64957_Durect_AR04_v3.QXP 5/4/05 12:09 PM Page 1 01 02 03 04 05 — — DURECT CORPORATION 2004 ANNUAL REPORT 64957_Durect_AR04_v3.QXP 5/4/05 12:09 PM Page 2 SABER™ Delivery System (Injectable) TRANSDUR™ Transdermal Technology ORADUR™ Sustained Release Oral Gel-cap DUROS® Implant System DURIN™ Biodegradable Implant 01 02 03 04 05 — (Post Operative Pain Relief Depot) SABER-Bupivacaine (7-Day Pain Patch) TRANSDUR-Sufentanil (Remoxy™) ORADUR-Oxycodone (Sufentanil) CHRONOGESIC® Pain Therapy System DURIN-Leuprolide 01 02 03 04 05 — — FIVE PROPRIETARY TECHNOLOGIES — FIVE CLINICAL PROGRAMS 64957_Durect_AR04_v3.QXP 5/4/05 12:09 PM Page 4 Liquid Injectable Transdermal Patch Oral Gelcap Subcutaneous Implant (long-term) Subcutaneous Implant (biodegradable) 01 02 03 04 05 — Post-operative Pain Chronic Pain Chronic Pain Chronic Pain Alzheimer’s Disease 01 02 03 04 05 — — FIVE NOVEL DELIVERY SYSTEMS FOR FDA APPROVED THERAPIES — FIVE INDICATIONS WITH LARGE UNMEET NEEDS 64957_Durect_AR04_v3.QXP 5/4/05 12:09 PM Page 6 05 — Specialty pharmaceutical systems. Enabling biotechnology. 05 — Better treatments for chronic, debilitating disease. Improving quality of life. — MANY SOURCES OF POTENTIAL REVENUE AND PARTNERS — ONE LONG-TERM MISSION 64957_Durect_AR04_v3.QXP 5/4/05 12:09 PM Page 8 Clinical Pipeline — 01 PRODUCT: Post Operative Pain Depot 02 PRODUCT: Transdermal Sufentanil Patch 03 PRODUCT: Remoxy™ 04 PRODUCT: CHRONOGESIC® 05 PRODUCT: DURIN™- Leuprolide — 07 DURECT Corporate Highlights — TECHNOLOGY: SABER Delivery System (injectable) PARTNER: DURECT Corporation INDICATION: Post-Operative Pain PRE P1 P2 P3 NDA TECHNOLOGY: Transdermal Technology PARTNER: Endo Pharmaceuticals, Inc. INDICATION: Chronic Pain PRE P1 P2 P3 NDA TECHNOLOGY: ORADUR (sustained release oral gel-cap) PARTNER: Pain Therapeutics, Inc. INDICATION: Chronic Pain PRE P1 P2 P3 NDA TECHNOLOGY: DUROS Implant Technology PARTNER: Endo Pharmaceuticals, Inc. INDICATION: Chronic Pain PRE P1 P2 P3 NDA TECHNOLOGY: DURIN Biodegradable Implant PARTNER: Voyager Pharmaceuticals, Inc. INDICATION: Alzheimer’s Disease PRE P1 P2 P3 NDA March 14, 2005 - DURECT Corporation And Endo Pharmaceuticals Sign Agreement to Develop And Commercialize DURECT’s Seven-Day Transdermal Pain Patch February 16, 2005 - DURECT Initiates Phase II Program for Its Sufentanil Patch Product February 10, 2005 - DURECT Completes Dosing of the Phase I Pharmacokinetic Study for Its Sufentanil Patch Product and of the First Cohort of the Phase II Study for Its Post-Operative Pain Relief Depot January 28, 2005 - DURECT Corporation Announces Completion of Clinical Trial Enrollment for DURIN™-Based Leuprolide Product Candidate December 23, 2004 - DURECT Corporation Announces Initiation of Phase III Studies for Remoxy, a Novel Oral Pain Medication using the ORADUR™ Gel-Cap December 20, 2004 - DURECT and Voyager Pharmaceutical Announce the Acceptance of DURIN™ Investigational New Drug Application and Clinical Protocol by the FDA for the Treatment of Alzheimer’s Disease October 25, 2004 - DURECT Initiates Phase II Clinical Program for Post-Operative Pain Relief Depot October 22, 2004 - DURECT Initiates Phase I Trial for Its Proprietary Transdermal Sufentanil Patch July 6, 2004 - DURECT Announces Positive Clinical Results with its ORADUR™ Sustained Release Oral Gel-cap Technology June 21, 2004 - DURECT Corporation and NeuroSystec Corporation Announce Exclusive Agreement to Develop Treatments for Certain Inner Ear Disorders Including Tinnitus MONTH YEAR 03.05 02.05 02.05 01.05 12.04 12.04 10.04 10.04 07.04 06.04 — 08 DURECT 64957_Durect_AR04_v3.QXP 5/4/05 12:09 PM Page 10 TO OUR SHAREHOLDERS We are delighted to report that 2004 was the year where we saw the transformation of DURECT from concept about eighteen months ago to the initiation of Phase II studies this year. As a result of our a company that was focused on a single product candidate, CHRONOGESIC®, to a company with a progress, we established a strong commercialization partnership with Endo Pharmaceuticals on diversified pipeline of five product candidates in advanced development, namely, the SABER™- this product candidate in March 2005 for the U.S. and Canadian markets under which we retain Bupivacaine injectable depot, TRANSDUR™-Sufentanil Patch, ORADUR™ Oxycodone (Remoxy™), co-promotion rights, as well as all commercial rights for non-North American territories, to support CHRONOGESIC® Implant and DURIN™-Leuprolide. our transition into a specialty pharmaceutical company. The success that we have achieved is based on the foundation we laid since the founding of DURECT in 1998, and on which