Durect Corp. Annual Report 2015

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-K(Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2015OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 ofincorporation or organization) (I.R.S. EmployerIdentification No.)10260 Bubb RoadCupertino, CA 95014(Address of principal executive offices, including zip code)Registrant’s telephone number, including area code: (408) 777-1417 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock $0.0001 par value per sharePreferred Share Purchase Rights The NASDAQ Stock Market LLC(NASDAQ Global Market)Securities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 of the Act. YES ¨ NO xIndicate 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 1934during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES x NO ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). YES x NO ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “largeaccelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO xThe aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $242,145,190 as of June 30, 2015 based uponthe closing sale price on the NASDAQ Global Market reported for such date. Shares of Common Stock held by each officer and director and by each personwho may be deemed to be an affiliate have been excluded. This determination of affiliate status is not necessarily a conclusive determination for otherpurposes.There were 122,065,924 shares of the registrant’s Common Stock issued and outstanding as of February 18, 2016.DOCUMENTS INCORPORATED BY REFERENCEPart III incorporates information by reference from the definitive Proxy Statement for the 2016 annual meeting of stockholders, which is expected to befiled not later than 120 days after the Registrant’s fiscal year ended December 31, 2015. Table of ContentsDURECT CORPORATIONANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2015TABLE OF CONTENTS Page PART I ITEM 1. Business 1 ITEM 1A. Risk Factors 26 ITEM 1B. Unresolved Staff Comments 54 ITEM 2. Properties 54 ITEM 3. Legal Proceedings 54 ITEM 4. Mine Safety Disclosures 54 PART II ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 55 ITEM 6. Selected Financial Data 57 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 58 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 72 ITEM 8. Financial Statements and Supplementary Data 75 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 107 ITEM 9A. Controls and Procedures 107 ITEM 9B. Other Information 109 PART III ITEM 10. Directors, Executive Officers and Corporate Governance 109 ITEM 11. Executive Compensation 109 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 109 ITEM 13. Certain Relationships and Related Transactions, and Director Independence 109 ITEM 14. Principal Accountant Fees and Services 109 PART IV ITEM 15. Exhibits, and Financial Statement Schedules 109 Signatures 114 Table of ContentsPART I Item 1.Business.OverviewWe are a biopharmaceutical company with research and development programs broadly falling into two categories: (i) new chemical entities derivedfrom our Epigenomic Regulator Program, in which we attempt to discover and develop molecules which have not previously been approved and marketed astherapeutics, and (ii) Drug Delivery Programs, in which we apply our formulation expertise and technologies largely to active pharmaceutical ingredientswhose safety and efficacy have previously been established but which we aim to improve in some manner through a new formulation. We also manufactureand sell osmotic pumps used in laboratory research and design, develop and manufacture a wide range of standard and custom biodegradable polymers andexcipients for pharmaceutical and medical device clients for use as raw materials in their products.Our product pipeline currently consists of seven investigational drug candidates in clinical development, with one program the subject of a New DrugApplication (NDA) with the U.S. Food and Drug Administration (FDA) for which a Complete Response Letter was received in June 2011, another program thesubject of an NDA with the FDA for which a Complete Response Letter was received in February 2014, one program in Phase 2 and four programs in Phase 1.The more advanced programs are in the field of pain management and we believe that each of these targets large market opportunities with product featuresthat are differentiated from existing therapeutics. We have other programs underway in fields outside of pain management, including central nervous systemdisorders, acute organ injury, metabolic disorders, ophthalmic conditions, and other chronic diseases.A central aspect of our business strategy involves advancing multiple product candidates at one time, which is enabled by leveraging our resourceswith those of corporate collaborators. Thus, certain of our programs are currently licensed to corporate collaborators on terms which typically call for ourcollaborator to fund all or a substantial portion of future development costs and then pay us milestone payments based on specific development orcommercial achievements plus a royalty on product sales. At the same time, we have retained the rights to other programs, which are the basis of potentialfuture collaborations and which over time may provide a pathway for us to develop our own commercial, sales and marketing organization.New Chemical Entities from our Epigenomic Regulator ProgramOur Epigenomic Regulator Program involves a multi-year collaborative effort with the Department of Internal Medicine at Virginia CommonwealthUniversity (VCU), the VCU Medical Center and the McGuire VA Medical Center. The discoveries from this program are a result of more than 20 years of lipidresearch by Shunlin Ren, M.D., Ph.D., Professor of Internal Medicine at the VCU Medical Center and a recipient of multiple grants from the NationalInstitutes of Health (NIH) for metabolic disease research. Epigenetics is the study of how reversible modifications of a cell’s DNA or histones (proteinsassociated with DNA) affect gene expression without altering the DNA sequence. Epigenomics is the study of large scale effects on cellular function andinterrelated collections of epigenetic modifications. Epigenetic and epigenomic modifications play an important role in regulation of key cellular processes.DUR-928 is the program’s lead product candidate. We hold the exclusive worldwide right to develop and commercialize DUR-928 and related moleculesdiscovered in the program. 1Table of ContentsOur major product research and development efforts for new chemical entities derived from our Epigenomic Regulator Program are set forth in thefollowing table: Product Candidate Disease/Indication Collaborator Stage• DUR-928, oral • Metabolic / lipid disorders • DURECT retains worldwidedevelopment and commercializationrights under a license with VirginiaCommonwealth University • Phase 1• DUR-928, injectable • Acute organ injuries • DURECT retains worldwidedevelopment and commercializationrights under a license with VirginiaCommonwealth University • Phase 1During the course of this program, a number of compounds have been identified that may have therapeutic utility for various diseases and syndromesfor orphan indications as well as for broader patient populations. The lead compound from this program (DUR-928) is an endogenous, orally bioavailablesmall molecule that modulates the activity of various nuclear receptors that play an important regulatory role in lipid homeostasis, inflammation and cellsurvival.The biological activity of DUR-928 has been demonstrated in 8 different animal disease models involving three animal species. Four of these modelsrepresent chronic disorders of hepatic lipid accumulation and dysfunction (e.g., nonalcoholic fatty liver disease (NAFLD) and nonalcoholic steatohepatitis(NASH) associated with diabetes) and four represent acute organ injuries (endotoxin shock, kidney, liver and brain).We are pursuing the development of DUR-928 through two broad programs for: (i) chronic metabolic diseases using an oral formulation, and (ii) acuteorgan injury using an injectable formulation.In pharmacokinetic and toxicity studies conducted in mice, hamsters, rats, dogs and monkeys, DUR-928 has been found to be orally bioavailable andsafe at all doses tested to date. These non-clinical results supported the initiation of DUR-928 into human safety trials with an oral formulation.Pharmacokinetic and toxicity studies with an injectable formulation were also conducted in rats and dogs; these non-clinical results supported the initiationinto human safety trials with an injectable formulation of DUR-928.Chronic Metabolic Disease Program with DUR-928Market Opportunity. Non-alcoholic fatty liver disease (NAFLD) affects approximately 30% of adults and 10% of children (about 81 millionindividuals) in the U.S. Non-alcoholic steatohepatitis (NASH), a more severe and progressive form of NAFLD, is one of the most common chronic liverdiseases worldwide, with an estimated prevalence of more than 10% of adults in the U.S., Europe, Japan and other developed countries. No drug is currentlyapproved for NAFLD or NASH. In addition to these large populations of patients with liver disease, there are a number of orphan patient populations withvarious forms of liver disease for which we may seek to develop DUR-928.Clinical Program. The initial Phase 1 trial of DUR-928 was a single-site, randomized, double-blinded, placebo-controlled, single-ascending-dosestudy that evaluated the safety, tolerability and pharmacokinetics of DUR-928 when orally administered. The 30-subject study evaluated DUR-928 in fivecohorts of healthy volunteers receiving DUR-928 (n=20 on drug, 10 on placebo) at escalating doses that resulted in peak plasma concentrations greater than100-fold higher than endogenous levels. DUR-928 was well-tolerated at all dose 2Table of Contentslevels, with no serious treatment-related adverse events reported. We subsequently conducted a Phase 1 multiple-ascending-dose, oral administration trial in20 healthy subjects (n=16 on drug, 4 on placebo). Following multiple dosing, DUR-928 was well-tolerated at all doses, with no clinically significant changesin vital signs, laboratory values or ECG parameters, no serious drug-related adverse events reported and no subjects withdrawing from the study. Peak plasmaconcentrations achieved were greater than 100-fold higher than endogenous levels, no accumulation in plasma concentrations were observed with repeatdosing, and dose related increases in plasma concentrations were observed with peak plasma concentration at approximately 2-6 hours after dosing. We alsoconducted a food effect study with 8 healthy volunteers and observed no food effect on absorption.In January 2016, we initiated a single-ascending-dose Phase 1b clinical trial with DUR-928 in patients with nonalcoholic steatohepatitis (NASH). Thisopen-label Phase 1b trial of DUR-928 is a safety and pharmacokinetic study of DUR-928 in subjects with NASH and matched control subjects. This studywill be conducted in three successive cohorts evaluating three single-dose levels of oral DUR-928. After a PK/safety review at each dose, the study canproceed to the next higher dose. Assuming all three cohorts are dosed, the study will comprise approximately 48 subjects, of which approximately 30 willhave received DUR-928. The study is being conducted in Australia, and we anticipate that we will obtain results from this trial in the first half of 2016.Future Development Plans. We anticipate that the single-ascending-dose Phase 1b clinical trial described above will enable and inform a multiple-dose study in the second half of 2016 in NASH patients or patients with other liver function impairment.Acute Organ Injury Program with DUR-928Market Opportunity. Acute organ injury, including acute kidney injury (AKI) and other conditions, is another area of major unmet medical need forwhich effective pharmaceutical treatment is often lacking. AKI, for example, affects approximately 2.8 million patients per year in the U.S. and is associatedwith increased mortality, prolonged hospital stays, and worsening of chronic kidney disease. In addition to these large populations of patients, there are anumber of orphan patient populations with various forms of acute organ injury for which we may seek to develop DUR-928.Clinical Program. In addition to the oral administration clinical studies described above, we have conducted a Phase 1 single-site, randomized,double-blinded, placebo-controlled, single-ascending-dose study that evaluated the safety, tolerability and pharmacokinetics of four doses of DUR-928 whenadministered by injection. The 24-subject study evaluated DUR-928 in four cohorts of healthy volunteers receiving DUR-928 (16 subjects on the drug, 8 onplacebo) at escalating doses that resulted in dose proportionality of systemic exposure. DUR-928 was well-tolerated at all dose levels, with no serioustreatment-related adverse events reported. We also conducted a multiple-dose study involving 10 healthy volunteers, in which participants received DUR-928 for 5 consecutive days (8 subjects on the drug, 2 on placebo) with the next to highest dose in the single dose study. No serious treatment related adverseevents were reported, no subjects withdrew from the study, no accumulation in plasma concentrations were observed with repeat dosing, and the pain scoresand injection site reactions were minimal.Future Development PlansWe anticipate commencing a Phase 1b single-ascending-dose, injectable administration trial in renal function impaired patients in the first half of2016, with data available from the study in 2016. This trial is anticipated to be a single-site, open-label safety and pharmacokinetics study. This trial willenable and inform subsequent patient studies in acute kidney injury and/or other kidney function impairment. 3Table of ContentsDrug Delivery ProgramsOur major product research and development efforts utilizing our drug delivery platforms are set forth in the following table: Product Candidate Disease/Indication Collaborator Technology Platform Stage• POSIMIR (controlledrelease injection ofbupivacaine) • Post-Operative Pain • DURECT retains worldwiderights • SABER • NDA accepted in June 2013 /Complete Response Letterreceived in February 2014;Phase 3 trial ongoing• REMOXY (oral controlledrelease oxycodone) • Chronic Pain • Pain Therapeutics (worldwide) • ORADUR • NDA resubmitted inDecember 2010 but notapproved / CompleteResponse Letter received inJune 2011• ORADUR-ADHD • Attention DeficitHyperactivity Disorder(ADHD) • Orient Pharma (defined Asianand South Pacific countries);DURECT retains developmentand commercialization rights inNorth America, Europe, Japanand all other countries • ORADUR • Phase 3 in Taiwan• ELADUR (controlledrelease injection ofbupivicane) • Pain • Impax Laboratories (worldwide) • TRANSDUR • Phase 1• Relday (risperidone) • Schizophrenia/ bipolardisorder • Zogenix (worldwide) • SABER • Phase 1• ORADUR-based opioid(hydromorphone) • Chronic Pain • Pain Therapeutics (worldwide) • ORADUR • Phase 1• SABER-based ophthalmic(active drug ingredient notdisclosed) • Ophthalmic disorder • Santen (worldwide) • SABER • Preclinical / Research Stage• Various • Research programs invarious therapeuticcategories • DURECT retains worldwiderights, except for certainfeasibility projects whereby ourcollaborator generally has anoption on rights • SABER / CLOUD • Preclinical / Research Stage NOTE: POSIMIR™, SABER, CLOUD, TRANSDUR, ORADUR, ALZET and LACTEL are trademarks of DURECT Corporation. Othertrademarks referred to belong to their respective owners. 4®®TM®®®®Table of ContentsDURECT’s Drug Delivery Programs and Pharmaceutical SystemsWe are developing and commercializing pharmaceutical systems that will deliver the right drug to the right place, in the right amount and at the righttime to treat chronic and episodic diseases and conditions. Our pharmaceutical systems enable optimized therapy for a given disease or patient population bycontrolling the rate and duration of drug administration. In addition, if advantageous for the therapy, our pharmaceutical systems can target the delivery ofthe drug to its intended site of action. ● The Right Drug: By precisely controlling the dosage or targeting delivery to a specific site, we can expand the therapeutic use of compounds thatwould otherwise be too potent to be administered systemically, do not remain in the body long enough to be effective, or have significant sideeffects when administered systemically. This flexibility allows us to work with a variety of drug candidates including small molecules, proteins,peptides or genes. ● The Right Place: In addition to enabling systemic delivery, if advantageous for the therapy, with precise placement of our drug deliveryformulations, we can design our pharmaceutical systems to deliver drugs directly to the intended site of action. This can ensure that the drugreaches the target tissue in effective concentrations, eliminate many side effects caused by delivery of the drug to unintended sites in the body,and reduce the total amount of drug administered to the body. ● The Right Amount: Our pharmaceutical systems can automatically deliver drug dosages continuously within the desired therapeutic range for theduration of the treatment period, from days to up to months, without the fluctuations in drug levels typically associated with conventional pills orinjections. This can reduce side effects, eliminate gaps in drug therapy, conveniently ensure accurate dosing and patient compliance, and mayreduce the total amount of drug administered to the body. ● The Right Time: Our pharmaceutical systems technologies are designed to minimize the need for intervention by the patient or care-giver and toenhance dosing compliance. In addition to reducing the cost of care, continuous drug therapy frees the patient from repeated treatment orhospitalization, improving convenience and quality of life. Our systems are well-suited to deliver drugs for the right period of time for theintended indication, whether for hours or days for acute indications, or for weeks or months for treating chronic, debilitating diseases such aschronic pain, cancer, heart disease, and neurodegenerative diseases. We believe that it is more effective to treat chronic diseases with continuous,long-term therapy than with alternatives such as multiple conventional injections or immediate release oral dosage forms that create short-termeffects.DURECT Drug Delivery TechnologyOur pharmaceutical systems combine engineering with proprietary small molecule pharmaceutical and biotechnology drug formulations to yieldproprietary delivery technologies and products. Through this combination, we are able to control the rate and duration of drug administration, as well as,when desired, target the delivery of the drug to its intended site of action, allowing our pharmaceutical systems to meet the special challenges associated withtreating medical conditions over an extended period of time. Our pharmaceutical systems can enable new drug therapies or optimize existing therapies basedon a broad range of compounds, including small molecule pharmaceuticals as well as biologics such as proteins and peptides.Our pharmaceutical systems are suitable for providing long-term drug therapy because they store highly concentrated, stabilized drugs in a smallvolume and can protect the drug from degradation by the body. This, in combination with our ability to continuously deliver precise and accurate doses of adrug, allows us to extend the therapeutic value of a wide variety of drugs, including those which would otherwise be ineffective, too unstable, too potent orcause adverse side effects. In some cases, delivering the drug directly to the intended site of action can improve efficacy while minimizing unwanted sideeffects elsewhere in the body, which often limit the long-term use of many drugs. Our pharmaceutical systems can thus provide better therapy for chronicdiseases or conditions, or for certain acute conditions where longer drug dosing is required or advantageous, by replacing 5Table of Contentsmultiple injection therapy or oral dosing, improving drug efficacy, reducing side effects and ensuring dosing compliance. Our pharmaceutical systems canimprove patients’ quality of life by eliminating more repetitive treatments, reducing dependence on caregivers and allowing patients to lead moreindependent lives.We currently have several major active drug delivery technology platforms:The SABER and CLOUDBioerodible Injectable Depot SystemsOur bioerodible injectable depot systems include our SABER and CLOUD platform technologies. SABER uses a high viscosity base component, suchas sucrose acetate isobutyrate (SAIB), to provide controlled release of a drug. When the high viscosity SAIB is formulated with drug, biocompatibleexcipients and other additives, the resulting formulation is easily injectable with standard syringes and needles. After injection of a SABER formulation, theexcipients diffuse away, leaving a viscous depot which provides controlled sustained release of drug. CLOUD is a class of bioerodible injectable depottechnology which generally does not contain SAIB but does include various other release rate modifying excipients and/or bioerodible polymers to achievethe delivery of