DURECT (DRRX) - 2020 Q4 - Annual Report

PART I Business DURECT Corporation is a biopharmaceutical company focused on its Epigenetic Regulator Program, with lead candidate DUR-928, and also manages an FDA-approved product, POSIMIR®, alongside other revenue streams Overview DURECT's core focus is advancing DUR-928 for AH and NASH, complemented by its FDA-approved POSIMIR® and diverse revenue from partnerships and product sales - DURECT's primary focus is advancing investigational therapies from its Epigenetic Regulator Program, with the lead candidate being DUR-928[7] - DUR-928 is in a Phase 2b clinical trial (AHFIRM) for severe Alcohol-associated Hepatitis (AH) and is also being investigated for Nonalcoholic Steatohepatitis (NASH)[7] - The company's product POSIMIR®, a non-opioid local analgesic, received FDA approval in February 2021 for post-surgical pain in a specific shoulder surgery procedure[8] - DURECT generates revenue from earn-out payments on Indivior's PERSERIS™ sales, royalties from Orient Pharma's Methydur sales in Taiwan, and sales of its ALZET® osmotic pumps[9] Epigenetic Regulator Program and New Chemical Entities This section details DUR-928, an epigenetic regulator, in Phase 2b for Alcohol-associated Hepatitis and Phase 1b for Nonalcoholic Steatohepatitis, with promising clinical results - The lead compound, DUR-928, is an endogenous, orally bioavailable small molecule that modulates gene expression related to lipid homeostasis, inflammation, and cell survival, with exclusive worldwide rights held by the company through a license with VCU[13] - Injectable DUR-928 is being developed for acute organ injuries, primarily Alcohol-associated Hepatitis (AH), with a Phase 2a trial showing 100% survival at 28 days for all 19 treated patients, and a larger Phase 2b trial (AHFIRM) initiated in January 2021 to evaluate 90-day survival in approximately 300 patients[16][20][40] - Orally administered DUR-928 is being developed for chronic liver diseases like NASH, with a Phase 1b study in 65 NASH patients showing statistically significant reductions in liver enzymes (ALT, AST), liver stiffness, and serum lipids after 28 days of treatment[46][47][51] Approved and Commercial Pharmaceutical Products This section covers the FDA-approved POSIMIR® seeking a commercial partner, along with revenue from PERSERIS™ earn-outs and Methydur royalties - POSIMIR® (bupivacaine solution) was approved by the FDA in February 2021 for post-surgical analgesia for up to 72 hours following arthroscopic subacromial decompression, with the company holding worldwide rights and discussing with potential licensees for commercialization[65][66] - DURECT receives quarterly single-digit earn-out payments on U.S. net sales of Indivior's PERSERIS™ (risperidone) for schizophrenia, launched in February 2019, with patent rights extending into at least 2026[70] - The company's licensee, Orient Pharma, launched Methydur Sustained Release Capsules for ADHD in Taiwan in September 2020, from which DURECT receives a single-digit royalty on sales[72] Drug Delivery Technologies and Programs The company utilizes proprietary drug delivery platforms like SABER®, CLOUD™, and ORADUR™ for controlled, sustained drug release, exemplified by POSIMIR® and Methydur - The company has several drug delivery technology platforms, including SABER®, CLOUD™, and ORADUR™, designed to provide controlled, sustained release of drugs[74][76] - The SABER® technology, a bioerodible injectable depot system, is the basis for the FDA-approved products POSIMIR® and SucroMate™ Equine[77] - The ORADUR™ sustained release gel-cap technology is the basis for the ORADUR-Methylphenidate ER program (Methydur) and is designed to have abuse-deterrent properties[78][79] DURECT Strategy DURECT's strategy centers on developing its Epigenetic Regulator Program, diversifying risk through multiple indications and collaborations, and potentially building its own commercial team - Focus on developing pharmaceuticals from the Epigenetic Regulator Program (DUR-928) for acute organ injuries and metabolic diseases[82] - Diversify risk by pursuing multiple indications with DUR-928 and collaborating with partners on early-stage programs[84] - Utilize strategic collaborations to enhance product development, mitigate risk, and manage operating costs, while retaining significant economic rights[85] - May elect to build its own commercial, sales, and marketing organization in the future to capture more economic value from its products[86] Patents and Proprietary Rights The company holds extensive patent protection for its Epigenetic Regulator Program, including DUR-928, and its FDA-approved product POSIMIR®, with numerous granted and pending patents - As of March 1, 2021, the company owned or exclusively in-licensed over 35 unexpired U.S. patents and over 145 unexpired foreign patents, with numerous pending applications[100] - The Epigenetic Regulator Program (including DUR-928) is covered by thirteen patent families, with granted patents providing protection until 2026, 2032, and 2034, and pending applications potentially extending to 2041[101] - POSIMIR