we have continued to build such that, to date we have established a broad base of proprietary injectable, oral, transdermal and implantable technologies suitable for the treatment of chronic debilitating diseases and the enabling of biotech technology products. This broad technology base has allowed us to diversify our product portfolio and minimize our development and financial risk by establishing partnerships. In addition, the strength of our technology and product portfolio allowed us to execute on late-stage development agreements and maintain commercial rights on select products to further our goal of developing into a specialty pharmaceutical company with sales and marketing capabilities to drive greater shareholder value. The highlights of the year include: • On the strength of positive Phase I data, our SABER-Bupivacaine product candidate entered Phase II clinical testing at the end of 2004. This product candidate is intended to be administered around a surgical site after surgery to provide up to 72 hours or more of regional pain relief and is based on our patented SABER delivery system. We believe this product could potentially reduce hospital stays and the amount of traditional post-surgical pain medications needed by patients, as well as the side effects that result from the use of concomitant opioid medications. Although there has been significant interest from potential commercialization partners for this product candidate, we are evaluating retaining commercialization rights for this product candidate to further our goal of developing into a specialty pharmaceutical company. • Based on the infrastructure and the clinical and delivery experience that we have developed on sufentanil through our CHRONOGESIC program, we established a transdermal program to develop a product that also enhances our return on our sufentanil investment. Our TRANSDUR Sufentanil • Remoxy (ORADUR-Oxycodone), a product candidate utilizing ORADUR, our proprietary oral sustained release gel cap technology under development in collaboration with Pain Therapeutics advanced into Phase III clinical testing at the end of 2004. • DURIN Leuprolide for the treatment of Alzheimer’s disease, under development in collaboration with the private company Voyager Pharmaceuticals advanced into clinical testing. In 2004, Voyager filed an IND and initiated Phase I testing on this product candidate while simultaneously conducting Phase II proof-of-concept studies. • In 2004, we reported that our CHRONOGESIC program for the development of a product candidate to deliver sufentanil from the DUROS implant for the treatment of chronic pain, has been delayed after we continued to see a small fraction of systems experience a pre-mature shut down prior to end of the intended drug delivery period in animal testing. We continue to work on redesigning the system to address this issue. In summary, DURECT met all of its corporate goals in 2004 for four of its five programs in development. In addition to advancing our product pipeline, we achieved regulatory milestones with the acceptance of two INDs for product candidates utilizing our technologies and continued to build on our strong patent position covering our technologies. We have a strong position in intangible assets such as “know-how” and other intellectual property to protect our products. Each of our products, both licensed and proprietary, possess key attributes critical to becoming a successful product in the large and growing markets they address. There is tremendous enthusiasm and optimism at DURECT because of the quality of the products we are developing and their increasing stage of maturity. patch for the treatment of chronic pain is designed for a dosing period of one week and is about one On behalf of everyone at DURECT, we thank you for your continued support and look forward to the fifth the size of currently marketed opioid patches. This program has moved very rapidly, from initial achievement of major milestones in 2005. Sincerely, James E. Brown, D.V.M. President and Chief Executive Officer Felix Theeuwes, D.Sc Chairman and Chief Scientific Officer Thomas A. Schreck Chief Financial Officer — 09 DURECT — 10 DURECT 64957_Durect_AR04_v3.QXP 5/4/05 12:09 PM Page 12 01 — 11 DURECT SABER POST-OPERATIVE PAIN DEPOT TRANSDERMAL SUFENTANIL PATCH The SABER system is a patented controlled-release technology that can be formulated for systemic Developing small, non-irritating and user-friendly products with excellent skin-adhesion are the main or local administration of active agents via the parenteral or oral route. We