long-shot.
Where Does That Leave Investors With Remoxy?
In September 2012, Zacks initiated coverage of DURECT Corp. with a 'Buy' rating and $2.50 price target. I encourage investors to read my 26-page report available for free on the website (downloaded copy:
Back in September 2012, I believed the story was vastly undervalued. I stripped the company down into its individual product components through a ""sum-of-parts"" analysis and arrived at a $2.50 per share value. Today, despite the seemingly more cautious tone Pfizer has taken with Remoxy, I am reiterating the rating. However, pushing back the Remoxy (and POSIDUR discussed below) time frame reduces the target by $0.50 to $2.00. I should note that the vast majority of my valuation still comes from Remoxy. In September, I expected that Pfizer would be in position to re-file the new drug application on Remoxy during the first half of 2013. I have pushed back this expectation to the second half of 2013, and thus the reduction to the target.
Nevertheless, I see Remoxy, a tamper-resistant extended release formulation of oxycodone, as a blockbuster drug. I think that Pfizer will be able to capture 30% of the OxyContin market from Purdue Pharma LP within five years of launch. Its shear marketing muscle, with the ability to co-detail Remoxy next to blockbuster pain medications like Lyrica and Celebrex, along with Purdue's less-than-stellar reputation should help drive uptake once approved. Abuse of OxyContin is a major healthcare concern, and recent FDA advisory panels and CDC workshops have the problem on the top of the ""get it fixed"" list. I think Remoxy is a meaningful step forward in the fight to reduce the OxyContin abuse epidemic.
DURECT is entitled to receive a tiered royalty on global sales of Remoxy at Pfizer. There are no expenses associated with the ongoing royalty stream. In fact, DURECT and Pfizer recently signed a long-term supply agreement whereby DURECT will supply some of the excipients included in the Remoxy formulation at a cost-plus transfer price. The royalties from Remoxy, heavily discounted, are worth $1.50 per share.
Pipeline Update

On the DURECT conference call on November 5, 2012, management provided a brief update on the rest of the pipeline outside of Remoxy. Generally, little has changed from the Zacks initiation of coverage in September 2012.
Investors still may be questioning DURECT's strategy to file for approval of Posidur based on the failure of the phase 3 BESST trial earlier in the year. Back in September, management was guiding for filing the NDA before the end of the year. Now, the NDA has been pushed into the first quarter of 2013. Management notes not wanting to rush the NDA around the holidays as the chief reason for the delay. I do not see this as a major concern.
My model assumes the company receives a complete response letter (CRL) and that the FDA requires DURECT to re-conduct another phase 3 program. I think BESST was outside the core capabilities of the product - surgical pain. I think odds favor success in a second phase 3 trial with a more narrow focus for Posidur, such as laparoscopic cholecystectomy (gallbladder removal). I see only a 20% chance of approval on the first NDA. Nevertheless, even with the expected CRL and the delay and costs necessary to conduct another phase 3 trial, I think Posidur, with peak sales around $250 million, is worth $0.35 per share if DURECT can eventually gain approval on a second attempt in, say, 2015.
Management reports being in discussions with potential partners on both TRANSDUR-Sufentanil and ELADUR. I have minimal expectations for both factored into my valuation. Any potential deal for either of these products would be a pleasant surprise for investors. Finally, Zogenix (NASDAQ:ZGNX) continues enrollment in its phase 1 study with Relday, which we are expecting to be completed by the end of the year.
Below is a summary of my sum-of-parts analysis (full analysis can be found in the Zacks report). I include only modest contributions from the rest of the pipeline, including Eladur, TRANSDUR-sufentanil, Relday, and early-stage ORADUR candidates. I also include projected operating expenses over the next several years at around $30 to $35 million in combined R&D and SG&A, a net operating loss (NOL) carryforward of approximately $228 million at year end 2011, and a projected cash balance of $17.5 million at year end 2012. I see cash sufficient to fund operations into 2014.

DURECT is a high-risk investment, tied closely to the future of Remoxy. However, at today's price I like the risk / reward. My modeling shows the shares have over 100% upside to fair-value. Besides Remoxy, this upside could come from virtually any other product in the pipeline. I see several catalysts on the horizon, including the Posidur NDA filing and potential partnerships on TRANSDUR, ELADUR, and ORADUR-ADHD as bringing investor attention back to the name.
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