is covered by U.S. patents that could provide protection until 2025, with pending applications potentially extending to 2042, and European patents expiring in 2025 and 2026[101] Human Capital Resources The company's human capital comprises 81 employees, with a significant portion in R&D and a diverse gender representation Employee Statistics as of March 1, 2021 | Category | Number/Percentage | | :--- | :--- | | Total Employees (as of Mar 1, 2021) | 81 | | Research and Development | 46 | | Manufacturing | 10 | | Selling, General & Administrative | 25 | | Employees with Advanced Degrees | 41 | | Gender Diversity | 40% male, 60% female | Risk Factors The company faces significant risks, primarily its dependence on the successful development and commercialization of its lead candidate, DUR-928, alongside potential clinical trial delays, COVID-19 impacts, commercialization challenges for POSIMIR, and the need for additional capital - The company's business is substantially dependent on the successful development, regulatory approval, and commercialization of DUR-928, where failure to demonstrate safety or efficacy would materially harm the business[153] - The COVID-19 pandemic has disrupted operations, delayed the initiation and enrollment of clinical trials like AHFIRM, and may impact supply chains and capital markets, posing a significant risk to the business[159] - The company has a significant amount of debt under a loan agreement with Oxford Finance, with covenants that may be difficult to comply with, where a default could lead to acceleration of repayment obligations[172][174] - The company will require additional capital to fund its research, development, and clinical testing, and difficulty in raising needed funds may force delays or elimination of programs[176] - The company is in discussions for a commercialization partner for POSIMIR and may be unable to enter an agreement on acceptable terms, if at all, which could harm financial prospects[165] Properties The company leases three facilities: two in Cupertino, CA for office, laboratory, and manufacturing purposes, and one in Vacaville, CA for manufacturing, with all leases expiring between 2023 and 2024 with renewal options Leased Facilities Overview | Location | Size (sq. ft.) | Use | Lease Expiration | | :--- | :--- | :--- | :--- | | Cupertino, CA | 30,149 | Office, Lab, Manufacturing | 2024 | | Cupertino, CA | 20,100 | Office and Laboratory | 2024 | | Vacaville, CA | 24,634 | Manufacturing | 2023 | Legal Proceedings The company is not a party to any material legal proceedings - The company reports no material legal proceedings[279] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NASDAQ Capital Market under the symbol "DRRX", with approximately 101 holders of record as of March 1, 2021, and no cash dividends paid or anticipated in the foreseeable future - Common stock is traded on the NASDAQ Capital Market under the symbol "DRRX"[282] - The company has never paid cash dividends and does not intend to in the foreseeable future[283] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2020, total revenues increased to $30.1 million, net loss significantly narrowed to $0.6 million due to a $13.8 million gain from discontinued operations, and the company ended the year with $56.9 million in cash, sufficient for the next 12 months Operating Results In 2020, total revenues increased to $30.1 million, driven by Gilead agreement revenue, while R&D expenses slightly decreased, and net loss significantly narrowed Key Financial Metrics (in millions USD) | Metric | 2020 (Millions USD) | 2019 (Millions USD) | 2018 (Millions USD) | | :--- | :--- | :--- | :--- | | Total Revenues | $30.1M | $25.1M | $15.3M | | R&D Expenses | $27.7M | $29.6M | $25.0M | | SG&A Expenses | $13.6M | $14.1M | $12.3M | | Loss from Continuing Operations | ($14.3M) | ($21.4M) | ($25.3M) | | Income from Discontinued Operations | $13.8M | $0.8M | $0.02M | | Net Loss | ($0.6M) | ($20.6M) | ($25.3M) | Collaborative R&D Revenue by Partner (in millions USD) | Collaborator/Counterparty | 2020 Revenue (Millions USD) | 2019 Revenue (Millions USD) | 2018 Revenue (Millions USD) | | :--- | :--- | :--- | :--- | | Gilead | $22.9M | $17.1M | $2.5M | | Other | $1.1M | $1.0M | $5.7M | | Total | $23.9M | $18.1M | $8.2M | - The increase in collaborative R&D revenue in 2020 was primarily due to recognizing all remaining deferred revenue from the Gilead agreement upon its termination in June 2020[330][331] R&D Expenses by Program (in millions USD) | Program | 2020 R&D Expense (Millions USD) | 2019 R&D Expense (Millions USD) | 2018 R&D Expense (Millions USD) | | :--- | :--- | :--- | :--- | | DUR-928 | $21.3M | $20.1M | $14.8M | | POSIMIR | $3.7M | $4.6M | $6.6M | | Gilead program | $1.0M | $3.8M | $2.2M | | Other Programs | $1.7M | $1.1M | $1.3M | | Total | $27.7M | $29.6M | $25.0M | - Product revenues decreased to $6.2 million in 2020 from $6.9 million in 2019, primarily due to lower sales of the ALZET osmotic pump line, impacted by COVID-19 affecting customer research activities[338][339] Liquidity and Capital Resources The company held $56.9 million in