are researching and objectives for our TRANSDUR technology, which are major differentiating factors to patients and developing a variety of controlled-release products based on the SABER technology. physicians that require a transdermally administered therapy. We believe that our SABER system can provide the basis for the development of a state-of-the-art Depending on the drug and its physiochemical properties, our TRANSDUR technology provides thin biodegradable, controlled-release injectable. The SABER system uses a high-viscosity base component, solid-state transdermal products that can deliver drugs, through the skin, at a controlled rate up to such as sucrose acetate isobutyrate (SAIB), to provide controlled release of the drug. When the high one week. TRANSDUR technology encompasses proprietary product components, which enable our viscosity SAIB is formulated with drug, a biocompatible diluent (solvent) and other additives, the scientists to expand the range of drugs that can be delivered transdermally. Transdermal products resulting formulation is liquid enough to inject easily with standard syringes and needles. After injection based on TRANSDUR technology can improve convenience and compliance as well as of a SABER formulation, the system sets up in a viscous, matrix of the three components — SAIB, drug, cost-effectiveness, and provide highly reliable therapy to patients and health care providers. and any additives. Depending on how it is formulated, the SABER system can successfully deliver Our TRANSDUR technology is the basis for our transdermal sufentanil patch product candidate under therapeutic levels of a wide spectrum of drugs from 1 day to 3 months from a single injection. collaboration in the U.S. and Canadian markets with Endo Pharmaceuticals, Inc. The SABER Technology is the basis of our injectable post-operative pain relief depot product candidate currently under Phase II clinical testing. Our proprietary TRANSDUR-Sufentanil patch is a product under development for the treatment of moderate to severe chronic pain for once a week administration. Our sufentanil patch is a Our SABER-Bupivacaine product candidate is a long-acting local anesthetic being developed for the matrix-style transdermal patch that incorporates sufentanil, an opioid analgesic that is currently treatment of post surgical pain and is intended to deliver from a single injection uninterrupted regional FDA approved for use in hospitals and the active agent in our CHRONOGESIC® product under pain relief regional for up to 72 hours or more, which we believe coincides with the time period of the development, to provide extended chronic pain relief for up to seven days, as compared to currently greatest need for post surgical pain control in most patients. available three-day opioid patches. Also, the small size of the sufentanil patch, approximately one- fifth the size of other currently available opioid patches, may offer significant patient benefits. There are over 70 million combined inpatient and outpatient surgical procedures performed each year The product is currently undergoing Phase II clinical testing. in the United States. We believe that SABER-Bupivacaine could be utilized in 40%-60% of these procedures (including abdominal, orthopedic, hernia, and many others types of procedures). Physicians Physicians that participated in DURECT’s market research on TRANSDUR-Sufentanil patch indicated that participated in DURECT’s market research on this product indicated that SABER-Bupivacaine would that this product would represent a significant innovation over currently available transdermal pain represent a significant innovation over currently available postoperative pain relief therapies. Pain has relief therapies. Some of the expected product benefits include improved convenience and patient been deemed by the WHO as the “5th Vital Sign,” and stated that pain is significantly under treated. compliance, reduced skin irritation, cosmetic and quality of life improvements, improved patch SABER-Bupivacaine may offer a significant improvement in post-operative analgesia. It can also adhesion and easier for high dose patients who require multiple transdermal patches. potentially reduce opioid consumption, the amount of time hospital staffs spend managing post surgical pain and the duration of hospital stays. “Working with visionary scientists and engineers is what I want and is the environment DURECT provides.” Eric Sheu Principal Scientist “It is a rare opportunity to be part of a team that will greatly improve healthcare through its own talent, innovations, and