DRRX - Initiating Coverage of DURECT Corp.
By Jason Napodano, CFA
We are initiating coverage of
DURECT Corp. (
with a 'Buy' rating. We believe the story is vastly undervalued.
We have stripped the company down into its individual product
components through a "sum-of-parts" analysis. We arrive at a
price target of $2.50 per share.
A copy of our initiation report can be downloaded here:
The vast majority of our valuation comes from Remoxy. We expect
will be in position to re-file the new drug application on Remoxy
during the first half of 2013. Pfizer is conducting two
bioavailability studies and plans to discuss the results with the
U.S. FDA in the fourth quarter 2012. Based on comments made by
Pfizer to date, we think Remoxy could be approved by the end of
We see Remoxy, a tamper-resistant extended release formulation
of oxycodone, as a blockbuster drug. We think that Pfizer will be
able to capture 30% or more of the OxyContin market from Purdue
Pharma LP within five years of launch. The 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
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. We 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
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. We see the royalties from Remoxy, heavily
discounted, worth $1.75 per share.
Investors may be questioning DURECT strategy to file for approval
of Posidur based on the failure of the phase 3 BESST trial
earlier in the year. Our model assumes the company receives a
complete response letter (CRL) and that the FDA requires DURECT
to re-conduct another phase 3 program. We think BESST was outside
the core capabilities of the product - surgical pain. We think
odds favor success in a second phase 3 trial with a more narrow
focus for Posidur. We 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, we think
Posidur, with peak sales around $250 million, is worth $0.40 per
Below is our sum-of-parts analysis. We include only modest
contributions from the rest of the pipeline, including Eladur,
TRANSDUR-sufentanil, Relday, and early-stage ORADUR candidates.
We 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. We see cash sufficient
to fund operations into 2014.
We would be buyers of DURECT stock at today's price. We see
upside over the next 12 to 18 months of nearly 150%. We see
several catalysts on the horizon, including the Posidur and
Remoxy NDA filings and potential partnerships on Eladur and
ORADUR-ADHD as bringing investor attention back to the name.
For additional information, please visit:
DURECT CORP (DRRX): Free Stock Analysis Report
PFIZER INC (PFE): Free Stock Analysis Report
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