10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 000-31615

DURECT CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	94-3297098
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10240 Bubb Road

Cupertino, California 95014

(Address of principal executive offices, including zip code)

(408) 777-1417

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    YES  x    NO  ¨

As of April 25, 2005, there were 51,932,587 shares of the registrant’s Common Stock outstanding.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Statements of Operations For the three months ended March 31, 2005 and 2004 (unaudited)	3
	Condensed Consolidated Balance Sheets As of March 31, 2005 (unaudited) and December 31, 2004	4
	Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2005 and 2004 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.	Controls and Procedures	35
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Submission of Matters to a Vote of Security Holders	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
	(a) Exhibits	37
Signatures		38
Certifications

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

DURECT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three months ended March 31,
	2005			2004
Product revenue, net	$	1,757		$	1,365
Collaborative research and development and other revenue		3,597			2,020
Total revenues		5,354			3,385
Operating expenses:
Cost of revenues		671			565
Research and development		6,618			5,409
Selling, general and administrative		2,504			2,224
Amortization of intangible assets		303			335
Stock-based compensation(1)		50			35
Total operating expenses		10,146			8,568
Loss from operations		(4,792	)		(5,183	)
Other income (expense):
Interest and other income		485			304
Interest expense		(1,120	)		(1,111	)
Net other expense		(635	)		(807	)
Net loss	$	(5,427	)	$	(5,990	)
Net loss per common share, basic and diluted	$	(0.10	)	$	(0.12	)
Shares used in computing basic and diluted net loss per share		51,887			51,124
(1)    Stock-based compensation related to the following:
Cost of revenues	$	—		$	3
Research and development		46			27
Selling, general and administrative		4			5
	$	50		$	35

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

DURECT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

	March 31, 2005			December 31, 2004
	(unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	18,472		$	20,032
Short-term investments		20,065			21,765
Accounts receivable, net of allowances of $262 and $208, respectively		13,958			2,481
Inventories		1,906			1,929
Prepaid expenses and other current assets		1,417			1,364
Total current assets		55,818			47,571
Property and equipment, net		7,213			7,112
Goodwill		6,399			6,399
Intangible assets, net		1,441			1,745
Long-term investments		14,454			17,218
Restricted investments		2,808			2,798
Other long-term assets		2,469			2,625
Total assets	$	90,602		$	85,468
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,298		$	1,658
Accrued liabilities		2,265			2,549
Contract research liability		1,066			554
Interest payable on convertible notes		1,104			167
Deferred revenue, current portion		2,665			78
Term loan, current portion		245			293
Bonds payable, current portion		190			190
Total current liabilities		8,833			5,489
Term loan, noncurrent portion		34			60
Bonds payable, noncurrent portion		875			875
Convertible subordinated notes		60,000			60,000
Deferred revenue, noncurrent portion		7,219			—
Other long-term liabilities		645			654
Commitments
Stockholders’ equity:
Common stock, $0.0001 par value: 110,000 shares authorized at March 31, 2005 and December 31, 2004 respectively; 51,924 and 51,870 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively		5			5
Additional paid-in capital		196,198			196,065
Note receivable from stockholder		(37	)		(37	)
Deferred compensation		(2	)		(4	)
Deferred royalties and commercial rights		(13,480	)		(13,480	)
Accumulated other comprehensive loss		(370	)		(268	)
Accumulated deficit		(169,318	)		(163,891	)
Stockholders’ equity		12,996			18,390
Total liabilities and stockholders’ equity	$	90,602		$	85,468

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

DURECT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three months ended March 31,
	2005			2004
Cash flows from operating activities
Net loss	$	(5,427	)	$	(5,990	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		576			823
Amortization		303			335
Noncash charges related to stock-based compensation		50			35
Changes in assets and liabilities:
Accounts receivable		(11,477	)		(658	)
Inventories		23			(154	)
Prepaid expenses and other assets		104			226
Accounts payable		(360	)		(23	)
Accrued liabilities and other long-term liabilities		(293	)		(295	)
Contract research liability		512			(81	)
Interest payable on convertible notes		937			937
Deferred revenue		9,806			137
Total adjustments		181			1,282
Net cash and cash equivalents used in operating activities		(5,246	)		(4,708	)
Cash flows from investing activities
Purchases of equipment		(677	)		(299	)
Purchases of available for sale securities		(3,689	)		(18,568	)
Proceeds from maturities of available for sale securities		8,041			24,015
Net cash and cash equivalents provided by investing activities		3,675			5,148
Cash flows from financing activities
Payments on term loan and equipment financing obligations		(74	)		(71	)
Net proceeds from issuances of common stock through exercise of options and warrants		85			71
Net proceeds from notes receivable from stockholders		—			24
Net cash and cash equivalents provided by financing activities		11			24
Net increase (decrease) in cash and cash equivalents		(1,560	)		464
Cash and cash equivalents, beginning of the period		20,032			21,203
Cash and cash equivalents, end of the period	$	18,472		$	21,667

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

DURECT Corporation (the Company) was incorporated in the state of Delaware on February 6, 1998. The Company is an emerging specialty pharmaceuticals systems company focused on the development of pharmaceutical systems based on its proprietary drug delivery technology platforms. The Company has several product candidates under development by itself and with third-party collaborators in the areas of pain and other chronic diseases and disorders. The Company also manufactures and sells osmotic pumps used in laboratory research. In addition, the Company conducts research and development of pharmaceutical product candidates with third-party pharmaceutical and biotechnology company partners.

The Company also designs, develops and manufactures a wide range of standard and custom biodegradable polymers for pharmaceutical and medical device clients for use as raw materials in their products. Until December 31, 2004, this business was conducted by the Company’s wholly owned subsidiary, Absorbable Polymers International Corporation (API), formerly known as Birmingham Polymers Inc., an Alabama corporation. API was merged with and into the Company on December 31, 2004.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated. These financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, and therefore, do not include all the information and footnotes necessary for a complete presentation of the Company’s results of operations, financial position and cash flows in conformity with accounting principles generally accepted in the United States. The unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position at March 31, 2005, the operating results for the three months ended March 31, 2005 and 2004, and cash flows for the three months ended March 31, 2005 and 2004. The condensed consolidated balance sheet as of December 31, 2004 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto, included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission.

The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

Inventories

Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis.

Inventories consisted of the following (in thousands):

	March 31, 2005		December 31, 2004
	(unaudited)
Raw materials	$	172	$	175
Work in process		499		452
Finished goods		1,235		1,302
Total inventories	$	1,906	$	1,929

Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with the provisions and related interpretations of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and has elected to follow the “disclosure only” alternative prescribed by Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under APB 25, stock-based compensation is based on the

6

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

difference, if any, on the date of grant, between the fair value of the Company’s stock and the exercise price. Unearned compensation is amortized using the graded vesting method and expensed over the vesting period of the respective options.

At March 31, 2005, the Company has five stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income when all options granted under those plans have an exercise price at least equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (in thousands).

	Three months ended March 31,
	2005			2004
Net loss—as reported	$	(5,427	)	$	(5,990	)
Add: Stock-based employee compensation expense included in reported net loss		2			(20	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(988	)		(461	)
Pro forma net loss	$	(6,413	)	$	(6,471	)
Net loss per share:
Basic and diluted—as reported	$	(0.10	)	$	(0.12	)
Basic and diluted—pro forma	$	(0.12	)	$	(0.13	)

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS 123 and Emerging Issues Task Force 96-18, Accounting for Equity Instruments that are Issued to other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The fair value of equity instruments granted to non-employees is periodically remeasured as the underlying options vest.

Revenue Recognition

Revenue from the sale of products is recognized at the time the product is shipped and title transfers to customers, provided no continuing obligation exists and the collectibility of the amounts owed is reasonably assured.

Revenue related to collaborative research and development with the Company’s corporate partners is recognized as the related research and development services are performed over the related funding periods for each agreement. The payments received under each respective agreement are not refundable and are generally based on reimbursement of qualified expenses, as defined in the agreements. Research and development expenses under the collaborative and development research agreements approximate or exceed the revenue recognized under such agreements over the term of the respective agreements. Upfront payment received upon execution of collaborative agreements are recorded as deferred revenue and recognized as collaborative research and development revenue on a systematic basis (based on a straight-line basis or upon the timing and level of work performed) over the period that the related research and development services are performed as defined in the respective agreements. Milestone and royalties payments, if any, will be recognized as earned in accordance with the terms of the respective agreements. Deferred revenue may result when we do not expend the required level of effort during a specific period in comparison to funds received under the respective agreement.

Revenue on cost-plus-fee contracts, such as under contracts to perform research and development for others, is recognized only to the extent of reimbursable costs incurred plus estimated fees thereon. In all cases, revenue is recognized only after a signed agreement is in place. For contracts that have a ceiling price or contract value, losses on contracts are recognized in the period in which the losses become known and estimable.

Comprehensive Loss

The Company’s comprehensive losses include unrealized gains and losses on the Company’s available-for-sale securities. For the three months ended March 31, 2005, the Company’s total comprehensive loss was $5.5 million compared to its net loss of $5.4

7

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

million. For the three months ended March 31, 2004, the Company’s total comprehensive loss was $5.9 million compared to its net loss of $6.0 million.

Net Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding, less the weighted average number of common shares subject to repurchase or held in escrow pursuant to an acquisition agreement, during the period. Diluted net loss per share includes the impact of options and warrants to purchase common stock (using the treasury stock method), if dilutive. There is no difference between basic and diluted net loss per share as the Company incurred a net loss in each period presented and inclusion of common stock equivalents would have been antidilutive. The following table presents the calculations of basic and diluted net loss per share (in thousands, except per share amounts):

	Three months ended March 31,
	2005			2004
Net loss	$	(5,427	)	$	(5,990	)
Basic and diluted weighted average shares:
Weighted-average shares of common stock outstanding		51,887			51,180
Less: weighted-average shares subject to repurchase		—			(56	)
Weighted-average shares used in computing basic and diluted net loss per share		51,887			51,124
Basic and diluted net loss per share	$	(0.10	)	$	(0.12	)

The computation of diluted net loss per share for the three months ended March 31, 2005 excludes the impact of options to purchase 8.7 million shares of common stock, warrants to purchase 770 shares of common stock and 19.0 million shares of common stock issuable upon conversion of the subordinated notes at March 31, 2005, as such impact would be antidilutive.

The computation of diluted net loss per share for the three months ended March 31, 2004 excludes the impact of options to purchase 6.1 million shares of common stock, warrants to purchase 1.0 million shares of common stock, and 19.0 million shares of common stock issuable upon conversion of the subordinated notes at March 31, 2004, as such impact would be antidilutive.

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement No. 123 (revised 2004, or SFAS 123R), “Share-Based Payment,” which was originally effective for annual or interim periods beginning after June 15, 2005. SFAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and will require companies to recognize compensation expense, using a fair-value based method, for costs related to share-based payments including stock options and stock issued under our employee stock purchase plans. In April 2005, the SEC issued a press release that revised the required date of adoption under SFAS 123R. We will be required to implement SFAS 123R no later than the fiscal year that begins after June 15, 2005. Our adoption will be applied on a modified prospective basis and measured compensation expense will be recognized commencing on January 1, 2006. We are currently evaluating option valuation methodologies and assumptions in light of SFAS 123R, and therefore cannot estimate the impact of our adoption at this time. These methodologies and assumptions may be different than those currently employed by the company in applying SFAS 123, outlined above in “Stock-Based Compensation” section of this note. We expect that our adoption of SFAS 123R will have a material adverse impact on our consolidated results of operations.

In March 2005, the SEC issued SAB No. 107 regarding the interaction between SFAS 123R which was revised in December 2004, and certain SEC rules and regulations and provides the SEC’s staff views regarding the valuation of share-based payment arrangements for public companies. We are evaluating the impact this guidance will have on our consolidated results of operations and financial position.

8

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

Note 2. Agreement with Endo Pharmaceuticals

On March 10, 2005, the Company entered into a license agreement with Endo Pharmaceuticals Inc. (Endo) under which the Company granted to Endo the exclusive right to develop and commercialize the Company’s proprietary sufentanil transdermal patch product candidate (TRANSDUR-Sufentanil) in the U.S. and Canada. Under the terms of the agreement, Endo will assume all remaining development and regulatory filing responsibility in the U.S. and Canada, including the funding thereof. The Company will perform all formulation development for Endo unless the Company defaults on such obligations and the Company will be reimbursed for its fully allocated cost in performance of such work. Endo will also be responsible and pay for the manufacture, marketing, sales and distribution of TRANSDUR-Sufentanil in the U.S. and Canada.

Pursuant to the agreement, Endo was obligated to pay an upfront, nonrefundable fee of $10 million. In April 2005, Endo paid the Company the $10 milion upfront fee, and will pay to the Company additional payments of up to approximately $35 million in the aggregate based upon achievement of predetermined regulatory and commercial milestones. Endo will also pay the Company product royalties based on the net sales of TRANSDUR-Sufentanil under the agreement. The Company has the right to co-promote TRANSDUR-Sufentanil under terms specified in the agreement. The agreement also contains terms and conditions customary for this type of arrangement, including representations, warranties and indemnities. The agreement shall continue in effect until terminated. The agreement provides each party with specified termination rights, including the right of each party to terminate the agreement upon material breach of the agreement by the other party. In addition, Endo shall have the right to terminate the agreement at any time without cause subject to a specified notice period and due to adverse product events, legal impediment or the issuance of a final, non-appealable court order enjoining Endo from selling TRANSDUR-Sufentanil in the U.S. and Canada as a result of an action for patent infringement by a third party, provided that in the latter instance, the Company will be required to pay Endo a termination fee ranging from $5 million to $10 million, depending on the date of termination.

The $10 million up-front fee is recognized as revenue ratably over the term of the Company’s continuing involvement with Endo. The term of the continuing involvement will be defined by the Development Plan anticipated to be finalized in May 2005. Research and development expenses associated with the Company’s TRANSDUR-Sufentanil product candidate from March 10, 2005 to March 31, 2005 which would be reimbursed by Endo under the license agreement were recognized as collaborative research and development revenue in the three months ended March 31, 2005.

9

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

Note 3. Goodwill and Intangible Assets

Intangible assets consist of the following (in thousands):

	March 31, 2005
	Gross Intangibles		Accumulated Amortization			Net Intangibles
Developed technology	$	3,600	$	(2,811	)	$	789
Patents		466		(335	)		131
Other intangibles		3,260		(2,739	)		521
Total	$	7,326	$	(5,885	)	$	1,441
	December 31, 2004
	Gross Intangibles		Accumulated Amortization			Net Intangibles
Developed technology	$	3,600	$	(2,647	)	$	953
Patents		466		(319	)		147
Other intangibles		3,260		(2,615	)		645
Total	$	7,326	$	(5,581	)	$	1,745

Intangible assets subject to amortization at March 31, 2005 totaled $1.4 million, net of amortization,. The Company expects to amortize the amounts as follows: $905,000 in the nine months ending December 31, 2005, $424,000 in the year of 2006, $31,000 in each of the years 2007, 2008 and 2009, and $19,000 in the year 2010. Should intangible assets become impaired, the Company will write them down to their estimated fair value.

Goodwill totaled $6.4 million at March 31, 2005 and December 31, 2004. In 2004, goodwill was evaluated and no indicators of impairment were noted. Should goodwill become impaired, we may be required to record an impairment charge to write the goodwill down to its estimated fair value.

10

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three months ended March 31, 2005 and 2004 should be read in conjunction with our annual report on Form 10-K filed with the Securities and Exchange Commission and “Factors that May Affect Future Results” section included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. When used in this report or elsewhere by management from time to time, the words “believe,” “anticipate,” “intend,” “plan,” “estimate,” “expect,” and similar expressions are forward-looking statements. Such forward-looking statements are based on current expectations. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. For a more detailed discussion of such forward-looking statements and the potential risks and uncertainties that may impact upon their accuracy, see the “Factors that May Affect Future Results” and “Overview” sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements reflect our view only as of the date of this report. Except as required by law, we undertake no obligations to update any forward looking statements. You should also carefully consider the factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission.

Overview

We are an emerging specialty pharmaceuticals systems company focused on the development of pharmaceutical systems based on the following proprietary drug delivery technology platforms: the SABER^™ Delivery System (a patented and versatile depot injectable useful for protein and small molecule delivery), the TRANSDUR^™ Delivery System (a proprietary transdermal technology), the ORADUR^™ sustained release oral gel-cap technology (an oral sustained release technology with several potential abuse deterrent properties), the DURIN^™ Biodegradable Implant (a biodegradable drug-loaded implant), the DUROS^® System, (an osmotic implant technology licensed to us for specified fields from ALZA Corporation, a Johnson & Johnson Company) and the MICRODUR^™ Biodegradable Microparticulates (a microspheres injectable system). *

Our pharmaceutical systems combine engineering innovations and delivery technology from the drug delivery and medical device industries with our proprietary pharmaceutical and biotechnology drug formulations. By integrating these technologies, we are able to control the rate and duration of drug administration as well as target the delivery of the drug to its intended site of action, allowing our pharmaceutical systems to meet the special challenges associated with treating chronic diseases or conditions. Our pharmaceutical systems can enable new drug therapies or optimize existing therapies based on a broad range of compounds, including small molecule pharmaceuticals as well as biotechnology molecules such as proteins, peptides and genes.

We focus on the treatment of chronic diseases and the development of pharmaceutical product candidates incorporating pharmaceutical or biotechnology agents. We may also choose to develop product candidates for acute indications, such as our SABER-based post-operative pain product candidate, to the extent it makes strategic sense to do so. In addition to developing our own proprietary products, we also partner with pharmaceutical companies to develop and commercialize proprietary and enhanced pharmaceutical products based on our technologies. We have five disclosed on-going development programs of which three are in collaboration with pharmaceutical partners. The following are our most advanced product candidates in development:

SABER-Bupivacaine

Our post-operative pain relief depot product candidate (SABER-Bupivacaine) is a sustained release injectible using our SABER^™ delivery system to deliver bupivacaine. SABER is a patented controlled drug delivery technology that can be formulated for systemic or local administration of drugs via the parenteral (i.e., injectible) or oral route. This product candidate is designed to be administered around a surgical site after surgery for post-operative pain relief and is intended to provide local analgesia for 72 hours or more, which we believe coincides with the time period of the greatest need for post surgical pain control in most patients. Bupivacaine, the active agent for the product candidate, is currently FDA-approved for use as a local anesthetic. We initiated the Phase II program for this product candidate in October 2004. We completed dosing of first cohort of Phase II clinical trial in February 2005 and completed dosing of the second cohort of the trial completed as of May 2005.

* NOTE: CHRONOGESIC^®, ALZET^®, SABER™, TRANSDUR™, LACTEL^®, DURIN™ and MICRODUR™ are trademarks of DURECT Corporation. Other trademarks referred to belong to their respective owners.

11

TRANSDUR-Sufentanil

Our transdermal sufentanil product candidate (TRANSDUR-Sufentanil) uses our proprietary TRANSDUR delivery system to deliver sufentanil, an opioid medication, to provide extended chronic pain relief for up to seven days, as compared to the three days of relief provided with currently available opiate patches. We anticipate that the small size of our sufentanil patch (potentially as small as 1/5^th the size of currently marketed transdermal fentanyl patches for a therapeutically equivalent dose) may offer improved convenience and compliance for patients. We commenced the Phase II program for this product candidate in February 2005. In March 2005, we entered into an agreement with Endo Pharmaceuticals Inc. (Endo) granting Endo exclusive rights to develop, market and commercialize TRANSDUR-Sufentanil in the U.S. and Canada.

ORADUR- Oxycodone (Remoxy^™)

In December 2002, we entered into an agreement with Pain Therapeutics, Inc. (Pain Therapeutics) under which we granted Pain Therapeutics the exclusive, worldwide right to develop and commercialize selected long-acting oral opioid products using our ORADUR technology. ORADUR is our SABER-based oral gel cap technology. Products based on the ORADUR technology can take the form of an easy to swallow gelatin capsule that provides controlled release of active ingredients for a period of from 12 to 24 hours of drug delivery. Oral dosage forms based on the ORADUR technology may also have the added benefit of being less prone to abuse than other sustained release dosage forms on the market today. The first product candidate being developed under the collaboration is Remoxy, a novel long-acting oral formulation of the opioid oxycodone targeted to decrease the potential for oxycodone abuse. Pain Therapeutics began Phase III clinical studies for Remoxy in December 2004.

DURIN-Leuprolide

In July 2002, we entered into a development and commercialization agreement with Voyager Pharmaceutical Corporation (Voyager) under which we granted Voyager the exclusive, worldwide right to develop and commercialize a product candidate using the DURIN implant system to deliver the peptide leuprolide to treat Alzheimer’s disease based on Voyager’s patented method of treatment. DURIN is our proprietary biodegradable polymeric implant drug delivery technology which can deliver a wide variety of drugs from several weeks to six months or more. Voyager completed enrollment of a Phase I pharmacokinetic trial in volunteers for this product candidate in January 2005.

CHRONOGESIC^® (sufentanil) Pain Therapy System

The CHRONOGESIC (sufentanil) Pain Therapy System is an osmotic implant that is intended to continuously deliver sufentanil for an extended duration. This product candidate is intended to treat chronic pain, and is based on the DUROS System, a miniature osmotic pump capable of continuously delivering drugs for up to a year in duration. We have granted to Endo exclusive commercialization rights for the CHRONOGESIC product candidate in the U.S. and Canada. To date, we have completed a Phase I clinical trial, a Phase II clinical trial, a pharmacokinetic trial and a pilot Phase III clinical trial for the CHRONOGESIC product candidate. We are presently working to redesign the delivery system to address a premature shutdown of the system prior to end of the intended drug delivery period that we have observed in a small fraction of units. We have stopped all clinical testing of the product candidate and will not resume clinical testing until the system design is completed.

We are also currently researching and developing additional pharmaceutical systems in a variety of therapeutic areas, including chronic pain, central nervous system disorders and cardiovascular disease based on our proprietary drug delivery platform technologies.

For the three months ended March 31, 2005, revenues from our collaborative agreements with Pain Therapeutics (Remoxy), Endo (TRANSDUR-Sufentanil) and Voyager (DURIN-Leuprolide) represented 22%, 20% and 19% of our total revenues. For the three months ended March 31, 2004, revenues from our collaborative agreements with Pain Therapeutics, Endo and Voyager represented 32%, 0% and 9% of our total revenues. At March 31, 2005, one customer accounted for 77% of our gross accounts receivable. At December 31, 2004, two customers accounted for 40% and 26% of our gross accounts receivable.

Product Revenues

We currently generate product revenue from the sale of two product lines:

• ALZET osmotic pumps for animal research use; and

• LACTEL biodegradable polymers which are used by our customers as raw materials in their pharmaceutical and medical products. This product line was sold through our wholly-owned subsidiary API until it was merged with and into us as of December 31, 2004.

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Because we consider our core business to be developing and commercializing pharmaceutical systems, we do not intend to significantly increase our investments in or efforts to sell or market any of our existing product lines. However, we expect that we will continue to make efforts to increase our revenue related to collaborative research and development by entering into additional research and development agreements with third-party partners to develop product candidates based on our drug delivery technologies.

Since our inception in 1998, we have had a history of operating losses. At March 31, 2005, we had an accumulated deficit of $169.3 million. Our net loss for the three months ended March 31, 2005 was $5.4 million. Our losses were $27.6 million, $22.7 million and $37.2 million for the twelve months ended December 31, 2004, 2003 and 2002, respectively. These losses have resulted primarily from costs incurred to research and develop our product candidates and to a lesser extent, from selling, general and administrative costs associated with our operations and product sales. We expect our research and development expenses to increase modestly in the near future as we expect to continue to expand our animal studies, clinical trials and other research and development activities. We expect selling, general and administrative expenses to remain at comparable level in the near future as we strive to conserve cash and leverage our existing infrastructure to support our current business activities and to comply with corporate governance requirements. We also expect to incur additional non-cash expenses relating to amortization of intangible assets and stock-based compensation. We do not anticipate revenues from our pharmaceutical systems, should they be approved, for at least several years. Therefore, we expect to incur continuing losses and negative cash flow from operations for the foreseeable future.

Critical Accounting Policies and Estimates

General

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition, the recoverability of our long-lived assets, including goodwill and other intangible assets, accrued liabilities and contract research liabilities. Actual amounts could differ significantly from these estimates.

Revenue Recognition

Revenue from the sale of products is recognized at the time the product is shipped and title transfers to customers, provided no continuing obligation exists and the collectibility of the amounts owed is reasonably assured. Incorrect assumptions at the time of sale about our customers’ ability to pay could result in an overstatement of revenue.

Revenue related to research and development with our collaborators is recognized as the related research and development services are performed over the related funding periods for each agreement. The payments received under each respective agreement are not refundable and are generally based on reimbursement of qualified expenses, as defined in the agreements. Research and development expenses under the collaborative and development research agreements approximate or exceed the revenue recognized under such agreements over the term of the respective agreements. Deferred revenue may result when we do not expend the required level of effort during a specific period in comparison to funds received under the respective agreement. Milestone and royalties payments, if any, are recognized as earned. Incorrect determination of qualified expenses could result in greater or lesser revenue being recorded.

Revenue on cost-plus-fee contracts, such as other contract research and development revenue, is recognized only to the extent of reimbursable costs incurred plus estimated fees thereon. In all cases, revenue is recognized only after a signed agreement is in place. For contracts that have a ceiling price or contract value, losses on contracts are recognized in the period in which the losses become known and estimable. Incorrect estimates as to percentage of completion or losses expected to be incurred could result in greater or lesser revenues or losses being recorded.

Intangible Assets and Goodwill

We record intangible assets when we acquire other companies. The cost of an acquisition is allocated to the assets acquired and liabilities assumed, including intangible assets, with the remaining amount being classified as goodwill. Certain intangible assets such as completed or core technology are amortized over time, while acquired in-process research and development is recorded as a one-time charge on the acquisition date. Acquired in-process research and development represents the value of research projects in process at the time of acquisition which have not yet reached technological feasibility, and which have no alternative future use. The determination of the amount of acquired in-process research and development involves several estimates and judgments, including the percentage of completion of the in-process technology and assumptions about future cash flows to be derived from the technology and discount rates. Different assumptions employed in determining the value of in-process research and development could result in a greater or lesser amount being recorded.

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As of January 1, 2002, goodwill is not amortized to expense but rather periodically assessed for impairment. The allocation of the cost of an acquisition to intangible assets and goodwill therefore has a significant impact on our future operating results. The allocation process requires the extensive use of estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets. We are also required to estimate the useful lives of those intangible assets subject to amortization, which determines the amount of amortization that will be recorded in a given future period and how quickly the total balance will be amortized. We periodically review the estimated remaining useful lives of our intangible assets. A reduction in our estimate of remaining useful lives, if any, could result in increased amortization expense in future periods.

We assess the impairment of identifiable intangible assets, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

• significant underperformance relative to expected historical or projected future operating results;

• significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

• significant negative industry or economic trends;

• significant decline in our stock price for a sustained period; and

• our market capitalization relative to net book value.

When we determine that the carrying value of intangibles, long-lived assets and goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. The amount of any impairment charge is significantly impacted by and highly dependent upon assumptions as to future cash flows and the appropriate discount rate. Management believes that the discount rate used in this analysis is reasonable in light of currently available information. The use of different assumptions or discount rates could result in a materially different impairment charge.

In 2002, Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142) became effective. As a result, we ceased amortizing approximately $4.7 million of goodwill and assembled workforce. In lieu of amortization, we perform a review for impairment at least annually. No impairment of goodwill has been recorded through March 31, 2005. However, there can be no assurance that at the time other periodic reviews are completed, a material impairment charge will not be recorded.

Accrued Liabilities and Contract Research Liabilities

We incur significant costs associated with third-party consultants and organizations for clinical trials, animal toxicological studies, engineering, validation, testing and other research and development-related services. We are required to estimate periodically the cost of services rendered but unbilled based on management’s estimates of project status. If these good faith estimates are inaccurate, actual expenses incurred could materially differ from our estimates.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto in Item 8 of our Form 10-K which contain accounting policies and other disclosures required by generally accepted accounting principles.

Results of Operations

Three months ended March 31, 2005 and 2004

Revenues. Net revenues were $5.4 million and $3.4 million for the three months ended March 31, 2005 and 2004, respectively. The increase in total revenues was primarily attributable to higher collaborative research and development revenue recognized from our agreements with strategic partners and higher product revenues recognized from our ALZET product lines.