drugs for periods of days to months from a single injection. We are researching and developing a variety of controlled-release products basedon the SABER and CLOUD technologies. Based on research and development work to date, our bioerodible injectable depot technologies have shown thefollowing advantages: ● Peptide/Protein/Small Molecule Delivery—The chemical nature of our bioerodible injectable depot systems tend to repel water and bodyenzymes from its interior and thereby stabilizes proteins and peptides. For this reason, we believe that bioerodible injectable depot systems arewell suited as a platform for biotechnology therapeutics based on proteins and peptides. ● Controlled Onset and Release—Typically, controlled release injections are associated with an initial higher release of drug immediately afterinjection (also called “burst”). Animal and human studies have shown that our bioerodible injectable depots can be associated with less post-injection burst than is typically associated with other commercially available injectable controlled release technologies, while still achievingcontrolled rapid onset of drug concentration. ● High Drug Loading—Drug loading in our bioerodible injectable depot formulations can be as high as 30%, considerably greater than is typicalwith other commercially available injectable controlled release technologies. As a result, smaller injection volumes are possible with thistechnology. ● Ease of Administration—Prior to injection, our bioerodible injectable depot formulations are fairly liquid and therefore can be injected throughsmall needles. Additionally, because of the higher drug concentration of our bioerodible injectable depot formulations, less volume is required tobe injected. Small injection volumes and more liquid solutions are expected to result in easier, less painful administration. ● Patent Protection—Our bioerodible injectable depot technology is covered by United States and foreign patents. See “Patents, Licenses andProprietary Rights” below. ● Ease of Manufacture—Compared to microspheres and other polymer-based controlled release injectable systems, our bioerodible injectable depotformulations are readily manufacturable at low cost.The SABER Technology is the basis of POSIMIR, for which our NDA received a Complete Response Letter in February 2014. The SABER Technologyis also the basis for Relday, which has completed single and multiple dose Phase 1 clinical trials in the U.S. The SABER Technology is also utilized in ourSanten Ophthalmic Program as well as multiple feasibility programs. In our clinical studies thus far, our bioerodible injectable depot formulations have beenobserved to be safe and well-tolerated, and no significant side effects or adverse events have been reported.The SABER Technology is also the basis for SucroMate™ Equine, an injectable animal health drug utilizing our SABER technology to deliver thepeptide deslorelin. This is the first FDA approved SABER injectable product and it was launched in 2011 by our collaborator, CreoSalus, Inc. 6 Table of ContentsThe ORADUR Sustained Release Gel Cap TechnologyWe believe that our ORADUR sustained release technology can transform short-acting oral capsule dosage forms into sustained release oral products.Products based on our ORADUR technology can take the form of an easy to swallow gelatin capsule that uses a high-viscosity base component such assucrose acetate isobutyrate (SAIB) to provide controlled release of active ingredients for a period of 12 to 24 hours of drug delivery. Oral dosage forms basedon the ORADUR gel-cap may also have the added benefit of being less prone to abuse (e.g., by crushing and then snorting, smoking, injecting or extractingby mixing with alcohol or water) than other controlled release dosage forms on the market today. These properties have the potential to make ORADUR-based products an attractive option for pharmaceutical companies that seek to develop abuse deterrent oral products.The ORADUR technology is the basis of REMOXY, a novel long-acting oral formulation of the opioid oxycodone which is targeted to decrease thepotential for oxycodone abuse, and for which the NDA received a Complete Response Letter in June 2011. Starting in 2006, we also began working with PainTherapeutics, Inc. (Pain Therapeutics) on the development of three additional ORADUR abuse-resistant opioid drug candidates which would address thechronic pain market. Phase 1 clinical trials have been conducted for two of these ORADUR-based products (hydrocodone and hydromorphone), and anInvestigational New Drug (IND) has been accepted by the FDA for the fourth ORADUR-based opioid (oxymorphone). In May 2015, Pain Therapeuticsinformed us that they were returning to us all of Pain Therapeutics’ rights and obligations under our license agreement to develop and commercializeORADUR-based formulations of hydrocodone but without impacting the rights and obligations of the two parties with respect to REMOXY (oxycodone),hydromorphone and oxymorphone. We also have an ORADUR-ADHD program for which we and Orient Pharma Co., Ltd. (Orient Pharma) have selected alead formulation containing the active pharmaceutical ingredient methylphenidate. This formulation was selected based on its potential for rapid onset ofaction, long duration for once-a-day dosing and target pharmacokinetic profile as demonstrated in a Phase 1 trial. Orient Pharma has initiated a Phase 3 trialin Taiwan and anticipates completing it in 2016.The TRANSDUR Transdermal Delivery SystemOur TRANSDUR technology is a proprietary transdermal delivery system that enables delivery of drugs continuously for multiple days. TheTRANSDUR technology is the basis for ELADUR, for which two Phase 2 clinical trials have been conducted and for which we licensed worldwidedevelopment and commercialization rights to Impax in January 2014.Major Drug Delivery ProgramsPOSIMIR (SABER-Bupivacaine)Market Opportunity. According to data published by the Center for Disease Control and Prevention, there are approximately 72 million ambulatoryand inpatient surgical procedures performed annually in the U.S. Insufficient postoperative pain control remains a significant problem, with studiesindicating that roughly 65% of patients experience moderate-to-extreme pain after surgery. The current standard of care for post-surgical pain includes oralopiate and non-opiate analgesics and muscle relaxants. While systemic opioids can effectively control post-surgical pain, they commonly cause side effectsincluding drowsiness, constipation, nausea and vomiting, and cognitive impairment. Effective pain management can be compromised if patients fail toadhere to recommended dosing regimens because they are suffering from these side effects. Post-surgical pain also can be treated effectively with localanesthetics; however, their usefulness often is limited by their short duration of action.Development Strategy. We are developing POSIMIR, an extended-release formulation of bupivacaine, using our SABER delivery system for thetreatment of post-surgical pain. Bupivacaine is an off-patent pharmaceutical agent. The physician would administer POSIMIR at the time of surgery to thesurgical site. This formulation is designed to provide extended analgesia from a single dose. We believe that by delivering effective amounts of a potentanalgesic to the location from which the pain originates, improved pain control can be 7Table of Contentsachieved with minimal exposure to the remainder of the body and reduced need for systemic analgesics, thus minimizing systemic side effects. POSIMIR isintended to provide local analgesia for 3 days, which we believe generally coincides with the time period of greatest need for post-surgical pain control inmost patients.We are in discussions with potential partners regarding licensing development and commercialization rights to POSIMIR, for which we hold worldwiderights. We are also continuing to evaluate the requirements for commercializing POSIMIR on our own in the U.S., in the event that we determine that to bethe preferred route of commercialization.Clinical Program. Our POSIMIR clinical development program has been devised to establish the safety and efficacy of POSIMIR for the treatment ofpost-surgical pain for 3 days. Toward that end, 15 clinical studies have been conducted, of which 13 clinical studies were with the final formulation ofPOSIMIR in either blinded, randomized controlled trials or open-label trials. These 15 trials are included in the Integrated Summary of Safety (ISS) which wasincluded in the POSIMIR NDA. Seven randomized, controlled, parallel design clinical trials of POSIMIR using the instillation method of administration anddose proposed for marketing are included in the Integrated Summary of Efficacy (ISE) which was included in the NDA. Seven different surgical procedureshave been investigated, including inguinal hernia repair, shoulder surgery (primarily subacromial decompression), appendectomy, abdominal hysterectomy,open laparotomy, laparoscopic cholecystectomy, and laparoscopic colectomy. The incision lengths treated ranged from a few centimeters for laparoscopicportals, to open laparotomy incisions of up to 35 cm. The seriousness of the surgery ranged from day surgery hernia repair in relatively healthy patients tomajor abdominal surgery for colon cancer in elderly patients with substantial co-morbidity who were often hospitalized for a week or more. The safetyexperience from this variety of procedures and patients was designed to allow a more confident extrapolation of the safety and efficacy data to a broadgeneral surgical population.SafetyAs bupivacaine is a well-known drug with an extensive understanding of its risks and benefits, the safety database in the Integrated Summary of Safety(ISS) is not as large as required for a new chemical entity. A total of 1075 patients were included in the ISS database, 951 of whom have been exposed toPOSIMIR or SABER-Placebo in volumes ranging from 2.5 to 10 mL. A total of 683 patients have been exposed to POSIMIR with the dose of bupivacaineranging from 330 to 990 mg. In addition, a total of 124 patients have been treated with bupivacaine HCl in control groups and 268 patients received SABER-Placebo in control groups.Overall, the POSIMIR patient groups showed a similar systemic safety profile as the patient groups treated with SABER-Placebo and bupivacaine HCl.Local site reactions were observed more frequently in the POSIMIR and SABER-Placebo groups than in the active comparator groups, most frequently inabdominal surgeries; most of these observations were discolorations (e.g., surgical bruising), the majority of which resolved without treatment during theobservation period. There was little difference in the incidence of severe or serious adverse events between the POSIMIR, SABER-Placebo and bupivacaineHCl treatment groups. Most of the serious adverse events seen in these trials appear to be due to complications of surgery, anesthesia, analgesics, or co-morbidity and not POSIMIR-related. The clinical history for serious adverse events has been reviewed and no evidence of bupivacaine toxicity was apparent.The adverse event data have been analyzed in a variety of ways to detect any evidence of bupivacaine central nervous system or cardiac toxicity or otherunexpected effects. No patients treated with POSIMIR had an instance of a severe central nervous system or cardiac adverse event traditionally associatedwith bupivacaine toxicity.EfficacyIn the NDA, we presented the results from two efficacy trials that we positioned as pivotal (inguinal hernia repair and shoulder surgery, primarilysubacromial decompression) and an Integrated Summary of Efficacy (ISE) based on 7 randomized, controlled, parallel design surgical trials of POSIMIRusing the administration technique and 5 mL (660 mg) dose proposed for marketing. 8Table of ContentsHernia pivotal efficacy trialThe hernia pivotal efficacy clinical trial was designed to evaluate the tolerability, activity, dose response and pharmacokinetics of POSIMIR inpatients undergoing open inguinal hernia repair. The trial was conducted in Australia and New Zealand as a multi-center, randomized, double blind, placebo-controlled study in 122 patients. Study patients were randomized into three treatment groups: patients that were treated with POSIMIR 2.5 mL (n=43),POSIMIR 5 mL (n=47) and placebo (n=32). The co-primary efficacy endpoints for the study were Mean Pain Intensity on Movement area under the curve(AUC), a measure of pain over a period of 1-72 hours post-surgery, and the proportion of patients requiring supplemental opioid analgesic medication duringthe study (defined as 0-15 days).In relation to the co-primary endpoint of pain reduction as measured by Mean Pain Intensity on Movement AUC 1-72 hours post-surgery, the patientgroup treated with POSIMIR 5 mL reported thirty-one percent (31%) less pain versus placebo, and the result was statistically significant (p=0.0031). Fifty-three percent (53%) of the study patients in the POSIMIR 5 mL group took supplemental opioid analgesic medications versus seventy-two percent (72%) ofthe placebo patients (p=0.0909). Although this positive trend for this co-primary endpoint in favor of the POSIMIR 5 mL group was not statisticallysignificant, both secondary endpoints measuring opioid analgesic medication consumption were met at a statistically significant level. During the periods of1-24 hours, 24-48 hours and 48-72 hours after surgery, placebo patients consumed approximately 3.5 (p=0.0009), 2.9 (p=0.0190) and 3.6 (p=0.0172) timesmore supplemental opioid analgesic medications (mean total daily consumption of opioid analgesic medication in morphine equivalents), respectively, thanthe POSIMIR 5 mL treatment group. The median decrease in supplemental opioid analgesics taken over the first three days after surgery was 80% (p=0.0085)for the POSIMIR 5 mL group as compared to the placebo group.Shoulder pivotal efficacy trialThe shoulder pivotal efficacy trial was a multicenter, randomized, double-blind, active- and placebo-controlled, parallel-group, dose-response trialconducted at 9 investigational centers in Europe. Nycomed, our collaborator at the time, was responsible for the conduct of the clinical trial. In this study,107 patients were randomly assigned to one of three treatment groups prior to undergoing elective arthroscopic shoulder surgery: POSIMIR 5 mL (n=53),SABER-Placebo (n=25) or bupivacaine HCl solution (n=29). All patients were given a background pain treatment consisting of a daily dose of two or fourgrams (depending on the patient’s weight) of paracetamol (acetaminophen). In addition, each patient was provided supplemental opioid rescue medication, ifneeded. With respect to efficacy, the primary endpoints of the study were to demonstrate: (1) an improvement in terms of pain intensity on movement areaunder the curve (AUC) during the period 1–72 hours post-surgery, and (2) a decrease in the total use of opioid rescue analgesia 0–72 hours post-surgery.Results from this study demonstrate that the POSIMIR group experienced a statistically significant reduction in pain intensity of approximately 21%(p=0.0122) versus SABER-Placebo. Applying the appropriate statistical test given the data distribution, the POSIMIR group showed a statistically significantreduction of approximately 67% (p=0.013) in median opioid use in favor of POSIMIR. No statistical differences were found when POSIMIR was compared tobupivacaine HCl.Phase 3 trial in abdominal surgical proceduresWe also conducted a Phase 3 U.S. and international, multi-center, randomized, double-blind, controlled trial evaluating the safety, efficacy,effectiveness, and pharmacokinetics of POSIMIR in 305 patients undergoing a variety of general abdominal surgical procedures. The trial included thefollowing three cohorts:Cohort 1: An active comparator cohort in which patients were randomized to receive either POSIMIR 5 mL or commercially available BupivacaineHCl solution after laparotomy.Cohort 2: An active comparator cohort in which patients were randomized to receive either POSIMIR 5 mL or commercially available BupivacaineHCl solution after laparoscopic cholecystectomy.Cohort 3: A double blind, placebo controlled cohort in which patients were randomized to receive either POSIMIR 5 mL or SABER-Placebo afterlaparoscopically-assisted colectomy. 9Table of ContentsEfficacy evaluation in the Phase 3 trial encompassed a number of parameters. The two co-primary efficacy endpoints for Cohort 3 were mean painintensity on movement (normalized) Area Under the Curve (AUC) during the period 0-72 hours post-dose and mean total morphine equivalent opioid dosefor supplemental analgesia during the period 0-72 hours post-dose. The purpose of Cohorts 1 and 2 was to give us additional experience with the use ofPOSIMIR in a broader group of surgeries and patients.Cohort 3. With respect to the co-primary efficacy endpoint of pain reduction as measured by mean pain intensity on movement (normalized) AreaUnder the Curve (AUC) during the period 0-72 hours post-dose, the patient group treated with POSIMIR reported a mean pain reduction in pain scores ofapproximately 7%, although this was not statistically significant (p=0.1466). The statistical analysis plan included pain on movement as recorded atscheduled times through an electronic diary plus pain scores reported whenever supplemental opioids were administered with such scores attributed as if theywere pain on movement. In the prespecified sensitivity analysis (which includes only scheduled pain assessment on movement scores as collected on theelectronic diary), the patient group treated with POSIMIR reported approximately 10% less pain versus placebo (p=0.0410). In relation to the co-primaryefficacy endpoint of median total morphine-equivalent opioid dose for supplemental analgesia during the period 0-72 hours post-dose, the patient grouptreated with POSIMIR reported approximately 16% less opioids consumed versus the placebo group, although this was not statistically significant(p=0.5897).Cohorts 1 and 2. Cohorts 1 and 2 were prespecified to be pooled due to their small sample size. For Cohorts 1 and 2 (pooled), the mean reduction inpain on movement was approximately 20% and statistically significant (p=0.0111) for the POSIMIR group compared to the patient group treated withbupivacaine HCl. With respect to the median total morphine-equivalent opioid dose for supplemental analgesia during the period 0-72 hours post-dose forCohorts 1 and 2 (pooled), the patient group treated with POSIMIR reported approximately 18% less opioids consumed compared to the bupivacaine HClgroup, although this was not statistically significant (p=0.5455).Integrated Summary of EfficacyThe seven controlled trials in the ISE can be separated into two different surgical types, soft tissue and orthopedic. The four soft tissue trials involvedincisions or laparoscopic portals either in the abdomen or in the inguinal area for hernia repair. In these surgeries, the pain producing tissue was primarily softtissue such as viscera, fascia, muscle, or skin. However, in the three orthopedic surgeries involving shoulder surgery, a major pain producing tissue is bonethat has been resected during the procedure. Given that the responsiveness to treatment of these different surgical types may be different, a pooled analysiswas conducted separately by tissue type.In the soft tissue pooled analysis group comprised of 410 patients, 253 were treated with POSIMIR and 157 were treated with SABER-Placebo. Themean pain intensity was lower during the period 0-72 hours post-dose in the POSIMIR group than in the SABER-Placebo group and the difference wasstatistically significant (p=0.0099). The median total morphine-equivalent dose during the period 0-72 hours post-dose was lower in the POSIMIR group thanin the SABER-Placebo group, however the difference was not statistically significant.In the orthopedic pooled analysis group comprised of 187 patients, 114 were treated with POSIMIR and 73 were treated with SABER-Placebo. Themean pain intensity during the period 0-72 hours post-dose was lower in the POSIMIR group than in the SABER-Placebo group and the difference wasstatistically significant (p=0.0205). The median total morphine-equivalent dose during the period 0-72 hours post-dose was lower in the POSIMIR group thanin the SABER-Placebo group and the difference was statistically significant (p=0.0025).Current Status. In April 2013, we submitted an NDA as a 505(b)(2) application, which relies in part on the FDA’s findings of safety and effectivenessof a reference drug. In February 2014 we received a Complete Response Letter from the FDA. Based on the Complete Response Letter and subsequentcommunications with 10Table of Contentsthe FDA, we are conducting a new POSIMIR Phase 3 clinical trial consisting of approximately 306 patients undergoing laparoscopic cholecystectomy(gallbladder removal) surgery to further evaluate the benefits and risks of POSIMIR. We are referring to this trial as PERSIST (Placebo Controlled Trial ofSABER™-Bupivacaine for the Management of Postoperative Pain Following Laparoscopic Cholecystectomy). In a previous trial of 50 patients undergoinglaparoscopic cholecystectomy, POSIMIR demonstrated an approximately 25% reduction in pain