cash and investments at year-end 2020, raised an additional $47.8 million in early 2021, and believes existing capital is sufficient for the next 12 months - The company had cash, cash equivalents, and investments totaling $56.9 million at December 31, 2020, compared to $64.8 million at year-end 2019[369] - In February 2021, the company raised net proceeds of $47.8 million from an underwritten public offering and other equity sales[369] - The company has a $20.0 million term loan with Oxford Finance, with interest-only payments until December 1, 2021, and a final maturity date of May 1, 2024[377] - Management believes that existing cash, including proceeds from the February 2021 offering, is sufficient to fund planned operations for at least the next 12 months[383] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to changes in interest rates, affecting its investment portfolio and floating-rate term loan, with the investment portfolio focused on principal preservation and the term loan carrying a floating interest rate - The company's main market risk is interest rate risk, affecting its investment portfolio and its floating-rate term loan[395] - The investment policy prioritizes principal preservation and liquidity, with investments in money market funds, commercial paper, and government securities, and as of December 31, 2020, 97.5% of the portfolio had original maturities of one year or less[396] - The term loan has a floating interest rate (7.95% as of December 31, 2020), exposing the company to increased interest expense if rates rise[401] Financial Statements and Supplementary Data This section contains the company's audited financial statements for the fiscal years ended December 31, 2020, 2019, and 2018, including the Balance Sheets, Statements of Operations and Comprehensive Loss, Statement of Stockholders' Equity, and Statements of Cash Flows, along with accompanying notes and an unqualified audit opinion from Ernst & Young LLP Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified audit opinion on the financial statements, identifying 'Prepaid and accrued contract research expenses' as a critical audit matter - Ernst & Young LLP issued an unqualified audit opinion, stating the financial statements present fairly, in all material respects, the financial position of the company[407] - The audit identified 'Prepaid and accrued contract research expenses' as a critical audit matter due to the challenging and subjective judgments required to estimate the progress and stage of completion of R&D activities[411][412] Financial Statements This section presents the company's audited balance sheets, statements of operations, stockholders' equity, and cash flows for 2018-2020, along with related notes Consolidated Balance Sheets (in thousands USD) | Balance Sheet | Dec 31, 2020 (Thousands USD) | Dec 31, 2019 (Thousands USD) | | :--- | :--- | :--- | | Assets | | | | Cash, cash equivalents & investments | $56,890 | $64,824 | | Total Current Assets | $63,061 | $71,829 | | Total Assets | $75,641 | $86,020 | | Liabilities & Equity | | | | Total Current Liabilities | $10,703 | $36,768 | | Term Loan, non-current | $19,936 | $20,262 | | Total Liabilities | $34,926 | $63,160 | | Total Stockholders' Equity | $40,115 | $22,860 | Consolidated Statements of Operations (in thousands USD) | Statement of Operations | 2020 (Thousands USD) | 2019 (Thousands USD) | 2018 (Thousands USD) | | :--- | :--- | :--- | :--- | | Total Revenues | $30,111 | $25,074 | $15,275 | | Total Operating Expenses | $42,726 | $45,018 | $38,915 | | Loss from Continuing Operations | $(14,335) | $(21,371) | $(25,343) | | Income from Discontinued Operations | $13,753 | $793 | $21 | | Net Loss | $(582) | $(20,578) | $(25,322) | - In December 2020, the company sold its LACTEL Absorbable Polymers product line to Evonik for approximately $15 million, resulting in a $12.8 million gain and reporting the business as a discontinued operation[574][575] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2020, with no material changes identified during the last fiscal quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[584] - Management concluded that internal control over financial reporting was effective as of December 31, 2020[586] PART III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, certain relationships, related transactions, director independence, and principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for its 2020 annual meeting of stockholders - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's forthcoming Proxy Statement[592][593][594] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, including various agreements, corporate governance documents, and SEC-required certifications - This section contains the list of all financial statements, schedules, and exhibits filed with the 10-K, including key agreements such as the Asset Purchase Agreement with Evonik and the Loan and Security Agreement with Oxford Finance[597][598] Form 10-K Summary The company has elected not to include a summary for its Form 10-K - The company has elected not to provide a Form 10-K summary[619]