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Product revenue

A portion of our revenues is derived from our product sales, which include our ALZET mini pump product line, and to a lesser extent our biodegradable polymer products. Net product revenues were $1.8 million in the three months ended March 31, 2005 compared to $1.4 million for the same period in 2004. The increase was primarily due to higher product revenue from our ALZET mini pump product line due to a greater number of units sold in the three months ended March 31, 2005. The polymer sales remained comparable in both periods.

Collaborative research and development and other revenue

We also recognize revenues from collaborative research and development activities and service contracts. We recorded $3.6 million of collaborative research and development revenue for the three months ended March 31, 2005 compared to $2.0 million for the same period in 2004. Collaborative research and development revenue represents reimbursement of qualified expenses related to the collaborative agreements with various third parties to research, develop and commercialize potential products using our drug delivery technologies. The increase in collaborative research and development revenue in the three months ended March 31, 2005 was primarily attributable to our increased development activities for Remoxy (collaboration with Pain Therapeutics) and DURIN-Leuprolide (collaboration with Voyager) and the development activities incurred for TRANSDUR-Sufentanil (collaboration with Endo) compared with the same period in 2004.

In March 2005, we signed a license agreement with Endo in which we granted to Endo the exclusive right to develop and commercialize our TRANSDUR-Sufentanil product candidate in the U.S. and Canada. Under the terms of the agreement, Endo will assume all remaining development and regulatory filing responsibility in the U.S. and Canada, including the funding thereof. We will perform all formulation development for Endo unless we default on such obligations, and we will be reimbursed for our fully allocated cost for performing such work. Endo will also be responsible and pay for the manufacture, marketing, sales and distribution of TRANSDUR-Sufentanil in the U.S. and Canada. We expect our collaborative research and development revenue to increase in the future years as we continue to increase our effort to develop partnered products with various strategic partners.

Other revenue from service contracts was $41,000 for the three months ended March 31, 2005 and $200,000 for the same period in 2004. The service contract revenues were related to certain polymer related service contracts we signed with various customers through API, our former subsidiary. The decrease was primarily due to completion of certain service contracts in the three months ended March 31, 2005. We do not expect to increase our effort to generate significant revenue from our service contracts related to polymer business in the future.

In the future, we do not intend to significantly increase our investments in or efforts to sell or market any of our existing product lines. However, we will continue to make efforts to increase our revenue related to collaborative research and development by entering into additional research and development agreements with third parties to develop products based on our drug delivery technologies.

Cost of revenues. Cost of revenues was $671,000 and $565,000 for the three months ended March 31, 2005 and 2004, respectively. Cost of revenues includes cost of product revenue from our ALZET mini pump product line and our biodegradable polymer products and, to a lesser extent, cost of certain polymer related service contracts through API, our former subsidiary. The increase in the cost of revenues was primarily due to higher product revenue from our existing commercial product lines in the three months ended March 31, 2005.

Cost of revenues associated with the product revenue increased to $578,000 in the first three months of 2005 from $377,000 in the same period in 2004, primarily as the result of an increase in product revenue of our ALZET mini pump product line. Cost of service revenue was $93,000 for the three months ended March 31, 2005 and $188,000 for the same period in 2004 due to a decline in our service contract revenue related to our polymer business. As of March 31, 2005, we had 19 manufacturing employees compared with 20 as of the corresponding date in 2004. We expect cost of revenues to remain comparable in the future, as we do not expect product revenues to increase significantly in the future.

Research and Development. Research and development expenses were $6.6 million and $5.4 million for the three months ended March 31, 2005 and 2004, respectively. The increase in the three months ended March 31, 2005 was primarily attributable to the higher employee costs and higher development expenses for SABER-Bupivacaine, TRANSDUR-Sufentanil, Remoxy and DURIN-Leuprolide, partially offset by lower development expenses for CHRONOGESIC, compared with the same period in 2004.

In the three months ended March 31, 2005, we continued with Phase II clinical trials and animal toxicological studies for SABER-Bupivacaine. In addition, we incurred higher expenses for formulation development, clinical and non-clinical studies for TRANSDUR-Sufentanil in the three months ended March 31, 2005 compared with the same period in 2004 as we commenced a Phase II clinical program and conducted animal studies for this product candidate in the first quarter of 2005. We also incurred higher research and development expenses for Remoxy and DURIN-Leuprolide in the three months ended March 31, 2005 compared with the same period in 2004.

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As of March 31, 2005, we had 79 research and development employees compared with 59 as of the corresponding date in 2004. We expect research and development expenses to increase in the near future as we continue product development efforts for our internal and partnered product candidates.

Selling, General and Administrative. Selling, general and administrative expenses were $2.5 million and $2.2 million for the three months ended March 31, 2005 and 2004, respectively. The increase was primarily due to higher employee costs and external costs to comply with the Sarbanes-Oxley Act. As of March 31, 2005, we had 33 selling, general and administrative personnel compared with 30 as of the corresponding date in 2004. We expect selling, general and administrative expenses to remain at comparable level in the near future as we strive to conserve cash and leverage our existing infrastructure to support our current business activities and to comply with corporate governance requirements.

Amortization of intangible assets. Amortization of intangible assets was $303,000 and $335,000 for the three-month periods ended March 31, 2005 and 2004, respectively. The amortization of intangible assets decreased slightly in the three months ended March 31, 2005 as certain intangible assets were fully amortized in the quarter ended June 30, 2004. We continue to amortize the existing intangible assets at a constant rate over their estimated useful lives. In 2004, goodwill was evaluated for impairment in accordance with SFAS 142. Based on our evaluation, no indicators of impairment were noted. Should goodwill become impaired in the future, we may be required to record an impairment charge to write the goodwill down to its estimated fair value.

The net amount of other intangible assets at March 31, 2005 was $1.4 million, which will be amortized as follows: $905,000 for the nine months ending December 31, 2005, $424,000 for the year ending December 31, 2006, $31,000 in each of the years ending December 31, 2007, 2008 and 2009, and $19,000 for the year ending December 31, 2010. We periodically evaluate acquired intangible assets for impairment or obsolescence. Should the intangible assets become impaired or obsolete, we will write them down to their estimated fair value.

Stock-Based Compensation. For the three months ended March 31, 2005, we recorded $50,000 of stock-based compensation compared with $35,000 recorded for the corresponding period in 2004. Of these amounts, employee stock-based compensation related to the following: cost of revenues of none for the three months ended March 31, 2005, and $3,000 for the corresponding period in 2004; research and development expenses of $1,000 for the three months ended March 31, 2005 compared with $(28,000) in the corresponding period in 2004; and selling, general and administrative expenses of $2,000 in the three months ended March 31, 2005 and $5,000 in the corresponding period in 2004.

Non-employee stock compensation related to research and development expenses was $45,000 for the three months ended March 31, 2005 and $55,000 for the corresponding period in 2004. Non-employee stock compensation related to selling, general and administrative expenses was $2,000 for the three months ended March 31, 2005 and none for the corresponding period in 2004. Expenses for non-employee stock options are recorded over the vesting period of the options, with the amount determined by the Black-Scholes option valuation method and remeasured over the vesting term.

The remaining employee deferred stock compensation at March 31, 2005 was $2,000, which will be amortized as follows: $1,000 for the nine months ending December 31, 2005 and $1,000 for the year ending December 31, 2006. Termination of employment of option holders could cause stock-based compensation in future years to be less than indicated and require reversal of previously recognized stock-based compensation.

Other Income (Expense). Interest and other income increased to $485,000 for the three months ended March 31, 2005, from $304,000 for the corresponding period in 2004. The increase in interest and other income was primarily the result of higher yields on our cash and investment balances during the three months ended March 31, 2005 and the receipt of approximately $150,000 of settlement payment from our former collaboration partner. Interest expense was both $1.1 million for the three months ended March 31, 2005 and 2004. The interest expense was primarily due to the interest accrued on the $60.0 million convertible notes we issued in June and July of 2003.

Liquidity and Capital Resources

Since our inception in 1998, we have funded our operations primarily through convertible preferred stock financings of $53.2 million, our initial public offering of $84.0 million and the issuance of $60.0 million principal amount of convertible notes. We had cash, cash equivalents and investments totaling $55.8 million at March 31, 2005 compared to $61.8 million at December 31, 2004. These numbers include $2.8 million of interest-bearing marketable securities classified as restricted investments on our balance sheets

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as of March 31, 2005 and December 31, 2004. The decrease in cash, cash equivalents and investments during the three months ended March 31, 2005 was primarily the result of ongoing operating expenses, partially offset by payments received from customers.

Working capital was $47.0 million and $42.1 million at March 31, 2005 and December 31, 2004, respectively. The increase was primarily attributable to the $10.0 million of upfront payment receivable from Endo in connection with the license agreement signed in March 2005, offset by our operating expenditures in the three months ended March 31, 2005.

We used $5.2 million of cash for operations for the three months ended March 31, 2005 compared to $4.7 million for the corresponding period in 2004. The cash used for operations was primarily to fund operations as well as our working capital requirements. The increase in cash used for operations was primarily attributable to the increase in accounts receivable due to higher collaborative research and development revenue for the three months ended March 31, 2005 compared to the same period in 2004.

We received $3.7 million of cash from investing activities for the three months ended March 31, 2005 compared to $5.1 million for the corresponding period in 2004. The decrease in cash provided by investing activities was primarily due to a net decrease in proceeds from maturities of investments, net of investment purchases and to a lesser extent an increase in purchases of plant and equipment.

We received $11,000 of cash from financing activities for the three months ended March 31, 2005 compared to $24,000 for the corresponding period in 2004. The decrease was primarily due to lower proceeds from notes receivable from stockholders, partially offset by higher proceeds from exercises of stock options in the three months ended March 31, 2005.

In June and July 2003, we completed a private placement of an aggregate of $60.0 million in convertible subordinated notes. The notes bear interest at a fixed rate of 6.25% per annum and are due on June 15, 2008. The notes are convertible at the option of the note holders into our common stock at a conversion rate of 317.4603 shares per $1,000 principal amount of notes, subject to adjustment in certain circumstances. Interest on the notes is payable semi-annually in arrears in June and December. We received net proceeds of approximately $56.7 million after deducting underwriting fees of $3.0 million and related expenses of $300,000. The convertible subordinated notes are unsecured obligation of ours and are subordinate to any secured debt we currently have or any future senior debt we may have. The proceeds from the convertible notes will be used to fund the research, development, manufacture and commercialization of existing and future products and for general corporate purpose, including working capital and capital expenditures.

In conjunction with the acquisition of Southern BioSystems, Inc. (SBS) in April 2001, we assumed Alabama State Industrial Development Bonds (SBS Bonds) with remaining principal payments of $1.7 million and a current interest rate of 6.35% increasing each year up to 7.20% at maturity on November 1, 2009. As part of the acquisition agreement, we were required to guarantee and collateralize these bonds with a letter of credit of approximately $2.4 million that we secured with investments deposited with a financial institution in July 2001. Interest payments are due semi-annually and principal payments are due annually. Principal payments increase in annual increments from $150,000 to $240,000 over the term of the bonds until the principal is fully amortized in 2009. We have the option to call the SBS Bonds at any time. On December 31, 2002, SBS was merged into DURECT, and the SBS bonds were assigned to DURECT with the terms unchanged. At March 31, 2005, the remaining principal payments of the bonds were $1.1 million.

We anticipate that cash used in operating and investing activities will stay at current level or slightly decrease in the near future as we continue to research, develop and manufacture our products through internal efforts and partnering activities, and service our debt obligations. In aggregate, we are required to make future payments pursuant to our existing contractual obligations at March 31, 2005 as follows (in thousands):

Contractual Obligations	2005		2006		2007		2008		2009		Total
Convertible subordinated notes (1)	$	3,750	$	3,750	$	3,750	$	61,875	$	—	$	73,125
Long-term debt (1)		266		263		258		258		258		1,303
Term loan (1)		218		24		—		—		—		242
APT acquisition consideration payable (2)		250		500		—		—		—		750
Capital lease		8		11		11		10		6		46
Operating lease obligations		2,053		1,843		1,244		1,257		270		6,667
Total contractual cash obligations	$	6,545	$	6,391	$	5,263	$	63,400	$	534	$	82,133

Note (1): Includes principal and interest payments

Note (2): To be paid by our common stock or cash at our election

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We also anticipate incurring capital expenditures of at least $2 million over the next 12 months to purchase research and development and other capital equipment. The amount and timing of these capital expenditures will depend on, among other things, the timing of clinical trials for our products and our collaborative research and development activities.

We believe that our existing cash, cash equivalents and investments will be sufficient to finance our planned operations and capital expenditures through at least the next 12 months. We may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding. Additionally, we do not expect to generate revenues from our pharmaceutical systems currently under development for at least the next several years. Accordingly, we may be required to raise additional capital through a variety of sources, including:

• the public equity market;

• private equity financing;

• collaborative arrangements; and

• public or private debt.

There can be no assurance that additional capital will be available on favorable terms, if at all. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain of our products, technologies or potential markets, any of which could have a material adverse effect on our business, financial condition and results of operations. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to our existing stockholders.

Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations. We select investments that maximize interest income to the extent possible given these two constraints. We satisfy liquidity requirements by investing excess cash in securities with different maturities to match projected cash needs and limit concentration of credit risk by diversifying our investments among a variety of high credit-quality issuers.

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement No. 123 (revised 2004, or SFAS 123R), “Share-Based Payment,” which was originally effective for annual or interim periods beginning after June 15, 2005. SFAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and will require companies to recognize compensation expense, using a fair-value based method, for costs related to share-based payments including stock options and stock issued under our employee stock purchase plans. In April 2005, the SEC issued a press release that revised the required date of adoption under SFAS 123R. We will be required to implement SFAS 123R no later than the fiscal year that begins after June 15, 2005. Our adoption will be applied on a modified prospective basis and measured compensation expense will be recognized commencing on January 1, 2006. We are currently evaluating option valuation methodologies and assumptions in light of SFAS 123R, and therefore cannot estimate the impact of our adoption at this time. These methodologies and assumptions may be different than those currently employed by the company in applying SFAS 123, outlined above in “Stock-Based Compensation” section of this note. We expect that our adoption of SFAS 123R will have a material adverse impact on our consolidated results of operations.

In March 2005, the SEC issued SAB No. 107 regarding the interaction between SFAS 123R which was revised in December 2004, and certain SEC rules and regulations and provides the SEC’s staff views regarding the valuation of share-based payment arrangements for public companies. We are evaluating the impact this guidance will have on our consolidated results of operations and financial position.

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Factors that May Affect Future Results

In addition to the other information in this Form 10-Q, a number of factors may affect our business and prospects. These factors include but are not limited to the following, which you should consider carefully in evaluating our business and prospects.

We have not completed development of any of our pharmaceutical systems, and we cannot be certain that our pharmaceutical systems will be able to be commercialized

To be profitable, we must successfully research, develop, obtain regulatory approval for, manufacture, introduce, market and distribute our pharmaceutical systems under development. For each pharmaceutical system that we or our third-party collaborators intend to commercialize, we must successfully meet a number of critical developmental milestones for each disease or medical condition targeted, including:

• selecting and developing drug delivery platform technology to deliver the proper dose of drug over the desired period of time;

• determining the appropriate drug dosage for use in the pharmaceutical system;

• developing drug compound formulations that will be tolerated, safe and effective and that will be compatible with the system;

• demonstrating the drug formulation will be stable for commercially reasonable time periods;

• selecting and developing catheter or other targeting technology, if appropriate, to deliver the drug to a specific location within the body; and

• demonstrating through clinical trials that the drug and system combination is safe and effective in patients for the intended indication.

The time frame necessary to achieve these developmental milestones for any individual product candidate is long and uncertain, and we may not successfully complete these milestones for any of our product candidates in development. We have not yet selected the drug dosages nor finalized the formulation or the system design of any pharmaceutical systems, including our SABER-based post-operative pain depot, our TRANSDUR-Sufentanil patch, Remoxy, our DURIN-based Alzheimer’s disease product candidate and our CHRONOGESIC product candidate, and we have limited experience in developing such products. We may not be able to finalize the design or formulation of any of our product candidates. In addition, we may select components, solvents, excipients or other ingredients to include in our pharmaceutical systems that have not been previously approved for use in pharmaceutical products, which may require us to perform additional studies and may delay clinical testing and regulatory approval of our pharmaceutical systems. Even after we complete the design of the product candidate, the product candidate must still complete required clinical trials and additional safety testing in animals before approval for commercialization. See “We must conduct and satisfactorily complete required laboratory performance and safety testing, animal studies and clinical trials for our pharmaceutical systems before we can sell them.” We are continuing testing and development of our product candidates and may explore possible design or formulation changes to address issues of safety, manufacturing efficiency and performance. We may not be able to complete development of any product candidates that will be safe and effective and that will have a commercially reasonable treatment and storage period. If we are unable to complete development of our SABER-based post-operative pain depot product candidate, our TRANSDUR-Sufentanil patch, Remoxy, our DURIN-based Alzheimer’s disease product candidate, CHRONOGESIC or other product candidates, we will not be able to earn revenue from them, which would materially harm our business.

We must conduct and satisfactorily complete required laboratory performance and safety testing, animal studies and clinical trials for our pharmaceutical systems before they can be sold

Before we can obtain government approval to sell any of our pharmaceutical systems, we must demonstrate through laboratory performance studies and safety testing, preclinical (animal) studies and clinical (human) trials that each system is safe and effective for human use for each targeted disease. The clinical development status of our most advanced programs is as follows:

• SABER-Bupivacaine—Phase I trial completed and Phase II trial initiated. Dosing of first cohort of Phase II trial completed as of February 2005. Dosing of the second cohort of Phase II trial completed as of May 2005.

• TRANSDUR-Sufentanil Patch—Dosing of Phase I trial completed and first trial of Phase II program initiated as of February 2005.

• ORADUR-Oxycodone (Remoxy)—Phase I trial completed and Phase III program initiated by Pain Therapeutics.

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• DURIN-Leuprolide for Alzheimer’s disease—Phase I trial initiated by Voyager. Enrollment completed in Phase I trial as of January 2005.

• CHRONOGESIC—Phase I, Phase II and Pilot Phase III completed. Redesigning the system to address premature shutdown problem and will resume clinical trials when system design is completed.

We are currently in the preclinical or research stages with respect to all our other product candidates under development. We plan to continue extensive and costly tests, clinical trials and safety studies in animals to assess the safety and effectiveness of our product candidates. These studies include laboratory performance studies and safety testing, clinical trials and animal toxicological studies necessary to support regulatory approval of product candidates in the United States and other countries of the world. These studies are costly, complex and last for long durations, and may not yield the data required for regulatory approval. We may not be permitted to begin or continue our planned clinical trials for our potential product candidates. If our trials are permitted, our potential product candidates may not prove to be safe or produce their intended effects. In addition, we may be required by regulatory agencies to conduct additional animal or human studies regarding the safety and efficacy of our product candidates which we have not planned or anticipated that could delay commercialization of such product candidates and harm our business and financial conditions.

The length of our clinical trials will depend upon, among other factors, the rate of trial site and patient enrollment and the number of patients required to be enrolled in such studies. We may fail to obtain adequate levels of patient enrollment in our clinical trials. Delays in planned patient enrollment may result in increased costs, delays or termination of clinical trials, which could have a material adverse effect on us. In addition, even if we enroll the number of patients we expect in the time frame we expect, our clinical trials may not provide the data necessary to support regulatory approval for the product candidates for which they were conducted. Additionally, we may fail to effectively oversee and monitor these clinical trials, which would result in increased costs or delays of our clinical trials. Even if these clinical trials are completed, we may fail to complete and submit a new drug application as scheduled. Even if we are able to submit a new drug application as scheduled, the Food and Drug Administration may not clear our application in a timely manner or may deny the application entirely.

Data already obtained from preclinical studies and clinical trials of our pharmaceutical systems do not necessarily predict the results that will be obtained from later preclinical studies and clinical trials. Moreover, preclinical and clinical data such as ours is susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and effectiveness of a product candidate under development could delay or prevent regulatory clearance of the potential product candidate, resulting in delays to the commercialization of our product candidates, and could materially harm our business. Our clinical trials may not demonstrate the sufficient levels of safety and efficacy necessary to obtain the requisite regulatory approvals for our product candidates, and thus our product candidates may not be approved for marketing.

We and our third-party collaborators may not be able to manufacture sufficient quantities of our products and components to support the clinical and commercial requirements of our collaborators and ourselves at an acceptable cost, and we have limited manufacturing experience

We or our third-party collaborators to whom we have assigned such responsibility must manufacture our product candidates and components in clinical and commercial quantities, either directly or through third parties, in compliance with regulatory requirements and at an acceptable cost. The manufacture processes associated with our pharmaceutical systems are complex. We and our third-party collaborators, where relevant, have not yet completed development of the manufacturing process for any product candidates or components including our SABER-based post-operative pain depot, our TRANSDUR-Sufentanil patch product candidate, Remoxy, our DURIN-based Alzheimer’s disease product candidate and our CHRONOGESIC product candidate. If we and our third-party collaborators, where relevant, fail to timely complete the development of the manufacturing process for our product candidates, we and our third-party collaborators, where relevant, will not be able to timely produce product for clinical trials and commercialization of our product candidates. In the future, we will continue to consider ways to optimize our manufacturing process and to explore possible changes to improve product performance and quality, increase efficiencies and lower costs. We have also committed to manufacture and supply product or components under a number of our collaborative agreements with third-party companies. We have limited experience manufacturing pharmaceutical products, and we may not be able to timely accomplish these tasks. If we and our third-party collaborators, where relevant, fail to develop manufacturing processes to permit us to manufacture a product candidate or component at an acceptable cost, then we and our third-party partners may not be able to commercialize that product candidate or we may be in breach of our supply obligations to our third-party partners.

Our manufacturing facility in Cupertino is a functional multi-discipline site that we have used to manufacture research and clinical supplies of several of our pharmaceutical system product candidates under good manufacturing practices (GMP), including SABER-Bupivacaine, TRANSDUR-Sufentanil, Remoxy and CHRONOGESIC. We have recently made significant site improvements and equipment installations to upgrade and expand our manufacturing capabilities. In the future, we intend to develop additional

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manufacturing capabilities for our pharmaceutical systems and components to meet our demands and those of our third-party collaborators by contracting with third-party manufacturers and by construction of additional manufacturing space at our current facilities in Cupertino, CA and Pelham, AL. We have limited experience building and validating manufacturing facilities, and we may not be able to timely accomplish these tasks.

In order to manufacture clinical and commercial supplies of our pharmaceutical systems or components for our third-party collaborators or ourselves, we must attain and maintain compliance with applicable federal, state and foreign regulatory standards relating to manufacture of pharmaceutical products which are rigorous, complex and subject to varying interpretations. Furthermore, our facilities will be subject to government audits to determine compliance with good manufacturing practices regulations, and we may be unable to pass inspection with the applicable regulatory agencies or may be asked to undertake corrective measures which may be costly and cause delay.

If we and our third-party collaborators, where relevant, are unable to manufacture product or components in a timely manner or at an acceptable cost, quality or performance level, and attain and maintain compliance with applicable regulations, the clinical trials and the commercial sale of our pharmaceutical systems and those of our third-party partners could be delayed. Additionally, we may need to alter our facility design or manufacturing processes, install additional equipment or do additional construction or testing in order to meet regulatory requirements, optimize the production process, increase efficiencies or production capacity or for other reasons, which may result in additional cost to us or delay production of product needed for the clinical trials and commercial launch of our product candidates and those of our third-party collaborators. We and our third-party collaborators, where relevant, may also need or choose to subcontract with third-party contractors to perform manufacturing steps of our pharmaceutical systems or supply required components for our pharmaceutical systems in which case we will be subject to the schedule, expertise and performance of third parties as well as incur significant additional costs. See “We rely heavily on third parties to support development, clinical testing and manufacturing of our product candidates” and “Key Components of our pharmaceutical systems are provided by limited numbers of suppliers, and supply shortages or loss of these suppliers could result in interruptions in supply or increased costs.” Under our development and commercialization agreement with ALZA, we cannot subcontract the manufacture of subassemblies of the DUROS system components of our DUROS-based pharmaceutical system product candidates to third parties which have not been approved by ALZA. If we cannot manufacture product or components in time to meet the clinical or commercial requirements of our partners or ourselves or at an acceptable cost, our operating results will be harmed.

In April 2000, we acquired the ALZET product and related assets from ALZA. We manufacture subassemblies of the ALZET product at our Vacaville facility. We currently rely on a third-party to perform the coating process for the manufacture of the ALZET product under a contract that expires in January 2008.

Failure to obtain product approvals or comply with ongoing governmental regulations could delay or limit introduction of our product candidates and result in failure to achieve anticipated revenues

The manufacture and marketing of our product candidates and our research and development activities are subject to extensive regulation for safety, efficacy and quality by numerous government authorities in the United States and abroad. We must obtain clearance or approval from applicable regulatory authorities before we can market or sell our product candidates in the United States or abroad. Before receiving approval or clearance to market a product in the United States or in any other country, we will have to demonstrate to the satisfaction of applicable regulatory agencies that the product is safe and effective on the patient population and for the diseases that will be treated. Clinical trials, manufacturing and marketing of products are subject to the rigorous testing and approval process of the FDA and equivalent foreign regulatory authorities.

The Federal Food, Drug and Cosmetic Act and other federal, state and foreign statutes and regulations govern and influence the testing, manufacture, labeling, advertising, distribution and promotion of drugs and medical devices. These laws and regulations are complex and subject to change. Furthermore, these laws and regulations may be subject to varying interpretations, and we may not be able to predict how an applicable regulatory body or agency may choose to interpret or apply any law or regulation. As a result, clinical trials and regulatory approval can take a number of years to accomplish and require the expenditure of substantial resources. We may encounter delays or rejections based upon administrative action or interpretations of current rules and regulations. We may not be able to timely reach agreement with the FDA on our clinical trial protocols or on the required data we must collect to continue with our clinical trials or eventually commercialize our product candidates.

We may also encounter delays or rejections based upon additional government regulation from future legislation, administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. We may encounter similar delays in foreign countries. Sales of our product candidates outside the United States are subject to foreign regulatory standards that vary from country to country. The time required to obtain approvals from foreign countries may be shorter or longer than that required for FDA approval, and requirements for foreign licensing may differ from FDA requirements. We may be unable to obtain requisite approvals from the FDA and foreign regulatory authorities, and even if obtained, such approvals may not be on a timely basis, or they may not cover the clinical uses that we specify. If we fail to obtain timely clearance or approval for our product candidates, we will not be able to market and sell our product candidates, which will limit our ability to generate revenue.

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Marketing or promoting a drug is subject to very strict controls. Furthermore, clearance or approval may entail ongoing requirements for post-marketing studies. The manufacture and marketing of drugs are subject to continuing FDA and foreign regulatory review and requirements that we update our regulatory filings. Later discovery of previously unknown problems with a product, manufacturer or facility, or our failure to update regulatory files, may result in restrictions, including withdrawal of the product from the market. Any of the following events, if they were to occur, could delay or preclude us from further developing, marketing or realizing full commercial use of our product candidates, which in turn would materially harm our business, financial condition and results of operations:

• failure to obtain or maintain requisite governmental approvals;

• failure to obtain approvals for clinically intended uses of our product candidates under development; or

• identification of serious and unanticipated adverse side effects in our product candidates under development.

Manufacturers of drugs also must comply with the applicable FDA good manufacturing practice regulations, which include production design controls, testing, quality control and quality assurance requirements as well as the corresponding maintenance of records and documentation. Compliance with current good manufacturing practices regulations is difficult and costly. Manufacturing facilities are subject to ongoing periodic inspection by the FDA and corresponding state agencies, including unannounced inspections, and must be licensed before they can be used for the commercial manufacture of our product candidates. We and/or our present or future suppliers and distributors may be unable to comply with the applicable good manufacturing practice regulations and other FDA regulatory requirements. We have not been subject to a good manufacturing regulation inspection by the FDA relating to our pharmaceutical systems. If we do not achieve compliance for the product candidates we manufacture, the FDA may refuse or withdraw marketing clearance or require product recall, which may cause interruptions or delays in the manufacture and sale of our product candidates.