intensity on movement for the first 3 days after surgery(p=0.024) against the active control bupivacaine HCl, using the same statistical methodology specified for the PERSIST trial. We began recruiting patientsfor this trial in November 2015 and expect that it will take approximately one year to complete enrollment. This clinical trial is designed to generate datanecessary to support an NDA resubmission.REMOXY (ORADUR-Oxycodone)Market Opportunity. Chronic pain is usually the result of an ongoing condition or significant problem associated with chronic diseases, includingcancer, various neurological and skeletal disorders and other ailments such as severe arthritis or a debilitating back injury. As the condition gets worse, thepain often gets worse. Also, long-lasting pain can affect the nervous system to the point where pain persists even if the condition that originally caused thepain is stabilized or improved. This is one reason patients often need stronger pain medication even if their underlying condition has been treated. Chronicpain affects as many as 100 million Americans annually. OxyContin, a brand name extended-release oral oxycodone-based painkiller, accounted forapproximately $2.4 billion in worldwide sales in 2014.Development Strategy. REMOXY is an oral, long-acting oxycodone gelatin capsule under development with Pain Therapeutics to which we havelicensed exclusive, worldwide, development and commercialization rights under a development and license agreement entered into in December 2002.REMOXY is formulated with our ORADUR technology and incorporates several abuse-deterrent properties with the convenience of twice-a-daydosing. Under the agreement with Pain Therapeutics, subject to and upon the achievement of predetermined development and regulatory milestones, we areentitled to receive milestone payments of up to $7.2 million in the aggregate for REMOXY and other licensed ORADUR-based opioids. As of December 31,2015, we had received $1.7 million in cumulative milestone payments. We also receive reimbursement for our research and development efforts on REMOXYand other licensed products, and a manufacturing profit on our supply of key excipients for use in REMOXY and other licensed products. In addition, ifcommercialized, we will receive royalties for REMOXY and other licensed products which do not contain an opioid antagonist of between 6.0% to 11.5% ofnet sales depending on sales volumes.Clinical Program. Pain Therapeutics submitted an NDA for REMOXY to the FDA in June 2008, and in August 2008 the FDA accepted the NDA andgranted priority review. In December 2008, Pain Therapeutics received a Complete Response Letter for its NDA for REMOXY in which the FDA determinedthat the NDA was not approved. According to Pain Therapeutics, the FDA indicated that additional non-clinical data would be required to support theapproval of REMOXY, but the FDA had not requested or recommended additional clinical efficacy studies prior to approval. King Pharmaceuticals (King), towhich Pain Therapeutics had licensed development and commercialization rights, assumed responsibility for further development of REMOXY from PainTherapeutics in March 2009. In July 2009, King met with the FDA to discuss the Complete Response Letter. King took over the NDA from Pain Therapeuticsand resubmitted the NDA in December of 2010. In February 2011, King was acquired by Pfizer. On June 23, 2011, a Complete Response Letter from the FDAwas received by Pfizer on the resubmission to the NDA for REMOXY. The FDA’s June 2011 Complete Response Letter raised concerns related to, amongother matters, the Chemistry, Manufacturing, and Controls section of the NDA for REMOXY. Pfizer undertook efforts to resolve these issues. In October 2013,Pfizer stated that, having achieved technical milestones related to manufacturing, they would continue the development program for REMOXY. Followingguidance received from the FDA earlier in 2013, Pfizer announced that they were proceeding with the additional clinical studies and other actions required toaddress the Complete Response Letter. Pfizer stated that these new clinical studies would include, in part, a pivotal bioequivalence study with the 11®Table of Contentsmodified REMOXY formulation to bridge to the clinical data related to the original REMOXY formulation, and an abuse-potential study with the modifiedformulation. We understand from the public disclosures of Pain Therapeutics that these studies have been completed and met their objectives. It is possiblethat the results of such studies will not be satisfactory to the FDA. In October 2014, Pfizer notified Pain Therapeutics that Pfizer had decided to discontinuedevelopment of REMOXY, and that Pfizer would return all rights, including responsibility for regulatory activities, to Pain Therapeutics and that Pfizerwould continue ongoing activities under the agreement until the scheduled termination date in April 2015. In April 2015, Pain Therapeutics stated that it hadresumed responsibility for REMOXY under the terms of a letter agreement with Pfizer. In July 2015, Pain Therapeutics stated that it had substantiallycompleted the transition of REMOXY from Pfizer, and that Pain Therapeutics expected to resubmit the NDA in the first quarter of 2016.ORADUR-ADHD ProgramMarket Opportunity. Attention Deficit Hyperactivity Disorder (ADHD) is a neurobehavioral condition that is estimated to affect over 5 million(approximately 9%) of U.S. children ages 3-17, according to the U.S. Department of Health and Human Services. The principal characteristics of ADHD areinattention, hyperactivity, and impulsivity. The condition presents itself in childhood and can be life long as a significant number of children with ADHDcontinue to present symptoms as adults. Over 50% of children with ADHD are estimated to being treated by medication, with stimulants such as amphetamineor methylphenidate as first-line treatments. U.S. sales of ADHD treatments were approximately $9 billion in 2014. The 2010 National Survey on Drug Use &Health estimates that 1.1 million Americans over the age of 12 abuse stimulants for euphoric highs and increased performance or wakefulness.Development Strategy. We are developing a drug candidate (ORADUR-ADHD) based on our ORADUR Technology for the treatment of ADHD. Thisdrug candidate is intended to provide once-a-day dosing with added tamper resistant characteristics to address common methods of abuse and misuse of thesetypes of drugs. In August 2009, we entered into a development and license agreement with Orient Pharma, a diversified multinational pharmaceutical,healthcare and consumer products company with headquarters in Taiwan, under which we granted to Orient Pharma development and commercializationrights in certain defined Asian and South Pacific countries to ORADUR-ADHD. We retain rights to North America, Europe, Japan and all other countries notspecifically licensed to Orient Pharma. Under our agreement with Orient Pharma, the parties will collaborate to perform a clinical development programthrough a Phase 2 study intended to produce a data package suitable for further development of the drug candidate by us as well as Orient Pharma in theirrespective territories. We will be responsible for formulation and study design of the Phase 1 and Phase 2 clinical program which Orient Pharma has agreed tofund and execute. Orient Pharma would be responsible for all remaining development and commercialization activities for ORADUR-ADHD in the licensedterritory. If commercialized, we will be entitled to receive a royalty on sales of ORADUR-ADHD by Orient Pharma. Orient Pharma has committed to supply aportion of our commercial requirements in all territories other than the U.S. for ORADUR-ADHD. In 2013, we and Orient Pharma selected a lead formulationbased on its potential for rapid onset of action, long duration for once-a-day dosing and target pharmacokinetic profile as demonstrated in a Phase 1 trial. Inaddition, this product candidate is expected to utilize a small capsule size relative to the leading existing long-acting products on the market. Orient Pharmahas initiated a Phase 3 study in Taiwan and anticipates completing it in 2016. We retain rights to all other territories in the world and are engaged inlicensing discussions with other companies.ELADUR (TRANSDUR-Bupivacaine)Market Opportunity. Pain can arise from a variety of diseases and conditions, and in many instances, pain originates from a localized point in thebody and can benefit from treatments which are administered and act locally as opposed to in a systemic fashion. One such example is post-herpetic neuralgia(PHN or post-shingles pain), a debilitating complication of herpes zoster, which is usually defined as the presence of pain at the site of eruption that lastsmore than a month after the onset of a zoster eruption. The prevalence of PHN (including PHN 12Table of Contentslasting more than one year) is estimated to be approximately 144,000 people in the U.S. In addition to PHN, there are a number of other widely prevalentchronic and acute local pain conditions (e.g., neuropathic pain, sprains, strains, and contusions) that could benefit from a locally acting pain product.Development Strategy. Our transdermal bupivacaine patch (ELADUR) under development is intended to provide continuous delivery of bupivacainefor up to three days from a single application, as compared to a wearing time limited to 12 hours with currently available lidocaine patches. We anticipatethat ELADUR will have several potential differentiating attributes compared with currently marketed lidocaine patches, including extended duration ofaction and better wearability. During 2008, we received Orphan Drug Designation for bupivacaine for relief of persistent pain associated with PHN, such thatif ELADUR is the first bupivacaine product approved for PHN, ELADUR should be eligible to receive seven years of data exclusivity following its approvalby the FDA. There can be no assurance that ELADUR will be the first bupivacaine product approved for PHN, and therefore ELADUR may not be entitled tothe seven year data exclusivity period for orphan drugs. Effective October 2008, we licensed the worldwide development and commercialization rights forELADUR to Alpharma Ireland Limited (Alpharma), which was acquired by King in December 2008. In February 2011, Pfizer acquired King and therebyassumed the rights and obligations of King with respect to ELADUR. In February 2012, Pfizer gave notice that its rights with respect to ELADUR were beingreturned to us. In January 2014, we and Impax Laboratories, Inc. (Impax) entered into a definitive agreement (the Impax Agreement) pursuant to which wehave granted Impax an exclusive worldwide license to our proprietary TRANSDUR transdermal delivery technology and other intellectual property todevelop and commercialize ELADUR, in addition to selling certain assets and rights in and related to the product. Impax will control and fund thedevelopment and commercialization programs, and the parties established a joint management committee to oversee, review and coordinate the developmentand commercialization activities of the parties under the Impax Agreement.Clinical Program. In 2007, we reported positive results from a 60 patient Phase 2a clinical trial for ELADUR. In this study of patients suffering fromPHN, ELADUR showed improved pain control versus placebo during the 3-day continuous treatment period. In addition, ELADUR appeared well toleratedoverall, and patients treated with ELADUR and placebo exhibited similar safety profiles. After acquiring Alpharma, King altered the clinical and regulatorystrategy for further development of this program to prioritize chronic low back pain. We reported top line data from a Phase 2 clinical trial conducted by Kingfor ELADUR in April 2011. In this study of 263 patients suffering from chronic low back pain, the primary efficacy endpoint of demonstrating a positivetreatment difference for the mean change in pain intensity scores from baseline to the mean of weeks 11 and 12 between ELADUR as compared to placebowas not met. Commencing in January 2014, Impax is now in charge of the future development program for ELADUR.ReldayMarket Opportunity. Risperidone is one of the most widely prescribed medications used to treat the symptoms of schizophrenia and bipolar I disorderin adults and teenagers 13 years of age and older. Relday is being developed to address unmet clinical needs in this large patient population. An existinglong-acting injectable risperidone product, which achieved global net sales of approximately $1.2 billion in 2014, requires twice monthly, intramuscularinjections and drug reconstitution prior to use. We and Zogenix expect that, if approved, Relday will be the first once-monthly, subcutaneous antipsychoticproduct that may offer an improved pharmacokinetic profile, significant reduction in injection volume and a simplified dosing regimen. We and Zogenixalso expect that, if approved, Relday will provide a new long-acting treatment option for patients that currently use daily oral antipsychotic products.Development Strategy. Under the development and license agreement entered into in July 2011 after working together since October 2007 under afeasibility agreement, Zogenix will be responsible for the clinical development and commercialization of a proprietary, long-acting injectable formulation ofrisperidone using our SABER controlled-release formulation technology. We will share non-clinical development responsibilities. In 13Table of ContentsJanuary 2013, Zogenix reported positive single-dose pharmacokinetic (PK) results from a Phase 1 clinical trial of Relday. According to Zogenix, adverseevents in the Phase 1 trial in patients diagnosed with schizophrenia were generally mild to moderate and consistent with other risperidone products. ThePhase 1 clinical trial for Relday was conducted as a single-center, open-label, safety and PK trial of 30 patients with chronic, stable schizophrenia orschizoaffective disorder. Per Zogenix, based on the favorable safety and PK profile demonstrated with the 25 mg and 50 mg once-monthly doses tested in thePhase 1 trial, Zogenix extended the study to include a 100 mg dose of the same formulation. In May 2013, Zogenix announced positive results with the 100mg arm, demonstrating dose proportionality across the full dose range that would be anticipated to be used in clinical practice. In March 2015, Zogenixcommenced a Phase 1b multi-dose parallel clinical trial, enrolling 60 subjects, for which Zogenix announced positive top line results in September 2015.According to Zogenix, the results for Relday demonstrated that risperidone plasma concentrations in the therapeutic range were achieved on the first day ofdosing, reached steady state levels following the second dose and consistently maintained therapeutic levels throughout the four-month period. Alsoaccording to Zogenix, Relday was generally safe and well-tolerated, with results consistent with the profile of risperidone and the previous Phase 1 single-dose clinical trial. Zogenix further stated that it has now initiated efforts to secure a development and commercialization partner for Relday, and that Reldayis well-positioned to begin a Phase 3 program once a partner is secured.Additional ORADUR-Opioid ProductsSince 2006, we also worked with Pain Therapeutics on the development of three additional ORADUR abuse-resistant opioid drug candidates whichwould address the chronic pain market. Phase 1 clinical trials have been conducted for two of these ORADUR-based products (hydrocodone andhydromorphone), and an IND has been accepted by the FDA for the fourth ORADUR-based opioid (oxymorphone). In October 2013, Pain Therapeutics statedthat it had regained all rights from Pfizer with respect to the three other ORADUR-based opioid drug candidates (hydrocodone, hydromorphone andoxymorphone). In 2015, Pain Therapeutics returned to us all of Pain Therapeutics’ rights and obligations under our license agreement to develop andcommercialize ORADUR-based formulations of hydrocodone but without impacting the rights and obligations of the two parties with respect to REMOXY(oxycodone), hydromorphone and oxymorphone. In 2015, we conducted research and development activities on two of these programs under approvedworkplans with Pain Therapeutics.Depot Injectable ProgramsIn addition to biologic drugs, many traditional small molecule drugs have to be given by frequent injections, which is costly, inconvenient and mayresult in either unwanted side effects or suboptimal efficacy. We have active programs underway to improve our depot injectable systems and to apply thosesystems to various drugs and drug candidates, and have entered into a number of feasibility studies with biotechnology and pharmaceutical companies to testtheir products in our systems. The Relday program with Zogenix and the ophthalmic program with Santen are two projects which started as depot injectablefeasibility projects and then matured into development and license agreements.Research Programs in other Therapeutic CategoriesWe have underway a number of research programs covering medical diseases and conditions other than pain. Such programs include various diseasesand disorders of the central nervous system, cardiovascular disease, ophthalmic conditions and metabolic disorders. In conducting our research programs anddetermining which particular efforts to prioritize for formal development, we employ a rigorous opportunity assessment process that takes into account theunmet medical need, commercial opportunity, technical feasibility, clinical viability, intellectual property considerations, and the development pathincluding costs to achieve various critical milestones. 14Table of ContentsDURECT StrategyOur objective is to develop multiple pharmaceutical products that address significant unmet medical needs and improve patients’ quality of life. Toachieve this objective, our strategy includes the following key elements:Apply our Drug Development Expertise to New Chemical Entities Derived from our Epigenomic Regulator Program. We have assembled a core teamof employees with considerable experience in drug development, and it is our intent to leverage their capabilities by developing pharmaceuticals derivedfrom our Epigenomic Regulator Program. We believe that these new chemical entities may have utility for several metabolic diseases such as NAFLD andNASH, in acute organ injuries such as acute kidney injury, and in various orphan diseases. We believe that these product candidates may be of interest tolarger pharmaceutical companies and that it may be possible to license the rights to certain products from this program while retaining the rights to otherproduct candidates for either our own development and commercialization or for licensing at a later stage of development.Focus on Chronic Debilitating Medical Conditions, Certain Local Pain Conditions and Certain Acute Indications. Many of the diseases anddisorders that present great challenges to medicine include pain management, CNS disorders, metabolic disorders, cardiovascular disease, acute organ injury,ophthalmic conditions and other chronic diseases. In addition, we have identified certain local and acute pain and other medical conditions that we believecan be addressed by improved therapeutics. Our current efforts focus on using our versatile drug delivery platform technologies to develop products thataddress these medical conditions and on exploiting our Epigenomic Regulator Program through which we have identified new chemical entities that mayhave utility in conditions such as acute organ injuries and chronic metabolic/lipid disorders.Minimize Product Development Risk. Initially, we intend to minimize product development risk by using our drug delivery platform technologies toadminister drugs for which medical data on efficacy and safety are available. This strategy reduces much of the development risk that is inherent intraditional pharmaceutical product discovery. We anticipate that we can expand the medical usefulness of existing well-characterized drugs in several ways: ● expand uses or create new uses for existing drugs by delivering drugs continuously for convenient long dosing intervals; ● create new uses for drugs which were previously considered to be too potent to be used safely by precisely controlling dosing; ● deliver drugs by injection or transdermally to eliminate the first pass effect whereby the efficacy of the active agent is impacted by digestion anddeactivation; ● enhance drug performance by minimizing side effects; and ● expand uses of drugs by delivering them to the target site.Enable the Development of Pharmaceutical Systems Based on Biotechnology and Other New Compounds. We believe there is a significantopportunity for pharmaceutical systems to add value to therapeutic medicine by administering biologics, such as proteins and peptides. We believe ourtechnologies will improve the specificity, potency, convenience and cost-effectiveness of proteins, peptides, and other newly discovered drugs. Our systemscan enable these compounds to be effectively administered, thus allowing them to become viable medicines. We can address the stability and storage needsof these compounds through our advanced formulation technology and package them in a suitable pharmaceutical system for optimum delivery. Throughcontinuous administration, the SABER and CLOUD technology platforms may eliminate or reduce the need for multiple injections of these drugs. Inaddition, through precise placement of our proprietary biodegradable drug formulations, proteins can be delivered to specific tissues for extended periods oftime, thus ensuring that large molecule agents are present at the desired site of action and minimizing the potential for adverse side effects elsewhere in thebody. 