Description

This idea is probably best suited as a small, option-like position or for your PA.

Setup:

DURECT Corporation (DRRX) is an underfollowed, orphaned micro cap equity. The Company is a pre-FDA approval biotech Company. We acknowledge that the situation is highly binary with little to no downside protection. But with 50x+ potential upside, we believe this is one of the best risk reward return profiles that we have seen. We have estimated a potential valuation of $4.6BN+ which implies the stock is trading at a <2% probability of success based on the current ~$92MM market cap. Our assessment is this discount is unwarranted.

DRRX’s most promising opportunity has a venture like return profile. It solves a significant unmet need for patients, faces no competition and saves the hospitals money. The Company is currently conducting a Phase 2b trial which follows an extremely encouraging Phase 2a trial. Enrollment in the trial is accelerating and we believe could be completed much sooner than the market expects. The Company is due to provide a business update on enrollment sometime in early May. We think there is an opportunity today to establish a position in the equity at what we view as basement-bargain prices.

This is a totally hated stock in a hated sector. YTD the stock is down -59% despite good trial progress. And since its most recent peak in early 2020, the stock is down -90%. We see this as a situation where the baby has been thrown out with the bathwater. We view the recent weakness in the stock as an opportunity to establish a position in a highly compelling asymmetric return profile. At a minimum, it is worth watching as enrollment progresses throughout the next couple of quarters given the potential upside.

Profile:

DRRX is a biopharmaceutical company committed to transforming the treatment of acute organ injury and chronic liver diseases by advancing novel and potentially lifesaving therapies based on its endogenous epigenetic regulator program. Larsucosterol (DUR-928), the lead drug candidate, is in clinical development for the potential treatment of alcohol-associated hepatitis (AH) for which the FDA has granted Fast Track Designation.

AH is an acute liver disease caused by excessive drinking. This is a deadly disease that has very little treatment options other than supportive care. AH patients have a 26% 28 day mortality rate and corticosteroids, current standard of care, have been clinically shown to have a limited impact. There are roughly 137K AH patients in the US every year and it is estimated that these AH patients cost the health system over $10BN annually.

Larsucosterol is currently undergoing a Phase 2b 300 patient trial, AHFIRM, with the primary endpoint being 90 day survival rate. The AHFIRM trial follows an extremely encouraging Phase 2a 19 patient trial that showed a 100% survival rate at 28 days with 75% of patients being discharged at less than 4 days with no significant adverse effects. Enrollment in AHFIRM got off to a slow start but is now beginning to accelerate. As of the most recent business update in early March 2022, AHFIRM now has over 100 patients enrolled with 80%+ trial sites open.

The Company has indicated September 2023 as the estimated study completion date on clinicaltrials.gov. However, we believe there is a real and likely chance that enrollment is completed and we see data 6-9 months earlier for a couple of reasons: (1) the primary endpoint is only 90 day survival and (2) the IRB could decide to unmask the data early given the AH mortality rate.

Given the very positive Phase 2a trial results, significant unmet profile and FDA fast track designation, we think the Company will be ready to file an NDA once the results, if positive, are published. If all goes according to plan, Larsucosterol has annual sales potential of over $3BN in just the US with commercial launch in late 2023 / early 2024.

At a ~$92MM market cap, the stock has a 50x+ potential return profile with just Larsucosterol in AH. Not to mention Larsucosterol is also being evaluated for NASH and other potential indications and a legacy pain management product could generate $130MM of cash milestone payments. We also see this as a high probability take-out if / when they report positive AHFIRM results.

AH Background:

AH is an acute subset of alcohol-associated liver disease (ALD) that is both fatal and costly to the health system. AH is usually associated with long-term alcohol consumption and often occurs after a sudden increase in alcohol intake (ie binge), with a mortality rate of 26% at 28 days and 44% at 180 days. For severe AH patients, the outlook is much worse with a mortality rate of 75% by 180 days. The disease is characterized by excessive fat, inflammation and dying cells in the liver.

AH leads to over 137K hospitalizations in the US every year and a comparable number of hospitalizations in Europe. Unfortunately, the AH patient population has only grown during the COVID pandemic – widely reported that alcohol consumption has increased 30%+ during the pandemic. The average hospitalization costs more than $50K which implies the cost of care to the US hospital system is greater than $6BN every year. Recovery from AH varies but is typically 3 to 12 months.