Our near-term revenues depend on collaborations agreements with other companies. These agreements subject us to obligations which must be fulfilled and require us to manage complex relationships with third parties. If we are unable to meet our obligations or manage our relationships with our collaborators under these agreements or enter into additional collaboration agreements or if our existing collaborations are terminated, our revenues may decrease

Our near-term revenues are based to a significant extent on collaborative arrangements with third parties, pursuant to which we receive payments based on our performance of research and development activities and the attainment of milestones set forth in the agreements. We may not be able to fulfill our obligations or attain milestones set forth in any specific agreement, which could cause our revenues to fluctuate or be less than anticipated and may expose us to liability for contractual breach. In addition, these agreements may require us to devote significant time and resources to communicating with and managing our relationship with such collaborators and resolving possible issues of contractual interpretation which may detract from time our management would otherwise devote to our managing our operations. In general, our collaboration agreements, including our agreements with Endo with respect to CHRONOGESIC and TRANSDUR-Sufentanil, Pain Therapeutics and Voyager, may be terminated by the other party at will or upon specified conditions including, for example, if we fail to satisfy specified performance milestones or if we breach the terms of the agreement.

Our agreement with Endo for the development and commercialization of our CHRONOGESIC product candidate in the United States and Canada can be terminated by Endo starting in January 2006 in the event we have not commenced a specified clinical trial for the CHRONOGESIC product candidate by January 1, 2006, provided that Endo provides us written notice of termination prior to January 31, 2006.

If any of our collaborative agreements are terminated, our revenues will be reduced and our product candidates related to those agreements may not be commercialized.

We do not have or have limited control over the development, sales and distribution for our product candidates which are the subject of third-party collaborative or license agreements

We have yet to establish any marketing, sales or distribution capabilities for our pharmaceutical system product candidates, and therefore are dependent on such third-party companies to market, sell and distribute such product candidates. We have entered into agreements with Endo related to the promotion and distribution of our CHRONOGESIC and TRANSDUR-Sufentanil product candidates in the United States and Canada once such products are approved for commercialization. In addition, we have entered into agreements with Endo, Pain Therapeutics and Voyager under which we granted such third parties the right to develop, apply for regulatory approval for, market, promote or distribute the resulting developed products subject to payments to us in the form of product royalties and other payments. We have limited or no control over the expertise or resources that any collaborator may devote to the development, marketing or sale of these product candidates, or the timing of their activities. Any of our present or future

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collaborators may not perform their obligations as expected. These collaborators may breach or terminate their agreement with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may elect not to develop or commercialize products arising out of our collaborative arrangements or not devote sufficient resources to the development, manufacture, marketing or sale of these products. If any of these events occur, we may not be able to develop our technologies or recognize revenue from the commercialization of our product candidates based on such collaborations. In addition, these third parties may have similar or competitive products to the ones which are the subject of their collaborations with us, or relationships with our competitors, which may reduce their interest in developing or selling our product candidates.

We and our third-party collaborators compete with many other companies that currently have extensive and well-funded marketing and sales operations. Our marketing and sales efforts and those of our third-party collaborations may be unable to compete successfully against these other companies. We and our third-party collaborators, if relevant, may be unable to establish a sufficient sales and marketing organization on a timely basis, if at all. We and our third-party collaborators, if relevant, may be unable to engage qualified distributors. Even if engaged, these distributors may:

• fail to satisfy financial or contractual obligations to us;

• fail to adequately market our products;

• cease operations with little or no notice to us;

• offer, design, manufacture or promote competing product lines;

• fail to maintain adequate inventory and thereby restrict use of our products; or

• build up inventory in excess of demand thereby limiting future purchases or our products resulting in significant quarter-to-quarter variability in our sales.

The failure of us or our third-party collaborators to effectively develop, gain regulatory approval for sell and market our products will hurt our business and financial results.

We rely heavily on third parties to support development, clinical testing and manufacturing of our product candidates

We rely on third-party contract research organizations, service providers and suppliers to provide critical services to support development, clinical testing, and manufacturing of our pharmaceutical systems. For example, we currently depend on third-party vendors to manage and monitor our clinical trials and to perform critical manufacturing steps for our pharmaceutical systems. In the past, we relied on a third-party contract manufacturer to perform the final manufacturing steps of our CHRONOGESIC product candidate, and we anticipate that in the near future that we will need or choose to rely on a third-party manufacturer to manufacture or perform manufacturing steps relating to our pharmaceutical systems or components. See “We may not be able to manufacture sufficient quantities of our product candidates to support our clinical and commercial requirements at an acceptable cost, and we have limited manufacturing experience.” We anticipate that we will continue to rely on these and other third-party contractors to support development, clinical testing, and manufacturing of our pharmaceutical systems. Failure of these contractors to provide the required services in a timely manner or on reasonable commercial terms could materially delay the development and approval of our product candidates, increase our expenses and materially harm our business, financial condition and results of operations.

Key components of our pharmaceutical systems are provided by limited numbers of suppliers, and supply shortages or loss of these suppliers could result in interruptions in supply or increased costs

Certain components and drug substances used in our pharmaceutical systems (including the SABER post-operative pain depot, the TRANSDUR-Sufentanil patch, Remoxy, the DURIN-based Alzheimer’s Disease product and the CHRONOGESIC product candidates) are currently purchased from a single or a limited number of outside sources. The reliance on a sole or limited number of suppliers could result in:

• delays associated with redesigning a product candidate due to a failure to obtain a single source component;

• an inability to obtain an adequate supply of required components; and

• reduced control over pricing, quality and time delivery.

We have a supply agreement with Mallinckrodt, Inc. for our sufentanil requirements, the initial term of which expires on September 30, 2009. Other than this agreement, we do not have long-term agreements with any of our suppliers, and therefore the supply of a particular component could be terminated at any time without penalty to the supplier. In addition, we may not be able to procure required components or drugs from third-party suppliers at a quantity, quality and cost acceptable to us. Any interruption in the supply of single source components could cause us to seek alternative sources of supply or manufacture these components

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internally. If the supply of any components for our pharmaceutical systems is interrupted, components from alternative suppliers may not be available in sufficient volumes or at acceptable quality levels within required timeframes, if at all, to meet our needs. This could delay our ability to complete clinical trials and obtain approval for commercialization and marketing of our product candidates, causing us to lose sales, incur additional costs and delay new product introductions and could harm our reputation.

If we do not generate sufficient cash flow through increased revenues or raising additional capital, then we may not be able to meet our substantial debt obligations

As of March 31, 2005, we had approximately $60.0 million in long-term convertible subordinated notes which mature in June 2008, $34,000 in non-current lease obligations, $875,000 in non-current bonds payable and $645,000 in other long-term liabilities. Our substantial indebtedness, which totals $61.6 million, has and will continue to impact us by:

• making it more difficult to obtain additional financing; and

• constraining our ability to react quickly in an unfavorable economic climate.

Currently we are not generating positive cash flow. Adverse occurrences related to our product development efforts will adversely impact our ability to meet our obligations to repay the principal amounts on our convertible subordinated notes when due in June 2008. In addition, if the market price of our common stock on the due date of our notes is below $3.15 per share, the approximate equity conversion price of the notes, it will be highly unlikely that the holders of a large percentage of our outstanding convertible subordinated notes will convert such securities to equity in accordance with their existing terms. If we are unable to satisfy our debt service requirements, substantial liquidity problems could result. As of March 31, 2005 we had cash and investments valued at approximately $55.8 million. We expect to use substantially all of these assets to fund our on-going operations over the next few years. We may not generate sufficient cash from operations to repay our convertible subordinated notes or satisfy any other of these obligations when they become due and may have to raise additional financing from the sale of equity or debt securities or otherwise restructure our obligations in order to do so. There can be no assurance that any such financing or restructuring will be available to us on commercially acceptable terms, if at all. If we are unable to restructure our obligations, we may be forced to seek protection under applicable bankruptcy laws. Any restructure or bankruptcy could materially impair the value of our common stock.

We may not have sufficient funds to redeem our outstanding convertible subordinated notes if required to do so, and the redemption rights in our outstanding convertible subordinated notes could discourage a potential acquirer

If we engage in any transaction or event in connection with which all or substantially all of our common stock is exchanged for, converted into, acquired for or constitutes solely the right to receive consideration which is not all or substantially all common stock listed on a United States national securities exchange or approved for quotation on the NASDAQ National Market or any similar United States system of automated dissemination of quotations of securities prices, or, if for any reason, our common stock is no longer listed for trading on a United States national securities exchange nor approved for trading on the NASDAQ National Market (a “fundamental change”), we may be required to redeem all or part of the $60 million in outstanding principal, plus any accrued but unpaid interest on our outstanding convertible promissory notes. We may not have enough funds to pay the redemption price for all tendered notes. In addition, any credit agreement or other agreements relating to our indebtedness may contain provisions prohibiting redemption of the notes under certain circumstances, or expressly prohibit our redemption of the notes upon a designated event or may provide that a designated event constitutes an event of default under that agreement. Our failure to redeem tendered notes would constitute an event of default under the indenture, which might also constitute a default under the terms of our other indebtedness. Any such default could cause us to seek to restructure our indebtedness or seek protection under applicable bankruptcy laws, either of which could materially impair the value of our common stock.

This redemption feature upon fundamental change could also discourage a potential acquirer. However, this redemption feature is not the result of management’s knowledge of any specific effort to obtain control of us by means of a merger, tender offer or solicitation, or part of a plan by management to adopt a series of anti-takeover provisions. The term “fundamental change” is limited to specified transactions and may not include other events that might adversely affect our financial condition or business operations.

We have a history of operating losses, expect to continue to have losses in the future and may never achieve or maintain profitability

We have incurred significant operating losses since our inception in 1998 and, as of March 31, 2005, had an accumulated deficit of approximately $169.3 million. We expect to continue to incur significant operating losses over the next several years as we continue to incur costs for research and development, clinical trials and manufacturing. Our ability to achieve profitability depends upon our ability, alone or with others, to successfully complete the development of our proposed product candidates, obtain the required regulatory clearances and manufacture and market our proposed product candidates. Development of pharmaceutical systems is costly and requires significant investment. In addition, we may choose to license either additional drug delivery platform technology or rights to particular drugs or other appropriate technology for use in our pharmaceutical systems. The license fees for these technologies or rights would increase the costs of our pharmaceutical systems.

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To date, we have not generated significant revenue from the commercial sale of our products and do not expect to receive significant revenue in the near future. Our current product revenues are from the sale of the ALZET product we acquired in April 2000 from ALZA and the sale of biodegradable polymers. We do not expect these product revenues to increase significantly in future periods. We do not anticipate commercialization and marketing of our product candidates in development in the near future, and therefore do not expect to generate sufficient revenues to cover expenses or achieve profitability in the near future.

We may have difficulty raising needed capital in the future

Our business currently does not generate sufficient revenues to meet our capital requirements and we do not expect that it will do so in the near future. We have expended and will continue to expend substantial funds to complete the research, development and clinical testing of our product candidates. We will require additional funds for these purposes, to establish additional clinical- and commercial-scale manufacturing arrangements and facilities and to provide for the marketing and distribution of our product candidates. Additional funds may not be available on acceptable terms, if at all. If adequate funds are unavailable from operations or additional sources of financing, we may have to delay, reduce the scope of or eliminate one or more of our research or development programs which would materially harm our business, financial condition and results of operations.

We believe that our cash, cash equivalents and investments, will be adequate to satisfy our capital needs for at least the next 12 months. However, our actual capital requirements will depend on many factors, including:

• continued progress and cost of our research and development programs;

• success in entering into collaboration agreements and meeting milestones under such agreements;

• progress with preclinical studies and clinical trials;

• the time and costs involved in obtaining regulatory clearance;

• costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

• costs of developing sales, marketing and distribution channels and our ability to sell our product candidates;

• costs involved in establishing manufacturing capabilities for clinical and commercial quantities of our product candidates;

• competing technological and market developments;

• market acceptance of our product candidates; and

• costs for recruiting and retaining employees and consultants.

We may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding. We may seek to raise any necessary additional funds through equity or debt financings, convertible debt financings, collaborative arrangements with corporate partners or other sources, which may be dilutive to existing stockholders and may cause the price of our common stock to decline. In addition, in the event that additional funds are obtained through arrangements with collaborators or other sources, we may have to relinquish rights to some of our technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves. If adequate funds are not available, we may be required to significantly reduce or refocus our product development efforts, resulting in loss of sales, increased costs, and reduced revenues.

Investors may experience substantial dilution of their investment

In the past, we have issued and have assumed, pursuant to the SBS acquisition, options and warrants to acquire common stock. To the extent these outstanding options are ultimately exercised, there will be dilution to investors. In addition, conversion of some or all of the $60.0 million aggregate principal amount of convertible subordinated notes that we issued in June and July 2003 will dilute the ownership interests of investors. Investors may experience further dilution of their investment if we raise capital through the sale of additional equity securities or convertible debt securities. See “Liquidity and Capital Resources”. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices for our common stock.

Our stock price may fluctuate, and your investment in our stock could decline in value

The average daily trading volume of our common stock for the three months ending March 31, 2005, was 224,966 shares. The limited trading volume of our stock may contribute to its volatility, and an active trading market in our stock might not continue. In accordance with our Common Stock Purchase Agreement with Endo, we filed a registration statement on Form S-3 with the SEC on August 29, 2003 to register 1,533,742 shares of our common stock issued to Endo and 485,122 shares issued to former APT shareholders for resale. The registration statement was declared effective by the SEC on September 26, 2003. Pursuant to a Purchase

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Agreement with Morgan Stanley & Co., Incorporated, we filed a registration statement with the SEC on Form S-3 to register an aggregate of $60.0 million in convertible subordinated notes for resale on August 29, 2003. The registration statement was declared effective by the SEC on November 3, 2003. The convertible subordinated notes are convertible into shares of our common stock at a conversion rate of 317.4603 shares per $1,000 principal amount of notes, subject to adjustment and will bear interest at a rate of 6.25% per annum. So long as these registration statements are effective, shares covered thereunder are tradeable without limitation. If substantial amounts of our common stock were to be sold in the public market, the market price of our common stock could fall. In addition, the existence of our convertible subordinated notes may encourage short selling by market participants. The market price of our common stock may fluctuate significantly in response to factors which are beyond our control. The stock market in general has recently experienced extreme price and volume fluctuations. In addition, the market prices of securities of technology and pharmaceutical companies have also been extremely volatile, and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could result in extreme fluctuations in the price of our common stock, which could cause a decline in the value of our investors’ stock.

We could be exposed to significant product liability claims which could be time consuming and costly to defend, divert management attention and adversely impact our ability to obtain and maintain insurance coverage

The testing, manufacture, marketing and sale of our product candidates involve an inherent risk that product liability claims will be asserted against us. Although we are insured against such risks up to an annual aggregate limit in connection with clinical trials and commercial sales of our product candidates, our present product liability insurance may be inadequate and may not fully cover the costs of any claim or any ultimate damages we might be required to pay. Product liability claims or other claims related to our product candidates, regardless of their outcome, could require us to spend significant time and money in litigation or to pay significant damages. Any successful product liability claim may prevent us from obtaining adequate product liability insurance in the future on commercially desirable or reasonable terms. In addition, product liability coverage may cease to be available in sufficient amounts or at an acceptable cost. An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our pharmaceutical systems. A product liability claim could also significantly harm our reputation and delay market acceptance of our product candidates.

We may be required to obtain rights to certain drugs

Some of the pharmaceutical systems that we are currently developing require the use of proprietary drugs to which we do not have commercial rights. For example, our research collaboration with the University of Maastricht has demonstrated that the use of a proprietary angiogenic factor in a pharmaceutical system can lead to elevated local concentration of the angiogenic factor in the pericardial sac of the heart, resulting in physical changes, including the growth of new blood vessels. We do not currently have a license to develop or commercialize a product candidate containing such proprietary angiogenic factor.

To complete the development and commercialization of pharmaceutical systems containing drugs to which we do not have commercial rights, we will be required to obtain rights to those drugs. We may not be able to do this at an acceptable cost, if at all. If we are not able to obtain required rights to commercialize certain drugs, we may not be able to complete the development of pharmaceutical systems which require use of those drugs. This could result in the cessation of certain development projects and the potential write-off of certain assets.

Technologies and businesses which we have acquired may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention. We may also acquire additional businesses or technologies in the future, which could have these same effects

We may acquire technologies, products or businesses to broaden the scope of our existing and planned product lines and technologies. For example, in October 1999, we acquired substantially all of the assets of IntraEAR, Inc.; in April 2000 we acquired the ALZET product and related assets from ALZA; in April 2001, we completed the acquisition of SBS and in August 2003, we acquired APT. These and our future acquisitions expose us to:

• increased costs associated with the acquisition and operation of the new businesses or technologies and the management of geographically dispersed operations;

• the risks associated with the assimilation of new technologies, operations, sites and personnel;

• the diversion of resources from our existing business and technologies;

• the inability to generate revenues to offset associated acquisition costs;

• the requirement to maintain uniform standards, controls, and procedures; and

• the impairment of relationships with employees and customers as a result of any integration of new management personnel.

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Acquisitions may also result in the issuance of dilutive equity securities, the incurrence or assumption of debt or additional expenses associated with the amortization of acquired intangible assets or potential businesses. Past acquisitions, such as our acquisitions of IntraEAR, ALZET, SBS and APT, as well future acquisitions, may not generate any additional revenue or provide any benefit to our business.

Our limited operating history makes evaluating our stock difficult

Investors can only evaluate our business based on a limited operating history. We were incorporated in February 1998 and have engaged primarily in research and development, licensing technology, raising capital and recruiting scientific and management personnel. This short history may not be adequate to enable investors to fully assess our ability to successfully develop our product candidates, achieve market acceptance of our product candidates and respond to competition. Furthermore, we anticipate that our quarterly and annual results of operations will fluctuate for the foreseeable future. We believe that period-to-period comparisons of our operating results should not be relied upon as predictive of future performance. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly companies in new and rapidly evolving markets such as pharmaceuticals, drug delivery and biotechnology. To address these risks, we must, among other things, obtain regulatory approval for and commercialize our product candidates, which may not occur. We may not be successful in addressing these risks and difficulties. We may require additional funds to complete the development of our product candidates and to fund operating losses to be incurred in the next several years.

Acceptance of our product candidates in the marketplace is uncertain, and failure to achieve market acceptance will delay our ability to generate or grow revenues

Our future financial performance will depend upon the successful introduction and customer acceptance of our future products, including our SABER post-operative pain depot, TRANSDUR-Sufentanil patch, Remoxy, DURIN-based Alzheimer’s disease and CHRONOGESIC product candidates. Even if approved for marketing, our product candidates may not achieve market acceptance. The degree of market acceptance will depend upon a number of factors, including:

• the receipt of regulatory clearance of marketing claims for the uses that we are developing;

• the establishment and demonstration in the medical community of the safety and clinical efficacy of our products and their potential advantages over existing therapeutic products, including oral medication, transdermal drug delivery products such as drug patches, or external or implantable drug delivery products; and

• pricing and reimbursement policies of government and third-party payors such as insurance companies, health maintenance organizations and other health plan administrators.

Physicians, patients, payors or the medical community in general may be unwilling to accept, utilize or recommend any of our products. If we are unable to obtain regulatory approval, commercialize and market our future products when planned and achieve market acceptance, we will not achieve anticipated revenues.

If users of our products are unable to obtain adequate reimbursement from third-party payors, or if new restrictive legislation is adopted, market acceptance of our products may be limited and we may not achieve anticipated revenues

The continuing efforts of government and insurance companies, health maintenance organizations and other payors of healthcare costs to contain or reduce costs of health care may affect our future revenues and profitability, and the future revenues and profitability of our potential customers, suppliers and collaborative partners and the availability of capital. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, recent federal and state government initiatives have been directed at lowering the total cost of health care, and the U.S. Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals could materially harm our business, financial condition and results of operations.

The successful commercialization of our product candidates will depend in part on the extent to which appropriate reimbursement levels for the cost of our product candidates and related treatment are obtained by governmental authorities, private health insurers and other organizations, such as HMOs. Third-party payors are increasingly limiting payments or reimbursement for medical products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may limit reimbursement or payment for our products. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could materially harm our ability to operate profitably.

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We may be sued by third parties which claim that our product candidates infringe on their intellectual property rights, particularly because there is substantial uncertainty about the validity and breadth of medical patents

We may be exposed to future litigation by third parties based on claims that our product candidates or activities infringe the intellectual property rights of others or that we have misappropriated the trade secrets of others. This risk is exacerbated by the fact that the validity and breadth of claims covered in medical technology patents and the breadth and scope of trade secret protection involve complex legal and factual questions for which important legal principles are unresolved. Any litigation or claims against us, whether or not valid, could result in substantial costs, could place a significant strain on our financial resources and could harm our reputation. In addition, intellectual property litigation or claims could force us to do one or more of the following, any of which could harm our business or financial results:

• cease selling, incorporating or using any of our product candidates that incorporate the challenged intellectual property, which would adversely affect our revenue;

• obtain a license from the holder of the infringed intellectual property right, which license may be costly or may not be available on reasonable terms, if at all; or

• redesign our product candidates, which would be costly and time-consuming.

If we are unable to adequately protect or enforce our intellectual property rights or secure rights to third-party patents, we may lose valuable assets, experience reduced market share or incur costly litigation to protect our rights

Our success will depend in part on our ability to obtain patents, maintain trade secret protection and operate without infringing the proprietary rights of others. As of March 31, 2005, we held 25 issued U.S. patents and 14 issued foreign patents. In addition, we have 40 pending U.S. patent applications and have filed 48 patent applications under the Patent Cooperation Treaty, from which 92 national phase applications are currently pending in Europe, Australia, Japan, Canada, Mexico, New Zealand, Brazil, Israel and China. Our patents expire at various dates starting in the year 2012. Under our agreement with ALZA, we must assign to ALZA any intellectual property rights relating to the DUROS system and its manufacture and any combination of the DUROS system with other components, active agents, features or processes. In addition, ALZA retains the right to enforce and defend against infringement actions relating to the DUROS system, and if ALZA exercises these rights, it will be entitled to the proceeds of these infringement actions.

The patent positions of pharmaceutical companies, including ours, are uncertain and involve complex legal and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued. Consequently, our patent applications or those of ALZA that are licensed to us may not issue into patents, and any issued patents may not provide protection against competitive technologies or may be held invalid if challenged or circumvented. Our competitors may also independently develop products similar to ours or design around or otherwise circumvent patents issued to us or licensed by us. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as U.S. law.

We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. We require our employees, consultants, advisors and collaborators to execute appropriate confidentiality and assignment-of-inventions agreements with us. These agreements typically provide that all materials and confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances, and that all inventions arising out of the individual’s relationship with us shall be our exclusive property. These agreements may be breached, and in some instances, we may not have an appropriate remedy available for breach of the agreements. Furthermore, our competitors may independently develop substantially equivalent proprietary information and techniques, reverse engineer our information and techniques, or otherwise gain access to our proprietary technology.

We may be unable to meaningfully protect our rights in trade secrets, technical know-how and other non-patented technology. We may have to resort to litigation to protect our intellectual property rights, or to determine their scope, validity or enforceability. Enforcing or defending our proprietary rights is expensive, could cause diversion of our resources and may not prove successful. Any failure to enforce or protect our rights could cause us to lose the ability to exclude others from using our technology to develop or sell competing products.

If we or our third-party collaborators are unable to train physicians to use our pharmaceutical systems to treat patients’ diseases or medical conditions, we may incur delays in market acceptance of our products

Broad use of our pharmaceutical systems will require extensive training of numerous physicians on the proper and safe use of our products. The time required to begin and complete training of physicians could delay introduction of our products and adversely affect market acceptance of our products. We or third parties selling our products may be unable to rapidly train physicians in numbers sufficient to generate adequate demand for our pharmaceutical systems. Any delay in training would materially delay the demand for

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our systems and harm our business and financial results. In addition, we may expend significant funds towards such training before any orders are placed for our products, which would increase our expenses and harm our financial results.

Some of our product candidates contain controlled substances, the making, use, sale, importation and distribution of which are subject to regulation by state, federal and foreign law enforcement and other regulatory agencies

Some of our product candidates currently under development contain, and our products in the future may contain, controlled substances which are subject to state, federal and foreign laws and regulations regarding their manufacture, use, sale, importation and distribution. Our TRANSDUR-Sufentanil patch, Remoxy and CHRONOGESIC product candidates and other product candidates we have under development contain opioids which are classified as Schedule II controlled substances under the regulations of the U.S. Drug Enforcement Agency. For our product candidates containing controlled substances, we and our suppliers, manufacturers, contractors, customers and distributors are required to obtain and maintain applicable registrations from state, federal and foreign law enforcement and regulatory agencies and comply with state, federal and foreign laws and regulations regarding the manufacture, use, sale, importation and distribution of controlled substances. These regulations are extensive and include regulations governing manufacturing, labeling, packaging, testing, dispensing, production and procurement quotas, record keeping, reporting, handling, shipment and disposal. Failure to obtain and maintain required registrations or comply with any applicable regulations could delay or preclude us from developing and commercializing our product candidates containing controlled substances and subject us to enforcement action. In addition, because of their restrictive nature, these regulations could limit our commercialization of our product candidates containing controlled substances.

Write-offs related to the impairment of long-lived assets and other non-cash charges, as well as future deferred compensation expenses may adversely impact or delay our profitability

We may incur significant non-cash charges related to impairment write-downs of our long-lived assets, including goodwill and other intangible assets. In 2002, Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142) became effective and as a result, we ceased to amortize approximately $4.7 million of goodwill and assembled workforce on January 1, 2002.

However, we will continue to incur non-cash charges related to amortization of other intangible assets. We are required to perform periodic impairment reviews of our goodwill at least annually. To the extent these reviews conclude that the expected future cash flows generated from our business activities are not sufficient to recover the cost of our long-lived assets, we will be required to measure and record an impairment charge to write down these assets to their realizable values. We completed our last review during the fourth quarter of 2004 and determined that goodwill was not impaired as of December 31, 2004. However, there can be no assurance that upon completion of subsequent reviews a material impairment charge will not be recorded. If future periodic reviews determine that our assets are impaired and a write down is required, it will adversely impact or delay our profitability.

To date, we have recorded deferred compensation expenses related to stock options grants, including stock options assumed in our acquisition of SBS, which will be amortized through 2006. In addition, deferred compensation expense related to option awards to non-employees will be calculated during the vesting period of the option based on the then-current price of our common stock, which could result in significant charges that adversely impact or delay our profitability. Furthermore, we have issued to ALZA common stock and a warrant to purchase common stock with an aggregate value of approximately $13.5 million, which will be amortized over time based on sales of our DUROS-based products and which will also adversely impact or delay our profitability.

We depend upon key personnel who may terminate their employment with us at any time, and we need to hire additional qualified personnel

Our success will depend to a significant degree upon the continued services of key management, technical and scientific personnel, including Felix Theeuwes, our Chairman and Chief Scientific Officer and James E. Brown, our President and Chief Executive Officer. Although we have obtained key man life insurance policies for each of Messrs. Theeuwes and Brown in the amount of $1.0 million, this insurance may not adequately compensate us for the loss of their services. In addition, our success will depend on our ability to attract and retain other highly skilled personnel. Competition for qualified personnel is intense, and the process of hiring and integrating such qualified personnel is often lengthy. We may be unable to recruit such personnel on a timely basis, if at all. Our management and other employees may voluntarily terminate their employment with us at any time. The loss of the services of key personnel, or the inability to attract and retain additional qualified personnel, could result in delays to product development or approval, loss of sales and diversion of management resources.

We may not successfully manage our growth

Our success will depend on the timely expansion of our operations and the effective management of growth, which will place a significant strain on our management and on our administrative, operational and financial resources. To manage such growth, we must expand our facilities, augment our operational, financial and management systems and hire, train and supervise additional qualified personnel. If we were unable to manage growth effectively our business would be harmed.

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The market for our product candidates is new, rapidly changing and competitive, and new products or technologies developed by others could impair our ability to grow our business and remain competitive

The pharmaceutical industry is subject to rapid and substantial technological change. Developments by others may render our product candidates under development or technologies noncompetitive or obsolete, or we may be unable to keep pace with technological developments or other market factors. Technological competition in the industry from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Many of these entities have significantly greater research and development capabilities than we do, as well as substantially more marketing, manufacturing, financial and managerial resources. These entities represent significant competition for us. Acquisitions of, or investments in, competing pharmaceutical or biotechnology companies by large corporations could increase such competitors’ financial, marketing, manufacturing and other resources.