15Table of ContentsDiversify Risk by Pursuing Multiple Programs in Development. In order to reduce the risks inherent in pharmaceutical product development, we havediversified our product pipeline such that, between our own programs and those where we have collaborated, we presently have two programs for which NewDrug Applications have been filed and Complete Response Letters have been received, and six different other programs in development, including three oraldrug candidates, one transdermal patch candidate and two injectable drug candidates. We believe that having multiple programs in development helpsmitigate the negative consequences to us of any setbacks or delays in any one of our programs.Enable Product Development Through Strategic Collaborations. We believe that entering into selective collaborations with respect to our productdevelopment programs can enhance the success of our product development and commercialization, mitigate our risk and enable us to better manage ouroperating costs. Additionally, such collaborations enable us to leverage investment by our collaborators and reduce our net cash burn, while retainingsignificant economic rights.Build Our Own Commercial Organization. In the future, we may elect to build our own commercial, sales and marketing capability in order to capturemore of the economic value of certain products that we may develop. If we choose to enter into third-party collaborations to commercialize ourpharmaceutical product candidates, we may in the future enter into these alliances under circumstances that allow us to participate in the sales and marketingof these products.Third-Party CollaborationsWe have entered into the following agreements in connection with our third party collaborations:Santen Pharmaceutical Co., Ltd. On December 11, 2014, we and Santen Pharmaceutical Co., Ltd. (“Santen”) entered into a definitive agreement (theSanten Agreement). Pursuant to the Santen Agreement, we have granted Santen an exclusive worldwide license to our proprietary SABER formulationplatform and other intellectual property to develop and commercialize a sustained release product utilizing our SABER technology to deliver anophthalmology drug. Santen will control and fund the development and commercialization program, and the parties will establish a joint managementcommittee to oversee, review and coordinate the development activities of the parties under the Agreement.In connection with the license agreement, Santen paid us an upfront fee of $2.0 million in cash and agreed to make contingent cash payments to us ofup to $76.0 million upon the achievement of certain milestones, of which $13.0 million are development-based milestones (none of which has been achievedas of December 31, 2015), and $63.0 million are commercialization-based milestones including milestones requiring the achievement of certain product salestargets (none of which has been achieved as of December 31, 2015). Santen will also pay for certain of our costs incurred in the development of the licensedproduct. If the product is commercialized, we would also receive a tiered royalty on annual net product sales ranging from single-digit to the low doubledigits, determined on a country-by-country basis. Santen may terminate the Santen Agreement without cause at any time upon prior written notice, and eitherparty may terminate the Santen Agreement upon certain circumstances including a material uncured breach. As of December 31, 2015, the cumulativeaggregate payments received by us under this agreement were $2.4 million.Impax Laboratories, Inc. On January 3, 2014, we and Impax entered into the definitive Impax Agreement. Pursuant to the Impax Agreement, we havegranted Impax an exclusive worldwide license to our proprietary TRANSDUR transdermal delivery technology and other intellectual property to developand commercialize ELADUR, our investigational transdermal bupivacaine patch for the treatment of pain associated with PHN, in addition to selling certainassets and rights in and related to the product. Impax will control and fund the development and commercialization programs, and the parties will establish ajoint management committee to oversee, review and coordinate the development and commercialization activities of the parties under the Impax Agreement.Impax will reimburse us for certain future research and development we may be requested to conduct on the product. 16Table of ContentsIn connection with the Impax Agreement, Impax paid us an upfront fee of $2.0 million in cash and agreed to make contingent cash payments to us ofup to $61.0 million payable based upon the achievement of predefined milestones, of which $31.0 million are development-based milestones and $30.0million are commercialization-based milestones. Upon the first commercialization of ELADUR by Impax, we would also receive a tiered mid single-digit tolow double-digit royalty on annual net product sales determined on a country-by-country basis. Impax is also required to pay to us a percentage of feesreceived in connection with any sublicense of the licensed rights. Impax may terminate the Impax Agreement without cause at any time upon prior writtennotice, and either party may terminate the Impax Agreement upon certain circumstances including written notice of a material uncured breach. As ofDecember 31, 2015, the cumulative aggregate payments received by us under this agreement were $2.1 million.Zogenix, Inc. On July 11, 2011, we and Zogenix, Inc., (Zogenix), entered into a Development and License Agreement (the Zogenix Agreement). Weand Zogenix had previously been working together under a feasibility agreement pursuant to which our research and development costs were reimbursed byZogenix. Under the Zogenix Agreement, Zogenix is responsible for the clinical development and commercialization of a proprietary, long-acting injectableformulation of risperidone using our SABER and other controlled-release depot formulation technologies. We are responsible for non-clinical, formulationand CMC development activities. We will be reimbursed by Zogenix for our research and development efforts on the product. Zogenix paid a non-refundableupfront fee to us of $2.25 million in July 2011. Zogenix is obligated to pay us up to $103 million in total future milestone payments with respect to theproduct subject to and upon the achievement of various development, regulatory and sales milestones. Of these potential milestones, $28 million aredevelopment-based milestones (none of which has been achieved as of December 31, 2015), and $75 million are sales-based milestones (none of which hasbeen achieved as of December 31, 2015). Zogenix is also required to pay a mid single-digit to low double-digit percentage patent royalty on annual net salesof the product determined on a jurisdiction-by-jurisdiction basis.We granted to Zogenix an exclusive worldwide license, with sub-license rights, to the intellectual property rights related to the proprietary polymericand non-polymeric controlled-release formulation technology to make and have made, use, offer for sale, sell and import risperidone products, whererisperidone is the sole active agent, for administration by injection in the treatment of schizophrenia, bipolar disorder or other psychiatric related disorders inhumans. We retain the right to supply Zogenix’s Phase 3 clinical trial and commercial product requirements on the terms set forth in the Zogenix Agreement.We retain the right to terminate the Zogenix Agreement with respect to specific countries if Zogenix fails to advance the development of the product in suchcountry, either directly or through a sublicensee. In addition, either party may terminate the Zogenix Agreement upon insolvency or bankruptcy of the otherparty, upon written notice of a material uncured breach or if the other party takes any act impairing such other party’s relevant intellectual property rights.Zogenix may terminate the Zogenix Agreement upon written notice if during the development or commercialization of the product, the product becomessubject to one or more serious adverse drug experiences or if either party receives notice from a regulatory authority, independent review committee, datasafety monitoring board or other similar body alleging significant concern regarding a patient safety issue. Zogenix may also terminate the ZogenixAgreement with or without cause, at any time upon prior written notice. As of December 31, 2015, the cumulative aggregate payments received by us underthis agreement and the prior feasibility agreement were $19.3 million.Pain Therapeutics, Inc. In December 2002, we entered into an exclusive agreement with Pain Therapeutics to develop and commercialize on aworldwide basis oral sustained release, abuse deterrent opioid products incorporating four specified opioid drugs using our ORADUR technology. Theagreement also provides Pain Therapeutics with the exclusive right to commercialize products developed under the agreement on a worldwide basis. Inconnection with the execution of the agreement, Pain Therapeutics paid us an upfront fee. In November 2005, Pain Therapeutics sublicensed the worldwidecommercialization rights (except for Australia and New Zealand) to certain products developed under the agreement (including REMOXY) to King. InFebruary 2011 Pfizer acquired King and thereby assumed the rights and obligations of King with respect to the sublicense 17Table of Contentsagreement. In December 2005, we amended our agreement with Pain Therapeutics in order to specify our obligations with respect to the supply of keyexcipients for use in the licensed products. Under the amended agreement, we are responsible for formulation development, supply of selected key excipientsused in the manufacture of licensed product and other specified tasks. We receive reimbursement for our research and development efforts on the licensedproducts and a manufacturing profit on our supply of key product excipients to Pain Therapeutics for use in the licensed products. In 2015, Pain Therapeuticsreturned to us all of Pain Therapeutics’ rights and obligations under our license agreement to develop and commercialize ORADUR-based formulations ofhydrocodone but without impacting the rights and obligations of the two parties with respect to REMOXY, hydromorphone and oxymorphone. Under theagreement with Pain Therapeutics, subject to and upon the achievement of predetermined development and regulatory milestones for the two drug candidatescurrently in development, we are entitled to receive milestone payments of up to $7.2 million in the aggregate. As of December 31, 2015, we had received$1.7 million in cumulative milestone payments. In addition, if commercialized, we will receive royalties for REMOXY and other licensed products which donot contain an opioid antagonist of between 6.0% to 11.5% of net sales of the product depending on the sales volumes. This agreement can be terminated byeither party for material breach by the other party and by Pain Therapeutics without cause. As of December 31, 2015, the cumulative aggregate paymentsreceived by us under this agreement were $45.6 million.In addition, pursuant to a long term supply agreement that has now terminated, in 2015, 2014 and 2013, the Company recognized $96,000, $33,000and $273,000 of product revenue, respectively, related to key excipients for REMOXY and the associated cost of goods sold was $51,000, zero and$165,000, respectively.Commercial Product LinesALZETThe ALZET product line consists of miniature, implantable osmotic pumps and accessories used for experimental research in mice, rats and otherlaboratory animals. These pumps are neither approved nor intended for human use. ALZET pumps continuously deliver drugs, hormones and other testagents at controlled rates from one day to six weeks without the need for external connections, frequent handling or repeated dosing. In laboratory research,these infusion pumps can be used for systemic administration when implanted under the skin or in the body. They can be attached to a catheter forintravenous, intracerebral, or intra-arterial infusion or for targeted delivery, where the effects of a drug or test agent are localized in a particular tissue ororgan. The wide use and applications of the ALZET product line is evidenced by the more than 15,000 scientific references that now exist.We acquired the ALZET product line and assets used primarily in the manufacture, sale and distribution of this product line from ALZA in April 2000.We believe that the ALZET product line provides us with innovative design and application opportunities for potential new products.LACTEL Absorbable PolymersWe currently design, develop and manufacture a wide range of standard and custom biodegradable polymers based on lactide, glycolide andcaprolactone under the LACTEL brand for pharmaceutical and medical device clients for use as raw materials in their products. These materials aremanufactured and sold by us directly from our facility in Alabama and are used by us and our third-party customers for a variety of controlled-release andmedical-device applications, including several FDA-approved commercial products.Marketing and SalesHistorically, we have established strategic distribution and marketing alliances for products based on our pharmaceutical systems to leverage theestablished sales organizations that certain pharmaceutical companies have in markets we are targeting. In the future, we may elect to build our owncommercial, sales and marketing 18Table of Contentscapability in order to capture more of the economic value of certain products that we may develop. If we choose to enter into third-party collaborations tocommercialize our pharmaceutical systems, we may in the future enter into these alliances under circumstances that allow us to participate in the sales andmarketing of these products. We will continue to pursue strategic alliances and collaborators from time to time consistent with our strategy to leverage theestablished sales organizations of third-party collaborators to achieve greater market penetration for some of our products than we could on our own. If wechoose to enter into third-party collaborations to commercialize our pharmaceutical systems, we believe we have the flexibility to enter into these alliancesunder circumstances that allow us to retain greater economic participation because our pharmaceutical systems combine drugs for which medical data onefficacy and safety are available with proven technology platforms.We market and sell our ALZET and LACTEL product lines through a direct sales force in the U.S. and through a network of distributors outside of theU.S.SuppliersWe purchase sucrose acetate isobutyrate, a raw material for our ORADUR and SABER-based pharmaceutical systems, including POSIMIR, REMOXYand other ORADUR-based drug candidates, pursuant to a supply agreement with Eastman Chemical Company. Our supply agreement with Eastman ChemicalCompany requires us to purchase a certain portion of our requirements for sucrose acetate isobutyrate from Eastman Chemical and obligates us to pay a feeper annum if our purchases do not meet specified sales targets. The agreement may be terminated by either party under certain circumstances, including anymaterial uncured breach by, or the insolvency, liquidation or bankruptcy of, or similar proceedings involving, the other party. We believe that this agreementwill provide a sufficient supply of these raw materials to meet our needs for the foreseeable future. We do not have in place long term supply agreements withrespect to all of the components of any of our pharmaceutical product candidates, however, and are subject to the risk that we may not be able to procure allrequired components in adequate quantities with acceptable quality, within acceptable time frames or at reasonable cost.CustomersOur product revenues principally are derived from the sale of the ALZET product line to academic and pharmaceutical industry researchers, theLACTEL product lines to pharmaceutical and medical device customers, and from the sale of certain key excipients that are included in REMOXY and otherproducts. Until such time that we are able to bring our pharmaceutical product candidates to market, if at all, we expect these to be our principal sources ofproduct revenue. We also receive revenue from collaborative research and development arrangements with our third-party collaborators. In 2015, Zogenixand Tolmar Inc. accounted for 26% and 11% of the Company’s total revenues, respectively. In 2014, Zogenix and Impax accounted for 23% and 11% of ourtotal revenues, respectively. In 2013, Tolmar Inc. accounted for 15% of our total revenues.ManufacturingThe process for manufacturing our pharmaceutical product candidates is technically complex, requires special skills, and must be performed in aqualified facility. We have entered into a manufacturing development agreement with a contract manufacturing organization for the manufacture ofPOSIMIR. In addition, we have a small multi-discipline manufacturing facility in California that we have used to manufacture research and clinical suppliesof several of our pharmaceutical product candidates under GMP, including POSIMIR, REMOXY, and ELADUR. In the future, we intend to developadditional manufacturing capabilities for our pharmaceutical product candidates and components to meet our demands and those of our third partycollaborators by contracting with third party manufacturers and by potentially constructing additional manufacturing space at our current facilities inCalifornia and Alabama. We manufacture our ALZET product line and certain key components for REMOXY at one of our California facilities and ourLACTEL product line at our Alabama facility. 19Table of ContentsPatents, Licenses and Proprietary RightsOur success depends in part on our ability to obtain patents, to protect trade secrets, to operate without infringing upon the proprietary rights of othersand to prevent others from infringing on our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S.and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Asof February 18, 2016, we held over 55 unexpired issued U.S. patents and over 375 unexpired issued foreign patents (which include granted European patentrights that have been validated in various EU member states). In addition, we have over 35 pending U.S. patent applications and over 75 foreign applicationspending in Europe, Australia, Japan, Canada and other countries.Proprietary rights relating to our planned and potential products will be protected from unauthorized use by third parties only to the extent that theyare covered by valid and enforceable patents or are effectively maintained as trade secrets. Patents owned by or licensed to us may not afford protectionagainst competitors, and our pending patent applications now or hereafter filed by or licensed to us may not result in patents being issued. In addition, thelaws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the U.S.The patent positions of biopharmaceutical companies involve complex legal and factual questions and, therefore, their enforceability cannot bepredicted with certainty. Our patents or patent applications, or those licensed to us, if issued, may be challenged, invalidated or circumvented, and the rightsgranted thereunder may not provide proprietary protection or competitive advantages to us against competitors with similar technology. Furthermore, ourcompetitors may independently develop similar technologies or duplicate any technology developed by us. Because of the extensive time required fordevelopment, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patentmay expire or remain in existence for only a short period following commercialization, thus reducing any advantage of the patent, which could adverselyaffect our ability to protect future product development and, consequently, our operating results and financial position.Because patent applications in the U.S. are typically maintained in secrecy for at least 18 months after filing and since publication of discoveries in thescientific or patent literature often lag behind actual discoveries, we cannot be certain that we were the first to make the inventions covered by each of ourissued or pending patent applications or that we were the first to file for protection of inventions set forth in such patent applications.Our planned or potential products may be covered by third-party patents or other intellectual property rights, in which case we would need to obtain alicense to continue developing or marketing these products. Any required licenses may not be available to us on acceptable terms, if at all. If we do notobtain any required licenses, we could encounter delays in product introductions while we attempt to design around these patents, or could find that thedevelopment, manufacture or sale of products requiring such licenses is foreclosed. Litigation may be necessary to defend against or assert such claims ofinfringement, to enforce patents issued to us, to protect trade secrets or know-how owned by us, or to determine the scope and validity of the proprietaryrights of others. In addition, interference, derivation, post-grant oppositions, and similar proceedings may be necessary to determine rights to inventions inour patents and patent applications. Litigation or similar proceedings could result in substantial costs to and diversion of effort by us, and could have amaterial adverse effect on our business, financial condition and results of operations. These efforts by us may not be successful.We may rely, in certain circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We seek to protect ourproprietary technology and processes, in part, by confidentiality agreements with our employees and certain contractors. There can be no assurance that theseagreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or beindependently discovered by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in theirwork for us, disputes may also arise as to the rights in related or resulting know-how and inventions. 