hard work.” John Culwell Senior Director of Project Management 02 — 12 DURECT 64957_Durect_AR04_v3.QXP 5/4/05 12:09 PM Page 14 03 — 13 DURECT REMOXY CHRONOGESIC Our ORADUR technology is a sustained release oral gel-cap containing the drug in the SABER matrix DUROS® implant technology is coupled with proprietary drug delivery catheter and drug formulation to deliver over a 12 to 24 hour period. The ORADUR gel-cap may also be resistant to drug abuse (e.g., technology. DURECT licensed the DUROS® technology for selected fields from ALZA Corporation in 1998. by crushing or alcohol or water extraction) as compared to other controlled release dosage forms on ALZA's Viadur® (leuprolide acetate implant) is the first approved product to be administered via the market today. ORADUR-based products can be manufactured by a simple capsule filling process the DUROS® System. The Food and Drug Administration approved the product in March 2000 as a by conventional methods making them readily scalable. These properties have the potential to make palliative treatment for prostate cancer. ORADUR-based products an attractive option for pharmaceutical companies that seek to develop abuse resistant sustained release oral products. The DUROS system can be used for therapies requiring systemic or site-specific administration of a drug. To deliver drugs systemically, the DUROS system is placed just under the skin, for example in the upper Our ORADUR Technology is the basis of Remoxy, a novel long-acting oral formulation of the opioid arm, in an outpatient procedure that is completed in just a few minutes using local anesthetic. Removal oxycodone, and is targeted to decrease the potential for oxycodone abuse. Remoxy is a twice daily or replacement of the product is also a simple, quick procedure completed in the doctor's office. controlled release formulation that is intended to match the performance of Oxycontin®, but with enhanced abuse deterrence properties. Remoxy is developed under a joint development and To deliver a drug to a specific site, DURECT is developing proprietary miniaturized catheter technology commercialization agreement between DURECT and Pain Therapeutics, Inc. The product is currently that can be attached to the DUROS system to direct the flow of a drug to the target organ, tissue or under Phase III clinical testing by Pain Therapeutics, Inc. synthetic medical structure, such as a graft. Site-specific delivery enables a therapeutic concentration of a drug to be administered to the desired target without exposing the entire body to a similar dose. The Worldwide sales of Oxycontin, the leading sustained release formulation of oxycodone, exceeded precision, size and performance of the DUROS system will allow for continuous site-specific delivery $2 billion in 2004. Diversion and misuse are a significant issue in the sale and distribution of strong to a variety of precise locations within the body. The DUROS system is the basis of our CHRONOGESIC® opioids such as oxycodone. Abusers can easily extract the full dose from currently marketed product candidate under development in collaboration with Endo in the U.S. and Canada. time-release opioid preparations and administer the dose as a bolus (e.g. resulting in an immediate and large spike in opioid blood levels). This provides abusers with a fast and powerful morphine-like The CHRONOGESIC (sufentanil) Pain Therapy System is a subcutaneous implant that is intended to high. We believe that the ORADUR technology offers a significant advantage over other controlled continuously deliver sufentanil, an opioid medication, for an extended duration. This product under devel- release technologies as it is more difficult to misuse. opment is intended to treat chronic pain. Sufentanil is an FDA approved opioid that is currently used as an in-hospital anesthetic. CHRONOGESIC is intended for stable, opioid responsive chronic pain patients of malignant and non-malignant origin. Since the product is fully implanted under the skin, this product can allow for greater physician control over administering clinically necessary opioid therapy to chronic pain patients with potentially less risk of misuse, abuse and diversion than traditional pills or patches. Chronic pain, defined as pain that lasts 6 months or longer, affects as many as one in eight people worldwide (34 million Americans annually). The market for strong opioids in the treatment of pain has been estimated to exceed $4 billion annually. “Our focus at DURECT for the ORADUR technology is to demonstrate it’s capacity to mitigate the abuse potential of