We are engaged in the development of novel therapeutic technologies. Our resources are limited and we may experience technical challenges inherent in such novel technologies. Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely different approach or means of accomplishing similar therapeutic effects than our product candidates. Our competitors may develop products that are safer, more effective or less costly than our product candidates and, therefore, present a serious competitive threat to our product offerings.

The widespread acceptance of therapies that are alternatives to ours may limit market acceptance of our product candidates even if commercialized. Chronic and post-operative pain are currently being treated by oral medication, transdermal drug delivery systems, such as drug patches, and implantable drug delivery devices which will be competitive with our product candidates. These treatments are widely accepted in the medical community and have a long history of use. The established use of these competitive products may limit the potential for our product candidates to receive widespread acceptance if commercialized.

Our business involves environmental risks and risks related to handling regulated substances

In connection with our research and development activities and our manufacture of materials and product candidates, we are subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens and wastes. Although we believe that we have complied with the applicable laws, regulations and policies in all material respects and have not been required to correct any material noncompliance, we may be required to incur significant costs to comply with environmental and health and safety regulations in the future. Our research and development involves the use, generation and disposal of hazardous materials, including but not limited to certain hazardous chemicals, solvents, agents and biohazardous materials. The extent of our use, generation and disposal of such substances has increased substantially since we started manufacturing and selling biodegradable polymers. Although we believe that our safety procedures for storing, handling and disposing of such materials comply with the standards prescribed by state and federal regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. We currently contract with third parties to dispose of these substances generated by us, and we rely on these third parties to properly dispose of these substances in compliance with applicable laws and regulations. If these third parties do not properly dispose of these substances in compliance with applicable laws and regulations, we may be subject to legal action by governmental agencies or private parties for improper disposal of these substances. The costs of defending such actions and the potential liability resulting from such actions are often very large. In the event we are subject to such legal action or we otherwise fail to comply with applicable laws and regulations governing the use, generation and disposal of hazardous materials and chemicals, we could be held liable for any damages that result, and any such liability could exceed our resources.

Our agreement with ALZA limits our fields of operation for our DUROS-based pharmaceutical systems and gives ALZA a first right to negotiate to distribute selected products for us

Our agreement with ALZA gives us exclusive rights to develop, commercialize and manufacture products using ALZA’s DUROS technology to deliver by catheter:

• drugs to the central nervous system to treat select nervous system disorders;

• drugs to the middle and inner ear;

• drugs to the pericardial sac of the heart; and

• select drugs into vascular grafts.

We also have the right to use the DUROS technology to deliver systemically and by catheter:

• sufentanil to treat chronic pain; and

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• select cancer antigens.

We may not develop, manufacture or commercialize DUROS-based pharmaceutical systems outside of these specific fields without ALZA’s prior approval. In addition, if we develop or commercialize any drug delivery technology for use in a manner similar to the DUROS technology in a field covered in our license agreement with ALZA, then we may lose our exclusive rights to use the DUROS technology in such field as well as the right to develop new product candidates using DUROS technology in such field. In order to maintain commercialization rights for our products on a worldwide basis, we must diligently develop our product candidates, procure required regulatory approvals and commercialize the product candidates in selected major market countries. If we fail to meet commercialization diligence requirements, we may lose rights for products in some or all countries, including the United States. These rights would revert to ALZA, which could then develop DUROS-based pharmaceutical products in such countries itself or license others to do so. In addition, in the event that our rights terminate with respect to any product or country, or this agreement terminates or expires in its entirety (except for termination by us due to a breach by ALZA), ALZA will have the exclusive right to use all of our data, rights and information relating to the products developed under the agreement as necessary for ALZA to commercialize these products, subject to the payment of a royalty to us based on the net sales of the products by ALZA.

Our agreement with ALZA gives us the right to perform development work and manufacture the DUROS pump component of our DUROS-based pharmaceutical systems. In the event of a change in our corporate control, including an acquisition of us, our right to manufacture and perform development work on the DUROS pump would terminate and ALZA would have the right to manufacture and develop DUROS systems for us so long as ALZA can meet our specification and supply requirements following such change in control.

Under the ALZA agreement, we must pay ALZA royalties on sales of DUROS-based pharmaceutical systems we commercialize and a percentage of any up-front license fees, milestone or special fees, payments or other consideration we receive, excluding research and development funding. In addition, commencing upon the commercial sale of a product developed under the agreement, we are obligated to make minimum product payments to ALZA on a quarterly basis based on our good faith projections of our net product sales of the product. These minimum payments will be fully credited against the product royalty payments we must pay to ALZA.

ALZA may obtain from us, for its own behalf or on behalf of one of its affiliates, the exclusive right to develop and commercialize a product in a field of use exclusively licensed to us, provided that such product does not incorporate a drug in the same drug class and is not intended for the same therapeutic indication as a product which is then being developed or commercialized by us or for which we have made commitments to a third-party. In the event that ALZA or an affiliate commercializes such a product, ALZA or its affiliate will pay us a royalty on sales of such product at a specified rate.

ALZA also has an exclusive option to distribute any DUROS-based pharmaceutical system we develop to deliver non-proprietary cancer antigens worldwide. The terms of any distribution arrangement have not been set and are to be negotiated in good faith between ALZA and us. ALZA’s option to acquire distribution rights limits our ability to negotiate with other distributors for these products and may result in lower payments to us than if these rights were subject to competitive negotiations. We must allow ALZA an opportunity to negotiate in good faith for commercialization rights to our products developed under the agreement prior to granting these rights to a third-party. These rights do not apply to products that are subject to ALZA’s option or products for which we have obtained funding or access to a proprietary drug from a third-party to whom we have granted commercialization rights prior to the commencement of human clinical trials.

ALZA has the right to terminate the agreement in the event that we breach a material obligation under the agreement and do not cure the breach in a timely manner. In addition, ALZA has the right to terminate the agreement if at any time prior to July 2006, we solicit for employment or hire, without ALZA’s consent, a person who is or within the previous 180 days has been an employee of ALZA in the DUROS technology group.

We do not control ALZA’s ability to develop and commercialize DUROS technology outside of fields licensed to us, and problems encountered by ALZA could result in negative publicity, loss of sales and delays in market acceptance of our DUROS-based pharmaceutical systems

ALZA retains complete rights to the DUROS technology for fields outside the specific fields licensed to us. Accordingly, ALZA may develop and commercialize DUROS-based products or license others to do so, so long as there is no conflict with the rights granted to us. ALZA received FDA approval to market its first DUROS-based product, VIADUR (leuprolide acetate implants) for the palliative treatment of advanced prostate cancer in March 2000. If ALZA or its commercialization partner, Bayer, fails to commercialize this product successfully, or encounters problems associated with this product, negative publicity could be created about all DUROS-based products, which could result in harm to our reputation and cause reduced sales of our DUROS-based product candidates. In addition, if any third party that may be licensed by ALZA fails to develop and commercialize DUROS-based products successfully, the success of all DUROS-based systems could be impeded, including ours, resulting in delay or loss of revenue or damage to our reputation, any one of which could harm our business.

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Our corporate headquarters, manufacturing facilities and personnel are located in a geographical area that is seismically active

Our corporate headquarters, manufacturing facilities and personnel are located in a geographical area that is known to be seismically active and prone to earthquakes. Should such a natural disaster occur, our ability to conduct our business could be severely restricted, and our business and assets, including the results of our research and development efforts, could be destroyed.

We have broad discretion over the use of our cash and investments, and their investment may not yield a favorable return

Our management has broad discretion over how our cash and investments are used and may invest in ways with which our stockholders may not agree and that do not yield favorable returns.

Executive officers, directors and entities affiliated with them have substantial control over us, which could delay or prevent a change in our corporate control favored by our other stockholders

Our directors, executive officers and principal stockholders, together with their affiliates have substantial control over us. The interests of these stockholders may differ from the interests of other stockholders. As a result, these stockholders, if acting together, would have the ability to exercise control over all corporate actions requiring stockholder approval irrespective of how our other stockholders may vote, including:

• the election of directors;

• the amendment of charter documents;

• the approval of certain mergers and other significant corporate transactions, including a sale of substantially all of our assets; or

• the defeat of any non-negotiated takeover attempt that might otherwise benefit the public stockholders.

Our certificate of incorporation, our bylaws, Delaware law and our stockholder rights plan contain provisions that could discourage another company from acquiring us

Provisions of Delaware law, our certificate of incorporation, bylaws and stockholder rights plan may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions include:

• authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;

• providing for a dividend on our common stock, commonly referred to as a “poison pill”, which can be triggered after a person or group acquires 17.5% or more of common stock;

• providing for a classified board of directors with staggered terms;

• requiring supermajority stockholder voting to effect certain amendments to our certificate of incorporation and bylaws;

• eliminating the ability of stockholders to call special meetings of stockholders;

• prohibiting stockholder action by written consent; and

• establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

Legislative actions, potential new accounting pronouncements and higher insurance costs are likely to impact our future financial position or results of operations

Future changes in financial accounting standards, including proposed changes in accounting for employee stock-based awards, may cause adverse, unexpected fluctuations in the timing of the recognition of revenues or expenses and may affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with frequency and may occur in the future and we may make changes in our accounting policies in the future. Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, PCAOB pronouncements and Nasdaq National Market rules, are creating uncertainty for companies such as ours and insurance, accounting and auditing costs are increasing as a result of this uncertainty and other factors. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with

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evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

In December 2004, the FASB issued Statement No. 123 (revised 2004, or SFAS 123R), “Share-Based Payment,” which was originally effective for annual or interim periods beginning after June 15, 2005. SFAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and will require companies to recognize compensation expense, using a fair-value based method, for costs related to share-based payments including stock options and stock issued under our employee stock purchase plans. In April 2005, the SEC issued a press release that revised the required date of adoption under SFAS 123R. We will be required to implement SFAS 123R no later than the fiscal year that begins after June 15, 2005. Our adoption will be applied on a modified prospective basis and measured compensation expense will be recognized commencing on January 1, 2006. We are currently evaluating option valuation methodologies and assumptions in light of SFAS 123R, and therefore cannot estimate the impact of our adoption at this time. These methodologies and assumptions may be different than those currently employed by the company in applying SFAS 123, outlined above in “Stock-Based Compensation” section of this note. We expect that our adoption of SFAS 123R will have a material adverse impact on our consolidated results of operations.

In March 2005, the SEC issued SAB No. 107 regarding the interaction between SFAS 123R which was revised in December 2004, and certain SEC rules and regulations and provides the SEC’s staff views regarding the valuation of share-based payment arrangements for public companies. We are evaluating the impact this guidance will have on our consolidated results of operations and financial position.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and long-term debt obligations. Fixed rate securities and borrowings may have their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall and floating rate borrowings may lead to additional interest expense if interest rates increase. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates.

Our primary investment objective is to preserve principal while at the same time maximizing yields without significantly increasing risk. Our portfolio includes money markets funds, commercial paper, medium-term notes, corporate notes, government securities, auction rate securities, corporate bonds and market auction preferreds. The diversity of our portfolio helps us to achieve our investment objective. As of March 31, 2005, approximately 73% of our investment portfolio is composed of investments with original maturities of one year or less and approximately 35% of our investment portfolio matures less than 90 days from the date of purchase.

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The following table presents the amounts of our cash equivalents and investments that may be subject to interest rate risk and the average interest rates as of March 31, 2005 by year of maturity (dollars in thousands):

	2005			2006			2007			2008			Total
Cash equivalents:
Fixed rate	$	17,968		$	—		$	—		$	—		$	17,968
Average fixed rate		2.72	%		—	%		—	%		—	%		2.72	%
Variable rate	$	503		$	—		$	—		$	—		$	503
Average variable rate		2.71	%		—	%		—	%		—	%		2.71	%
Short-term investments:
Fixed rate	$	15,469		$	3,596		$	—		$	—		$	19,065
Average fixed rate		1.75	%		2.26	%		—	%		—	%		1.83	%
Variable rate	$	1,000		$	—		$	—		$	—		$	1,000
Average variable rate		1.55	%		—	%		—	%		—	%		1.55	%
Long-term investments:
Fixed rate	$	—		$	11,447		$	2,014		$	993		$	14,454
Average fixed rate		—	%		2.37	%		3.35	%		4.00	%		2.63	%
Restricted investments:
Fixed rate	$	2,808		$	—		$	—		$	—		$	2,808
Average fixed rate		0.88	%		—	%		—	%		—	%		0.88	%
Total investment securities	$	37,748		$	15,043		$	2,014		$	993		$	55,798
Average rate		1.99	%		2.35	%		3.35	%		4.00	%		2.20	%

In the table above we have reflected the duration of one auction rate security (ARS) based on its reset feature as of March 31, 2005. The rate on this security typically resets every 365 days. The underlying security in this investment has a final maturity extending 44 years or more. If we were to reflect this investment based on the final maturity date, rather than reset date, this investment would be classified as long term, with the furthest maturity date extending to December 31, 2049.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures: The Company’s principal executive and financial officers reviewed and evaluated the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Form 10-Q. Based on that evaluation, the Company’s principal executive and financial officers concluded that the Company’s disclosure controls and procedures are effective in timely providing them with material information relating to the Company, as required to be disclosed in the reports the Company files under the Exchange Act.

Changes in Internal Control Over Financial Reporting: There were no significant changes in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

We are not a party to any material legal proceedings.

ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None

ITEM 3. Defaults Upon Senior Securities

None

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ITEM 4. Submission of Matters to a Vote of Security Holders

None

ITEM 5. Other Information

None

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ITEM 6. Exhibits

(a) Exhibits:

10.41*	License agreement between the Company and Endo Pharmaceuticals, Inc. dated as of March 10, 2005.
31.1	Rule 13a-14(a) Section 302 Certification of James E. Brown.
31.2	Rule 13a-14(a) Section 302 Certification of Jian Li.
32.1	Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of James E. Brown.
32.2	Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jian Li.

* Confidential treatment requested with respect to portions of this Exhibit.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DURECT CORPORATION
By:	/s/ JAMES E. BROWN
	James E. Brown Chief Executive Officer

Date: May 6, 2005

By:	/s/ JIAN LI
	Jian Li Vice President, Finance and Corporate Controller (Principal Financial and Accounting Officer)

Date: May 6, 2005

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EX-10.41

Exhibit 10.41

LICENSE AGREEMENT

This License Agreement (this “Agreement”), effective as of March 10, 2005 (the “Effective Date”), is made by and between DURECT CORPORATION, a Delaware corporation having its principal place of business at 10240 Bubb Road, Cupertino, CA 95014 (“Durect”) and ENDO PHARMACEUTICALS INC., a Delaware corporation having its principal place of business at 100 Endo Boulevard, Chadds Ford, PA 19317 (“Endo”) (each a “Party” and collectively, the “Parties”).

WITNESSETH

WHEREAS, Durect is the owner of all right, title and interest in certain patents and know-how relating to its proprietary product for pain treatment consisting of a sufentanil patch as described in Section 1.92 below, and Durect desires to have such product further developed and commercialized;

WHEREAS, Endo has capabilities in the development, manufacture, promotion, marketing, sales and life cycle management of pharmaceutical products in the field of pain treatment; and

WHEREAS, Durect desires to grant certain exclusive rights to Endo in respect of such product and related matters upon the terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the mutual covenants and agreements expressed herein, and intending to be legally bound, the Parties agree as follows:

1 DEFINITIONS

Capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meaning given to such terms in this Section 1.

1.1 “ANDA” means an abbreviated new drug application pursuant to the FDC Act.

1.2 “Adverse Event” shall have the meaning given in Section 3.9.

1.3 “Affiliate” means a person or entity that directly or indirectly through one or more intermediates, controls, is controlled by, or is under common control with the person or entity specified. For the purpose of this definition, “control” shall mean with respect to an entity, the direct or indirect ownership of (a) more than fifty percent (50%) of the capital stock or share capital entitled to vote for the election of directors of the entity or (b) more than fifty percent (50%) of equity or voting interest of the entity. An entity will be an Affiliate for purposes of this Agreement only so long as it satisfies the definition set forth herein.

1.4 “Annual Net Sales Period” shall have the meaning given in Section 5.3(a).

1.5 “Audited Party” shall have the meaning given in Section 6.4.

1.6 “Auditing Party” shall have the meaning given in Section 6.4.

1.7 “[***]” shall have the meaning given in Section 5.4(b).

1.8 “CMC” means chemistry manufacturing and controls.

1.9 “CMO” shall have the meaning given in Section 7.2(a).

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

1

1.10 “Change of Control” means the occurrence of a tender offer, stock purchase, other stock acquisition, merger, consolidation, recapitalization, reverse split, sale or transfer of assets or other transaction, as a result of which any person, entity or group, other than an Affiliate of Endo or Durect prior to the occurrence of such event, as the case may be, (a) becomes the beneficial owner, directly or indirectly, of securities of Endo or Durect representing more than 50% of the ordinary shares of Endo or Durect, as the case may be, or representing more than 50% of the combined voting power with respect to the election of directors, (b) obtains the ability to appoint a majority of the board of directors of Endo or Durect, as the case may be, or (c) obtains the ability to direct the operations or management of Endo or Durect, as the case may be.

1.11 [***]

1.12 [***]

1.13 [***]

1.14 [***]

1.15 “Clinical” when used with respect to studies or data refers to studies in humans.

1.16 “Clinical Trials” means human clinical trials.

1.17 “Collaboration Inventions” means all Know-How (whether or not patentable) conceived and/or reduced to practice by or for either Party or any of its Affiliates arising out of or in connection with performing the activities under this Agreement including the Development Plan.

1.18 “Commercialization Plan” shall have the meaning given in Section 4.5.

1.19 “Commercially Reasonable” means consistent with Commercially Reasonable Efforts.

1.20 “Commercially Reasonable Efforts” means the level of effort and resources required to develop, manufacture and commercialize the Product in a sustained manner consistent with the efforts that, in the case of Endo, a specialty pharmaceutical company of similar size and resources, or, in the case of Durect, a life-sciences development company of similar size and resources, as applicable, would typically devote to its own product of similar market potential, profit potential or strategic value, based on conditions then prevailing.

1.21 “Competing Product” shall have the meaning given in Section 2.7.

1.22 “Confidential Information” shall have the meaning given in Section 9.3.

1.23 “Control” or “Controlled” means possession by a Party or its Affiliate of the right to grant to the other Party a license, sublicense or other right to use, of the scope provided for in this Agreement, intangible or intellectual property rights (including patent rights, know-how, trade secrets, data and rights to access or cross-reference regulatory filings) without violating the terms of any agreement or other arrangement with any Third Party existing at the time such Party or such Affiliate would be first required hereunder to grant the other Party such license, sublicense or other right.

1.24 “Co-Promotion Notice” shall have the meaning given in Section 4.8.

1.25 “Damages” shall have the meaning given in Section 11.1.

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

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1.26 [***] shall have the meaning given in Section 8.6(g)(i).

1.27 “Development Data” means all Preclinical, Non-Clinical and Clinical data, including without limitation pharmacological, pharmacokinetic and toxicological data, generated with respect to the Product that is Controlled at any time during the term of this Agreement by either Party or any of their respective Affiliates.

1.28 “Development Plan” shall have the meaning given in Section 3.4(a).

1.29 “Dosage Form Development” shall have the meaning given in Section 3.1.

1.30 “Durect” shall have the meaning given in the first paragraph of this Agreement.

1.31 “Durect Know-How” means Know-How related to the Product that is (a) Controlled by Durect or any of its Affiliates during the term of this Agreement and (b) useful for Endo or its Sublicensees to develop, make, have made, use, sell, offer to sell, import, export, register, market and promote the Product in the Licensed Territory in accordance with Endo’s rights under this Agreement. Without limiting the generality of the foregoing, Durect Know-How includes Formulation C.

1.32 “Durect Licensee Post-Registration Study” shall have the meaning given in Section 4.3(c).

1.33 [***]

1.34 “Durect Patents” means the patents and patent applications identified on Schedule 1.34, all patents issuing from any such applications, and any other patents issuing from applications that claim the same priority entitlement as any of the patents and patent applications identified on Schedule 1.34, and to the extent Controlled by Durect or any of its Affiliates at any time during the term of this Agreement: (i) all other patents and patent applications that relate to the Product (including components thereof), its formulation or composition, or method of manufacture or use, (ii) all other patents and patent applications that relate to Durect Know-How, (iii) all patents and patent applications to Collaboration Inventions owned by Durect under Section 8.2 and (iv) any provisionals, continuations, divisionals, continuation-in-part applications, substitutions, reissues, renewals, re-examinations, supplementary protection certificates, extensions, registrations and confirmations of any of the above.

1.35 “Durect Post-Registration Study” shall have the meaning given in Section 4.3(b).

1.36 [***]

1.37 “Durect Related Party” shall have the meaning given in Section 11.2.

1.38 “Durect Technology” means all Durect Patents, Durect Know-How and Collaboration Inventions that are Controlled by Durect or any of its Affiliates during the term of the Agreement, including Durect’s interest in Joint Inventions and Joint Patents.

1.39 “Durect Territory” means the world, except for the Licensed Territory.

1.40 [***]

1.41 “EMEA” means the European Medicines Evaluation Agency and/or the Committee for Proprietary Medical Products or any successor agency thereof or, to the extent the mutual recognition procedure is used for the Product in the EU, any governmental authority having the authority to regulate the sale of medicinal or pharmaceutical products in any country in the EU.

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

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1.42 “EU” means European Union.

1.43 “Effective Date” shall have the meaning given in the first paragraph of this Agreement.

1.44 “Endo” shall have the meaning given in the first paragraph of this Agreement.

1.45 “Endo Collaboration Invention” shall have the meaning given in Section 8.2(c).

1.46 “Endo Generic” shall have the meaning given in Section 5.5(a).

1.47 “Endo Generic Notice” shall have the meaning given in Section 5.5(b).

1.48 “Endo Know-How” means Know-How related to the Product that is (a) Controlled by Endo or any of its Affiliates during the term of this Agreement and (b) useful for Durect or its licensees to develop, make, have made, use, sell, offer to sell, import, export, register, market and promote the Product.

1.49 [***]

1.50 “Endo Patents” means, to the extent Controlled by Endo or any of its Affiliates at any time during the term of this Agreement: (i) all patents and patent applications that relate to Endo Know-How, (ii) all patents and patent applications to Collaboration Inventions owned by Endo under Section 8.2 and (iii) any provisionals, continuations, divisionals, continuation-in-part applications, substitutions, reissues, renewals, re-examinations, supplementary protection certificates, extensions, registrations and confirmations of any of (i) and (ii) above.

1.51 “Endo Post-Registration Study” shall have the meaning given in Section 4.3(a).

1.52 [***]

1.53 “Endo Related Party” shall have the meaning given in Section 11.1.

1.54 “Endo Technology” means all Endo Patents, Endo Know-How and Collaboration Inventions that are Controlled by Endo or any of its Affiliates during the term of the Agreement, including Endo’s interests in Joint Inventions and Joint Patents.

1.55 [***]

1.56 “FDA” means the Food and Drug Administration of the United States Department of Health and Human Services or any successor agency thereof performing similar functions.

1.57 “FDC Act” means the United States Food, Drug and Cosmetic Act, as amended from time to time.

1.58 “First Launch” means the first Launch in the Licensed Territory.

1.59 “Force Majeure” shall have the meaning given in Section 13.15.

1.60 “Formulation C” means that formulation of the Product set forth in that certain side letter from Durect to Endo dated as of the Effective Date (the “Formulation C Side Letter”).

1.61 “Future Payments” shall have the meaning given in Section 5.6(a).

1.62 “GAAP” shall mean in accordance with United States generally accepted accounting principles.

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

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1.63 “GMP” means Good Manufacturing Practices, as set forth in U.S. Code of Federal Regulations 21 CFR Part 210, 211 et seq., and Canadian equivalent thereof, as applicable, each as amended from time to time.

1.64 “Generic Product” means a generic sufentanil pharmaceutical product that is bioequivalent to and substitutable (i.e., “AA” or “AB” therapeutic equivalence code or other therapeutic equivalence code hereafter created with similar meaning) for the Product and is sold under an ANDA pursuant to the FDC Act or pursuant to the applicable law of the relevant jurisdiction following expiry of the Marketing Exclusivity Rights for the Product.

1.65 “Generic Product X” shall have the meaning given in Section 5.5(a).

1.66 “Hatch-Waxman Act” means the United States Drug Price Competition and Patent Term Restoration Act of 1984 (Pub Law 98-471) (or any successor thereto) and any equivalent legal requirements in other countries, as in effect from time to time during the term of this Agreement.

1.67 “IND” means an investigational new drug application (together with all subsequent submissions, supplements and amendments thereto, and any materials, documents or information referred to or relied upon thereby) filed with the FDA in conformance with applicable laws and regulations, and the equivalent thereof (or other right to commence Clinical studies), as applicable, in jurisdictions outside the United States.

1.68 “Indemnified Party” shall have the meaning given in Section 11.4.

1.69 “Indemnifying Party” shall have the meaning given in Section 11.4.

1.70 “JEC” means the Joint Executive Committee referred to in Section 3.2.

1.71 “Joint Invention” shall have the meaning given in Section 8.2(d).

1.72 “Joint Patents” shall have the meaning given in Section 8.3(b).

1.73 “Know-How” means all technical information and other technical subject matter, proprietary methods, ideas, concepts, formulations, discoveries, inventions, devices, technology, trade secrets, compositions, designs, formulae, know-how, show-how, specifications, drawings, techniques, results, processes, methods, procedures, designs, whether now known or hereafter developed and whether or not patentable.

1.74 “Know-How Royalties” shall mean royalties payable by Endo to Durect during any Know-How Royalty Term pursuant to Section 5.3(b).

1.75 “Know-How Royalty Term” shall have the meaning given in Section 5.3(b).

1.76 “Launch,” when used as a noun, means, on a country-by-country basis, the first commercial sale of the Product to a major retail chain or a major distributor (as those terms are commonly understood in the industry) after Regulatory Approval in such country, and when used as a verb, means to consummate such first commercial sale.

1.77 “Licensed Field” means all fields of use in humans.

1.78 “Licensed Territory” means the United States and Canada and each such country’s respective possessions and territories.

1.79 “MUSD” means million United States dollars.

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

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1.80 “Manufacturing Technology” means all Know-How Controlled by a Party or any of its Affiliates that pertains to the manufacture, finishing, or packaging of the Product, including any analytical methods and other quality control and assurance methods (including all processes, procedures, and techniques).

1.81 “Marketing Exclusivity Right” means a marketing or data exclusivity right conferred as a result of (a) designation as a drug for rare diseases or conditions under Sections 525 et seq. of the FDC Act, (b) an exclusive right to sell under an NDA pursuant to Section 505(j)(5) or 505(c)(3)(D)(ii) and (iii) of the FDC Act or any relevant subsequent legislation, rules or regulations, or (c) the exclusive right granted by the FDA upon completion of pediatric studies requested by the FDA under Section 505A(a) of the FDC Act or Canadian equivalent thereof, as applicable, and any successor legislations thereof.

1.82 “NDA” means a new drug application, health registration, marketing authorization application, common technical document, regulatory submission, notice of compliance or equivalent application (excluding local and general business licenses and permits) required to be approved before commercial sale or use of the Product as a pharmaceutical or medicinal product in any formulation or dosage form (excluding any pricing and reimbursement approvals), together with all subsequent submissions, supplements and amendments thereto.

1.83 “NDA Approval” means written final approval of an NDA by the FDA, EMEA or other applicable regulatory authority permitting the immediate marketing and sale of the Product in the applicable country.

1.84 “Net Sales” means the gross amount invoiced by Endo or its Affiliates or Sublicensees for sale of the Product in commercial arm’s length sales to Third Parties, commencing with the First Launch, less deductions for: (i) normal and customary trade, cash and quantity discounts actually given, credits, price adjustments or allowances for damaged products, returns or rejections of products; (ii) chargeback payments and rebates (or the equivalent thereof) granted to group purchasing organizations, managed health care organizations or to federal, state/provincial, local and other governments, including their agencies, or to trade customers; (iii) freight, shipping insurance and other transportation expenses (if separately identified in such invoice); (iv) sales, value-added, excise taxes, tariffs and duties, and other taxes directly related to the sale, to the extent that such items are included in the gross invoice price (but not including taxes assessed against the income derived from such sale).