20Table of ContentsWe have also entered into an exclusive in-license and research and development agreement with the Virginia Commonwealth University IntellectualProperty Foundation regarding the new chemical entities under development through our Epigenomic Regulator Program. Under this licensing arrangement,we have agreed to undertake certain efforts to bring licensed products to market, prosecute related patents and report on progress to VCU. In addition, we areobligated to pay low single-digit percentage patent royalties on net sales of licensed products, subject to annual minimum payments and additionalmilestone payments. This license includes rights to six patent families.Government RegulationThe Food and Drug Administration. The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries imposesubstantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state andlocal entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, distribution,record keeping, approval, advertising and promotion of our products. We believe that our initial pharmaceutical systems will be regulated as drugs by theFDA rather than as biologics or devices.The process required by the FDA under the new drug provisions of the Federal Food, Drug and Cosmetics Act (the Act) before our initialpharmaceutical systems may be marketed in the U.S. generally involves the following: ● preclinical laboratory and animal tests; ● submission of an Investigational New Drug (IND) application which must become effective before clinical trials may begin; ● adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed pharmaceutical in our intended use; and ● FDA approval of a new drug application.Section 505 of the Act describes three types of new drug applications: (1) an application that contains full reports of investigations of safety andeffectiveness (section 505(b)(1)); (2) an application that contains full reports of investigations of safety and effectiveness but where at least some of theinformation required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference(section 505(b)(2)); and (3) an application that contains information to show that the proposed product is identical in active ingredient, dosage form,strength, route of administration, labeling, quality, performance characteristics and intended use, among other things, to a previously approved product(section 505(j)). A supplement to an application is a new drug application. We expect that most of the Drug Delivery Program product candidates will beapproved by submission of a new drug application under section 505(b)(2) and that our drug candidates deriving from our Epigenomic Regulator Programwill be approved by submission of a new drug application under section 505(b)(1).The testing and approval process requires substantial time, effort, and financial resources, and we cannot be certain that any approval will be grantedon a timely basis, if at all. Even though several of our pharmaceutical systems utilize active drug ingredients that are commercially marketed in the UnitedStates in other dosage forms, we need to establish safety and effectiveness of those active ingredients in the formulation and dosage forms that we aredeveloping.Preclinical tests include laboratory evaluation of the product, its chemistry, formulation and stability, as well as animal studies to assess the potentialsafety and efficacy of the pharmaceutical system. We then submit the results of the preclinical tests, together with manufacturing information and analyticaldata, to the FDA as part of an IND, which must become effective before we may begin human clinical trials. Each subsequent new clinical protocol must alsobe submitted to the IND. An IND automatically becomes effective 30 days after receipt by the 21Table of ContentsFDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the trials as outlined in the IND and imposes a clinicalhold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. Our submission of an IND may notresult in FDA authorization to commence clinical trials. Further, an independent Institutional Review Board at each medical center proposing to conduct theclinical trials must review and approve any clinical study as well as the related informed consent forms and authorization forms that permit us to useindividually identifiable health information of study participants.Human clinical trials are typically conducted in three sequential phases which may overlap: ● Phase 1: The drug is initially introduced into healthy human subjects or patients and tested for safety, dosage tolerance, absorption, metabolism,distribution and excretion. ● Phase 2: Involves clinical trials in a limited patient population to identify possible adverse effects and safety risks, to determine the efficacy ofthe product for specific targeted diseases and to determine dosage tolerance and optimal dosage. ● Phase 3: When Phase 2 clinical trials demonstrate that a dosage range of the product is effective and has an acceptable safety profile, Phase 3clinical trials are undertaken to further evaluate dosage, clinical efficacy and to further test for safety in an expanded patient population, atmultiple, geographically dispersed clinical study sites.In the case of products for severe diseases, such as chronic pain, or life-threatening diseases such as cancer, the initial human testing is often conductedin patients with disease rather than in healthy volunteers. Since these patients already have the target disease or condition, these studies may provide initialevidence of efficacy traditionally obtained in Phase 2 trials, and thus these trials are frequently referred to as Phase 1/2 clinical trials. We cannot be certainthat we will successfully complete Phase 1, Phase 2 or Phase 3 clinical trials of our pharmaceutical systems within any specific time period, if at all.Furthermore, the FDA or the Institutional Review Board or the sponsor may suspend clinical trials at any time on various grounds, including a finding thatthe subjects or patients are being exposed to an unacceptable health risk. During the clinical development of products, sponsors frequently meet and consultwith the FDA in order to ensure that the design of their studies will likely provide data both sufficient and relevant for later regulatory approval; however, noassurance of approvability can be given by the FDA.The results of product development, preclinical studies and clinical studies are submitted to the FDA as part of a new drug application, or NDA, forapproval of the marketing and commercial shipment of the product. Submission of an NDA requires the payment of a substantial user fee to the FDA, andalthough the agency has defined user fee goals for the time in which to respond to sponsor applications, we cannot assure you that the FDA will act in anyparticular timeframe. The FDA may deny a new drug application if the applicable regulatory criteria are not satisfied or may require additional clinical data.Even if such data is submitted, the FDA may ultimately decide that the new drug application does not satisfy the criteria for approval. Once issued, the FDAmay withdraw product approval if compliance with regulatory standards is not maintained or if safety problems occur after the product reaches the market.Requirements for additional Phase 4 studies (post approval marketing studies) to confirm safety and effectiveness in a broader commercial use populationmay be imposed as a condition of marketing approval. In addition, the FDA requires surveillance programs to monitor approved products which have beencommercialized, and the agency has the power to require changes in labeling or to prevent further marketing of a product based on the results of these post-marketing programs. Any comparative claims that we would like to make for our products vis-à-vis other dosage forms or products will need to besubstantiated generally by two adequate and well-controlled head-to-head clinical trials.Satisfaction of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual timerequired may vary substantially, based upon the type, complexity and novelty of the pharmaceutical product. Government regulation may delay or preventmarketing of potential products for a considerable period of time and impose costly procedures upon our activities. We cannot be 22Table of Contentscertain that the FDA or any other regulatory agency will grant approval for any of our pharmaceutical systems under development on a timely basis, if at all.Success in preclinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities isnot always conclusive and may be susceptible to varying interpretations which could delay, limit or prevent regulatory approval. Evolving safety concernscan result in the imposition of new requirements for expensive and time consuming tests, such as for QT interval cardiotoxicity testing. Even if a productreceives regulatory approval, the approval may be significantly limited to specific indications. Further, even after regulatory approval is obtained, laterdiscovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from themarket. Any pharmaceutical systems that we may develop and obtain approval for would also be subject to adverse findings of the active drug ingredientsbeing marketed in different dosage forms and formulations. Delays in obtaining, or failures to obtain regulatory approvals would have a material adverseeffect on our business. Marketing our pharmaceutical systems abroad will require similar regulatory approvals and is subject to similar risks. In addition, wecannot predict what adverse governmental regulations may arise from future U.S. or foreign governmental action.Any pharmaceutical systems manufactured or distributed by us pursuant to FDA approvals are subject to pervasive and continuing regulation by theFDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required toregister their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and state agencies forcompliance with good manufacturing practices, which impose procedural and documentation requirements upon us and our third party manufacturers. Wecannot be certain that we or our present or future suppliers will be able to comply with the GMP regulations and other FDA regulatory requirements.The FDA regulates drug labeling and promotion activities. The FDA has actively enforced regulations prohibiting the marketing of products forunapproved uses, and federal and state authorities are also actively litigating against sponsors who promote their drugs for unapproved uses under variousfraud and abuse and false claims act statutes. We and our pharmaceutical systems are also subject to a variety of state laws and regulations in those states orlocalities where our pharmaceutical systems are or will be marketed. Any applicable state or local regulations may hinder our ability to market ourpharmaceutical systems in those states or localities. We are also subject to numerous federal, state and local laws relating to such matters as safe workingconditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We mayincur significant costs to comply with such laws and regulations now or in the future.The FDA’s policies may change and additional government regulations may be enacted which could prevent or delay regulatory approval of ourpotential pharmaceutical systems. Moreover, increased attention to the containment of health care costs in the U.S. and in foreign markets could result in newgovernment regulations that could have a material adverse effect on our business. We cannot predict the likelihood, nature or extent of adverse governmentalregulation that might arise from future legislative or administrative action, either in the U.S. or abroad.On February 6, 2009, the FDA sent letters to manufacturers of certain opioid drug products, indicating that these drugs will be required to have a RiskEvaluation and Mitigation Strategy (REMS) to ensure that the benefits of the drugs continue to outweigh the risks. The affected opioid drugs include brandname and generic products and are formulated with the active ingredients fentanyl, hydromorphone, methadone, morphine, oxycodone, and oxymorphone.The FDA has authority to require a REMS under the Food and Drug Administration Amendments Act of 2007 (FDAAA) when necessary to ensure that thebenefits of a drug outweigh the risks.On April 19, 2011, the Office of National Drug Control Policy (ONDCP) released the Obama Administration’s Epidemic: Responding to America’sPrescription Drug Abuse Crisis—a comprehensive action plan to address the national prescription drug abuse epidemic. This plan includes action in fourmajor areas to 23Table of Contentsreduce prescription drug abuse: education, monitoring, proper disposal, and enforcement. In support of the action plan, the FDA announced the elements of aRisk Evaluation and Mitigation Strategy (REMS) that will require all manufacturers of long-acting and extended-release opioids to ensure that training isprovided to prescribers of these medications and to develop information that prescribers can use when counseling patients about the risks and benefits ofopioid use. The FDA wants drug makers to work together to develop a single system for implementing the REMS strategies.More recently, in February 2016, the FDA announced a comprehensive action plan to take concrete steps towards reducing the impact of opioid abuseon American families and communities. As part of this plan, the agency will review product and labelling decisions and re-examine the risk-benefit paradigmfor opioids.Many of our drug candidates including REMOXY and our other ORADUR-based opioid drug candidates are subject to the REMS requirement. Untilthe contours of required REMS programs are established by the FDA and understood by drug developers and marketers such as ourselves and ourcollaborators, and until the results of the FDA’s recently announced initiatives are known, there may be delays in marketing approvals for these drugcandidates. In addition, there may be increased cost, administrative burden and potential liability associated with the marketing and sale of these types ofdrug candidates subject to the REMS requirement, which could negatively impact the commercial benefits to us and our collaborators from the sale of thesedrug candidates.The Drug Enforcement Administration. The Drug Enforcement Administration (DEA) regulates chemical compounds as Schedule I, II, III, IV or Vsubstances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Certain activeingredients in REMOXY and our other ORADUR-based opioid drug candidates, are listed by the DEA as Schedule II under the Controlled Substances Act of1970. Consequently, their manufacture, research, shipment, storage, sale and use are subject to a high degree of oversight and regulation. For example, allSchedule II drug prescriptions must be signed by a physician, physically presented to a pharmacist and may not be refilled without a new prescription.Furthermore, the amount of Schedule II substances we can obtain for clinical trials and commercial distribution is limited by the DEA and our quota may notbe sufficient to complete clinical trials or meet commercial demand. There is a risk that DEA regulations may interfere with the supply of the drugs used inour clinical trials, and, in the future, our ability to produce and distribute our products in the volume needed to meet commercial demand, which couldnegatively impact us and our collaborators.CompetitionWe may face competition from other companies in numerous industries including pharmaceuticals, medical devices and drug delivery. POSIMIR,ELADUR, Relday, REMOXY and other ORADUR-based drug candidates, if approved, will compete with currently marketed oral opioids, transdermalopioids, local anesthetic patches, anti-psychotics, stimulants, implantable and external infusion pumps which can be used for infusion of opioids and localanesthetics. Products of these types are marketed by Purdue Pharma, AbbVie, Janssen, Medtronic, Endo, AstraZeneca, Pernix Therapeutics, Tricumed, HalyardHealth, Cumberland Pharmaceuticals, Pacira, Acorda Therapeutics, Mallinckrodt, Shire, Johnson & Johnson, Eli Lilly, Pfizer, Novartis and others. PurduePharma, Sandoz, Actavis, Collegium Pharmaceutical, Pfizer, Elite Pharmaceuticals, Intellipharmaceutics, Egalet, Teva Pharmaceuticals and others have alsoannounced regulatory approval or development plans for abuse deterrent opioid products. Our ORADUR-ADHD product candidates, if approved, willcompete with currently marketed or approved products by Shire, Johnson & Johnson, UCB, Novartis, Noven, Eli Lilly, Pfizer and others. Relday, if approved,will compete with currently marketed products by Johnson & Johnson, Eli Lilly, Astra Zeneca, Pfizer, Bristol-Myers Squibb, Otsuka, SunovionPharmaceuticals, Teva and others. Competition for DUR-928, if approved, will depend on the specific indications for which DUR-928 is approved. Intercept,Gilead, Shire, Conatus Pharmaceuticals, Galectin Therapeutics, Genfit, Pfizer, Roche, Galmed Pharmaceuticals, Tobira Therapeutics, Enanta Pharmaceuticals,Novo Nordisk, Takeda, Vital Therapies and others have development plans for products to treat NAFLD/NASH. Ischemix, Thrasos Therapeutics, AM-Pharma,Complexa, AbbVie, AlloCure, Quark Pharmaceuticals and others have development plans for products to treat acute kidney injury. Numerous companies 24Table of Contentsare applying significant resources and expertise to the problems of drug delivery and several of these are focusing or may focus on delivery of drugs to theintended site of action, including Alkermes, Pacira, Immune Pharmaceuticals, Innocoll, Nektar, Kimberly-Clark, Acorda Therapeutics, Flamel, Alexza,Mallinckrodt, Hospira, Pfizer, Cumberland Pharmaceuticals, Egalet, Acura, Elite Pharmaceuticals, Phosphagenics, Intellipharmaceutics, CollegiumPharmaceutical, Heron Therapeutics and others. Some of these competitors may be addressing the same therapeutic areas or indications as we are. Our currentand potential competitors may succeed in obtaining patent protection or commercializing products before us. Many of these entities have significantlygreater research and development capabilities than we do, as well as substantially more marketing, manufacturing, financial and managerial resources. Theseentities represent significant competition for us. Acquisitions of, or investments in, competing pharmaceutical or biotechnology companies by largecorporations could increase such competitors’ financial, marketing, manufacturing and other resources.Any products we develop using our pharmaceutical systems technologies will compete in highly competitive markets. Many of our potentialcompetitors in these markets have greater development, financial, manufacturing, marketing, and sales resources than we do and we cannot be certain thatthey will not succeed in developing products or technologies which will render our technologies and products obsolete or noncompetitive. In addition, manyof those potential competitors have significantly greater experience than we do in their respective fields.Corporate History, Headquarters and Website InformationWe were incorporated in Delaware in February 1998. We completed our initial public offering on September 28, 2000. Our principal executive officesare located at 10260 Bubb Road, Cupertino, California, 95014. Our telephone number is (408) 777-1417, and our website address is www.durect.com. Wemake our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports available free of chargeon our website as soon as reasonably practicable after we file these reports with the Securities and Exchange Commission. Our Code of Ethics can be foundon our website.EmployeesAs of February 18, 2016 we had 106 employees, including 57 in research and development, 22 in manufacturing and 27 in selling, general andadministrative. From time to time, we also employ independent contractors to support our research, development and administrative organizations. None ofour employees are represented by a collective bargaining unit, and we have never experienced a work stoppage. We consider our relations with ouremployees to be good.Executive Officers of the RegistrantOur executive officers and their ages as of February 18, 2016 are as follows: Name Age PositionFelix Theeuwes, D.Sc. 78 Chairman, Chief Scientific Officer and DirectorJames E. Brown, D.V.M. 59 President, Chief Executive Officer and DirectorMatthew J. Hogan, M.B.A. 56 Chief Financial OfficerJudy R. Joice 59 Senior Vice President, Operations and Corporate Quality AssuranceFelix Theeuwes, D.Sc. co-founded DURECT in February 1998 and has served as our Chairman, Chief Scientific Officer and a Director since July 1998.Prior to that, Dr. Theeuwes held various positions at ALZA Corporation, including President of New Ventures from August 1997 to August 1998, President ofALZA Research and Development from 1995 to August 1997, President of ALZA Technology Institute from 1994 to April 1995 and Chief Scientist from1982 to June 1997. Dr. Theeuwes holds a D.Sc. degree in Physics from the 25Table of ContentsUniversity of Leuven (Louvain), Belgium. He also served as a post-doctoral fellow and visiting research assistant professor in the Department of Chemistry atthe University of Kansas and has completed the Stanford Executive Program.James E. Brown, D.V.M. co-founded DURECT in February 1998 and has served as our President, Chief Executive Officer and a Director since June1998. He previously worked at ALZA Corporation as Vice President of Biopharmaceutical and Implant Research and Development from June 1995 to June1998. Prior to that, Dr. Brown held various positions at Syntex Corporation, a pharmaceutical company, including Director of Business Development fromMay 1994 to May 1995, Director of Joint Ventures for Discovery Research from April 1992 to May 1995, and held a number of positions including ProgramDirector for Syntex Research and Development from October 1985 to March 1992. Dr. Brown holds a B.A. from San Jose State University and a D.V.M.