medicine, with Remoxy as a prime example.” Wendy Chao Director of Formulation Development “DURECT management’s guidance and support allows me, as part of the Research and Development team, to cultivate and explore creative ideas pertaining to the Chronogesic Pain Therapy System.” Reggie Ordonio Senior Research and Development Technician 04 — 14 DURECT 64957_Durect_AR04_v3.QXP 5/4/05 12:09 PM Page 16 DURIN BUSINESS DEVELOPMENT / PARTNERING STRATEGY Our DURIN™ technology is a proprietary biodegradable implant that enables parenteral delivery of drugs Partnering with pharmaceutical and biotechnology firms is a key component of our business for long-term delivery of active ingredients, from several weeks to six months or more using our Lactel® strategy. In some cases, we will partner at a very early stage by means of research collaborations, brand polymers and co-polymers of lactic and glycolic acid. The DURIN technology can deliver a wide and in other cases we will develop compounds on our own and commence clinical trials before variety of drugs including hydrophobic and hydrophilic compounds, as well as small and large molecule seeking a development and/or commercialization partners. compounds. Our proprietary implant design allows for a variety of possible delivery profiles including first order, zero-order, delayed or biphasic drug release. Because DURIN implants are biodegradable, at At DURECT, we understand the complexity and challenges pharmaceutical companies face in the end of its delivery life, the body absorbs what remains of the DURIN implant. bringing new drugs to market. We also understand that risk is inherent throughout the development DURECT is researching and developing products based on the DURIN technology for a variety of unique partnering relationships. In addition, our delivery platforms may help extend the proprietary chronic disease applications. The DURIN technology is the basis of DURIN-Leuprolide, our product positions of your drug franchises and enable new claims with novel dosage forms. and approval process. And we believe we can help companies manage and minimize this risk through candidate for the treatment of Alzheimer’s disease that is currently in Phase I/II clinical development program by Voyager Pharmaceutical Inc. At DURECT, we offer a broad range of innovative drug delivery systems that are an essential element to any new controlled-release drug product. We offer sustained release technology platforms that DURIN-Leuprolide is a product candidate under development for the treatment of Alzheimer’s provide delivery of your product from days to years based on your therapeutic and business needs. disease that uses our proprietary DURIN technology to provide sustained release of the peptide Many, but not all, of these technology options can be found here on our website. Our dedicated team leuprolide acetate and is based on Voyager’s Pharmaceuticals’ (partner) patented method of of scientists and formulators offer additional expertise to custom-tailor drug delivery to our client’s treatment of Alzheimer’s disease. needs, whether parenteral, oral, transdermal, local or topical. It is this experience and expertise that accelerate the product development timelines, reduce development risk and increase the Alzheimer's disease is a progressive, irreversible brain disorder with no known cause or cure. probability for a successful outcome. Symptoms of the disease include memory loss, confusion, impaired judgment, personality changes, disorientation, and loss of language skills. Alzheimer's disease is the most common form of irreversible dementia, eventually leading to fatalities. Approximately 100,000 patients die and 360,000 new cases of Alzheimer's disease are diagnosed each year. It is estimated that by 2050, 14 million individuals in the United States will have this disease. It is estimated that by 2020, 30 million people will be affected by this devastating disorder worldwide. The market potential for Alzheimer's disease treatments is estimated to be in excess of $10 billion. “DURECT's approach includes the combination of formulation and engineering for drug delivery systems, which are expected to have a significant impact on various therapeutic areas.” Sanjay Goskonda Director of Formulation Development Our vision for product development is to combine known drugs (both in terms of efficacy and side effect profile) with proven systems to get drugs quickly to market and lower development risk. 05 — 15 DURECT — 16 DURECT 64957_Durect_AR04_v3.QXP 5/4/05 12:09 PM Page 18 CORPORATE DIRECTORY AND INFORMATION Executive