All such discounts, allowances, credits, rebates and other deductions shall be fairly and equitably allocated to the Product and other products or services of Endo or its Affiliates, such that the Product does not bear a disproportionate portion of such deductions. Net Sales shall not include sales of the Product among the Parties, their respective Affiliates, Sublicensees or subcontractors. Except as specifically provided above, Net Sales shall be calculated applying, in accordance with GAAP, the standard accounting practices Endo customarily applies to other products sold by it.

1.85 “Non-Clinical” when used with respect to studies or data refers to safety, toxicology and other studies undertaken in non-human animals in support of Clinical Trials or otherwise required for Regulatory Approval.

1.86 “Party” and “Parties” shall have the meaning given in the first paragraph of this Agreement.

1.87 “Patent Litigation Losses” shall have the meaning given in Section 8.7(c).

1.88 “Patent Royalties” shall mean royalties payable by Endo to Durect during any Patent Royalty Term pursuant to Section 5.3(a).

1.89 “Patent Royalty Term” shall have the meaning given in Section 5.3(a).

1.90 “Patent Term Extensions” shall have the meaning given in Section 8.4.

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

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1.91 “Preclinical” when used with respect to studies or data refers to preliminary pharmacological studies undertaken in non-human animals to show proof of concept, but not necessarily for purposes of submission in support of Regulatory Approval.

1.92 “Product” means a transdermal patch for human use using the Durect Technology containing sufentanil (including all salts thereof) and having a duration of application of [***] days or less, including all dosage strengths thereof and line extensions thereof, and including all improvements thereto, [***]. The term “Product” includes [***] except as expressly provided herein.

1.93 “Product Material” shall have the meaning given in Section 12.5(a)(iii).

1.94 “Product Trademarks” means one or more trademarks and/or logos that are used for the marketing and sale of the Product in the Licensed Territory. “Product Trademarks” does not include the logo or tradename of either Party, its Affiliates, or Sublicensees, or the trademark or tradename of another product sold by either Party.

1.95 “Product X” shall have the meaning given in Section 5.5(a).

1.96 “Profits” with respect to a product means that amount that is equal to the net sales of such product, calculated in the same fashion as Net Sales, minus Endo’s cost of goods, contractual payments and rebates, accrued, paid or deducted pursuant to governmental regulations or agreements with Third Parties, and sales general and administrative expenses of Endo proportionally allocated to such product.

1.97 “Regulatory Approvals” means any NDA Approvals and other approvals, licenses, registrations, or authorizations granted or issued by any national, regional, state or local governmental entities and agencies, including the FDA or European Commission based upon recommendation of the EMEA, necessary for the development, registration, manufacture, packaging, labeling, use, storage, transport, export, import, clinical testing, promotion or sale of the Product in a country, including pricing and reimbursement approvals to the extent the applicable regulatory authorities in such country require a pricing or reimbursement approval prior to commercialization of the Product in such country.

1.98 “Royalties” shall have the meaning given in Section 5.3.

1.99 “SPC” shall have the meaning given in Section 8.4.

1.100 “Serious Adverse Drug Experience” shall have the meaning given in Section 12.2(b).

1.101 “Sublicensee” shall have the meaning given in Section 2.4.

1.102 “Technology Transfer Plan” shall have the meaning given in Section 7.2(a).

1.103 “Territory” means all of the Durect Territory and the Licensed Territory.

1.104 “Third Party” means any entity other than Durect or Endo or their respective Affiliates.

1.105 “Third Party License Fees” shall have the meaning given in Section 8.7(e).

1.106 “Valid Claim” means a claim in any pending or issued unexpired Durect Patent, including any Patent Term Extensions, to the extent such claim has been examined and allowed, or indicated to be allowable, by either the United States Patent Office or the European Patent Office, and such claim has not subsequently been rejected, disclaimed, revoked or held invalid or unenforceable by a final decision of a court or governmental agency of competent jurisdiction not subject to appeal or in respect to which a timely appeal has not been filed.

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

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1.107 Interpretation

(a) Whenever any provision of this Agreement uses the term “including” (or “includes”), such term shall be deemed to mean “including without limitation” and “including but not limited to” (or “includes without limitations” and “includes but is not limited to”) regardless of whether the words “without limitation” or “but not limited to” actually follow the term “including” (or “includes”);

(b) “Herein”, “hereby”, “hereunder”, “hereof” and other equivalent words shall refer to this Agreement in its entirety and not solely to the particular portion of this Agreement in which any such word is used;

(c) All definitions set forth herein shall be deemed applicable whether the words defined are used herein in the singular or the plural;

(d) Wherever used herein, any pronoun or pronouns shall be deemed to include both the singular and plural and to cover all genders;

(e) The recitals set forth at the start of this Agreement, along with the Exhibits and Schedules to this Agreement, and the terms and conditions incorporated in such recital, Exhibits and Schedules shall be deemed integral parts of this Agreement and all references in this Agreement to this Agreement shall encompass such recitals, Exhibits and Schedules and the terms and conditions incorporated in such recitals, Exhibits and Schedules, provided, that in the event of any conflict between the terms and conditions of this Agreement and any terms and conditions set forth in the Exhibits and Schedules, the terms of this Agreement shall control;

(f) In the event of any conflict between the terms and conditions of this Agreement and any terms and conditions that may be set forth on any order, invoice, verbal agreement or otherwise, the terms and conditions of this Agreement shall govern;

(g) The Agreement shall be construed as if both Parties drafted it jointly, and shall not be construed against either Party as principal drafter;

(h) Unless otherwise provided, all references to Sections, Schedules and Exhibits in this Agreement are to Sections, Schedules and Exhibits of and to this Agreement;

(i) All references to days, months, quarters or years are references to calendar days, calendar months, calendar quarters or calendar years unless otherwise expressly provided;

(j) Any reference to any federal, national, state, local or foreign statute or law shall be deemed to also refer to all rules and regulations promulgated thereunder, unless the context requires otherwise; and

(k) Wherever used, the word “shall” and the word “will” are each understood to be imperative or mandatory in nature and are interchangeable with one another.

2 LICENSE GRANT TO ENDO

2.1 License Grant: Durect hereby grants to Endo, and Endo hereby accepts, the exclusive (even as to Durect and its Affiliates) royalty bearing license under the Durect Technology to develop, make or have made, use, sell, offer for sale, import, export, register, market and promote the Product in the Licensed Field in the Licensed Territory. Such grant specifically includes the right to use and further develop Formulation C in furtherance of the development and commercialization of the Product as contemplated herein.

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Durect hereby also grants to Endo access to and a right of cross-reference, solely to exercise its rights pursuant to the foregoing license, to the following, in each case to the extent Controlled by Durect and its Affiliates: (i) all Development Data in existence as of the Effective Date; (ii) all data related to the formulation or composition of the Product in existence as of or after the Effective Date; and (iii) to the extent useful for Endo or its Sublicensees to develop, make, have made, use, sell, offer to sell, import, export, register, market and promote the Product in the Licensed Field in the Licensed Territory in accordance with Endo’s rights under this Agreement, all Preclinical, Non-Clinical and Clinical data, including without limitation pharmacological, pharmacokinetic and toxicological data, [***]. Notwithstanding the foregoing, each of Endo and its Sublicensees and Durect and Durect’s licensees may make and have made the Product anywhere in the world for development, use, sale or offering to sell in their respective Territories. Furthermore, Endo may carry out Clinical Trials with the Product in the Durect Territory only with Durect’s written consent, which may be withheld in Durect’s sole discretion. Durect and Durect’s licensees may carry out Clinical Trials with the Product in the Licensed Territory only with Endo’s written consent, which may be withheld in Endo’s sole discretion.

2.2 [***]

(a) [***]

(b) [***]

2.3 Subcontracting: Endo shall have the right to subcontract its responsibilities under this Agreement (and grant any necessary sublicenses in connection therewith) without obtaining the written consent of Durect, provided that Endo shall at all times remain primarily responsible and liable for all such activities.

2.4 Sublicenses: Endo may not grant sublicenses under the licenses granted under Section 2.1 without the prior written consent of Durect, such consent not to be unreasonably withheld or delayed. However, without the prior written consent of Durect:

(a) Endo may grant sublicenses to make and have made the Product;

(b) Endo may grant sublicenses or assign its rights to any of its Affiliates for so long as such entity remains an Affiliate of Endo; and

(c) Endo may grant sublicenses to its subcontractors retained under Section 2.3 to the extent necessary for such subcontractors to perform their obligations;

With respect to each sublicense granted hereunder: (i) such sublicense shall be subject to all the terms and conditions of the Agreement as applicable; (ii) Endo shall be liable to Durect as if Endo is exercising such sublicensed rights itself under this Agreement, (iii) the Sublicensee will not be permitted to grant further sublicenses, unless the Sublicensee is an Affiliate of Endo, in which case the Sublicensee may sublicense any portion of its rights to another Affiliate of Endo for so long as such entity remains an Affiliate of Endo and (iv) Endo shall provide upon written request by Durect reasonable assurance that its Sublicensees comply with confidentiality, indemnity, reporting, audit rights, access to data (Endo’s obligation with respect to access to data including [***], and information and inventions assignment obligations substantially the same as to those set forth in this Agreement. Endo shall promptly provide notice to Durect of any sublicense granted pursuant to this Section 2.4. Any person or entity that receives a sublicense as permitted hereunder is a “Sublicensee.”

2.5 Durect Territory: To the extent permitted under applicable law, Endo will not: (a) solicit orders for the Product in the Durect Territory; (b) establish any sales branch for the Product in the Durect Territory, (c) directly or knowingly supply the Product to any Third Party located in any country in the Durect Territory

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(except in connection with development activities, Preclinical and Non-Clinical trials or Clinical Trials carried out in the Durect Territory to the extent permitted under Section 2.1) or (d) directly or knowingly supply the Product to any Third Party that, to Endo’s knowledge, supplies the Product to any customer located in a country in the Durect Territory (except a subcontractor of Endo that supplies the Product in the Durect Territory on behalf of Durect or one of its licensees). The foregoing restrictions will apply for the duration of the term of this Agreement.

2.6 Licensed Territory: To the extent permitted under applicable law, Durect will not: (a) solicit orders for the Product in the Licensed Territory; (b) establish any sales branch for the Product in the Licensed Territory, (c) directly or knowingly supply the Product to any Third Party located in any country in the Licensed Territory (except in connection with development activities, Preclinical and Non-Clinical trials or Clinical Trials carried out in the Licensed Territory to the extent permitted under Section 2.1) or (d) directly or knowingly supply the Product to any Third Party that, to Durect’s knowledge, supplies the Product to any customer located in a country in the Licensed Territory (except a subcontractor of Durect that supplies the Product in the Licensed Territory on behalf of Endo or one of its Sublicensees). The foregoing restrictions will apply for the duration of the term of this Agreement.

2.7 Exclusivity: During the term of this Agreement, Durect and its Affiliates shall not commercialize, and shall not grant any right or license to any Third Party to develop or commercialize, the Product in the Licensed Field in the Licensed Territory. For the term of this Agreement, and except as provided in Section 5.4(b) or 5.5, neither Party nor its Affiliates shall directly or indirectly develop, promote, market, sell or have sold a transdermal patch containing sufentanil (including all salts thereof) and having a duration of application of [***] days or less other than the Product (any such product, a “Competing Product”) nor sponsor, license or contract with a Third Party to do any of the foregoing acts. The second sentence of this Section 2.7 shall be of no further force and effect upon a Change of Control of either Party hereto.

3 DEVELOPMENT OF PRODUCT

3.1 Responsibility and Diligence: Endo shall exercise Commercially Reasonable Efforts to develop the Product at its own cost in accordance with the Development Plan, except that, subject to the terms of this Agreement, Durect shall perform: (i) all Dosage Form Development with respect to the Product and (ii) any other development activity allocated to Durect by Endo and agreed to by Durect, in either case in accordance with the Development Plan. “Dosage Form Development” means any work relating to the formulation or composition of the Product. Endo shall pay Durect its documented, fully allocated development costs in connection with the performance of work under the Development Plan on a monthly basis, Net 30 days from the receipt of a correct invoice therefor from Durect; provided that Endo shall have no obligation to reimburse Durect’s costs in excess of the amount specified in the then-current Development Plan, and Durect shall have no obligation to perform activities which would result in Durect incurring costs in excess of the amount specified in then-current Development Plan until Endo has given prior approval in writing to increase the allowable amount for such activities under the Development Plan.

3.2 Joint Executive Committee: Upon the Effective Date, the Parties shall appoint a Joint Executive Committee (the “JEC”), which shall be the primary forum for exchange of information between the Parties in the development and commercialization of the Product. The JEC shall have the following responsibilities:

(i) review the Development Plan and monitor the progress and results of the Development Plan, including without limitation reviewing the Dosage Form Development and commercialization of the Product and reviewing and discussing preliminary Preclinical, Non-Clinical and Clinical study results, data and reports consistently with Endo’s internal process for treatment of draft study reports;

(ii) recommend further development activities for the Product in the Licensed Territory;

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(iii) review the procedure for filing of Joint Patents;

(iv) discuss coordination of clinical development of the Product in the Territory as provided in Section 3.6;

(v) review and coordinate the technology transfer processes in accordance with Section 7.2; and

(vi) subject to Section 9, review each Party’s publication strategy (including abstract presentations at conferences, symposiums, etc.).

3.3 Meetings of the JEC:

(a) The JEC, which shall be chaired by Endo, shall consist of an equal number of representatives appointed by each of Durect and Endo. At least one (1) representative from each Party shall be a senior executive from such Party. Each Party shall have the right, at any time, to designate by written notice to the other Party, a sufficiently qualified replacement for any of such Party’s members on the JEC, including the chairperson. In addition, the JEC members may from time to time invite the participation of additional ad-hoc representatives from either Party or consultants thereto on specific issues as the need arises.

(b) The JEC may establish project teams or subcommittees as the Parties agree is necessary from time to time, to address any matters related to activities undertaken pursuant to this Agreement, and to facilitate the exchange of information and Know-How related to such matters pursuant to exchange procedures instituted by the JEC. Such project teams or subcommittees shall report to the JEC.

(c) The JEC shall meet not less than once quarterly following the Effective Date, and Endo will provide an update of the development status of the Product in the Licensed Territory during each meeting. To the extent possible, each JEC meeting shall take place shortly after the completion of a meeting of Endo’s internal project team tasked with overseeing the development of the Product. In lieu of in-person meetings, meetings of the JEC may take place by telephonic or video conference. Minutes of the meetings shall be kept by the chairperson of the JEC (or his or her designee) and circulated to members as soon as reasonably practicable without delay for comments.

(d) Each Party shall bear its own costs, including travel and lodging for its personnel serving on the JEC or attending meetings of the JEC.

(e) If either party submits any matter to the JEC for recommendation, the JEC shall determine its recommendation by consensus. If the members are unable to reach consensus on a matter within thirty (30) days from the date of the JEC meeting, then the disagreement shall be resolved as provided in Section 13.13(a); provided that if the Parties’ executives are unable to reach agreement then the opinion of Endo’s President shall prevail. For purposes of this Section 3.3(e), “consensus” shall mean unanimous agreement.

(f) Endo shall provide the JEC, at least annually after the Effective Date, information relating to the progress and results of Endo’s Development Plan and Commercialization Plan.

3.4 Development Plan:

(a) No later than [***] days after the Effective Date, Endo shall prepare a plan for developing the Product through Regulatory Approval including CMC development, Clinical and Non-Clinical development, process development and scale-up (as may from time to time be revised by Endo,

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the “Development Plan”), which plan shall detail activities and a development timeline, including, with Durect’s input, Dosage Form Development, and which shall be consistent with Commercially Reasonable Efforts to develop the Product in the Licensed Territory. Endo shall include in the Development Plan a clinical development plan suitable to produce a registration package for the United States and, subject to Section 3.7, the balance of the Licensed Territory. Thereafter, Endo shall update and provide a copy of the Development Plan to Durect for review and comment at least once in each year in accordance with Endo’s normal planning cycle. In the event that Durect reasonably believes that the development timeline in any version of the Development Plan does not comport with Commercially Reasonable Efforts to develop the Product, [***].

(b) In the event that Durect materially defaults on performance of any task related to Dosage Form Development or does not complete each such task within [***] days of the time frame reasonably allocated therefor in the Development Plan, and where such failure is not the result of one or more issues relating to Endo’s failure to comply with its obligations under the Agreement or safety, legal impediment or other events beyond Durect’s control, then Endo shall have the right to perform Dosage Form Development itself or subcontract such tasks to a Third Party.

3.5 Trials: Pursuant to the Development Plan, Endo shall conduct such Preclinical and Non-Clinical trials and Clinical Trials, at its own cost and expense, as it deems to be consistent with Commercially Reasonable Efforts and necessary to seek and maintain Regulatory Approval of the Product in the Licensed Territory. Endo will provide to Durect draft forms of protocols for all studies required for seeking a label indication. Endo shall consider in good faith all comments provided by Durect in writing within the [***] day period following Durect’s receipt of such protocols; provided that Endo shall have the sole discretion and authority to make all decisions with respect to final protocols and all other matters relating to development of the Product. Endo shall promptly provide Durect with a copy of all final reports and final protocols from Preclinical and Non-Clinical trials and Clinical Trials. [***]

3.6 Coordination of Clinical Development: The Parties undertake to use their Commercially Reasonable Efforts to coordinate through the JEC the clinical development efforts in the Territory to fully maximize the global position of the Product.

3.7 Regulatory Approvals in the Licensed Territory: Endo shall use Commercially Reasonable Efforts to obtain Regulatory Approvals for the Product in the United States. To this end, Endo shall use Commercially Reasonable Efforts to compile, submit and prosecute in a timely manner all necessary data, documents and NDAs (including labeling), in a format acceptable to the applicable regulatory authorities in the United States. If and when Regulatory Approvals are secured in the United States, Endo shall thereafter make a determination, acting in a Commercially Reasonable manner, as to whether to pursue Regulatory Approvals in Canada. If Endo decides to pursue Regulatory Approvals in Canada, Endo shall use Commercially Reasonable Efforts in furtherance thereof. If and when any Regulatory Approval is secured anywhere in the Licensed Territory, Endo shall thereafter use Commercially Reasonable Efforts to maintain and renew such Regulatory Approval and pay all user fees and other costs required to obtain and maintain such Regulatory Approval. Promptly following the Effective Date, Durect shall transfer to Endo all INDs held by Durect for the Product in the Licensed Territory, if any, including any draft IND documents, and copies of all correspondence and notes of any oral communication with regulatory agencies regarding the Product in the Licensed Territory. Endo shall then be responsible for reporting and other obligations to any regulatory authorities as the holder of such IND, except for any such obligation arising prior to the transfer date. Durect shall have the right to review and comment upon regulatory filings proposed to be made with respect to the Product in the Licensed Territory, provided that for any such comments to be considered, the comments shall be provided in writing within [***] business days after the receipt of any draft filings for review. Endo shall reasonably promptly provide to Durect copies of all filings and correspondence from or to such regulatory authorities concerning the Product in the Licensed Territory. [***] At the request of Endo, Durect shall participate, at Endo’s cost, in any major conference or meeting with regulatory authorities with respect to the Product in the Licensed Territory, and in any event, Durect shall have the right to attend and observe at such conference or meeting at

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12

Durect’s cost. Endo shall notify Durect in writing of its receipt of Regulatory Approval to market the Product within [***] days after receipt of any such approval.

3.8 Development Data:

(a) Ownership. Each item of Development Data shall be owned by the Party that generated or developed such Development Data, or on whose behalf such Development Data was generated or developed by a Third Party.

(b) [***]

(i) [***]

(ii) [***]

(iii) [***]

(iv) [***]

(c) [***]

(i) [***]

(ii) [***]

(iii) [***]

(iv) [***]

(d) [***]

3.9 Reporting Adverse Events: Within [***] days of the Effective Date, Endo and Durect will develop and agree upon safety data exchange procedures which will be set forth in a separate and detailed safety agreement. Such agreement will describe the coordination of collection, investigation, reporting, and exchange of information concerning adverse events with respect to the Product (as defined in the then current edition of ICH Guidelines and any other relevant regulations or regulatory guidelines) or any other safety problem of significance (each such adverse event or problem, an “Adverse Event”), and product quality and product complaints involving Adverse Events, sufficient to permit each Party, its Affiliates, Sublicensees or licensees to comply with its legal obligations, including to the extent applicable, those obligations contained in ICH guidelines. The safety data exchange procedures will be promptly updated if required by changes in legal requirements or by agreement between the Parties. The safety agreement shall also require Durect or its designee to maintain a global safety database with respect to the Product. In any event, each Party shall inform the other Party of any Adverse Event of which it becomes aware in a timely manner commensurate with the seriousness of the Adverse Event. Endo will be responsible for reporting all Adverse Events to the appropriate regulatory authorities in the countries in the Licensed Territory in accordance with the appropriate laws and regulations of the relevant countries and authorities, and Durect, or its licensees, will be responsible for reporting all Adverse Events to the appropriate regulatory authorities in the countries in the Durect Territory. Endo will ensure that its Affiliates and Sublicensees comply with all such reporting obligations, and Durect will ensure that its Affiliates and licensees comply with all such reporting obligations. Each Party will designate a safety liaison to be responsible for communicating with the other Party regarding the reporting of Adverse Events.

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

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4 COMMERCIALIZATION

4.1 Responsibility: Endo shall have responsibility at its own cost to use Commercially Reasonable Efforts to promote, market and sell the Product in the Licensed Territory during the term of this Agreement. In connection with its responsibilities for distribution, marketing and sales of the Product in the Territory, Endo shall provide for its sales force personnel (including sales administration and training), order entry, customer service, reimbursement management, medical affairs, medical information, marketing (including all advertising and promotional expenditures), warehousing, physical distribution, invoicing, credit and collections, production forecasting and other related facilities and services to the extent Commercially Reasonable for such distribution, marketing and sales.

4.2 Marketing Efforts: Subject to Section 3.7, Endo shall use Commercially Reasonable Efforts to Launch the Product in each country in the Licensed Territory promptly after Regulatory Approval is obtained in such country. Thereafter, Endo shall have sole responsibility for and shall use Commercially Reasonable Efforts to commence marketing of, promote, market, sell and commercialize the Product in such country within the scope of the rights granted it hereunder. In performing all such promotion activities and disseminating the Product information, Endo and its Affiliates and Sublicensees shall comply with all applicable laws and regulations. Notwithstanding anything in this Agreement to the contrary, in no event shall Endo be obligated to Launch the Product in Canada if Endo determines in its sole discretion that Launch of the Product in Canada would be detrimental to commercialization of the Product in the Licensed Territory as a whole.

4.3 Post-Registration Studies:

(a) Endo shall prolong the life cycle of the Product to the extent Endo determines it is Commercially Reasonable to do so. If Endo performs any Phase IV Clinical Trial or other Clinical Trial of the Product following receipt of Regulatory Approval for the Product (each, an “Endo Post-Registration Study”), Endo shall provide Durect with draft forms of summary protocols for major studies before commencement of any such study. Endo shall consider in good faith all comments provided by Durect in writing within the [***] day period following Durect’s receipt of such protocols; provided, that Endo shall have the sole discretion and authority to make all decisions with respect to the final protocols and all other matters relating to Endo Post-Registration Studies. Endo shall also promptly provide to Durect a copy of final protocols and reports from such Endo Post-Registration Studies. [***]. Endo shall bear the cost of all Endo Post-Registration Studies. For the avoidance of doubt, Endo Post-Registration Studies shall include any Clinical Trials required as a condition to, or for the maintenance of, Regulatory Approval of the Product in the Licensed Territory.

(b) If Durect performs on its own behalf any Phase IV Clinical Trial or other Clinical Trial of the Product in the Durect Territory following receipt of Regulatory Approval for the Product in the Durect Territory (each, a “Durect Post-Registration Study”), Durect shall provide Endo with draft forms of summary protocols for major studies before commencement of any such study in the Durect Territory. Durect shall consider in good faith all comments provided by Endo in writing within the [***] day period following Endo’s receipt of such protocols; provided, that Durect shall have the sole discretion and authority to make all decisions with respect to the final protocols and all other matters relating to Durect Post-Registration Studies. Durect shall promptly provide to Endo a copy of final protocols and reports from such Clinical Trials. [***] Durect shall bear the cost of all Durect Post-Registration Studies. For the avoidance of doubt, Durect Post-Registration Studies shall include any Clinical Trials required as a condition to, or for the maintenance of, Regulatory Approval of the Product in the Durect Territory.

(c) [***]

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4.4 Advertising and Promotional Material Review: Endo shall give Durect the opportunity to review and comment upon the initial core promotional and training materials prepared by Endo for the First Launch; provided that Endo shall have ultimate authority and sole discretion to determine content of such materials and further provided that Durect shall give Endo the same opportunity with respect to materials prepared by Durect or its Affiliates for Launch of the Product in any country in the Durect Territory. At the request of Durect and if Endo determines that it is reasonable to do so, Endo may invite Durect to attend portions of Endo sales meetings and trade shows that relate to the Product.

4.5 Commercialization Plan: Within [***] after Endo files an NDA with the FDA for the Product, Endo shall prepare a plan for promoting, marketing and selling the Product in the Licensed Territory under Section 4.1 hereof (as may from time to time be revised by Endo, the “Commercialization Plan”), which shall cover a period of at least one year from the date of the Commercialization Plan. The Commercialization Plan shall include, at such time as appropriate, (i) preliminary plans related to the prelaunch, Launch, promotion, reimbursement and sales of the Product and which shall, at such time as appropriate, include pricing strategy, public relations and promotional communications, forecasts for the number of sales representatives, sales detailing plans, sales incentive compensation programs related to the Product; and (ii) an estimated budget for the performance of the activities under the Commercialization Plan (a “Commercialization Budget”). Endo shall provide a copy of the Commercialization Plan to Durect for review and comment at least once in each year by a date no later than [***] of each year so as to cover the next calendar year.

4.6 Diligence Failure: If, at any time: (i) the actual development timeline for the Product is more than [***] days delayed from the development timeline set forth in the current Development Plan, where such failure is not the result of one or more issues relating to Durect’s failure to comply with its obligations under the Development Plan, safety, legal impediment or other events beyond Endo’s control, or (ii) if Endo has not used Commercially Reasonable Efforts to promote, market and sell the Product in accordance with the Commercialization Plan, then [***].

4.7 Global Marketing Team. To the extent reasonably feasible, and taking into account, without limitation, limitations on sharing pricing between companies, Endo and Durect may agree to create a global marketing strategy team that includes members from Third Parties licensed to market the Product outside the Licensed Territory. No Party shall have any liability for failure to enter into any such agreement.

4.8 Durect Right to Co-Promote: Durect, at its option, shall have the right to become Endo’s co-promotion partner with respect to the Product by providing promotion efforts in addition to those performed by Endo under the Commercialization Plan as set forth in this Section 4.8. Within [***] days after Endo’s first filing of an NDA in the United States for the Product, Durect may give Endo written notice (a “Co-Promotion Notice”) containing reasonably detailed terms and conditions upon which Durect offers to co-promote the Product in the Licensed Territory. Thereafter, for a period of up to [***] days commencing on the date of the Co-Promotion Notice, Endo and Durect shall negotiate in good faith to reach agreement for the co-promotion of the Product in the Licensed Territory. Unless mutually agreed to by the Parties, no such co-promotion arrangement shall effect any change to the financial terms of this Agreement. If the Parties do not reach agreement on a co-promotion agreement within such [***] period, and provided that Durect still desires to become Endo’s co-promotion partner, then Durect shall have the right to become Endo’s co-promotion partner with respect to the Product under the following terms. At all times, Endo shall have the sole discretion and authority to make all decisions with respect to the promotion of the Product, except that Durect may provide calls not exceeding the greater of (i) [***] and (ii) [***]. Such detailing activity shall be consistent with the Commercialization Plan, and Durect shall coordinate with Endo the activity of Durect’s sales force in a manner that integrates the total selling effort for the Product. Under no circumstances shall Durect create or execute its own sales, marketing or any other commercial effort for the Product, and Durect’s sales representatives may use only promotional and training materials and programs designed and provided by Endo. [***]. Such co-promotion effort shall continue in effect in a country for no longer than the Patent Royalty Term.