(Doctor of Veterinary Medicine) from the University of California, Davis where he also conducted post-graduate work in pharmacology and toxicology.Matthew J. Hogan, M.B.A. has served as our Chief Financial Officer since September 2006. He was the Chief Financial Officer at CiphergenBiosystems, Inc. from 2000 to 2006, and a consultant from March 2006. Prior to joining Ciphergen, Mr. Hogan was the Chief Financial Officer at AvocetMedical, Inc. from 1999 to 2000. From 1996 to 1999, Mr. Hogan was the Chief Financial Officer at Microcide Pharmaceuticals, Inc. From 1986 to 1996, heheld various positions in the investment banking group at Merrill Lynch & Co., most recently as a Director focusing on the biotechnology andpharmaceutical sectors. Mr. Hogan holds a B.A. in economics from Dartmouth College and an M.B.A. from the Amos Tuck School of BusinessAdministration.Judy R. Joice has served as our Senior Vice President, Operations and Corporate Quality Assurance since March 2014 and as our Vice President,Operations and Corporate Quality Assurance since April 2011. Previously, Ms. Joice served as our Vice President, Corporate Quality Assurance since July2008 and as our Executive Director, Quality Assurance from July 2007 to July 2008. She has over 25 years’ experience in the pharmaceutical industry withsuch companies as Nektar Therapeutics, Oread, Roche Pharmaceuticals, and Syntex Research. During her career, Ms. Joice has gained broad experience inCMC development activities including novel excipients, new chemical entities, devices, and combination products. She has developed, implemented andmanaged all aspects of company-wide quality systems and compliance functions, ranging from drug development through commercial manufacturing.Ms. Joice has a B.S. in Chemistry from California State University, Hayward. Item 1A.Risk Factors.In addition to the other information in this Form 10-K, a number of factors may affect our business and prospects. These factors include but are notlimited to the following, which you should consider carefully in evaluating our business and prospects.Risks Related To Our BusinessRegulatory approval of POSIMIR has been delayed and may be denied, and regulatory approval of our other product candidates is subject to delay ormay be denied, which could harm our businessIn February 2014, we received a Complete Response Letter to our NDA for POSIMIR from the FDA. Based on the Complete Response Letter andsubsequent communications with the FDA, we are conducting a new POSIMIR Phase 3 clinical trial consisting of approximately 306 patients undergoinglaparoscopic cholecystectomy (gallbladder removal) surgery to further evaluate the benefits and risks of POSIMIR. We began recruiting patients for this trialin November 2015 and expect that it will take approximately one year to complete enrollment. There can be no assurance that this clinical trial will beenrolled as quickly as expected or generate data necessary to support a successful NDA resubmission, or that it will be completed in a timely manner. Therecan also be no assurance that the results of this trial will be sufficient to support FDA approval. The failure to 26Table of Contentsadequately demonstrate the safety and effectiveness of a pharmaceutical product candidate under development to the satisfaction of FDA and otherregulatory agencies has, with respect to POSIMIR and could, with respect to other product candidates, delay or prevent regulatory clearance of the potentialproduct candidate, resulting in delays to the commercialization of our product candidate, and could materially harm our business. Clinical trials may notdemonstrate the sufficient levels of safety and efficacy necessary to obtain the requisite regulatory approvals for our product candidates, or may require suchsignificant numbers of patients or additional costs to make it impractical to satisfy the FDA’s requirements, and thus our product candidates may not beapproved for marketing. During the review process, the FDA may request more information regarding the safety of our product candidates, as they have intheir Complete Response Letter for POSIMIR, and answering such questions could require significant additional work and expense, and take a significantamount of time, resulting in a material delay of approval or the failure to obtain approval. During the review process, the FDA may also request moreinformation regarding the chemistry, manufacturing or controls related to our product candidates, as they have in their Complete Response Letter forREMOXY, and answering such questions could require significant additional work and expense, and take a significant amount of time, resulting in a materialdelay of approval or the failure to obtain approval.Development of REMOXY may be significantly delayed and adversely affected by Pfizer’s discontinuation of its developmentWe have relied on Pfizer and its subsidiaries to devote time and resources to the development, manufacturing and commercialization of REMOXY. InOctober 2014, Pfizer notified Pain Therapeutics that Pfizer had decided to discontinue development of REMOXY and that Pfizer would return all rights,including responsibility for regulatory activities, to Pain Therapeutics. There can be no assurance that the transition of all required information and assetsnecessary for the timely and successful resubmission of the NDA has been completed successfully. There can also be no assurance that Pain Therapeutics willcontinue development of REMOXY, or if Pain Therapeutics continues development of REMOXY, there can be no assurance that their resubmission of theNDA will be timely, or that it will satisfy the FDA’s requirements. Pain Therapeutics and its subsidiaries and affiliates may commercialize, develop or acquiredrugs or drug candidates that may compete indirectly or compete for resources with REMOXY. Any further delay or discontinuation in the development ofREMOXY will significantly harm our prospects and would be likely to have a negative effect on the price of our common stock.Development of our pharmaceutical product candidates is not complete, and we cannot be certain that our product candidates will be able to becommercializedTo be profitable, we or our third-party collaborators must successfully research, develop, obtain regulatory approval for, manufacture, introduce, marketand distribute our pharmaceutical product candidates under development. For each product candidate that we or our third-party collaborators intend tocommercialize, we must successfully meet a number of critical developmental milestones for each disease or medical condition targeted, including: ● with respect to each new chemical entity, determining appropriate indications; ● with respect to our Drug Delivery Program product candidates, selecting and developing a drug delivery technology to deliver the proper dose ofdrug over the desired period of time; ● determining the appropriate drug dosage for use in the pharmaceutical product candidate; ● developing drug compound formulations that will be tolerated, safe and effective and that will be compatible with the active pharmaceuticalagent; ● demonstrating the drug formulation will be stable for commercially reasonable time periods; ● demonstrating through clinical trials that the drug formulation is safe and effective in patients for the intended indication at an achievable dose;and ● completing the manufacturing development and scale-up to permit manufacture of the pharmaceutical product candidate in commercial quantitiesand at acceptable cost. 27Table of ContentsThe time frame necessary to achieve these developmental milestones for any individual product is long and uncertain, and we may not successfullycomplete these milestones for any of our products in development. We have not yet completed development of any of our product candidates, includingPOSIMIR, REMOXY, DUR-928, ORADUR-ADHD and other ORADUR-based opioid products, Relday, or ELADUR, and we have limited experience indeveloping such products. We may not be able to finalize the design or formulation of any of these product candidates. In addition, we may selectcomponents, solvents, excipients or other ingredients to include in our product candidates that have not been previously approved for use in pharmaceuticalproducts, which may require us or our collaborators to perform additional studies and may delay clinical testing and regulatory approval of our productcandidates. Even after we complete the design of a product candidate, the product candidate must still complete required clinical trials and additional safetytesting in animals before approval for commercialization. We are continuing testing and development of our product candidates and may explore possibledesign or formulation changes to address issues of safety, manufacturing efficiency and performance. We or our collaborators may not be able to completedevelopment of any product candidates that will be safe and effective and that will have a commercially reasonable treatment and storage period. If we or ourthird-party collaborators are unable to complete development of POSIMIR, REMOXY, DUR-928, ORADUR-ADHD and other ORADUR-based opioidproducts, Relday, or ELADUR, or other product candidates, we will not be able to earn revenue from them, which would materially harm our business.We or our third-party collaborators must show the safety and efficacy of our drug candidates in animal studies and human clinical trials to thesatisfaction of regulatory authorities before they can be sold; failure to obtain approvals for POSIMIR, REMOXY, DUR-928 or our other productcandidates would significantly harm our business, prospects and financial conditionBefore we or our third-party collaborators can obtain government approval to sell any of our pharmaceutical product candidates, we or they, asapplicable, must demonstrate through laboratory performance studies and safety testing, nonclinical (animal) studies and clinical (human) trials that eachsystem is safe and effective for human use for each targeted indication. The clinical development status of our major development programs is as follows: ● DUR-928—In 2015, we completed initial Phase 1 human safety trials of DUR-928 when orally administered and when administered throughinjection to a total of over 75 healthy volunteers. These trials evaluated the safety, tolerability and pharmacokinetics of DUR-928 whenadministered with a single dose and then with multiple doses. The high doses in these studies resulted in plasma levels greater than 100-foldhigher than endogenous levels of DUR-928, and DUR-928 was observed to be well tolerated at all doses, with no severe or serious drug-relatedadverse events reported. In these studies, there was no accumulation in plasma concentrations observed with repeated dosing, and there were doserelated increases in plasma concentrations. In January 2016, we initiated a single-ascending-dose Phase 1b clinical trial with DUR-928 in patientswith nonalcoholic steatohepatitis (NASH), and we expect to obtain results from this study in the first half of 2016. There can be no assurance thatbiological activity demonstrated in previous animal disease models will also be seen in human trials, that current and future planned trials will becompleted on the timetable anticipated, that further human trials will not identify safety issues, or that we will be able to successfully developDUR-928 to obtain marketing approval by the FDA or other regulatory agencies. ● POSIMIR—In April 2013, we submitted a new drug application as a 505(b)(2) application, which relies in part on the FDA’s findings of safety andeffectiveness of a reference drug. In February 2014, we received a Complete Response Letter from the FDA. Based on the Complete ResponseLetter and subsequent communications with the FDA, we are conducting a new POSIMIR Phase 3 clinical trial consisting of approximately 306patients undergoing laparoscopic cholecystectomy (gallbladder removal) surgery to further evaluate the benefits and risks of POSIMIR. We beganrecruiting patients for this trial in November 2015 and expect that it will take approximately one year to complete enrollment. There can be noassurance that the trial will enroll on the timetable we anticipate, that we will be able to adequately or timely address all of FDA’s concerns andsuggestions regarding POSIMIR, that the FDA will grant regulatory approval of POSIMIR, that adverse effects will not arise from additionaltesting or use of POSIMIR, and the data that we have generated or may generate will be deemed sufficient by FDA or other regulatory agencies tosupport regulatory approval of POSIMIR. 28Table of Contents ● REMOXY—In December 2010, King (now Pfizer) resubmitted the NDA in response to a Complete Response Letter received in December 2008 byPain Therapeutics. On June 23, 2011, a Complete Response Letter from the FDA was received by Pfizer on the resubmission to the NDA forREMOXY. The issues raised in the Complete Response Letter relate primarily to manufacturing. In October 2013, Pfizer stated that, havingachieved technical milestones related to manufacturing, it would continue developing REMOXY. Pfizer had also announced that it wasproceeding with additional clinical studies in support of resubmission of the NDA. We understand these studies have been completed and havemet their objectives. It is possible that the results of such studies will not be satisfactory to the FDA. In October 2014, Pfizer notified PainTherapeutics that Pfizer had decided to discontinue development of REMOXY, and that Pfizer would return all rights, including responsibility forregulatory activities, to Pain Therapeutics and that Pfizer would continue ongoing activities under the agreement until the scheduled terminationdate in April 2015. In April 2015, Pain Therapeutics stated that it had resumed responsibility for REMOXY under the terms of a letter agreementwith Pfizer. In July 2015, Pain Therapeutics stated that it had substantially completed the transition of REMOXY from Pfizer, and that PainTherapeutics expected to resubmit the NDA in the first quarter of 2016. There can be no assurance that Pain Therapeutics will successfullyresubmit the NDA or that Pain Therapeutics will obtain a new commercialization partner. ● ORADUR-ADHD—Since 2010, we and Orient Pharma conducted several Phase 1 studies to evaluate multiple formulations of ORADUR-Methylphenidate. We and Orient Pharma have selected a lead formulation based on its potential for rapid onset of action, long duration for once-a-day dosing and target pharmacokinetic profile as demonstrated in the latest Phase 1 trial. In addition, this product candidate will utilize a smallcapsule size relative to the leading existing long-acting products on the market. Orient Pharma, our licensee in defined Asian and South Pacificcountries, has initiated a Phase 3 trial in Taiwan and anticipates completing it in 2016. We retain rights to all other territories in the world and areengaged in licensing discussions with other companies. There can be no assurance that we will be able to successfully develop ORADUR-Methylphenidate to obtain marketing approval by the Taiwan FDA or the U.S. FDA or other regulatory agencies, nor is there any assurance that wewill be able to find a collaborator with respect to the development and commercialization of this drug candidate for the territories not currentlylicensed to Orient Pharma. ● Relday—In January 2013, Zogenix announced positive single-dose pharmacokinetic (PK) results from a Phase 1 clinical trial of Relday. PerZogenix, based on the favorable safety and PK profile demonstrated with the 25 mg and 50 mg once-monthly doses tested in the Phase 1 trial,Zogenix extended the study to include a 100 mg dose of the same formulation. In May 2013, Zogenix announced positive results with the 100 mgarm, demonstrating dose proportionality across the full dose range that would be anticipated to be used in clinical practice. According to Zogenix,the positive results from this study extension positioned Zogenix to begin a multi-dose clinical trial, which would provide the required steady-state pharmacokinetic and safety data prior to initiating Phase 3 development studies. In September 2015 Zogenix announced positive top lineresults from this multi-dose clinical trial. According to Zogenix, the results for Relday demonstrated that risperidone plasma concentrations in thetherapeutic range were achieved on the first day of dosing, reached steady state levels following the second dose and consistently maintainedtherapeutic levels throughout the four-month period. Also according to Zogenix, Relday was generally safe and well-tolerated, with resultsconsistent with the profile of risperidone and the previous Phase 1 single-dose clinical trial. Zogenix further stated that it has now initiated effortsto secure a development and commercialization partner for Relday, and that Relday is well-positioned to begin a Phase 3 program once a partner issecured. There can be no assurance that Zogenix will secure a development and commercialization partner for Relday or that Relday will begin thePhase 3 program or that if such a program is begun it will generate data sufficient to support a successful NDA. ● ELADUR—A Phase 2a clinical trial in post-herpetic neuralgia (PHN or post-shingles pain) was completed and positive efficacy trends werereported in the fourth quarter of 2007. King, which assumed worldwide development and commercialization rights for ELADUR through itsacquisition of Alpharma, conducted a Phase 2 clinical trial to evaluate ELADUR for the treatment of chronic low 29Table of Contents back pain and reported in April 2011 that the primary efficacy endpoint for the trial was not met. In February 2012, Pfizer, which assumedworldwide development and commercialization rights to ELADUR through its acquisition of King, notified us that they were returning theirworldwide development and commercialization rights to ELADUR. In January 2014, we and Impax entered into an agreement, pursuant to whichwe have granted Impax an exclusive worldwide license to our proprietary TRANSDUR transdermal delivery technology and other intellectualproperty to develop and commercialize ELADUR. There can be no assurance that Impax will continue to develop ELADUR or will be able tosuccessfully develop ELADUR to obtain marketing approval by the FDA or other regulatory agencies. ● ORADUR-based opioids—In addition to REMOXY, Phase 1 clinical trials have been conducted for two other ORADUR-based product candidates(hydrocodone and hydromorphone), and an IND has been accepted by the FDA for another ORADUR-based opioid (oxymorphone). In October2013, Pain Therapeutics stated that it had regained all rights from Pfizer with respect to the three ORADUR-based opioid drug candidates(hydrocodone, hydromorphone and oxymorphone). In May 2015, Pain Therapeutics returned to us all of Pain Therapeutics’ rights and obligationsunder our license agreement to develop and commercialize ORADUR-based formulations of hydrocodone but without impacting the rights andobligations of the two parties with respect to REMOXY (oxycodone), hydromorphone or oxymorphone. There can be no assurance that we or ourcollaborator will be able to successfully develop ORADUR-based formulations of oxycodone, hydromorphone or oxymorphone to obtainmarketing approval by the FDA or other regulatory agencies.We are currently in the clinical, preclinical or research stages with respect to all of our product candidates under development. We plan to continueextensive and costly tests, clinical trials and safety studies in animals to assess the safety and effectiveness of our product candidates. These studies includelaboratory performance studies and safety testing, clinical trials and animal toxicological studies necessary to support regulatory approval of developmentproducts in the United States and other countries of the world. These studies are costly, complex and last for long durations, and may not yield datasupportive of the safety or efficacy of our drug candidates or required for regulatory approval.New chemical entities derived from our Epigenomic Regulator Program, which is in the early stages of development, may require more time andresources for development, testing and regulatory approval than our Drug Delivery Program product candidates, and may not result in viablecommercial productsOur Epigenomic Regulator Program is in the early stages of development, involves unproven technology, requires significant further research anddevelopment and regulatory approvals and is subject to the risks of failure inherent in the development of products based on innovative technologies. Newchemical entities derived from our Epigenomic Regulator Program are molecules that have not previously been approved and marketed as therapeutics,unlike product candidates in our Drug Delivery Programs, in which we apply our formulation expertise and technologies largely to active pharmaceuticalingredients whose safety and efficacy have previously been established but which we aim to improve in some manner through a new formulation. As a result,the product candidates from our Epigenomic Regulator Program may face greater risk of unanticipated safety issues or other side-effects, or may notdemonstrate efficacy. Further, the regulatory pathway for our new chemical entities will be more demanding than that for product candidates under our DrugDelivery Programs, for which we may be able to leverage existing data under Section 505(b)(2) of the Act to reduce development risk, time and cost.Also, because our Epigenomic Regulator Program is in early stages, we have not defined with precision those indications we wish to pursue initially,each of which may have unique challenges. If the first indications pursued do not show positive results, the credibility of any product candidate from thisprogram may be tarnished, even if the molecule might be effective for other indications. Our decisions regarding which indications to pursue may cause us tofail to capitalize on indications that could have given rise to viable commercial products and profitable market opportunities. 