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DRRX - Initiating Coverage of DURECT Corp.
By Jason Napodano, CFA
We are initiating coverage of DURECT Corp. ( ( DRRX ) ) 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.
The vast majority of our valuation comes from Remoxy. We expect that Pfizer ( ( PFE - Analyst Report ) ) 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 2013.
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. 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 share.
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.
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