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4.9 Durect Supplemental Call Plan: Following the first full calendar year after the First Launch of the Product in the Licensed Territory, in the event that (i) Endo’s sales details for the Product are below the target for such details as set forth in the applicable Commercialization Plan by more than (a) [***] with respect to any single calendar year or (b) [***] with respect to any [***] consecutive calendar years, and (ii) the foregoing deficiency is not due to regulatory action or shortage of supply or other events beyond the control of Endo, then Durect shall have the right to present to the JEC a supplemental call plan for Durect to provide for the shortfall in sales details. If such supplemental call plan is approved by the JEC, which approval shall not be unreasonably withheld or delayed, Durect shall be entitled to conduct sales details in the amount of such shortfall, and Durect and Endo shall share [***] of the actual costs thereof for a minimum of [***] years or until such time as Endo reasonably demonstrates its ability and readiness to conduct sales calls in order to meet the forecasted sales detail target. If the JEC does not so approve such supplemental call plan, then Durect at its option shall be entitled to conduct sales details in the amount of such shortfall for a minimum of [***] years, and the costs thereof shall be borne by Durect alone; provided that under any condition Durect shall cooperate, and coordinate such efforts, with Endo. Notwithstanding the foregoing, in the event that Endo’s sales force has not reasonably demonstrated its ability and readiness to conduct sales calls in order to meet the applicable sales details target set forth in the Commercialization Plan submitted by Endo to Durect for the year following Durect’s commencement of sales details hereunder, then Durect shall, following the [***] anniversary of Durect’s commencement of sales details hereunder, be entitled to continue its supplemental sales detail activities under this Section 4.9 in the amount of such shortfall, and Endo shall reimburse Durect its expenses therefor after such [***] anniversary at [***] of such costs until such time as the Endo sales force reasonably demonstrates its ability and readiness to conduct sales calls in order to meet the forecasted sales detail target in the then-current Commercialization Plan; provided that if the Parties at any time do not agree to such ability and readiness of Endo to meet the applicable forecasted sales detail target, then either Party may resolve such disagreement pursuant to the Accelerated Arbitration Provisions of Section 13.13(d). At Durect’s reasonable request, Endo shall provide to Durect documents and other information necessary for Durect to determine whether Endo has conducted the number of sales details provided for in this Section 4.9. In addition, so long as Durect is conducting such supplemental sales details in accordance with this Section 4.9, Durect will be included in, and be allowed to participate in, all promotional activities being conducted by Endo pursuant to the then current Commercialization Plan, including participation in symposia, key opinion leader events, and the like, and Endo shall provide Durect’s supplemental detailing force with all promotional materials to the same extent available to Endo’s sales force; provided that any additional costs incurred by Endo in connection therewith shall be [***].

4.10 Sales Incentive Compensation Programs. During the first [***] years following the First Launch, Endo shall provide to its sales representatives who are promoting the Product sales incentive compensation programs for the Product that are no less favorable to those that Endo provides to such sales representatives with respect to their sale of any pharmaceutical products for the treatment of [***] other than the Product in the Licensed Territory.

5 PAYMENT OBLIGATIONS

5.1 Signing Fee: Within thirty (30) business days of the Effective Date and following receipt of an invoice from Durect, Endo shall pay Durect a non-refundable and non-creditable payment of Ten Million Dollars ($10,000,000) payable by wire transfer of immediately available funds to an account designated in writing by Durect.

5.2 Milestone Payments:

(a) Endo shall pay Durect a [***] Dollar ($[***]) non-refundable, non-creditable amount within [***] days after [***]. Such amount is payable only one time.

(b) Endo shall pay Durect an [***] Dollar ($[***]) non-refundable, non-creditable amount within [***] days after [***]. Such amount is payable only one time.

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(c) Endo shall pay Durect a [***] Dollar ($[***]) non-refundable, non-creditable amount within [***] days after [***]. Such amount is payable only one time.

(d) Endo shall pay Durect a [***] Dollar ($[***]) non-refundable, non-creditable amount within [***] days after [***]. Such amount is payable only one time.

(e) Endo shall pay Durect a [***] Dollar ($[***]) non-refundable, non-creditable amount within [***] days after [***]. Such amount is payable only one time.

5.3 Royalties: As long as Endo sells Product commercially under this Agreement, and subject to the other provisions of this Section 5, Endo shall pay Royalties to Durect in respect of the license granted to Endo by Durect hereunder. If the Patent Royalty Term is in effect, Endo shall owe Durect Patent Royalties with respect to annual Net Sales in the Licensed Territory. If the Know-How Royalty Term is in effect, Endo shall owe Durect Know-How Royalties with respect to annual Net Sales in the Licensed Territory. The aggregate of all Patent Royalties and Know-How Royalties that are due to Durect in any Annual Net Sales Period (as defined below) shall be referred to herein as “Royalties.”

(a) Patent Royalties. Patent Royalties shall begin to accrue on Net Sales within the Licensed Territory on the date of the First Launch and shall be payable until the later of (x) subject to Section 5.3(c), the expiration of all Durect Patents containing one or more Valid Claims that would be infringed by the manufacture, sale, offer for sale, use or importation of the Product; or (y) ten (10) years from the First Launch (such period the “Patent Royalty Term”). Subject to the other provisions of this Section 5, if the Patent Royalty Term is in effect, Endo shall pay Durect Patent Royalties equal to the following percentages of the aggregate annual Net Sales in both countries in the Licensed Territory:

Annual Net Sales in the Licensed Territory (MUSD)	Patent Royalty Rate
$[***]	[***]%
>$[***]	[***]%
>$[***]	[***]%
>$[***]	[***]%
>$[***]	[***]%
>$[***]	[***]%
>$[***]	[***]%
>$[***]	[***]%
>$[***]	[***]%

The Royalty rates set forth above shall apply only to that portion of Net Sales within the applicable tier of Net Sales.

For purposes of illustration, Patent Royalties owed on $[***] in annual Net Sales would be calculated as the sum of (a) [***]% of $[***] and (b) [***]% of $[***].

The periods by which annual net sales are measured for purposes of this Section 5.3 shall be a calendar year (each, an “Annual Net Sales Period”) except that the first Annual Net Sales Period shall begin on the first day of the calendar quarter preceding the First Launch and continue to the end of the calendar quarter ending on December 31^st of that calendar year. Patent Royalty payments for the first Annual Net Sales Period shall be calculated in the manner provided above, except that Net Sales will be pro-rated to reflect an annualized sales figure.

(b) Know-How Royalties. Subject to Section 5.3(c), Know-How Royalties shall begin to accrue on Net Sales in the Licensed Territory immediately after the expiration of the Patent Royalty Term and shall be payable as long as Endo shall continue to sell the Product in the Licensed Territory (such period the “Know-How Royalty Term”). Subject to the other provisions of this Section 5, if the Know-How Royalty Term is in effect, Endo shall pay Durect Know-How Royalties with

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

17

respect to the aggregate annual Net Sales in both countries at a rate of [***]% of the rates set forth in the table in Section 5.3(a).

The first Annual Net Sales Period in which Know-How Royalties are payable shall begin on the first day of the Know-How Royalty Term and continue to the end of the calendar quarter ending on December 31^st of that calendar year. Know-How Royalty payments for such Annual Net Sales Period shall be calculated in the manner provided above, except that Net Sales will be pro-rated to reflect an annualized sales figure.

(c) Reimbursement of Patent Royalties. In the event that after the commencement of the payment of Know-How Royalties by Endo pursuant to Section 5.3(b), a Valid Claim then comes into existence, then notwithstanding anything to the contrary herein, the Patent Royalty Term shall again come into effect at such time, and Endo shall: (i) thereafter, pay Durect applicable Patent Royalties with respect to the sale of Product until the expiration of the Patent Royalty Term and (ii) with respect to Product sales for which Endo has previously paid Know-How Royalties, reimburse Durect such amount equal to the applicable Patent Royalties for such sales minus the Know-How Royalties previously paid to Durect.

(d) Currency Conversion. Royalties with respect to any Net Sales in Canada shall be calculated by converting the Canadian dollar amount of Net Sales into a U.S. dollar amount and applying the applicable Royalties percentage under this Section 5.3 to such amount. The currency conversion shall be made using the rate of exchange that is the commercial rate of exchange for the conversion of local currency to U.S. Dollars as published by The Wall Street Journal on the last business day immediately prior to the date of payment (or if such journal shall cease to publish currency exchange rates, then another leading U.S. financial publication or bank as mutually agreed to in writing by the Parties).

5.4 Generic Competition: If, during a given calendar quarter, there is a Generic Product sold by a Third Party in the Licensed Territory, then:

(a) The Royalties due for such quarter pursuant to Section 5.3 shall be reduced by [***] of the amount of Royalties otherwise due pursuant to Section 5.3 if the total dispensed prescriptions as measured by dispensed prescriptions of Generic Product [***] exceed [***] of the combined total aggregate dispensed prescriptions of the Generic Product, [***] and the Product; and

(b) [***] and

(c) Endo may revise the Commercialization Plan then in effect at any time to reflect the Generic Product [***]. For the purpose of this Section 5.4, total aggregate dispensed prescriptions of the respective products shall be measured by IMS data or any other mutually agreed source of information.

5.5 Third Party Competing Products.

(a) If during the term of this Agreement, a Third Party launches a branded Competing Product in the Licensed Territory that is not a Generic Product (a “Product X”), and another Third Party launches a Competing Product that is a generic sufentanil pharmaceutical product that is bioequivalent to and substitutable (i.e., “AA” or “AB” therapeutic equivalence code or other therapeutic equivalence code hereafter created with similar meaning) for Product X (a “Generic Product X”), then Endo may launch, or authorize another to launch, in the Licensed Territory its own Competing Product which is a generic of Product X (an “Endo Generic”) at any time upon or following the first commercial sale of Generic Product X.

(b) In the event that Endo determines to sell an Endo Generic, Endo shall, before Endo begins development of such Endo Generic, give Durect notice (an “Endo Generic Notice”) that Endo has

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

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so determined. Durect shall have the option to pay up to [***] of Endo’s documented, fully allocated development costs with respect to such Endo Generic and receive from Endo the same percentage of any Profits [***] derived by Endo from the sale of such Endo Generic. Durect may exercise such option by giving Endo notice within [***] days of the date of the Endo Generic Notice that Durect shall participate in the development of and Profits from the Endo Generic and specifying the percentage rate of Durect’s participation. Durect’s portion of the development costs of an Endo Generic shall be payable on a quarterly basis, Net [***] days from the receipt of a correct invoice therefor from Endo. Endo shall have no obligation to remit to Durect any portion of its Profits from an Endo Generic until Durect has paid Endo the entire invoiced amount. As a matter of clarification, Endo shall have no obligation under Section 5.3 to pay to Durect any Royalties with respect to any Endo Generic.

5.6 Royalty Reduction/Set-Off:

(a) To the extent and subject to the limits provided in Sections 8.7(c) and (e) and 11.1, Endo may set off against Royalties and/or any other payment owing and unpaid to Durect under this Section 5 (“Future Payments”) Durect’s liability for all Patent Litigation Losses in accordance with Section 8.7(c), Third Party License Fees in accordance with Section 8.7(e), and Indemnification Obligations in accordance with Section 11.1. Any portion of Durect’s liability for Patent Litigation Losses, Third Party License Fees or Indemnification Obligations that is not set off in any Annual Net Sales Period in accordance with Sections 8.7(c) and (e) or 11.1 may be carried forward and set-off in accordance with this Section 5.6(a) in future Annual Net Sales Periods.

(b) In the event that Endo is awarded any damages as a result of a material breach of this Agreement by Durect, including any failure by Durect to pay any Damages for which it is obligated under Section 11, Endo may set-off such damages without limit against Royalties and/or any other payment owing to Durect under this Section 5.

6 PAYMENTS AND REPORTS

6.1 Payments: Beginning [***] days after the end of the calendar quarter in which the First Launch is made and for each calendar quarter thereafter (no later than [***] days after the end of such calendar quarter), Endo shall submit a statement to Durect that shall set forth the amount of Net Sales in the Licensed Territory during such quarter and the calculation of Royalties due on such Net Sales for such quarter and, if applicable Profits due for such quarter. Each such statement shall be accompanied by the payment, if any, due to Durect.

6.2 Mode of Payment: Endo shall make all payments required under this Agreement by wire transfer (at Durect’s expense for such wire transfer fees) to any account specified by Durect or as otherwise directed by Durect from time to time in U.S. Dollars.

6.3 Records Retention: Endo and Durect and their respective Affiliates, Sublicensees and licensees, as applicable, shall keep complete and accurate records pertaining to the sale and development of the Product, and if applicable, [***] and Endo Generic, and the calculation of Net Sales, and if applicable Profits, in the Licensed Territory for a period of two calendar years after the year in which such records were generated, and in sufficient detail to permit the Parties to confirm the accuracy of each of the foregoing.

6.4 Audit Request: During the term of this Agreement and for a period of [***] years thereafter, at the request and expense of either Party (the “Auditing Party”), Durect and its Affiliates (in the case of a request by Endo) or Endo and its Affiliates and Sublicensees (in the case of a request by Durect) (the “Audited Party”) shall permit an independent, certified public accountant appointed by the Auditing Party and reasonably acceptable to the Audited Party, at reasonable times and upon reasonable notice but not more often than once each calendar year, to examine such records pertaining to the period ending two

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years before the date of such notice as may be necessary to determine the correctness of any report or payment made under this Agreement or obtain information as to the determination of Net Sales, Royalties, Profits and development costs payable for any calendar quarter. Results of any such examination shall be made available to all Parties except that said independent, certified public accountant shall verify to the Auditing Party such amounts and shall disclose no other information revealed in such audit.

6.5 Cost of Audit: The Auditing Party shall bear the full cost of the performance of any audit requested by the Auditing Party except as hereinafter set forth. If, as a result of any inspection of the books and records of the Audited Party, it is shown that payments made by the Audited Party to the Auditing Party under this Agreement were less than the amount that should have been paid, then, subject to Section 6.6, the Audited Party shall make all payments required to be made to eliminate any discrepancy revealed by said inspection within [***] days after the Auditing Party’s demand therefor. Furthermore, if the payments made were less than [***]% of the amount that should have been paid during any calendar year, the Audited Party shall also reimburse the Auditing Party for the reasonable costs of such audit up to $[***]. In the event that the audit shows that an overpayment has been made by Endo, subject to Section 6.6, such amounts shall be deducted from Royalties owed to Durect and/or any other payment owing to Durect under Section 5. If such overpayment amounts have not been settled by such deductions from Royalties and/or any other payment owing to Durect under this Section 5 within one year from the date originally overpaid, then Durect shall promptly make all payments required to be made to Endo to eliminate any such overpayment. In the event that the audit shows that an overpayment has been made by Durect, subject to Section 6.6, Endo shall make all payments required to be made to eliminate any overpayment within [***] days after Durect’s demand therefore.

6.6 Resolution of Dispute as to Audit: Notwithstanding anything in Section 6.5 to the contrary, in the event that the Parties do not agree on the amount of overpayment or underpayment within [***] days, each Party shall select an independent public accounting firm (and each Party shall pay the costs of its own accounting firm), which shall meet and discuss the amount in dispute and other related matters within [***] days thereafter. If such independent public accounting firms cannot agree on a resolution mutually agreeable to the Parties, such independent public accounting firms shall, within [***] days after such selection, appoint a third independent public accounting firm which shall resolve the issue within [***] days after its selection, and the Parties shall equally share the costs of such accounting firm. The recommendation of the third independent public accounting firm shall be final and binding upon the Parties. A judgment on such firm’s disposition may be entered in any court having jurisdiction over the Parties. Notwithstanding anything to the contrary herein, the resolution of any dispute under this Section 6.6 shall be made under this Section 6.6 instead and in lieu of Section 13.13. The preceding sentence shall not preclude the application of Section 13.13 to any contract interpretation issue (as compared to an accounting issue which would be precluded from determination under Section 13.13).

7 MANUFACTURE

7.1 Responsibility: Endo shall have responsibility at its own cost to use Commercially Reasonable Efforts to manufacture the Product in compliance with the terms and conditions of this Agreement.

7.2 Technology Transfer:

(a) Durect shall use Commercially Reasonable Efforts to provide in a timely manner such of its Manufacturing Technology as may be reasonably necessary to enable Endo or a Third Party contract manufacturing organization (“CMO”) selected by Endo to manufacture the Product for sale in the Licensed Territory, and shall use Commercially Reasonable Efforts to provide technical assistance to enable the use of such Manufacturing Technology to manufacture the Product, as further detailed in a technology transfer plan to be developed by Endo with input from Durect no later than [***] days after the Effective Date (the “Technology Transfer Plan”), provided that the time period in which Endo prepares the Technology Transfer Plan may exceed [***] if Endo in good faith requires additional time. Endo shall reimburse Durect for reasonable out-of-pocket costs and expenses incurred in providing the Manufacturing Technology and technical assistance,

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such as costs for travel and lodging, if such costs and expenses are pre-approved by Endo. Durect shall be reimbursed by Endo on a monthly basis, within [***] days of receipt of an invoice setting forth such out-of-pocket costs and expenses.

(b) At such time as Durect shall desire to commence manufacturing of the Product intended for the Durect Territory, Endo shall use Commercially Reasonable Efforts to provide or cause its Affiliate or Third Party CMO to provide in a timely manner such Manufacturing Technology in the Control of Endo or its Affiliate as may be reasonably necessary to enable Durect or its Third Party CMO to manufacture the Product for sale in the Durect Territory, and shall use Commercially Reasonable Efforts to provide technical assistance to enable the use of such Manufacturing Technology to manufacture the Product, all to the extent set forth in a technology transfer plan reasonably agreed to by Endo. Durect shall reimburse Endo for reasonable out-of-pocket costs and expenses incurred in providing the Manufacturing Technology and technical assistance, such as costs for travel and lodging, if such costs and expenses are pre-approved by Durect. Endo shall be reimbursed by Durect on a monthly basis, within [***] days of receipt of an invoice setting forth such out-of-pocket costs and expenses.

7.3 Manufacturing Development: Pursuant to the Development Plan and using Commercially Reasonable Efforts, Endo shall at its own cost carry out scale-up and validation procedures for the manufacture of commercial quantities of the Product and conduct such other manufacturing development work as is necessary to manufacture and package commercial quantities of the Product, including stability studies. All such activities shall be conducted in accordance with applicable GMP.

7.4 Clinical Supply: Durect shall provide to Endo [***] its existing supply of the Product (and placebo product). Upon Endo’s request and subject to separate written agreement, Durect shall use Commercially Reasonable Efforts to supply Endo with any additionally required packaged quantities of the Product (and placebo product) for Clinical Trials through Phase II at Durect’s actual, documented, fully allocated manufacturing cost plus [***]. To the extent required under applicable law, any Product so supplied shall be produced in accordance with applicable GMP.

7.5 Commercial Supply in Licensed Territory: Endo shall have sole responsibility (including complete decision making authority and discretion) to manufacture or have manufactured Product for the development, use, sale or promotion of the Product in the Licensed Territory, and shall maintain or arrange for sufficient manufacturing capacity to meet the reasonably anticipated market demand for the Product in the Licensed Territory.

7.6 Third Party Manufacturers. In the event Endo contracts with any Third Party CMO to supply any of its Product requirements, Endo shall not restrict such Third Party CMO from also supplying the Product to Durect for use and sale in the Durect Territory; provided, however, Endo may require such Third Party CMO to supply Endo in priority over the obligation of such Third Party CMO to supply Durect.

7.7 Withdrawals: If (a) Endo is required by any regulatory authority to withdraw the Product in one or more countries in the Licensed Territory, or (b) due to safety concerns Endo withdraws the Product from any country in the Licensed Territory, or (c) the Parties mutually agree to withdraw the Product from any country in the Licensed Territory, Endo shall be responsible for withdrawing the Product on a country-by-country basis from the Licensed Territory. Any withdrawal of the Product from the Durect Territory shall be the sole responsibility and discretion of Durect and its licensees. In the event of a Product withdrawal in the Licensed Territory, Endo shall immediately cease the sale of the Product, and shall carry out any necessary recall and take such other actions as may reasonably be required to comply with applicable laws or customary industry practices. Except to the extent such withdrawal arose out of any breach of this Agreement or a breach by a Party of any agreement relating to the supply of the Product, neither Party shall have any liability to the other Party as a result of any such withdrawal of the Product. Voluntary withdrawals under clauses (b) and (c) above shall be evaluated on a country-by-country basis, and each Party’s obligations under this Section 7.7 shall be discharged on a country-by-country basis.

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8 INTELLECTUAL PROPERTY

8.1 Trademarks:

(a) Endo shall have the right to select, after consideration of Durect’s views but at the sole discretion of Endo, and shall register and maintain, at its expense, such Product Trademarks as shall be used for the promotion, marketing and sale of the Product in the Licensed Territory. Endo shall own such Product Trademarks and all goodwill associated therewith.

(b) Durect agrees to notify Endo in writing of any unauthorized use of the Product Trademarks by Third Parties promptly as such use comes to Durect’s attention.

(c) To the extent permitted by law, all labeling and packaging for the Product to be marketed, distributed or sold in any country in the Licensed Territory shall contain Durect’s name and logo in a size and location determined by Endo and reasonably acceptable to Durect and all patent markings and notices as may be applicable.

8.2 Ownership of Collaboration Inventions:

Subject to the terms hereof, including the licenses and other rights granted hereunder, all Collaboration Inventions shall be owned as follows:

(a) Durect shall own the entire right, title and interest in and to all Collaboration Inventions (including all patents and other intellectual property rights relating thereto) that relate exclusively to the Product (including components thereof, its composition or formulation, or method of manufacture or use), without regard to inventorship.

(b) In addition to Section 8.2(a) above, Durect shall own the entire right, title and interest in and to all Collaboration Inventions (including all patents and other intellectual property rights relating thereto) made solely by its employees and/or Third Parties acting on behalf of Durect in the performance of the Development Plan and other activities undertaken by it under this Agreement.

(c) Endo shall own the entire right, title and interest in and to all Collaboration Inventions (including all patents and other intellectual property rights relating thereto) that do not relate exclusively to the Product (including components thereof, its composition or formulation, or method of manufacture or use) so long as such inventions are made solely by its employees and/or Third Parties acting on behalf of Endo in the performance of the Development Plan and other activities undertaken by it under this Agreement (each such Collaboration Invention, an “Endo Collaboration Invention”). Endo hereby grants to Durect an exclusive, irrevocable, perpetual, royalty-free, paid-up license to develop, make or have made, use, sell, offer for sale, market and promote in the Durect Territory each Endo Collaboration Invention solely for use with respect to the Product.

(d) Subject to Section 8.2(a) above, the Parties shall jointly own all Joint Inventions (as defined below) and, subject to the rights granted each Party under this Agreement and except as otherwise specifically provided under this Agreement, each Party may make, use, sell, keep, license or assign its interest in Joint Inventions and otherwise undertake all activities a sole owner might undertake with respect to such Joint Inventions, without the consent of and without accounting to the other Party. “Joint Invention” means a Collaboration Invention for which both: (i) one or more employees, consultants or agents of Durect or any other persons obligated to assign such Collaboration Invention to Durect; and (ii) one or more employees, consultants or agents of Endo or any other persons obligated to assign such Collaboration Invention to Endo, are joint inventors of such Collaboration Invention. The term “joint inventors,” as it applies generally to

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Collaboration Inventions, shall be construed in accordance with how that term is used pursuant to United States patent law.

(e) Subject to appropriate confidentiality undertakings, each Party shall notify the other Party promptly after the completion of invention disclosure statements (or similar type of internal process employed by such Party for recording or recognizing inventions) for each Collaboration Invention (or, if any provisional or other patent application is filed claiming such invention, promptly upon such filing), and shall provide a copy of written documentation of the Collaboration Invention suitable to describe the invention and identify any inventors participating in the invention (or, if any patent application is filed, a full and complete copy of the documents submitted to the relevant patent office) to the other Party.

(f) Each Party may use and practice its own Collaboration Inventions in any manner not inconsistent with the terms of this Agreement without the consent of the other Party and without an obligation to notify the other Party of such intended use or to pay royalties or other compensation to the other by reason of such use during the term of this Agreement and thereafter unless otherwise provided herein. For the avoidance of doubt, neither Party is granted any license rights to any intellectual property rights of the other Party which may be required for such Party to use a Collaboration Invention, unless otherwise expressly granted herein or as may be necessary to fulfil the intent of this Agreement.

(g) Each Party shall, at the request of the other Party, execute all assignment documents necessary to perfect the ownership interests in Collaboration Inventions as determined pursuant to this Section 8.2.

8.3 Prosecution of Patents:

(a) Durect Patents. Durect shall prepare, prosecute and maintain all Durect Patents (including their issuance, reissuance, reexamination and the defense of any interference, revocation or opposition proceedings) at Durect’s sole expense and discretion subject to the provisions of this Section 8.3(a). Durect shall furnish Endo with copies of all substantive correspondence relating to Durect Patents to and from patent offices in the Licensed Territory and provide Endo a reasonable time to offer its comments thereon before Durect makes a submission to the relevant patent office, provided that in the event that delay would jeopardize any potential patent right, Durect shall have the right to proceed without awaiting Endo’s comments on any patent application or correspondence. Endo shall offer its comments promptly, and Durect shall use good faith efforts to accommodate such requests of Endo. If Durect determines in its reasonably exercised discretion not to file, prosecute, defend or maintain any patent application (including failing to defend any interference, revocation or opposition proceedings) within the Durect Patents in any country in the Licensed Territory, then Durect shall provide Endo with [***] days’ prior written notice (or such shorter time period that would permit Endo a reasonable opportunity to respond in a timely manner) of such determination, and Endo shall have the right and opportunity to file, prosecute, defend and/or maintain such patent application, at Endo’s sole cost and expense.

(b) Joint Patents. With respect to the preparation, prosecution and maintenance of patent applications claiming Joint Inventions (“Joint Patents”), Endo shall take such actions as are necessary or appropriate to procure, prosecute and maintain patents with respect thereto (including any issuance, reissuance or reexamination thereof and the defense of any interference, revocation or opposition proceedings related thereto) at Endo’s sole expense and discretion, subject to the provisions of this Section 8.3(b); provided, that all such patent applications and patents shall be owned jointly. Endo shall furnish Durect with copies of such Joint Patents and any substantive correspondence relating to such Joint Inventions to and from patent offices throughout the Territory and permit Durect to offer its comments thereon before Endo makes any submission or response to a patent office. Endo will inform Durect of the countries in which it intends to file patent applications. Durect shall offer its comments promptly, including any request that the

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patents be filed in additional countries; provided, that Endo shall determine the appropriate action after considering in good faith any comments or requests from Durect, and further provided that in the event that delay would jeopardize any potential patent right, Endo shall have the right to proceed without awaiting Durect’s comments. If Endo determines in its sole discretion not to file, prosecute, defend or maintain any patent application (including failing to defend any interference, revocation or opposition proceedings) within the Joint Patents in any country, then Endo shall provide Durect with [***] days’ prior written notice (or such shorter time period that would permit Durect a reasonable opportunity to respond in a timely manner) of such determination, and Durect shall have the right and opportunity to file, prosecute, defend and/or maintain such patent application on behalf of the Parties at Durect’s sole cost and expense.

(c) Endo Patents. Endo shall prepare, prosecute and maintain all Endo Patents relating to the Product (including their issuance, reissuance, reexamination and the defense of any interference, revocation or opposition proceedings) at Endo’s sole expense and discretion subject to the provisions of this Section 8.3(c). Endo shall furnish Durect with copies of all substantive correspondence relating to Endo Patents to and from patent offices and provide Durect a reasonable time to offer its comments thereon before Endo makes a submission or files a response to a patent office, provided that in the event that delay would jeopardize any potential patent right, Endo shall have the right to proceed without awaiting Durect’s comments on any patent application or correspondence. Durect shall offer its comments promptly and Endo shall use good faith efforts to accommodate such requests of Durect. If Endo determines in its reasonably exercised discretion not to file, prosecute, defend or maintain any patent application (including failing to defend any interference, revocation or opposition proceedings) within the Endo Patents in any country in the Territory, then Endo shall provide Durect with [***] days’ prior written notice (or such shorter time period that would permit Durect a reasonable opportunity to respond in a timely manner) of such determination, and Durect shall have the right and opportunity to file, prosecute, defend and/or maintain such patent application, at Durect’s sole cost and expense.

(d) Each Party shall, at the reasonable request of the other Party, execute all lawful papers, all divisional, continuing, reissue and foreign applications, make all rightful oaths and take such other actions as may be reasonably requested by the other Party in conjunction with prosecution of patents and to aid in obtaining the proper protection of inventions pursuant to this Section 8.3.