Officers Board of Directors Annual Meeting Corporate Profile Felix Theeuwes, D.Sc. Chairman, Chief Scientific Officer and Director James E. Brown, D.V.M. President, Chief Executive Officer and Director Thomas A. Schreck Chief Financial Officer and Director Jean I. Liu Senior Vice President and General Counsel Paula Mendenhall, Pharm D. Senior Vice President of Operations Su IL Yum, Ph.D. Senior Vice President, Engineering Tai Wah Chan, Ph.D. Vice President, Pharmaceutical Research and Development Steven C. Halladay, Ph.D. Vice President, Clinical and Regulatory Jian Li Vice President, Finance and Corporate Controller Felix Theeuwes, D.Sc. Chairman, Chief Scientific Officer and Director James E. Brown, D.V.M. President, Chief Executive Officer and Director Thomas A. Schreck Chief Financial Officer and Director Simon X. Benito Director Michael D. Casey Director David R. Hoffmann Director Armand P. Neukermans, Ph.D. Director Jon S. Saxe Director Coporate Secretary Jean I. Liu Senior Vice President and General Counsel Tel: 408.777.1417 Fax: 408.777.3577 Email: jean.liu@durect.com Additional Information For more information please contact: Schond L. Greenway Executive Director, Investor Relations and Strategic Planning Tel: 408.777.1417 Fax: 408.777.3577 Email: schond.greenway@durect.com Mailing Address: 10240 Bubb Road Cupertino, California 95014 www.durect.com The company’s annual meeting of stockholders will be held at 9:00 A.M. local time June 22, 2005 at Company Headquarters Independent Auditors Ernst & Young LLP 1451 California Street Palo Alto, CA 94304 Phone 650.496.1600 Fax 650.496.4660 Corporate Counsel Heller, Ehrman, White & McAuliffe, LLP 2800 Sand Hill Road Menlo Park, CA 94025 Phone 650.854.4488 Transfer Agent EquiServe Trust Company, N.A. 150 Royal Street Canton, MA 02021 Tel: 781.575.3400 SEC Form 10-K A copy of the Company’s annual report to the United States Securities and Exchange Commission on Form 10-K is available without charge upon written request to: DURECT Corporation Attn: Investor Relations 10240 Bubb Road Cupertino, California 95014 Trademarks SABER™, ORADUR™, DURIN™, TRANSDUR™, CHRONOGESIC®, MICRODUR™ and LACTEL® are trademarks of DURECT Corporation. Other referenced trademarks belong to their respective owners. DURECT Corporation is an emerging specialty pharmaceutical company focused on the development of pharmaceutical systems based on its proprietary drug delivery platform technologies that treat chronic debilitating diseases and enable biotechnology products. These platform technologies include the SABER™ Delivery System (a patented and versatile depot injectable useful for protein and small molecule delivery), the ORADUR™ sustained release oral gel-cap technology (an oral sustained release technology with several potential abuse deterrent properties), the DURIN™ Biodegradable Implant (drug-loaded implant system), the TRANSDUR™ transdermal technology, 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 (micros- pheres injectable system). DURECT also collaborates with pharmaceutical companies to develop and commercialize proprietary and enhanced pharmaceutical products based on its technologies. DURECT has five disclosed on-going development programs of which four are in collaboration with pharmaceutical partners The statements in this report regarding DURECT's partnered and proprietary products in development and product development plans are forward-looking statements involving risks and uncertainties that can cause actual results to differ materially from those in such forward-looking statements. Potential risks and uncertainties include, but are not limited to, DURECT's ability to complete the design, development, and manufacturing process development of its products, manufacture and commercialize its products, obtain product and manufacturing approvals from regulatory agencies, manage its growth and expenses, manage relationships with third parties, finance its activities and operations, as well as marketplace acceptance of DURECT's products. Further information regarding these and other risks is included in DURECT's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 filed with the SEC on March 11, 2005, DURECT’s Quarterly Report on Form 10-Q and other periodic reports filed with the SEC under the heading “Factors that may affect future results.” © 2005 DURECT Corporation concept and design: extralarge, a design studio (www.xlstudios.com) — 17 DURECT — 18 DURECT 64957_Durect_AR04_v3.QXP 5/4/05 12:09 PM Page 20 10240 Bubb Road Cupertino, CA 95014 main 408.777.1417 fax 408.777.3577 www.durect.com