Other than supportive care, there are no viable treatment options. Stopping alcohol consumption is not sufficient in many moderate and severe patients and corticosteroids have shown minimal clinical benefit to survival at 90 days or 1 year and actually increase the risk of infection (only 25%-45% of AH patients are even eligible for steroids). If moderate to severe AH patients do not respond to steroids, the only option left is liver transplant which has long lead times and costs more than $875K. Below are the results from a >1K patient study that shows the minimal clinical benefit that steroids offer.

So, from all this you can see that AH is a deadly and costly disease and is a significant unmet need.

Larsucosterol Background:

DRRX was founded in 1998, went public at $12 in 2000 and is HQ’d in Cupertino, CA. DRRX initially focused on drug delivery with a particular focus on pain management. Over time with the increasingly challenged pain management regulatory and commercial landscape, these partnerships were recalibrated and have become less of a focus.

In the mid-2000s, DRRX started focusing on developing its epigenetic regulator program. The epigenome makes up the majority of cells in our bodies. Everyone has the same DNA in every cell in the body regardless of tissue type (hair, muscle, bone, skin, etc.). The reason for this is the epigenome which makes up 95% of a cell’s nucleus. The epigenone is the “brains” of the operation so to speak and it allows certain genes to be expressed or not be expressed. This is all well and good when things are functioning normally but the epigenome can actually become dysregulated in disease states. Similar to the computers that we use every day, when the epigenome is dysregulated it is akin to having disrupted software. Essentially DRRX has been working on developing compounds through its epigenetic regulator program that can fix a cell’s dysregulated epigenome.

Around 2011, DRRX began collaborating mainly with Virginia Commonwealth University (VCU) on its epigenetic regulator program. While they have discovered numerous compounds, Larsucosterol is the lead compound in the program. Larsucosterol is a naturally occurring, small molecule that modulates the activity of various nuclear receptors that play important regulatory roles in lipid homeostasis, inflammation, and cell survival. Through various studies, Larsucosterol has been shown to regulate inflammatory responses and promote cell survival in the liver when normal function is lost. As such, Larsucosterol is currently being evaluated for AH and NASH.

Larsucosterol in AH:

DRRX’s Larsucosterol AH Phase 2a trial results were presented in November 2019. The trial results were robust and extremely encouraging – Larsucosterol treatment led to a 100% survival rate at 28 days and >75% of patients were discharged in <4 days.

Phase 2a trial details:

-          3 different doses: 30, 90 and 150 mg

-          19 patients: 7 moderate / 12 severe

-          Patients received up to 2 doses: 1^st on day 1 and 2^nd on day 4 if still hospitalized

-          Primary endpoint: 28 day survival

Aside from the 100% survival rate, the most important takeaway from the trial was that patient bilirubin levels were significantly reduced with Larsucosterol. Bilirubin is a key biomarker for AH patients. High bilirubin levels indicate high risk of death. Improving bilirubin levels is widely considered the best known indicator for AH patient survival. From the graph below, you can see that all patients experienced improving bilirubin levels by day 7 and all the way through day 28. Additionally you can see that severe / high bilirubin patients (green line) experienced the most improvement. Also patient’s MELD score, a key marker of AH severity, went down significantly.

Further, the Lille score which takes into account bilirubin, shows that the faster bilirubin levels decline, the higher the survival rate. You can see on the right graph, that 7 days after taking Larsucosterol, 16/18 patients Lille scores were below 0.45 indicating a much higher survival rate.

Compared to a University of Louisville study with a similar patient mix and profile, you can clearly see that traditional supportive care with steroids is not nearly as effective as Larsucosterol.

Phase 2a trial bottom line: Larsucosterol clearly showed significant potential to treat the underserved AH patient population.

-          No serious adverse safety events

-          100% survival rate

-          74% discharged under 4 days

-          Significant biomarker improvement for both moderate and severe patients

The next step for Larsucosterol in AH is a Phase 2b trial called AHFIRM. AHFIRM is a double-blind, placebo controlled and multi center 300 patient trial. Important to note, the 300 patients will all be severe cases. Primary endpoint is 90 day survival. The 300 patients will be in three dosing groups at a 1:1:1 ratio: 30mg, 90 mg, and placebo + standard of care.

Since commencing in earlier 2021, the AHFIRM trial has faced similar site opening and enrollment headwinds to other clinical trials. Site openings and enrollment has been slow to progress due to COVID related issues including hospital access, staffing shortages, etc. However, as COVID continues to recede (hopefully), we think enrollment will begin to accelerate.