8.4 Patent Term Extensions: The Parties shall notify each other of the issuance of each patent included within the Durect, Endo and Joint Patents where a patent term extension, adjustment or restoration, or supplementary protection certificate (an “SPC,” and together with patent term extensions, adjustments and restorations, “Patent Term Extensions”) is possible in the Licensed Territory, giving the date of issue and patent number for each such patent. Endo shall use Commercially Reasonable Efforts to obtain all available Patent Term Extensions of such Durect, Endo or Joint Patents (including those available under the Hatch-Waxman Act). Durect shall execute such authorizations and other documents and take such other actions as may be reasonably requested by Endo to obtain such Patent Term Extensions. The Parties shall cooperate with each other in obtaining Patent Term Extensions wherever applicable to such Durect, Endo or Joint Patents. If in any country in the Licensed Territory Endo has an option to extend the patent term for only one of several patents, Endo will consult with Durect before making the election. If more than one Durect, Endo or Joint Patent is eligible for Patent Term Extension in the Licensed Territory, the Parties shall agree upon a strategy that will maximize patent protection for the Product. All filings for such Patent Term Extensions in the Licensed Territory shall be made by Endo at its sole cost and expense; provided, that in the event that Endo elects not to file for a Patent Term Extension in the Licensed Territory, Endo shall (a) promptly inform Durect of its intention not to file and (b) grant Durect the right to file for such Patent Term Extension.

8.5 Patent Certifications:

(a) To the extent required or permitted by law, Endo shall use its Commercially Reasonable Efforts to maintain with the applicable regulatory authorities in the Licensed Territory during the term of this

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Agreement correct and complete listings of applicable patents relating to the Product, including all so called “Orange Book” listings required under the Hatch-Waxman Act.

(b) In the event either Party receives notice that a Third Party has filed a paragraph IV certification relating to the Product pursuant to 21 U.S.C. 355(j)(2)(A)(vii)(IV) of the Hatch/Waxman Act (or any successor statute), such Party shall immediately notify the other Party in writing of such notice. Endo shall have the first right, but not the duty, to institute a patent infringement action against such Third Party. In such instance, Endo may, if necessary, institute such an action in Durect’s name. Endo shall consider in good faith all comments provided by Durect within the [***] day period following Durect’s receipt of such notice from Endo; provided that Endo shall have the sole discretion and authority to exercise its first right to institute such a patent infringement action; however, Endo may not enter into any settlement, consent judgment or other voluntary final disposition of such action that adversely affects any Durect Patent without the prior written consent of Durect. If Endo determines not to institute an infringement proceeding against such Third Party, Endo shall so notify Durect at least [***] days before the expiration of the period within which a patent holder may bring an action for infringement against such Third Party, and give Durect a reasonable period of time to take action with respect to Durect’s right set forth in the following sentence. Durect shall then have the right, but not the duty, to institute such an infringement action against such Third Party, and to the extent necessary, Endo shall assign to Durect its cause of action for infringement of any Endo Patent against such Third Party; provided that Durect may not enter into any settlement, consent judgment or other voluntary final disposition of such action that adversely affects any Endo Patent without the prior written consent of Endo. The costs and expenses of any such action (including fees of attorneys and other professionals) shall be borne by the Party instituting the action, or, if the Parties elect to cooperate in instituting and maintaining such action, such costs and expenses shall be borne by the Parties in such proportions as they may agree in writing. Each Party shall execute all necessary and proper documents, take such actions as shall be appropriate to allow the other Party to institute and prosecute such infringement action and shall otherwise cooperate in the institution and prosecution of such action. Each Party prosecuting any such infringement action shall keep the other Party reasonably informed as to the status of such action. Any award paid by a Third Party as a result of such an infringement action (whether by way of settlement or otherwise) shall be allocated in the same manner as provided in Section 8.6(g).

8.6 Enforcement of Patent Rights:

(a) Other than as provided in Section 8.5, in the event that either Endo or Durect becomes aware of any product that is or is intended to be made, used, or sold in the Licensed Territory that it believes to (i) infringe Durect Patents, Endo Patents or Joint Patents, or (ii) constitute a misappropriation of Durect Know-How or Endo Know-How, such Party will promptly advise the other Party of all the relevant facts and circumstances known by it in connection with the infringement or misappropriation. Endo and Durect shall thereafter consult and cooperate fully to determine a course of action, including the commencement of legal action as provided in this Section 8.6 by either or both Parties, to terminate any such infringement or address and rectify such misappropriation. The Party Controlling (or whose Affiliate Controls) the Know-How that is the subject of such misappropriation claim shall have the sole right to assert and control any claim in respect thereof. If a Party asserts any such claim, it shall coordinate the commencement and conduct of any legal proceeding in respect thereof with the other Party and consult with such other Party, if such other Party has any right to enforce any claim of patent infringement in respect of the same or similar matter against the same Third Party.

(b) Durect shall have the first option at its own cost to initiate, prosecute and control the enforcement of any of the Durect Patents against infringement by a Third Party in the Licensed Territory through the marketing or sale of a product that the Parties reasonably agree is directly competing with the Product. Durect shall also have the first option at its own cost and for its own benefit to

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initiate, prosecute and control the enforcement of any of the Joint Patents against infringement by a Third Party in the Durect Territory.

(c) Endo shall have the right at its own cost and for its own benefit to initiate, prosecute and control the enforcement of the Joint Patents and Endo Patents against the infringement by a Third Party in the Licensed Territory through the marketing or sale of a product that the Parties reasonably agree is directly competing with the Product, and if Durect does not initiate proceedings pursuant to Section 8.6(b) above within [***] days of being requested in writing to do so by Endo, the Durect Patents. Durect shall have the sole right at its own cost and for its own benefit to initiate, prosecute and control the enforcement of the Durect Patents against all other infringement. Endo shall have the sole right at its own cost and for its own benefit to initiate, prosecute and control the enforcement of the Endo Patents against all other infringement.

(d) The Party prosecuting the infringement will control the litigation and will bear all the costs and legal expenses (including court costs and legal fees and expenses), including settlement thereof; provided, that no settlement or consent judgment or other voluntary final disposition of any infringement action brought by a Party pursuant to this Section 8.6 may be entered into without the prior written consent of the other Party if such settlement would require the other Party to be subject to an injunction or to make a monetary payment or would restrict the claims in or admit any invalidity of any of the other Party’s Patents or Joint Patents or otherwise significantly adversely affect the rights of the other Party to this Agreement. Endo may not grant any rights under any Durect Patents or, to the extent not otherwise permitted hereunder, any Joint Patents, including a license or covenant not to sue, without Durect’s prior written consent. Durect shall not grant any rights under any Joint Patents to the extent not otherwise permitted hereunder, including any covenant not to sue, without Endo’s prior written consent. For any such action to terminate any such infringement, in the event that either Party is unable to initiate or prosecute such action solely in its own name or it is otherwise advisable to obtain an effective remedy, the other Party will join such action voluntarily and will execute and cause its Affiliates to execute all documents necessary for the enforcing Party to initiate litigation to prosecute and maintain such action. Each Party shall at its own expense promptly give to the Party bringing such infringement proceedings such reasonable assistance as the Party bringing the action may reasonably request. The Party undertaking any proceedings shall keep the other reasonably informed of the progress of the action and shall consider the comments and observations of the other in prosecuting the proceedings.

(e) Other than as provided for in Section 8.5, Durect shall defend and control any action initiated by a Third Party (or any counterclaim or defense asserted in any other action) in the Licensed Territory alleging invalidity or unenforceability of any Durect Patents at its sole expense and its sole discretion, including the right to settle any such action, unless such settlement would require Endo to be subject to an injunction or would restrict the claims in or admit any invalidity of any of the Durect Patents or significantly adversely affect the rights of Endo under this Agreement. If Durect fails to defend any such action initiated by a Third Party (or any counterclaim or defense asserted in any other action) within [***] days of notice from such Third Party (or such shorter time period that would permit Endo a reasonable opportunity to respond in a timely manner), Endo shall thereafter have the right to defend and control any such invalidity action, counterclaim or defense in the Licensed Territory.

(f) Endo shall defend and control any action initiated by a Third Party (or any counterclaim or defense asserted in any other action) in the Licensed Territory alleging invalidity or unenforceability of any Endo Patents or Joint Patents at its sole expense and its sole discretion, including the right to settle any such action, unless such settlement would require Durect to be subject to an injunction or would restrict the claims in or admit any invalidity of any of the Endo Patents or Joint Patents or significantly adversely affect the rights of Durect under this Agreement. If Endo fails to defend any such action initiated by a Third Party (or any counterclaim or defense asserted in any other action) within [***] days of notice from such Third Party (or such shorter time period that would permit Durect a reasonable opportunity to respond in a timely manner),

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Durect shall thereafter have the right to defend and control any such invalidity action, counterclaim or defense in the Licensed Territory.

(g) Any recovery obtained as a result of an infringement action brought under this Section 8.6, whether by judgment, award, decree or settlement, will first be applied to reimbursement of each Party’s out-of-pocket costs and expenses in bringing such suit or proceeding, and any remaining balance will be distributed as follows:

(i) if Endo has instituted and maintained such action alone, [***];

(ii) if Durect has instituted and maintained such action alone, [***]; or

(iii) if the Parties have cooperated in instituting and maintaining such action, [***].

(h) A Party with knowledge that the other Party intends to enforce a Joint Patent against a Third Party will not grant a license under such Joint Patent to such Third Party.

8.7 Patent Infringement Claims:

(a) Each Party shall notify the other Party promptly in writing of any claim of, or action for, infringement of any patents or misappropriation of trade secret rights of any Third Party that is threatened, made or brought against either Party by reason of the development, manufacture, use, sale, offer for sale, importation, exportation, license or marketing of the Product by either Party. As between Endo and Durect, Durect shall be solely responsible for defense of all claims, including all related costs and expenses, with respect to alleged infringement or misappropriation by the manufacture, use, sale, offer for sale, exportation and importation of the Product in the Durect Territory, so long as the alleged infringing or misappropriating activity is carried out by or on behalf of Durect, and Endo shall be solely responsible for defense of all claims, including all related costs and expenses, with respect to alleged infringement or misappropriation by the manufacture, use, exportation and importation of the Product in the Durect Territory as permitted under the Agreement so long as the alleged infringing or misappropriating activity is carried out by or on behalf of Endo.

(b) Subject to the second sentence of this clause (b), in the event of the institution of any suit by a Third Party against either Party for patent infringement involving the development, manufacture, use, sale, offer for sale, importation, exportation, license or marketing of the Product in the Licensed Territory, Endo shall be responsible for the defense of any such suit and, subject to the terms of this Section 8.7, Endo shall control such defense. Durect shall be responsible for the defense and control of any patent infringement action referred to in the first sentence of this clause (b) if the alleged infringing activity is carried out by or on behalf of Durect as permitted under the Agreement. The Party controlling litigation under this clause (b) shall select mutually acceptable legal counsel, regularly consult with the other Party and its counsel to keep them fully informed on the progress and status of the suit, provide copies of all material documents and consider in good faith all comments and suggestions made by the other Party and its counsel. Durect and Endo shall assist one another and cooperate in any such litigation at the other’s request. No settlement, compromise or other disposition of any such proceeding shall be entered into without each Party’s prior written consent, which consent will not be unreasonably withheld.

(c) Endo shall be responsible for all costs and expenses to defend any suit that it is responsible for under this Section 8.7, including all fees and costs of attorneys, expert witnesses and other out-of-pocket litigation costs and all damages, penalties, court costs, attorney fees and other payments payable to any such Third Party, whether as a result of any judgment, award, settlement or otherwise (such liability, “Patent Litigation Losses”); provided, however, in the event it is determined that such Third Party patent is infringed by:

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(i) [***], then in such event, Endo may offset [***] of all such Patent Litigation Losses against any Future Payments due to Durect in accordance with Section 5.6(a), provided that any such set-off may not reduce the Royalties to Durect by more than [***] in any calendar quarter; or

(ii) [***], then in such event, Endo may offset [***] of all such Patent Litigation Losses against Future Payments due to Durect in accordance with Section 5.6(a) provided that any such set-off may not reduce the Royalties to Durect by more than [***] in any calendar quarter.

Subject to claims under Section 10 and subject to Section 12.2(d), Durect’s sole liability and Endo’s exclusive remedy against Durect for any Patent Litigation Losses shall be Endo’s right of offset in accordance with Sections 8.7(c) and 5.6(a).

(d) In the event a Third Party threatens suit against either Party for patent infringement involving the development, manufacture, use, sale, offer for sale, importation, exportation, license or marketing of the Product in the Licensed Territory, the Parties shall confer with respect to the appropriate course of action, and if they determine that a declaratory action is warranted, then with respect to such action, the provisions of this Section 8.7 shall apply thereto with respect to the prosecution of such action and the defense of any claims asserted in response thereto.

(e) In the event that either Party becomes aware of a Third Party patent, under which, in the good faith reasonable judgment of such Party, it would be advisable to obtain a license to avoid infringement by the manufacture, use, or sale of the Product in the Licensed Territory, such Party shall promptly notify the other Party. The Parties shall then confer in good faith with respect to the appropriate course of action, and if Endo determines that the procurement of a license is warranted, then subject to this Section 8.7(e), Endo shall have the right to negotiate and obtain such a license and, subject to the terms of this Section 8.7(e) below, Endo shall be solely responsible for all costs and obligations under such license (the “Third Party License Fees”). Endo shall provide Durect with complete copies of the license agreement with such Third Party and other material information in its possession in respect of such technology subject to any confidentiality provisions imposed by such Third Party. Endo shall consult with Durect prior to entering into any such license agreement and provide Durect a reasonable opportunity to provide its views on the need or benefit to obtain such license and the financial and other terms thereof. To the extent requested by Durect to maintain identical Products for sale worldwide, Endo shall attempt in good faith to obtain the right to sublicense or grant a direct license to Durect or its licensees for use of such Third Party technology in the Durect Territory; provided, that Durect or its licensees shall pay all payments allocable to such use and Endo shall have no liability to Durect if, despite its efforts, it does not obtain such rights. Notwithstanding the foregoing, however, in the event that the need for the license is advisable due to:

(i) [***], then in such event, Endo may offset [***] of all such Third Party License Fees against any Future Payments due to Durect in accordance with Section 5.6(a), provided that any such set-off may not reduce the Royalties to Durect by more than [***] in any calendar quarter; or

(ii) [***], then in such event, Endo may offset [***] of all such Third Party License Fees against Future Payments due to Durect in accordance with Section 5.6(a) provided that any such set-off may not reduce the Royalties to Durect by more than [***] in any calendar quarter.

If the Parties do not agree upon whether the need for the license is advisable, either Party may submit the matter for resolution pursuant to the Accelerated Arbitration provisions in accordance with Section 13.13(d). Subject to claims under Section 10 and subject to Section 12.2(d), Durect’s sole liability and Endo’s exclusive remedy against Durect for any Third Party License Fees shall be Endo’s right of offset in accordance with Sections 8.7(e) and 5.6(a).

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9 PUBLICATION; CONFIDENTIALITY

9.1 Notification: The Parties recognize that each may wish to publish the results of their work relating to the subject matter of this Agreement. However, the Parties also recognize the importance of acquiring patent protection and other considerations. Consequently, subject to any applicable laws or regulations obligating any Party to do otherwise, any proposed publication by any Party concerning the subject matter of this Agreement shall comply with this Section 9. All such publications, whether written or oral, shall be prepared in accordance with the publication strategy established by each Party and reviewed by the JEC. At least [***] days before a manuscript is to be submitted to a publisher, the publishing Party will provide the JEC with a copy of the manuscript. If the publishing Party wishes to make an oral presentation, it will provide the JEC with a summary of such presentation at least [***] days before such oral presentation and, if an abstract is to be published, [***] days before such abstract is to be submitted. Any oral presentation, including any question period, shall not include any Confidential Information belonging to a Party unless such Party agrees in writing to such inclusion in advance of such oral presentation.

9.2 Review: The JEC will review the manuscript, abstract, text or any other material provided to it under Section 9.1 to determine whether patentable subject matter is disclosed and to assess the accuracy of the technical content therein. The JEC will notify the publishing Party within [***] days of receipt of the proposed publication if the JEC, in good faith, determines that patentable subject matter is or may be disclosed, or if the JEC, in good faith, believes Confidential Information is or may be disclosed. If it is determined by the JEC that patent applications should be filed in advance of the proposed publication, the publishing Party shall delay its publication or presentation for a period not to exceed [***] days from the JEC’s receipt of the proposed publication or presentation to allow time for the filing of patent applications covering patentable subject matter. In the event that the delay needed to complete the filing of any necessary patent application will exceed the [***]-day period, the JEC will discuss the need for obtaining an extension of the publication delay beyond the [***]-day period. If it is determined in good faith by a Party that Confidential Information or proprietary information of such Party is being disclosed, the Parties shall consult in good faith to arrive at an agreement on mutually acceptable modifications to the proposed publication or presentation to avoid such disclosure.

9.3 Confidentiality: Except to the extent expressly authorized by this Agreement or otherwise agreed in writing, the Parties agree that, during the term of this Agreement and for [***] years thereafter, the receiving Party, its Affiliates and its designees shall, and shall ensure that their respective employees, officers, directors and other representatives shall, keep completely confidential and not publish or otherwise disclose and not use for any purpose any information including all Know-How furnished to it or them by the disclosing Party, its Affiliates or its designees, except to the extent that it can be established by the receiving Party by competent proof that such information: (i) was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure by the disclosing Party; (ii) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party; (iii) became generally available to the public or was otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; (iv) was disclosed to the receiving Party, other than under an obligation of confidentiality, by a Third Party who had, to the receiving Party’s knowledge, no legal obligation not to disclose such information to others; or (v) was independently generated by the receiving Party without reference to Confidential Information of the disclosing Party (all such information to which none of the foregoing exceptions applies, and the terms of this Agreement, shall be deemed “Confidential Information”). Any and all information and materials, including any and all intellectual property rights therein and thereto, owned by a Party shall constitute Confidential Information of such Party which shall be deemed the disclosing Party with respect to such Confidential Information. Notwithstanding the foregoing, the obligations of confidentiality under this Section 9.3 regarding any Confidential Information relating to or containing a Party’s trade secret that has been suitably identified to the other Party as such shall continue indefinitely so long as the subject trade secret remains as Confidential Information.

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9.4 Exceptions to Obligation: The restrictions contained in Sections 9.3 or 13.7 shall not apply to Confidential Information that: (i) is submitted by the recipient to a governmental authority to obtain Regulatory Approval for the Product, provided that reasonable measures shall be taken to assure confidential treatment of such information; (ii) is provided by the recipient to Third Parties under confidentiality provisions at least as stringent as those in this Agreement, in connection with consulting, development, manufacturing, external testing, or marketing trials under this Agreement or in connection with a proposed financing transaction, Change of Control of a Party or sale of all or substantially all of the assets of a Party; or (iii) is otherwise required to be disclosed in compliance with applicable laws or regulations or order by a court or other regulatory body having competent jurisdiction; provided that if a Party is required to make any such disclosure of the disclosing Party’s Confidential Information such Party will, except where impracticable for necessary disclosures (for example, to physicians conducting studies or to health authorities), give reasonable advance notice to the disclosing Party of such disclosure requirement, and will use all reasonable efforts to secure confidential treatment of such Confidential Information required to be disclosed.

9.5 Limitations on Use: Each Party shall use, and cause each of its Affiliates and its licensees to use, any Confidential Information obtained by such Party from the disclosing Party, its Affiliates or its licensees, pursuant to this Agreement or otherwise, solely in connection with the activities or transactions contemplated by this Agreement.

9.6 Remedies: Each Party shall be entitled, in addition to any other right or remedy it may have, at law or in equity, to seek an injunction, without the posting of any bond or other security, enjoining or restraining the other Party, its Affiliates and/or its licensees from any violation or threatened violation of this Section 9.

10 REPRESENTATIONS AND WARRANTIES

10.1 Representations and Warranties of the Parties:

Each Party represents and warrants to the other Party that as of the Effective Date:

(a) Such Party is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof;

(b) Such Party has taken all corporate action necessary to authorize the execution and delivery of this Agreement and the performance of its obligations under this Agreement and has full power and authority to enter into this Agreement and perform its obligations under this Agreement;

(c) This Agreement has been duly executed by such Party and constitutes a valid and legally binding obligation of such Party, enforceable in accordance with its terms, subject to and limited by: (i) applicable bankruptcy, insolvency, reorganization, moratorium, and other laws generally applicable to creditors’ rights; and (ii) judicial discretion in the availability of equitable relief;

(d) With the exception of Regulatory Approvals, such Party has obtained, or is not required to obtain, the consent, approval, order, or authorization of any Third Party, or has completed, or is not required to complete, any registration, qualification, designation, declaration or filing with, any governmental entity, in connection with the execution and delivery of this Agreement and the performance by such Party of its obligations under this Agreement, including any grant of rights to the other Party pursuant to this Agreement;

(e) The execution and delivery of this Agreement, and the performance by such Party of its obligations under this Agreement, including the grant of rights to the other Party pursuant to this Agreement, does not and will not: (i) conflict with, nor result in any violation of or default under

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any instrument, judgment, order, writ, decree, contract or provision to which such Party is otherwise bound; (ii) give rise to any lien, charge or encumbrance upon any assets of such Party or the suspension, revocation, impairment, forfeiture or non-renewal of any material permit, license, authorization or approval that applies to such Party, its business or operations or any of its assets or properties; or (iii) conflict with any rights granted by such Party to any Third Party or breach any obligation that such Party has to any Third Party;

(f) Each Party has and will continue to have written contracts with all Third Parties (including employees and subcontractors) performing services on its behalf under this Agreement where such services may give rise to the creation of inventions that may be Collaboration Inventions that assign to such Party all Collaboration Inventions and rights therein;

(g) As of the Effective Date, each Party is in compliance with Section 2.7;

(h) As of the Effective Date, neither Party knows of any [***].

10.2 Additional Representations and Warranties of Durect:

Durect hereby further represents and warrants to Endo that as of the Effective Date:

(a) Durect is the sole owner of all of the Durect Technology in existence on the Effective Date and has the exclusive right to grant to Endo the rights granted under this Agreement (including the right to commercialize the Product). To the knowledge of Durect, all of the Durect Patents are valid, in full force and effect and have been maintained to date, and are not the subject of any interference or opposition proceedings;

(b) To the knowledge of Durect, the manufacture, use or commercialization of Formulation C, the method of manufacture or use thereof and the Durect Technology embodied therein, in each case, as of the Effective Date will not infringe or otherwise violate any intellectual property right or trademark of any Third Party, and Durect is not aware of any asserted or unasserted claims, interferences, oppositions or demands of any Third Party against the Durect Technology in existence as of the Effective Date;

(c) Durect has provided Endo, or given Endo access to, true, complete and unredacted copies of (i) all Development Data; and (ii) material agreements (including any letter agreements) between Durect and any licensor, licensee, production or financing partner or other Third Party, including all effective amendments thereto, which material agreements, in any event (A) affect or may affect Endo’s rights under this Agreement, or (B) relate to the Product;

(d) There are no liens or security interests currently existing on or to the Durect Technology or any proceeds thereof (including any liens or security interest on or to rights underlying the Durect Technology) that could reasonably be expected to adversely affect Endo’s benefits and rights under this Agreement. Durect will not create, incur, or permit to exist on or to any Durect Technology or proceeds thereof, will defend such Durect Technology and proceeds thereof against, and will take such other action as is necessary to remove in respect to such Durect Technology or proceeds thereof, any lien or security interest that could reasonably be expected to adversely affect in any material respect Endo’s benefits and rights under this Agreement. If Durect plans to grant a security interest in the Durect Technology, it shall give advance written notice of such intention to Endo and shall not grant any such security interest that shall adversely affect any rights of Endo under this Agreement; and

(e) The documentation made available by Durect as requested by Endo in its written due diligence request, dated [***] as part of Endo’s due diligence in connection with entering into this Agreement, to Durect’s knowledge is, in all material respects, true, complete and unredacted

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(except as expressly noted). Without limiting the generality of the foregoing, all reports and other data summaries provided to Endo by Durect prior to the Effective Date relating to the Preclinical, Non-Clinical and Clinical studies of the Product accurately represent the underlying raw data in all material respects. Durect has provided to, or made available for review by, Endo all reports and data collections containing information about adverse safety issues (including adverse drug experiences) related to the Product of which Durect has knowledge.

10.3 Disclaimer of Other Warranties:

EXCEPT AS SET FORTH IN THIS AGREEMENT, THE PARTIES MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF QUALITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT.

10.4 Survival of Representations:

The representations and warranties set forth in this Agreement shall survive indefinitely.

11 INDEMNIFICATION; INSURANCE

11.1 Indemnification by Durect:

Durect shall indemnify, defend and hold Endo and its Affiliates, and their respective directors, officers, employees and agents (each an “Endo Related Party”) harmless from and against any and all damages, losses, judgments, penalties, fines, settlements, and costs and expenses (including reasonable fees of attorneys and other professionals) (“Damages”) arising out of Third Party claims relating to the Product that result from: (i) any defect in the design or formulation of Formulation C or any other Durect Technology embodied therein as of the Effective Date or any defect in the design or formulation of the Product resulting from changes to the design or formulation negligently made by Durect after the Effective Date except to the extent that such negligence was caused by Endo’s specific direction; (ii) the violation of any Third Party intellectual property rights, other than patent infringement, by Formulation C, the method of manufacture or use thereof or other Durect Technology embodied therein, in each case, as of the Effective Date; (iii) the wrongful promotion or marketing of the Product in the Licensed Territory by Durect, its Affiliates, licensees or designees; (iv) any defect in the manufacture of the Product not related to the design or formulation of the Product and resulting from the use of Manufacturing Technology in existence as of the Effective Date and provided by Durect to Endo under this Agreement; or (v) any other breach by Durect of this Agreement including breach by Durect of its representations and warranties hereunder. Unless expressly limited in this Agreement, any amount owed by Durect to Endo under this Section 11.1 (an “Indemnification Obligation”) shall be payable at Endo’s option upon demand by Endo or set off against payments due to Durect in accordance with Section 5.6(a) or some combination of the foregoing.

11.2 Indemnification by Endo:

Indemnification. Endo shall indemnify, defend and hold Durect and its Affiliates and their respective directors, officers, employees and agents (each a “Durect Related Party”) harmless from and against any and all Damages arising out of Third Party claims relating to the Product that result from: (i) any breach by Endo of this Agreement, including breach by Endo of its representations and warranties hereunder; (ii) the wrongful promotion or marketing of the Product by Endo, its Sublicensees, Affiliates or designees; (iii) any defect in the manufacture of the Product not related to the design or formulation of the Product except to the extent covered in Section 11.1(iv); (iv) any defect in the design or formulation of the Product except to the extent covered in Section 11.1(i); or (v) subject to Sections 5.6(a) and 8.7(c) and (e), the infringement or other violation of any Third Party intellectual property rights arising out of the manufacture, use or commercialization of the Product not covered by Section 11.1(ii).

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11.3 Shared Liability: If Damages arise out of Third Party claims that are subject to indemnification by Endo under Section 11.2 and also subject to indemnification by Durect under Section 11.1, then the Parties shall indemnify each other to the extent of their respective liability for the Damages. In the event that the Parties cannot agree to their respective indemnity obligations hereunder, a Party shall be free at any time to seek resolution of the respective indemnity obligations of the Parties under this Section 11 pursuant to the provisions set forth in Section 13.13.

11.4 Indemnification Procedure: Upon receipt by the Party seeking indemnification hereunder (an “Indemnified Party”) of notice of any action, suit, proceeding, claim, demand or assessment against such Indemnified Party which might give rise to Damages, the Indemnified Party shall give prompt written notice thereof to the Party from which indemnification is sought (the “Indemnifying Party”) indicating the nature of claim and the basis therefor, provided that the failure to give such prompt notice shall not relieve the Indemnifying Party of its obligations hereunder except to the extent the Indemnifying Party or the defense of any such claim is materially prejudiced thereby. The Indemnifying Party shall have the right, at its option, to assume the defense of, at its own expense and by its own counsel, any such claim involving the asserted liability of the Indemnified Party. If any Indemnifying Party shall undertake to compromise or defend any such asserted liability, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party shall agree to cooperate fully with the Indemnifying Party and its counsel in the compromise of, or defense against, any such asserted liability; provided, however, that the Indemnifying Party shall not, as part of any settlement or other compromise, admit to liability or agree to an injunction without the written consent of the Indemnified Party. Notwithstanding an election by the Indemnifying Party to assume the defense of any claim as set forth above, such Indemnified Party shall have the right (at its own expense if the Indemnifying Party has elected to assume such defense) to employ separate counsel and to participate in the defense of any claim.