30Table of ContentsEarly clinical trial results may not predict the results of later trials, and our clinical trials or those of our collaborators for POSIMIR or REMOXY maynot satisfy regulatory agenciesWhile some clinical trials of our product candidates have shown indications of safety and efficacy of our product candidates, there can be no assurancethat these results will be confirmed in subsequent clinical trials or provide a sufficient basis for regulatory approval. In addition, side effects observed inclinical trials, or other side effects that appear in later clinical trials, may adversely affect our or our collaborators’ ability to obtain regulatory approval ormarket our product candidates. For example, the finding that DUR-928 appears safe in the initial Phase 1 trials may not be confirmed in subsequent Phase 1or other clinical trials. In the Phase 2b hysterectomy trial and the BESST Phase 3 abdominal surgery trial of POSIMIR, transient local hematoma-likediscolorations were observed near the surgical site. Side effects such as these, toxicity or other safety issues associated with the use of our drug candidatescould require us to perform additional studies or halt development of our drug candidates. We or our collaborators may be required by regulatory agencies toconduct additional animal or human studies regarding the safety and efficacy of our pharmaceutical product candidates which we have not planned oranticipated. For example, the FDA’s Complete Response Letter raised concerns related to, among other matters, the Chemistry, Manufacturing, and Controlssection of the NDA for REMOXY. There can be no assurance that Pain Therapeutics will resolve these issues to the satisfaction of the FDA in a timely manneror ever, which could harm our business, prospects and financial condition. Further, the FDA’s Complete Response Letter for POSIMIR raised concerns thatinsufficient safety data had been provided and FDA has indicated that an additional clinical trial for POSIMIR needs to be conducted. There can be noassurance that the additional clinical trial we are conducting for POSIMIR will be sufficient to obtain FDA approval, and any additional trials would entailadded expense and further delay or preclude product approval, harming our business, prospects and financial condition.Regulatory action or failure to obtain product approvals could delay or limit development and commercialization of our product candidates and resultin failure to achieve anticipated revenuesThe manufacture and marketing of our pharmaceutical product candidates and our research and development activities are subject to extensiveregulation for safety, efficacy and quality by numerous government authorities in the United States and abroad. We or our third-party collaborators mustobtain clearance or approval from applicable regulatory authorities before we or they, as applicable, can perform clinical trials, market or sell our products indevelopment in the United States or abroad. Clinical trials, manufacturing and marketing of products are subject to the rigorous testing and approval processof the FDA and equivalent foreign regulatory authorities. In particular, the FDA rigorously focuses on the safety of drug products at every stage of drugdevelopment and commercialization from initial clinical trials to regulatory approval and beyond, and the interpretation of data that may pertain to safetycan be subject to the interpretation of individual reviewers within the FDA. These rigorous and potentially evolving standards, that often differ bytherapeutic area, may delay and increase the expenses of our development efforts. The FDA or other foreign regulatory agency may, at any time, halt our andour collaborators’ development and commercialization activities due to safety concerns, in which case our business will be harmed. In addition, the FDA orother foreign regulatory agency may refuse or delay approval of our or our collaborators’ drug candidates for failure to collect sufficient clinical or animalsafety data, and require us or our collaborators to conduct additional clinical or animal safety studies which may cause lengthy delays and increased costs toour programs.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 maychoose to interpret or apply any law or regulation to our pharmaceutical product candidates. As a result, clinical trials and regulatory approval can take anumber of years to accomplish and require the expenditure of substantial resources. We or our third-party collaborators, as applicable, may encounter delaysor rejections based upon administrative action or interpretations of current rules and 31Table of Contentsregulations. We or our third-party collaborators, as applicable, may not be able to timely reach agreement with the FDA on our clinical trials or on therequired clinical or animal data we or they must collect to continue with our clinical trials or eventually commercialize our product candidates.We or our third-party collaborators, as applicable, may also encounter delays or rejections based upon additional government regulation from futurelegislation, administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. We or ourthird-party collaborators, as applicable, may encounter similar delays in foreign countries. Sales of our pharmaceutical product candidates outside the UnitedStates 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 foreignlicensing may differ from FDA requirements. We or our third-party collaborators, as applicable, may be unable to obtain requisite approvals from the FDA andforeign 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 weor our third-party collaborators, as applicable, fail to obtain timely clearance or approval for our development products, we or they will not be able to marketand sell our pharmaceutical product candidates, which will limit our ability to generate revenue.Many of our drug candidates under development, including REMOXY and our other ORADUR-based opioids are subject to mandatory Risk Evaluationand Mitigation Strategy (REMS) programs, which could delay the approval of these drug candidates, reduce demand for them, and increase the cost,burden and liability associated with their commercializationOn February 6, 2009, the FDA sent letters to manufacturers of certain opioid drug products, indicating that these drugs will be required to have a RiskEvaluation and Mitigation Strategy (REMS) to ensure that the benefits of the drugs continue to outweigh the risks. The affected opioid drugs include brandname and generic products and are formulated with the active ingredients fentanyl, hydromorphone, methadone, morphine, oxycodone, and oxymorphone.On April 19, 2011, the Office of National Drug Control Policy (ONDCP) released the Obama Administration’s Epidemic: Responding to America’sPrescription Drug Abuse Crisis—a comprehensive action plan to address the national prescription drug abuse epidemic. This plan includes action in fourmajor areas to reduce prescription drug abuse: education, monitoring, proper disposal, and enforcement. In support of the action plan, the FDA announced theelements of a Risk Evaluation and Mitigation Strategy (REMS) that will require all manufacturers of long-acting and extended-release opioids to ensure thattraining is provided to prescribers of these medications and to develop information that prescribers can use when counseling patients about the risks andbenefits of opioid use. The FDA wants drug makers to work together to develop a single system for implementing the REMS strategies.On July 9, 2012 the FDA approved a REMS for extended-release (ER) and long-acting (LA) opioids. The REMS is part of a federal initiative to addressthe prescription drug abuse, misuse, and overdose epidemic. The REMS introduces new safety measures designed to reduce risks and improve the safe use ofER/LA opioids, while ensuring access to needed medications for patients in pain. The new ER/LA opioid REMS will affect more than 20 companies thatmanufacture these opioid analgesics. Under the new REMS, companies will be required to make education programs available to prescribers based on an FDABlueprint. It is expected that companies will meet this obligation by providing educational grants to continuing education (CE) providers, who will developand deliver the training. The REMS also will require companies to make available FDA-approved patient education materials on the safe use of these drugs.The companies will be required to perform periodic assessments of the implementation of the REMS and the success of the program in meeting its goals. TheFDA will review these assessments and may require additional elements to achieve the goals of the program. 32Table of ContentsOn September 10, 2013, the FDA announced safety labeling changes and post-market study requirements for extended-release and long-acting opioidanalgesics (ER/LA opioids). The updated class-wide labeling changes state that ER/LA opioids are indicated for the management of pain severe enough torequire daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. The updated indication furtherclarifies that, because of the risks of addiction, abuse, and misuse, even at recommended doses, and because of the greater risks of overdose and death, thesedrugs should be reserved for use in patients for whom alternative treatment options (e.g., non-opioid analgesics or immediate-release opioids) are ineffective,not tolerated, or would be otherwise inadequate to provide sufficient management of pain; ER/LA opioid analgesics are not indicated for as-needed painrelief. Recognizing that more information is needed to assess the serious risks associated with long-term use of ER/LA opioids, the FDA is requiring the drugcompanies that make these products to conduct further post-market studies and clinical trials. These changes may result in a decrease in prescriptions for thisclass of drugs and will increase the costs borne by manufacturers of ER/LA opioids.More recently, in February 2016, the FDA announced a comprehensive action plan to take concrete steps towards reducing the impact of opioid abuseon American families and communities. As part of this plan, the agency will review product and labelling decisions and re-examine the risk-benefit paragigmfor opioids.Many of our drug candidates including REMOXY and other ORADUR-based opioid drug candidates are subject to the REMS requirement. The FDA’sREMS requirements have been evolving, and until the contours of required REMS programs are established by the FDA and understood by drug developersand marketers such as ourselves and our collaborators, and until the results of the FDA’s recently announced initiatives are known, there may be delays inmarketing approvals for these drug candidates. In addition, there may be increased cost, administrative burden and potential liability associated with themarketing and sale of these types of drug candidates subject to the REMS requirement, as well as decreased demand resulting from new labelingrequirements, which could negatively impact the commercial benefits to us and our collaborators from the sale of these drug candidates.We depend to a large extent on third-party collaborators, and we have limited or no control over the development, sales, distribution and disclosure forour pharmaceutical product candidates which are the subject of third-party collaborative or license agreementsOur performance depends to a large extent on the ability of our third-party collaborators to successfully develop and obtain approvals for ourpharmaceutical product candidates. We have entered into agreements with Pain Therapeutics, Zogenix, Impax, Santen, Orient Pharma and others under whichwe granted such third parties the right to develop, apply for regulatory approval for, market, promote or distribute REMOXY and certain other ORADUR-based products, Relday, ELADUR and other product candidates, subject to payments to us in the form of product royalties and other payments. We havelimited or no control over the expertise or resources that any collaborator may devote to the development, clinical trial strategy, regulatory approval,marketing or sale of these product candidates, or the timing of their activities. Any of our present or future collaborators may not perform their obligations asexpected. These collaborators may breach or terminate their agreement with us or otherwise fail to conduct their collaborative activities successfully and in atimely manner. Enforcing any of these agreements in the event of a breach by the other party could require the expenditure of significant resources andconsume a significant amount of management time and attention. Our collaborators may also conduct their activities in a manner that is different from themanner we would have chosen, had we been developing such product candidates ourselves. Further, our collaborators may elect not to develop orcommercialize product candidates arising out of our collaborative arrangements or not devote sufficient resources to the development, clinical trials,regulatory approval, manufacture, marketing or sale of these product candidates. If any of these events occur, we may not recognize revenue from thecommercialization of our product candidates based on such collaborations. In addition, these third parties may have similar or competitive products to theones which are the subject of their collaborations with us, or relationships with our competitors, which may reduce their interest in developing or selling ourproduct candidates. We may not be able to control public disclosures made by some of our third-party collaborators, which could negatively impact our stockprice. 33Table of ContentsCancellation of collaborations regarding our product candidates may impact our near-term revenues and adversely affect potential economic benefitsThird-party collaboration agreements typically allow the third party to terminate the agreement (or a specific program within an agreement) byproviding notice. For example, in January 2012, we were notified that Nycomed was terminating the Development and License Agreement between Nycomedand us relating to the development and commercialization of POSIMIR in Europe and their other licensed territories. In February 2012, we were notified thatPfizer was terminating the worldwide Development and License Agreement between Alpharma (acquired by King which subsequently was acquired by Pfizer)and us relating to the development and commercialization of ELADUR. In March 2012, we were notified that Hospira was terminating the Development andLicense Agreement between Hospira and us relating to the development and commercialization of POSIMIR in the United States and Canada. In October2014, we were notified that Pfizer had decided to discontinue development of REMOXY, and that Pfizer would return all rights, including responsibility forregulatory activities, to Pain Therapeutics. If there have been payments under such agreements that are being recognized over time, termination of suchagreements (or programs) can lead to a near-term increase in our reported revenues resulting from the immediate recognition of the balance of such payments.Termination deprives us of potential future economic benefits under such agreements, and may make it more difficult to enter into agreements with otherthird parties for use of the assets that were subject to the terminated agreement. Termination of our agreements with Pain Therapeutics, Zogenix, Impax,Santen or Orient Pharma could have similar effects.Our revenues depend on collaboration agreements with other companies. These agreements subject us to obligations which must be fulfilled and alsomake our revenues dependent on the performance of such third parties. If we are unable to meet our obligations or manage our relationships with ourcollaborators under these agreements or enter into additional collaboration agreements or if our existing collaborations are terminated, our revenuesmay decrease. Acquisitions of our collaborators can be disruptiveOur revenues are based to a significant extent on collaborative arrangements with third parties, pursuant to which we receive payments based on ourperformance of research and development activities set forth in these agreements. We may not be able to fulfill our obligations or attain milestones set forthin any specific agreement, which could cause our revenues to fluctuate or be less than anticipated and may expose us to liability for contractual breach. Inaddition, these agreements may require us to devote significant time and resources to communicating with and managing our relationships with suchcollaborators and resolving possible issues of contractual interpretation which may detract from time our management would otherwise devote to managingour operations. Such agreements are generally complex and contain provisions that could give rise to legal disputes, including potential disputes concerningownership of intellectual property under collaborations. Such disputes can delay or prevent the development of potential new product candidates, or can leadto lengthy, expensive litigation or arbitration. In general, our collaboration agreements, including our agreements with Pain Therapeutics with respect toREMOXY and certain other ORADUR-based opioids, Orient Pharma with respect to ORADUR-Methylphenidate, Zogenix with respect to Relday, Impax withrespect to ELADUR, and Santen with respect to an ophthalmic product 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. From time to time, our licensees may be thesubject of an acquisition by another company. For example, Alpharma was acquired by King in December 2008, King was acquired by Pfizer in February2011 and Nycomed was acquired by Takeda in October 2011. Such transactions can lead to turnover of program staff, a review of development programs andstrategies by the acquirer, and other events that can disrupt a program, resulting in program delays or discontinuations.If any of our collaborative agreements are terminated or delayed, our anticipated revenues may be reduced or not materialize, and our products indevelopment related to those agreements may not be commercialized. 