On average, it costs about $800 million to develop a new pre­scription drug. After the patent expires on a novel treatment, the molecular blueprint becomes publicly available. In this way ge­neric reproduction becomes far less expensive—and if that mol­ecule is synthetic (not commonly found in nature), it’s even eas­ier and cheaper to replicate. Furthermore, the Food and Drug Administration (FDA) is friendly to generic drug manufacturers by providing a fast track for approval that usually doesn’t re­quire clinical trials; the approval process for generics typically requires simple tests for bioequivalence. To the end-user, the economics of breakthrough drugs are often frustrating—these therapies are expensive, while generic medicines are much more affordable. From a business standpoint, the high economic rent that can be earned from a blockbuster drug leads some manu­facturers to pursue the costlier and riskier business model of new drug development.

Durect Corporation (NASDAQ: DRRX) positions itself somewhere in-between breakthrough and generic by improv­ing generic formulas for duration and efficacy. In other words, DRRX takes a generic drug that needs to be taken every day and adjusts the formula, allowing one dose to last for three days with better results. A key consideration in their drug development model is that they alter the generic formula enough that costly development and clinical trials become necessary. To lessen their business risk, DRRX has developed repeatable drug devel­opment systems which save time, money, and provide for mean­ingful profit opportunities. By focusing on medicines that treat similar indications, and have similar chemical compositions, DRRX is able to leverage their knowledge capital to simplify the process of bringing new drugs to market.

Source: Durect Corporation's Website.

DRRX’s SABER delivery system is a repeatable process for the creation of protein, peptide, and small molecule-based drugs. The process combines injectable generic drugs with DRRX’s patented compounds. POSIDUR is one output of the SABER process. POSIDUR is a long-acting, local anesthetic (bu­pivacaine), designed to treat post-operative pain. The injection is administered at the time of surgery and provides for the ex­tended release of bupivacaine for up to 72 hours.

Other controlled release products on the market generally provide pain relief for 24 hours. By providing ongoing relief, POSIDUR has the potential advantages of reducing the quan­tity of narcotic needed, resulting in fewer unpleasant side effects commonly associated with the more frequent dosing of fast act­ing solutions. POSIDUR is currently enrolling a phase III clini­cal trial in the United States, with data expected in the second half of 2011 and a New Drug Application (NDA) submission in the first half of 2012.

ORADUR is another repeatable system based on the SABER technology, but focuses on transforming short-acting capsules to extended release capsules. Remoxy is one output of this sys­tem and is the leading product in DRRX’s clinical pipeline. Re­moxy is a long acting capsule similar to the painkiller oxycodo­ne, but is designed for extended relief for 12 to 24 hours. Remoxy also has the additional benefit of being abuse resistant. The gel based capsule prevents inhalation by even the most motivated users who find the potency drastically reduced when crushed and frozen.

The alternative oxycodone market where Remoxy competes is more crowded than the POSIDUR market. However, the aging U.S. population has generated more interest from large pharmaceutical companies to diversify and expand their pain management portfolios. Furthermore, the multi-billion dollar prescription pain market – a focus of much of DRRX’s clinical pipeline – is growing. One recent instance of industry consoli­dation was the acquisition of King Pharmaceuticals (NYSE: KG) by Pfizer (NYSE: PFE). Notably, KG was (and remains) a devel­opment partner in Remoxy. Under the terms of this partnership, KG is responsible for the sales and marketing of Remoxy. DRRX will benefit meaningfully from the acquisition due to the much larger and experienced PFE sales force. Remoxy has completed Phase III study, with an expected NDA submission this quarter, and hopeful FDA approval by mid-2011.

For many investors, biotech investing can be a risk/return roller coaster and a painful waiting game for new products to move through the pipeline. Imagine the frustration of micro­managing the daily activities of a process that requires 10 years to complete! We are encouraged by the long-term commitment of senior management at DRRX, many of whom have been with the company for 10 years or longer. In DRRX we see an oppor­tunity to attain biotech-like returns without the high risk profile or the waiting. From a clinical standpoint, we believe that the two key products (Remoxy – with NDA results in 6-8 months – and POSIDUR) have been meaningfully de-risked. Remoxy, on its own, has the ability to drastically alter the financial profile of this company. We are also impressed by management’s attitude to “show us” instead of pumping a story that has lots of potential. Along with strong management, comes a slow (aka patient) clin­ical development program that is focused on fiscal responsibility.

Lee Wolf, Securities Analyst,
Wanger Investment Management, Inc.