In fact, we are already seeing this. On the Q4 earnings call / business update in early March, management announced that over 100 patients have been dosed worldwide – more than 1/3 of the total trial target. Additionally, they now have 51 of 60 planned sites opened worldwide. The CEO said he expects AHFIRM to progress similar to other trials he has been associated with where the first 1/3 of patients takes as long to enroll as the remaining 2/3 of patients. This implies the trial will be fully enrolled in Q1 2023 with trial results publication sometime in Q2/Q3 2023. We believe there is a strong possibility that this timeline could be shifted to the left as there is no shortage of potential trial enrollees and hospital restrictions are paired back. Of note, the estimated completion date for the AHFIRM trial on clinicaltrials.gov is September 2023.

Should the AHFIRM trial have similar results to what they saw in the Phase 2a trial, they will likely submit an NDA. On top of this, Larsucosterol received fast track designation from the FDA in December 2020 for AH. Further, should the FDA consider the trial pivotal, they could commercially launch as soon as 1H 2023.

Market Potential:

The market potential for Larsucosterol is significant. Management has ball parked cost of treatment around ~$20-25K. This implies the annual sales potential in just the US is north of $3BN. The opportunity is equally as large in the EU. We see them partnering in the EU market.

Our primary diligence and discussions re Larsucosterol with hepatologists and gastroenterologists has been positive. The key takeaways from our diligence is as follows:

-          AH patients are a severely underserved population

-          Current standard of care, corticosteroids, does not adequately serve the patient population

-          High awareness of Larsucosterol, the Phase 2a trial and following the AHFIRM trial closely

-          Doctors would be very willing and eager to switch their patients to Larsucosterol barring positive AHFIRM results and FDA approval

-          25-75% of the AH hospital patient population would be eligible for Larsucosterol

-          No other therapies available or in the pipeline for AH

Cantor Fitzgerald conducted a survey of 25 hepatologists and gastroenterologists on the AH landscape in June 2021 that echoed and supported our findings.

From a commercialization standpoint, the AH hospital population is fairly concentrated. While patients come from all over, they typically are funneled into acute liver transplant centers of which there are only about ~120 facilities in the US. So DRRX does not need a huge sales force to eventually commercialize the drug and awareness levels amongst providers are already very high.

Valuation:

We believe the AH market exhibits an oncology like profile. To that end, we believe GlaxoSmithKline’s recently announced acquisition of Sierra Oncology leans a helpful eye towards valuation for DRRX. The deal values SRRA at roughly 3x peak sales.

Assuming a $22.5K cost of treatment, 50% penetration and 3x revenue multiple, the implied valuation would be ~$4.6BN compared to the current market cap of ~$92MM. Further, we believe the Company has plenty of cash to get them through a readout of the AHFIRM trial results. Additionally and as discussed below, DRRX has other sources of near term cash infusions from some of their legacy products.

While Larsucosterol in AH is clearly the Company’s primary focus and value creator, there are other sources of value in the Company:

-          Larsucosterol in AH in the EU – The AHFIRM trial includes 10-15 trial sites in the EU. The AH opportunity in the EU is comparable to the US. We think it is likely that they end up partnering in the EU.

-          Larsucosterol in NASH – NASH is another liver disease that unfortunately does not have effective treatment options. There is a graveyard full of companies that have unsuccessfully attempted to develop drugs to treat NASH. In May 2020, DRRX reported positive top line results from its Phase 1b trial of Larsucosterol in NASH patients that showed a 10% reduction in liver fat in 43% of the patients and there were no serious adverse events reported. These results support further evaluation of Larsucosterol's potential in NASH. We expect them to announce next steps here soon. NASH is a $10BN+ market opportunity.

-          Additional Larsucosterol indications – Potential additional indications supported by pre-clinical data include acute kidney injury, pancreatitis, metabolic syndrome, stroke, sepsis and others

-          POSIMIR – This is a non-opioid pain relief injection. This is one of DRRX’s legacy programs. In December 2021, the Company announced a partnership with Innocoll. The deal included a $6MMM upfront cash payment and an additional potential $130MM milestone payments. The agreement also includes double digits royalties on US sales.

-          Collaboration / other royalty revenue – in the last 3 years, DRRX has collected $25MM, $30MM and $14MM from other partnerships and product revenue associated with their legacy pain management products

-          $352MM federal NOLs

Catalyst

• AHFIRM trial enrollment updates - 2022
• AHFIRM trial Completion - Q4 2022 / 1H 2023
• AHFIRM trial results publication - Q2/Q3 2023
• Larsucosterol AH NDA Submission - 2H 2023
• Larsucosterol AH launch - 1H 2024
• Larsucosterol NASH next steps - 2H 2022
• POSIMIR cash milestone payments - 2H 2022 / 2023
• Sale - Anytime