11.5 Cost of Enforcement: All costs and expenses incurred by an Indemnified Party in connection with enforcement of its rights under Sections 11.1 and 11.2, as applicable, shall also be reimbursed by the Indemnifying Party promptly after final determination that such Indemnified Party is entitled to such indemnification by the Indemnifying Party.

11.6 LIMITATION ON DAMAGES: IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER, WHETHER PURSUANT TO THE FOREGOING INDEMNIFICATION OBLIGATIONS OR OTHERWISE, FOR SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES, INCLUDING BUSINESS INTERRUPTION OR LOST PROFITS, OR PUNITIVE DAMAGES; PROVIDED, HOWEVER, THIS EXCLUSION IS NOT INTENDED TO, NOR SHALL, EXCLUDE ACTUAL OR COMPENSATORY DAMAGES OF THE AFFECTED PARTY, INCLUDING SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES OWED TO THIRD PARTIES AS A RESULT OF A THIRD PARTY CLAIM.

11.7 Insurance: Each Party shall carry and maintain in full force and effect while this Agreement is in effect reasonable insurance in view of its obligations hereunder but in amounts no less than that specified for each type:

(a) Comprehensive general liability insurance with combined limits of not less than $[***] per occurrence and $[***] per accident for bodily injury, including death, and property damage;

(b) Workers’ compensation insurance in the amounts required by the law of the state(s) in which such Party’s workers are located; and

(c) Products liability insurance with a policy limit of at least $[***] per occurrence and in the aggregate.

Each Party hereto shall name the other Party hereto as an “additional insured” on all policies relating to the insurance described in this Section 11.7. Each Party upon request shall provide the other with evidence of such

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insurance. Each Party shall provide to the other [***] days’ prior written notice of any proposed cancellation, termination, reduction or change in its coverage.

Endo may fulfil its obligation pursuant to this Section 11.7 by maintaining self-insurance in a manner consistent with the self-insurance programs of similarly situated companies.

12 TERM AND TERMINATION

12.1 Term of Agreement:

This Agreement shall become effective as of the Effective Date and remain in effect until terminated pursuant to other provisions of this Section 12; provided, however, upon the expiration of the Patent Royalty Term, the following provisions of the Agreement shall terminate: (i) second sentence of Section 2.7, and (ii) Sections 3.1-3.7, 4.1, 4.2, 4.4-4.10, 5.1, 5.2, 5.5, 7.1, 7.3, 7.4, 7.5, and 9.2.

12.2 Termination by Endo:

Endo may terminate this Agreement as provided in this Section 12.2:

(a) Without Cause. Endo may terminate this Agreement without cause upon [***] prior written notice at any time. In such event, during the [***] notice period, Endo shall not be obligated to initiate any Clinical Trial after the date of Endo’s notice of termination pursuant to this subsection 12.2(a).

(b) Safety. If during the development or commercialization of the Product, the Product becomes subject to a pattern of Serious Adverse Drug Experiences (as defined below) or either Party receives notice from a regulatory authority, independent review committee, data safety monitoring board or another similar Clinical Trial or post-marketing monitoring body alleging significant concern regarding a patient safety issue, in each case which Endo, in good faith, reasonably believes would seriously impact the long-term viability of the Product, Endo shall have the right, upon [***] prior written notice to Durect setting forth the reasons therefor, to have the JEC determine whether or not there exists such serious impact on the long-term viability of the Product and, what if anything, the Parties should do to address the matter. In the event the JEC is unable to reach consensus on resolution of the matter within [***] of the matter being referred to the JEC, Endo may terminate its rights and obligations under this Agreement upon written notice so long as Endo reasonably believes the patient safety issue would seriously impact the long-term viability of the Product. During the period between the giving of the two notices provided in this Section 12.2(b), Endo shall not be obligated to (i) make payment of any milestone payment to Durect as contemplated by Section 5.2 that otherwise would be payable during such period, or (ii) initiate any Clinical Trial after the date of Endo’s first notice pursuant to this subsection 12.2(b). For purposes of this Agreement, a “Serious Adverse Drug Experience” means any adverse drug experience occurring at any dose that results in any of the following outcomes: death, a life-threatening adverse drug experience, inpatient hospitalization or prolongation of existing hospitalization, a persistent or significant disability/incapacity, or a congenital anomaly/birth defect. Important medical events that may not result in death, be life-threatening, or require hospitalization may be considered a Serious Adverse Drug Experience when, based upon appropriate medical judgment, they may jeopardize the patient or subject and may require medical or surgical intervention to prevent one of the outcomes listed in this definition.

(c) Legal Impediment. If Endo, in good faith, reasonably believes that the application of any law or regulation, or the obtaining of approval of any governmental body with respect to the Product, would seriously impact the long-term viability of the Product, Endo shall have the right to terminate this Agreement upon [***] prior written notice to Durect setting forth the reasons therefor. In such event, during the [***] notice period, Endo shall not be obligated to (i) make payment of any milestone payment to Durect as contemplated by Section 5.2 that otherwise would

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be payable during such [***] notice period, or (ii) initiate any Clinical Trial after the date of Endo’s notice of termination pursuant to this subsection 12.2(c).

(d) Injunction. If a Third Party brings an action for patent infringement that results in a final, non-appealable court order enjoining Endo from selling the Product in the Licensed Territory (an “Injunction”), then (i) Endo shall have the right to terminate this Agreement immediately upon written notice to Durect, and (ii) upon such termination of the Agreement, Durect shall pay Endo the amount specified in the following table (the “Termination Payment”).

Date of Issuance of Injunction Relative to First Launch	Termination Payment Amount
Before [***] anniversary of First Launch	$	[	***]
On or after [***] anniversary of First Launch and before [***] anniversary	$	[	***]
On or after [***] anniversary of First Launch	$	[	***]

The Termination Payment shall be payable in [***] quarterly instalments of equal amount (the “Equal Amount”) unless a Cash Contingency, as defined below, occurs. The first instalment shall be due on the first day of the first calendar quarter after Endo’s notice of termination under this Section 12.2(d), and the subsequent instalments shall be due on the first day of each calendar quarter thereafter until the Termination Payment is paid in full. If the Equal Amount exceeds [***] of Durect’s cash on hand at the time an instalment is due (a “Cash Contingency”), then Durect shall pay Endo such amount as equals [***] of its cash on hand at such time (the “[***] Amount”) in lieu of the Equal Amount. Durect shall pay the difference between the [***] Amount and the Equal Amount on the next payment date along with any Equal Amount then due unless a Cash Contingency occurs, in which case Durect shall pay the [***] Amount, and the balance of payments due shall be carried forward to the next payment date in the manner just described until the Termination Payment is paid in full. If Durect does not pay any instalment of the Termination Payment when due other than due to a Cash Contingency as set forth above, Endo may send written notice thereof to Durect, and in the event that Durect does not render payment within [***] days of the receipt of such notice from Endo, Endo may accelerate the payment of the balance of the Termination Payment and require that it be immediately paid in full.

12.3 Termination for Material Breach.

(a) Upon the material breach by one Party under this Agreement, the other Party shall notify the breaching Party of such breach, and require that the breaching Party cure such breach within [***] days or, in the case of payment defaults, within [***] days, or in the case of a breach that cannot be cured within [***] days, within a reasonable period not exceeding [***] days so long as the breaching party is diligently proceeding to cure such default.

(b) In the event that a material breach by Endo is not cured within the applicable cure period and without limiting other available remedies, Durect shall have the right to terminate this Agreement upon written notice and all licenses granted by Durect to Endo hereunder shall terminate, subject to the terms of Section 12.3(d).

(c) In the event that a material breach by Durect is not cured within the applicable cure period and without limiting other available remedies, Endo shall have the right to terminate this Agreement upon written notice, and, at Endo’s option, all licenses granted by Durect to Endo hereunder shall continue in full force and effect, subject to the continuing obligations under Section 5, including to make milestone payments as contemplated by Section 5.2 and Royalties under Section 5.3 (subject to Sections 5.4 and 5.6, which shall continue in effect). Upon such termination by Endo, (i) Durect’s obligations hereunder to provide Know-How and other materials and information to enable the use of such licenses shall continue; and (ii) the provisions of the following sections hereof shall also continue: 1, 2.3, 2.4, 2.5, 2.6, 2.7 (first sentence only), 3.9, 6, 7.7, 8, 9.1, 9.3-9.6, 10, 11, 12.5(a)(ii), 12.5(c), and 13.

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(d) In the event that Durect terminates this Agreement pursuant to subsection (b) above, and if Durect or any of its licensees elects to commercialize the Product itself, Durect shall pay a royalty to Endo on Durect’s net sales of the Product in the Licensed Territory determined as follows: Durect shall pay Endo a royalty of [***]% of the net sales of the Product sold by Durect, its Affiliates or licensees until [***]; provided, however, notwithstanding the foregoing, if Endo has successfully filed an NDA with respect to Product as of the effective date of the termination, Durect shall continue to pay the royalty for any remaining portion of the Patent Royalty Term at a royalty rate based on [***]% of the applicable royalty rate determined in accordance with the chart in Section 5.3 after any royalty reductions permitted under Section 5 (where Durect is substituted for Endo).

12.4 Termination in Connection with Bankruptcy. Either Party may terminate this Agreement effective immediately in the event that the other Party (i) has become insolvent or has been dissolved or liquidated, filed or has filed against it, a petition, case or other proceeding under Title 11 of the United Stated Code, 11 U.S.C. §§ 101-1330, as it may be amended from time to time, any successor statute or any applicable state or foreign laws relating to bankruptcy, dissolution, liquidation, winding up or reorganization, and such petition, case or proceeding if filed against it is not dismissed within 60 days of the filing; (ii) makes a general assignment for the benefit of creditors; or (iii) has a receiver, custodian, trustee or other Person exercising similar functions appointed for all or substantially all of its assets.

12.5 Effect of Termination:

(a) Upon termination of this Agreement by a Party:

(i) all licenses granted by Durect to Endo shall terminate (including all rights to use any Durect Technology), except that in the event this Agreement is terminated by Endo under Section 12.3(c) or Section 12.4, the licenses granted by Durect hereunder shall continue in full force and effect;

(ii) without limiting clause (v) below, all licenses and rights granted to Durect under Section 3.8(b) shall continue;

(iii) unless this Agreement is terminated by Endo under Section 12.3(c) or Section 12.4, Endo shall or shall cause its Affiliates and Sublicensees, if any, to assign to Durect all Collaboration Inventions, Development Data, regulatory filings, Regulatory Approvals, Know-How, Manufacturing Technology, Product Trademarks (and goodwill associated therewith) and other Endo Technology (including related Endo Patents and Joint Patents) Controlled by Endo or its Affiliates and Sublicensees, if any, as applicable, that directly and solely relate to the development, manufacturing, use or sale of the Product (collectively, the “Product Material”); provided that if such Product Material is not solely related to, but is necessary for, the development, manufacture, use or sale of the Product, then Endo or its Affiliate, as applicable, shall not assign such Product Material to Durect, but instead Endo shall or shall cause its Affiliate and Sublicensees, if any, to grant to Durect an exclusive, worldwide, perpetual, irrevocable, royalty free license (with right to sublicense) to develop, manufacture, sell and use such Product Material solely for purposes of development, manufacture, use or sale of the Product;

(iv) except for a termination pursuant to Sections 12.2(b) or (c) or (d), or by Endo under Section 12.3(c) or Section 12.4, Endo shall continue during the notice period before termination becomes effective (or if reasonably practicable and agreed to by Endo at such time, allow Durect or its clinical research organization (“CRO”) to continue, at Endo’s cost) any ongoing Clinical Trial for which Endo has responsibility and in which patient dosing has commenced;

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(v) except (A) for a termination pursuant to Sections 12.2(b) or (c), or by Endo under Section 12.3(c) or Section 12.4, or (B) if prohibited under the terms of an Injunction, if Endo has manufactured, or has had manufactured the Product for Clinical Trial, Endo at its option shall either transition the manufacturing process to Durect or a mutually agreed Third Party contract manufacturer or supply the Product to Durect; provided, that if Endo chooses to transition the manufacturing process to Durect or a mutually agreed Third Party contract manufacturer, Endo will continue to supply the Product until the completion of the transition and associated regulatory approvals have been received, but in no event for a period exceeding [***] years from the date of termination, and further provided that during any period in which Endo continues to supply the Product to Durect, Durect shall pay Endo therefor Endo’s documented, fully allocated cost to supply the Product plus [***]; and

(vi) except (A) for a termination pursuant to Sections 12.2(b) or (c) or by Endo under Section 12.3(c) or Section 12.4, or (B) if prohibited under the terms of an Injunction, Endo will cooperate in any reasonable manner requested by Durect to achieve a smooth transition of the development, manufacturing, marketing and sales of the Product to Durect or its licensees in the Licensed Territory, provided that unless such termination is by Durect under Section 12.3(b) Durect shall reimburse Endo for its out-of-pocket expenses in connection therewith.

(b) Upon termination of this Agreement by Endo pursuant to Sections 12.2(b) or (c) or (d), Durect shall indemnify, defend and hold harmless the Endo Related Parties against any and all Damages incurred or suffered by any Endo Related Party, or with which any of them may be faced, to the extent arising out of or caused by the manufacture, distribution, marketing, promotion, sale or other use of the Product by or on behalf of Durect or its Affiliates or licensees after the effective date of the termination.

(c) Nature of Licenses. All rights and licenses granted pursuant to this Agreement are, and shall otherwise be deemed to be, for purposes of 11 U.S.C. § 365(n), licenses of rights to “intellectual property” as defined under 11 U.S.C. § 101(35A). The Parties agree that Endo and Durect, each as a licensee of certain rights under this Agreement, shall retain and may fully exercise all of its rights, including any right to enforce any exclusivity provision of this Agreement, remedies, and elections under any bankruptcy law. To the fullest extent permitted by law, the Parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against the licensor Party, the licensee Party shall be entitled to all applicable rights under 11 U.S.C. § 365(n) or similar provision of any other bankruptcy law, including copies and access to, as appropriate, any such intellectual property and all embodiments of such intellectual property upon written request therefor by the licensee Party, and such, if not already in its possession, shall be promptly delivered to the licensee Party.

12.6 Termination for Patent Challenge. In the event that Endo or any of its Affiliates or Sublicensees commences or otherwise pursues, directly or indirectly (or voluntarily assists Third Parties to do so, other than as required by law or legal process), any proceeding seeking to have any of the Durect Patents revoked or declared invalid, unpatentable, or unenforceable, Durect may as its sole remedy terminate this Agreement upon written notice to Endo.

12.7 Surviving Provisions. Expiration or any termination of this Agreement shall not release a party from the obligations to make any payments that were due or had accrued immediately prior the effective date of such termination, and the following Sections of this Agreement shall survive any expiration or termination of this Agreement for any reason: (i) Sections 1, 3.8(a), 3.9, 6, 7.7, 8.2, 8.3, 9.1, 9.3-9.6, 10, 11, 12.3(b), (c) and (d), 12.5, 12.7, and 13, (ii) Sections 3.8 (b) and (c) [***] and (iii) 8.7 (with respect to events occurring during the term of this Agreement).

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

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13 MISCELLANEOUS PROVISIONS

13.1 Relationship of Parties: Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, employer-employee or joint venture relationship between the Parties. No Party shall incur any debts or make any commitments for the other, except to the extent, if at all, specifically provided herein.

13.2 Assignment: Neither Party shall assign this Agreement or its rights or obligations hereunder without the express written consent of the other Party hereto, except that either Party may assign or transfer this Agreement and its rights or obligations hereunder without the consent of the other Party to (i) an Affiliate, (ii) any assignee of all or substantially all of its business, or (iii) its successor in the event of its merger, consolidation or involvement in a similar transaction. An assignment or transfer by a Party pursuant to this Section 13.2 shall be binding on its successors or assigns. No such assignment or transfer shall be valid or effective unless done in accordance with this Section 13.2.

13.3 Books and Records: Any books and records to be maintained under this Agreement by a Party or its Affiliates shall be maintained in accordance with GAAP.

13.4 Further Actions: Each Party shall execute, acknowledge and deliver such further instruments, and do all such other acts, as may be reasonably necessary or appropriate in order to carry out the purposes and intent of this Agreement.

13.5 Notice: Any notice, request or other communication required or permitted to be given under or in connection with this Agreement shall be deemed to have been sufficiently given if in writing and personally delivered or sent by certified mail (return receipt requested), facsimile transmission (receipt verified), or overnight express courier service (signature required), prepaid, to the Party for which such notice is intended, at the address set forth for such Party below:

In the case of Durect, to:

Durect Corporation

10240 Bubb Road

Cupertino, CA 95014

Attention: General Counsel

Facsimile No: (408) 777-3577

Telephone No.: (408) 777-1417

In the case of Endo, to:

Endo Pharmaceuticals Inc.

100 Endo Boulevard

Chadds Ford, PA 19317

Attention: General Counsel

Facsimile No: (610) 558-9684

Telephone No.: (610) 558-9800

or to such other address for such Party as it shall have specified by like notice to the other Party, provided that notices of a change of address shall be effective only upon receipt thereof. If delivered personally or by facsimile transmission, the date of delivery shall be deemed to be the date on which such notice or request was given. If sent by overnight express courier service, the date of delivery shall be deemed to be the next business day after such notice or request was deposited with such service. If sent by certified mail, the date of delivery shall be deemed to be the fifth business day after such notice or request was deposited with the U.S. Postal Service.

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

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13.6 Use of Name: Except as otherwise provided herein, Durect, on the one hand, and Endo on the other hand, shall not have any right, express or implied, to use in any manner the name or other designation of the other or any other trade name, trademark or logos of the other for any purpose.

13.7 Public Announcements; Disclosures: Except as permitted by Section 9 or as required by law, none of the Parties shall make any public announcement or non-confidential disclosure concerning this Agreement anywhere in the world or concerning the Product in the Licensed Field in the Licensed Territory without the prior written approval of the other Party.

13.8 Waiver: A waiver by any Party of any of the terms and conditions of this Agreement in any instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach hereof. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and except as specifically provided herein none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either Party.

13.9 Counterparts: This Agreement may be executed simultaneously in any number of counterparts, any one of which need not contain the signature of more than one Party but all such counterparts taken together shall constitute one and the same agreement. This Agreement, to the extent signed and delivered by means of a facsimile machine, shall be treated in all manner and respects and for all purposes as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person.

13.10 Severability: When possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.

13.11 Amendment: No amendment, modification or supplement of any provisions of this Agreement shall be valid or effective unless made in writing and signed by a duly authorized officer of each Party.

13.12 Governing Law: This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York without regard to conflicts of law principles.

13.13 Dispute Resolution:

(a) The Parties recognize that a bona fide dispute as to certain matters may from time to time arise during the term of this Agreement that relate to any Party’s rights or obligations hereunder. In the event of the occurrence of any Dispute (as defined below), either Party may within three years after the act or failure to act giving rise to the Dispute, by written notice to the other, have such Dispute referred to its respective officer designated below or their successors, for attempted resolution by good faith negotiations within [***] days after such notice is received. If either Party desires to pursue arbitration under paragraph (b) below to resolve any such Dispute, a referral to such executives under this paragraph (a) shall be a mandatory condition precedent. Said designated officers are as follows.

For Durect: President and CEO

For Endo: President and COO

(b) In the event that they shall be unable to resolve the Dispute by executive mediation within such [***] day period, then the Dispute shall be finally settled by binding arbitration as provided below.

(c) Except as expressly otherwise provided in this Agreement, any dispute arising out of or relating to the interpretation of any provisions of this Agreement or the failure of either Party to perform or comply with any obligation of such Party pursuant to this Agreement or the breach, termination or validity hereof (a “Dispute”), shall be exclusively and finally settled by arbitration under the

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

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Commercial Arbitration rules of the American Arbitration Association (“AAA”) then in effect (the “Rules”), as modified by the terms set forth in this Section 13.13(c):

(i) The place of arbitration of any Dispute shall be in Wilmington, Delaware. Such arbitration shall be conducted by three arbitrators, one appointed by each of Endo and Durect and the third selected by the party-appointed arbitrators. Each arbitrator shall be neutral and impartial and shall have relevant experience in the pharmaceutical industry. Endo and Durect shall make their respective appointments within [***] business days of receipt by the respondent of a copy of the demand for arbitration. Such party-appointed arbitrators shall select the third arbitrator within [***] business days of the appointment of the second arbitrator. If any arbitrator is not timely appointed, on the request of any Party such arbitrator shall be appointed by the AAA in accordance with the listing, striking and ranking provisions in the Rules. The arbitrators shall render an award as expeditiously as possible; if practicable, within [***] after the appointment of the third arbitrator.

(ii) Any award rendered by the arbitrators shall be final and binding upon the Parties. Judgment upon any award rendered may be entered in any court having jurisdiction, or application may be made to such court for a judicial acceptance of the award and an order of enforcement, as the case may be. Except as provided in Section 11.5, each Party shall pay its own expenses of arbitration, and the fees and expenses of the arbitrators shall be equally shared between Endo and Durect. Any costs or fees (including attorney’s fees and expenses) incident to enforcing the award shall be charged against the Party resisting such enforcement.

(iii) This Section 13.13(c) shall not prohibit a Party from seeking preliminary injunctive relief in aid of arbitration from a court of competent jurisdiction in the event of a breach or prospective breach of this Agreement by any other Party which would cause irreparable harm to the Party seeking such relief. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitrators shall have full authority to grant provisional remedies and to direct the Parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any Party to respect the arbitrators’ orders to that effect.

(d) Whenever a Dispute is expressly designated in this Agreement as one to be resolved through the Accelerated Arbitration Provisions, then such Dispute shall be finally settled by arbitration under the then current AAA Expedited Procedures applicable to the Rules (“Expedited Rules”) and in accordance with the terms set forth in this Section 13.13(d) (the “Accelerated Arbitration Provisions”):

(i) The place of arbitration shall be Wilmington, Delaware. Such arbitration shall be conducted by a single neutral and impartial arbitrator agreed upon by the Parties within five days of receipt by respondent of a copy of the demand for arbitration. If the Parties fail to timely agree, on the request of any Party, such arbitrator shall be appointed by the AAA in accordance with the Expedited Rules. The Dispute shall be resolved by submission of documents unless the arbitrator determines (or the Parties agree) that an oral hearing is necessary. The award shall be rendered, if practicable, within [***] days of the appointment of the arbitrator.

(ii) Any award rendered by the arbitrator shall be final and binding upon the Parties. Judgment upon any award rendered may be entered in any court having jurisdiction, or application may be made to such court for a judicial acceptance of the award and an order of enforcement, as the case may be. Except as provided in Section 11.5, each Party shall pay its own expenses of arbitration, and the fees and expenses of the arbitrator shall be equally shared between Endo and Durect. Any costs or fees (including attorney’s fees and expenses) incident to enforcing the award shall be charged against the party resisting such enforcement.

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

40

(iii) This Section 13.13(d) shall not prohibit a Party from seeking preliminary injunctive relief in aid of arbitration from a court of competent jurisdiction in the event of a breach or prospective breach of this Agreement by any other Party which would cause irreparable harm to the Party seeking such relief. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitrator shall have full authority to grant provisional remedies and to direct the Parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any Party to respect the arbitrator’s orders to that effect.

13.14 Compliance with Laws: Each Party shall review in good faith and cooperate in taking actions to ensure compliance of this Agreement and the Parties’ activities hereunder with all applicable laws, rules, ordinances, regulations and guidelines. Each Party shall provide the other Party such reasonable assistance as may be required for the Party requesting such assistance to comply with all such laws, rules, ordinances, regulations and guidelines of all governmental entities, bureaus, and agencies having jurisdiction pertaining to this Agreement, including obtaining all import, export and other permits, certificates, licenses or the like required by such laws, rules, ordinances, regulations and guidelines necessary to permit the Parties to perform hereunder and to exercise their respective rights hereunder.

13.15 Force Majeure: Except where expressly provided for herein, neither Party shall be held liable or responsible to the other Party nor be deemed to be in default under, or in breach of any provision of, this Agreement for failure or delay in fulfilling or performing any obligation of this Agreement to the extent that such failure or delay is due to Force Majeure, and without the willful wrongdoing, recklessness or gross negligence of the Party so failing or delaying. For purposes of this Agreement, “Force Majeure” is defined as causes beyond the reasonable control of the Party, including acts of God; changes in regulations or laws of any government; war; terrorism; civil commotion; destruction of production facilities or materials by fire, flood, earthquake, explosion or storm; labor disturbances; epidemic; and failure of public utilities or common carriers. In the event that the ability of Durect or Endo to perform its obligations under this Agreement, as the case may be, shall be so affected, the affected Party shall immediately notify the other Party of such inability and of the period for which such inability is expected to continue. The Party giving such notice shall thereupon be excused from such of its obligations under this Agreement as it is thereby disabled from performing for so long as it is so disabled and the 30 days thereafter. To the extent possible, each Party shall use Commercially Reasonable Efforts to minimize the duration of any Force Majeure.

13.16 Entire Agreement: This Agreement including schedules and exhibits thereto, the Formulation C Side Letter, the Development Plan, Commercialization Plan, Technology Transfer Plan and safety agreement referred to herein and any co-promotion agreement as referred to herein constitute the entire agreement between the Parties with respect to the subject matter of this Agreement and supersede all prior agreements and understandings, both oral and written, between the Parties with respect to the subject matter of this Agreement.

13.17 Parties in Interest: All of the terms and provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Parties hereto and their respective permitted successors and assigns.

13.18 No Third Party Beneficiaries: Except for rights and obligations specifically referred to herein that apply to Affiliates, sublicenses or licensees of the Parties, nothing in this Agreement is intended to confer on any Person other than Durect or Endo any rights or obligations under this Agreement, and there are no intended Third Party beneficiaries to this Agreement.

13.19 Descriptive Headings; Certain Terms: The descriptive headings of this Agreement are for convenience only, and shall be of no force or effect in construing or interpreting any of the provisions of this Agreement.

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

41

13.20 Fees and Payments: All fees and payments made by one Party to the other under this Agreement shall be deemed non-refundable unless expressly provided to the contrary herein.

13.21 No Implied Licenses: Except as specifically and expressly granted in this Agreement, no rights or licenses to any intellectual property rights are granted by either Party to the other, by implication, estoppel or otherwise, and each Party specifically reserves all its rights with respect to any intellectual property rights not specifically granted hereunder. Furthermore, unless expressly provided otherwise herein, each Party may use and practice its own intellectual property rights, technology and data in any manner not inconsistent with the terms of this Agreement without the consent of the other Party and without obligation to notify the other Party of its intended use.

[Remainder of Page Intentionally Left Blank - Signature Pages to Follow]

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

42

IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed by its duly authorized representative as of the day and year first above written.

DURECT Corporation
By:	/s/ JAMES E. BROWN
	Name:	James E. Brown
	Title:	President and Chief Executive Officer
Endo Pharmaceuticals Inc.
By:	/s/ CAROL A. AMMON
	Name:	Carol A. Ammon
	Title:	Chairman and Chief Executive Officer

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

43

SCHEDULE 1.34

DURECT PATENTS

[***]

[***]

[***]

*** Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC.

44

EX-31.1

Exhibit 31.1

Rule 13a-14(a) Section 302 Certification

CERTIFICATIONS

I, James E. Brown, certify that:

1. I have reviewed this report on Form 10-Q of DURECT Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 6, 2005

/s/ JAMES E. BROWN

James E. Brown

Chief Executive Officer

EX-31.2

Exhibit 31.2

Rule 13a-14(a) Section 302 Certification

CERTIFICATIONS

I, Jian Li, certify that:

1. I have reviewed this report on Form 10-Q of DURECT Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 6, 2005

/s/ JIAN LI

Jian Li

Vice President, Finance and Corporate Controller

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DURECT Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Brown, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

May 6, 2005

/s/ JAMES E. BROWN

James E. Brown

Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DURECT Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jian Li, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

May 6, 2005

/s/ JIAN LI

Jian Li

Vice President, Finance and Corporate Controller

(Principal Financial Officer)