34Table of ContentsOur cash flows are likely to differ from our reported revenuesOur revenues will likely differ from our cash flows from revenue-generating activities. Upfront payments received upon execution of collaborativeagreements are recorded as deferred revenue and generally recognized on a straight-line basis over the period of our continuing involvement with the third-party collaborator pursuant to the applicable agreement. The period of continuing involvement may also be revised on a prospective basis. As ofDecember 31, 2015, we had $2.9 million of deferred revenue which will be recognized in future periods and may cause our reported revenues to be greaterthan cash flows from our ongoing revenue-generating activities.Our revenues also depend on milestone payments based on achievements by our third-party collaborators. Failure of such collaborators to attain suchmilestones would result in our not receiving additional revenuesIn addition to payments based on our performance of research and development activities, our revenues also depend on the attainment of milestones setforth in our collaboration agreements. Such milestones are typically related to development activities or sales accomplishments. While our involvement isnecessary to the achievement of development-based milestones, the performance of our third-party collaborators is also required to achieve those milestones.Under our third-party collaborative agreements, our third party collaborators will take the lead in commercialization activities and we are typically notinvolved in the achievement of sales-based milestones. Therefore, we are even more dependent upon the performance of our third-party collaborators inachieving sales-based milestones. To the extent we and our third-party collaborators do not achieve such development-based milestones or our third-partycollaborators do not achieve sales-based milestones, we will not receive the associated revenues, which could harm our financial condition and may cause usto defer or cut-back development activities or forego the exploitation of opportunities in certain geographic territories, any of which could have a materialadverse effect on our business.Our business strategy includes the entry into additional collaborative agreements. We may not be able to enter into additional collaborative agreementsor may not be able to negotiate commercially acceptable terms for these agreementsOur current business strategy includes the entry into additional collaborative agreements for the development and commercialization of ourpharmaceutical product candidates. The negotiation and consummation of these types of agreements typically involve simultaneous discussions withmultiple potential collaborators and require significant time and resources from our officers, business development, legal, and research and development staff.In addition, in attracting the attention of pharmaceutical and biotechnology company collaborators, we compete with numerous other third parties withproduct opportunities as well the collaborators’ own internal product opportunities. We may not be able to consummate additional collaborative agreements,or we may not be able to negotiate commercially acceptable terms for these agreements. If we do not consummate additional collaborative agreements, wemay have to consume money more rapidly on our product development efforts, defer development activities or forego the exploitation of certain geographicterritories, any of which could have a material adverse effect on our business.We will require and may have difficulty raising needed capital in the futureOur 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 pharmaceutical productcandidates. We will require additional funds for these purposes, to establish additional clinical- and commercial-scale manufacturing arrangements andfacilities, and to provide for the marketing and distribution of our product candidates. Additional funds may not be available on acceptable terms, if at all. Ifadequate 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 ourresearch or development programs which would materially harm our business, financial condition and results of operations. 35Table of ContentsWe believe that our cash, cash equivalents and investments, will be adequate to satisfy our capital needs for at least the next 12 months. However, ouractual capital requirements will depend on many factors, including: ● regulatory actions with respect to our product candidates; ● continued progress and cost of our research and development programs; ● the continuation of our collaborative agreements that provide financial funding for our activities; ● 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 and that of our collaborators to sell our pharmaceutical productcandidates; ● 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; ● costs for recruiting and retaining employees and consultants; and ● unexpected legal, accounting and other costs and liabilities related to our business.We may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding. We may seek to raise anynecessary additional funds through equity or debt financings, convertible debt financings, collaborative arrangements with corporate collaborators or othersources, which may be dilutive to existing stockholders and may cause the price of our common stock to decline. In addition, in the event that additionalfunds are obtained through arrangements with collaborators or other sources, we may have to relinquish rights to some of our technologies or pharmaceuticalproduct candidates that we would otherwise seek to develop or commercialize ourselves. If adequate funds are not available, we may be required tosignificantly reduce or refocus our product development efforts, resulting in delays in generating future product revenue.We and our third-party collaborators may not be able to manufacture sufficient quantities of our pharmaceutical product candidates and components tosupport the clinical and commercial requirements of our collaborators and ourselves at an acceptable cost or in compliance with applicable governmentregulations, and we have limited manufacturing experienceWe or our third-party collaborators to whom we have assigned such responsibility must manufacture our pharmaceutical product candidates andcomponents in clinical and commercial quantities, either directly or through third parties, in compliance with regulatory requirements and at an acceptablecost. The manufacturing processes associated with our product candidates are complex. We and our third-party collaborators, where relevant, have not yetcompleted development of the manufacturing process for any product candidates or components, including POSIMIR, REMOXY and our other ORADUR-based drug candidates, ELADUR, Relday and DUR-928. If we and our third-party collaborators, where relevant, fail to timely complete the development ofthe manufacturing process for our product candidates, we and our third-party collaborators, where relevant, will not be able to timely produce product forclinical trials and commercialization of our product candidates. We have also committed to manufacture and supply product candidates or components undera number of our collaborative agreements with third-party companies. We have limited experience manufacturing pharmaceutical products, and we may notbe able to timely accomplish these tasks. If we and our third-party collaborators, where relevant, fail to develop manufacturing processes to permit us tomanufacture a product candidate or component at an acceptable cost, then we and our third-party collaborators may not be able to commercialize thatproduct candidate or we may be in breach of our supply obligations to our third-party collaborators. 36Table of ContentsOur manufacturing facility in Cupertino is a multi-disciplinary site that we have used to manufacture only research and clinical supplies of several ofour pharmaceutical product candidates, including POSIMIR, REMOXY and our other ORADUR-based drug candidates, Relday and ELADUR. If weexperience delays or technical difficulties in scaling up the manufacturing of our product candidates, it could result in delays or added cost in ourdevelopment programs. We have not manufactured commercial quantities of any of our product candidates. In the future, we intend to develop additionalmanufacturing capabilities for our product candidates and components to meet our demands and those of our third-party collaborators by contracting withthird-party manufacturers and by potentially constructing additional manufacturing space at our facilities in California and Alabama. We have limitedexperience building and validating manufacturing facilities, and we may not be able to accomplish these tasks in a timely or cost effective manner.If we and our third-party collaborators, where relevant, are unable to manufacture our pharmaceutical product candidates or components in a timelymanner or at an acceptable cost, quality or performance level, and are unable to attain and maintain compliance with applicable regulations, the clinical trialsand the commercial sale of our product candidates and those of our third-party collaborators could be delayed. Additionally, we may need to alter our facilitydesign or manufacturing processes, install additional equipment or do additional construction or testing in order to meet regulatory requirements, optimizethe production process, increase efficiencies or production capacity or for other reasons, which may result in additional cost to us or delay production ofproduct needed for the clinical trials and commercial launch of our product candidates and those of our third-party collaborators.We had entered into a supply agreement with Hospira Worldwide, Inc. for clinical and commercial supplies of POSIMIR. This third party was our solesource for drug product required for development and commercialization of this drug candidate. Our agreement with Hospira terminated at the end of 2015and we have entered into a manufacturing development agreement with a different contract manufacturing organization for future supply of POSIMIR. Theremay be technical risks associated with establishing an alternative commercial manufacturer that could entail delays in supply, quality issues or delays in thepossible regulatory approval of POSIMIR. Furthermore, we and our contract manufacturer may also need or choose to subcontract with additional third-partycontractors to perform manufacturing steps of POSIMIR or supply required components for POSIMIR. Where third party contractors perform manufacturingservices for us, we will be subject to the schedule, expertise and performance of third parties as well as incur significant additional costs. Failure of thirdparties to perform their obligations could adversely affect our operations, development timeline and financial results. We expect to put in place in the futuresecond source supply arrangements, which may be costly and time consuming.If we or our third-party collaborators cannot manufacture our pharmaceutical product candidates or components in time to meet the clinical orcommercial requirements of our collaborators or ourselves or at an acceptable cost, our operating results will be harmed.Failure to comply with ongoing governmental regulations for our pharmaceutical product candidates could materially harm our business in the futureMarketing 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 ourregulatory filings. Later discovery of previously unknown problems with a product, manufacturer or facility, or our failure to update regulatory files, mayresult in restrictions, including withdrawal of the product from the market. Any of the following or other similar events, if they were to occur, could delay orpreclude 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 pharmaceutical product candidates under development; or 37Table of Contents ● FDA required product withdrawals or warnings arising from identification of serious and unanticipated adverse side effects in our productcandidates.Manufacturers of drugs 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 currentgood manufacturing practices regulations is difficult and costly. Manufacturing facilities are subject to ongoing periodic inspection by the FDA andcorresponding state agencies, including unannounced inspections, and must be licensed before they can be used for the commercial manufacture of ourdevelopment products. We and/or our present or future suppliers and distributors may be unable to comply with the applicable good manufacturing practiceregulations and other FDA regulatory requirements. We have not been subject to a good manufacturing regulation inspection by the FDA relating to ourproduct candidates. If we, our third-party collaborators or our respective suppliers do not achieve compliance for our product candidates we or theymanufacture, the FDA may refuse or withdraw marketing clearance or require product recall, which may cause interruptions or delays in the manufacture andsale of our product candidates.We have a history of operating losses, expect to continue to have losses in the future and may never achieve or maintain profitabilityWe have incurred significant operating losses since our inception in 1998 and, as of December 31, 2015, had an accumulated deficit of approximately$405.6 million. We expect to continue to incur significant operating losses over the next several years as we continue to incur significant costs for researchand development, clinical trials, manufacturing, sales, and general and administrative functions. 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, andmanufacture and market our proposed product candidates. Development of pharmaceutical product candidates is costly and requires significant investment.In addition, we may choose to license from third parties either additional drug delivery platform technology or rights to particular drugs or other appropriatetechnology for use in our product candidates. The license fees for these technologies or rights would increase the costs of our product candidates.To date, we have not generated significant revenue from the commercial sale of our pharmaceutical product candidates and do not expect to do so inthe near future. Our current revenues are from the sale of the ALZET product line, the sale of LACTEL biodegradable polymers and certain excipient sales,and from payments under collaborative research and development agreements with third parties. We do not expect our product revenues to increasesignificantly in the near future, and we do not expect that collaborative research and development revenues will exceed our actual operating expenses. We donot anticipate meaningful revenues to derive from the commercialization and marketing of our product candidates in development in the near future, andtherefore do not expect to generate sufficient revenues to cover expenses or achieve profitability in the near future.We may develop our own sales force and commercial group to market future products but we have limited sales and marketing experience with respect topharmaceuticals and may not be able to do so effectivelyWe have a small sales and marketing group focused on our ALZET and LACTEL product lines. We may choose to develop our own sales force andcommercial group to market products that we may develop in the future, or to market POSIMIR if we do not enter into an agreement with a third party tocommercialize POSIMIR. Developing a sales force and commercial group will require substantial expenditures and the hiring of qualified personnel. We havelimited sales and marketing experience, and may not be able to effectively recruit, train or retain sales personnel. If we are not able to put in place anappropriate sales force and commercial group for POSIMIR, we may not be able to effectively launch the product. We may not be able to effectively sell ourproduct candidates, if approved, and our failure to do so could limit or materially harm our business. 38Table of ContentsWe and our third-party collaborators may not sell our product candidates effectivelyWe and our third-party collaborators compete with many other companies that currently have extensive and well-funded marketing and salesoperations. Our marketing and sales efforts and those of our third-party collaborators 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 andour 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 product candidates; ● 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 product candidates; or ● build up inventory in excess of demand thereby limiting future purchases of our product candidates resulting in significant quarter-to-quartervariability in our sales.The failure of us or our third-party collaborators to effectively develop, gain regulatory approval for, sell, manufacture and market our productcandidates will hurt our business, prospects and financial results.We rely heavily on third parties to support development, clinical testing and manufacturing of our product candidatesWe rely on third-party contract research organizations, service providers and suppliers to provide critical services to support development, clinicaltesting, and manufacturing of our product candidates. For example, we currently depend on third-party vendors to manage and monitor our clinical trials andto perform critical manufacturing steps for our product candidates. These third parties may not execute their responsibilities and tasks competently incompliance with applicable laws and regulations or in a timely fashion. We rely on third-parties to manufacture or perform manufacturing steps relating toour product candidates or components. We anticipate that we will continue to rely on these and other third-party contractors to support development, clinicaltesting, and manufacturing of our product candidates. Failure of these contractors to provide the required services in a competent or timely manner or onreasonable commercial terms could materially delay the development and approval of our development products, increase our expenses and materially harmour business, financial condition and results of operations.Key components of our product candidates are provided by limited numbers of suppliers, and supply shortages or loss of these suppliers could result ininterruptions in supply or increased costsCertain components and drug substances used in our product candidates (including POSIMIR, REMOXY, our other ORADUR-based drug candidates,Relday and ELADUR, are currently purchased from a single or a limited number of outside sources. In particular, Eastman Chemical is the sole supplier,pursuant to a supply agreement entered into in December 2005, of our requirements of sucrose acetate isobutyrate, a necessary component of POSIMIR,REMOXY, our other ORADUR-based drug candidates, Relday, ELADUR and certain other pharmaceutical product candidates we have under development,and Hospira was our sole supplier for clinical and commercial supplies of POSIMIR. The reliance on a sole or limited number of suppliers could result in: ● delays associated with redesigning a pharmaceutical 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 delivery time. 39Table of ContentsWe have supply agreements in place for certain components of our pharmaceutical product candidates, but do not have in place long term supplyagreements with respect to all of the components of any of our product candidates. Therefore the supply of a particular component could be terminated at anytime 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, qualityand cost acceptable to us. Any interruption in the supply of single source components could cause us to seek alternative sources of supply or manufacturethese components internally. Furthermore, in some cases, we are relying on our third-party collaborators to procure supply of necessary components. If thesupply of any components for our product candidates is interrupted, components from alternative suppliers may not be available in sufficient volumes or atacceptable quality levels within required timeframes, if at all, to meet our needs or those of our third-party collaborators. This could delay our ability tocomplete clinical trials and obtain approval for commercialization and marketing of our product candidates, causing us to lose sales, incur additional costs,delay new product introductions and could harm our reputation.If we are unable to adequately protect, maintain or enforce our intellectual property rights or secure rights to third-party patents, we may lose valuableassets, experience reduced market share or incur costly litigation to protect our rights or our third-party collaborators may choose to terminate theiragreements with usOur ability to commercially exploit our products will depend significantly on our ability to obtain and maintain patents, maintain trade secretprotection and operate without infringing the proprietary rights of others.As of February 18, 2016, we held over 55 unexpired issued U.S. patents and over 375 unexpired issued foreign patents (which include grantedEuropean patent rights that have been validated in various EU member states). In addition, we have over 35 pending U.S. patent applications and over 75foreign applications pending in Europe, Australia, Japan, Canada and other countries.The patent status of our most advanced drug candidates, POSIMIR and REMOXY, are as follows:In the U.S., POSIMIR is covered by two patent families. One patent family includes granted patents expiring in at least 2025. Another patent familyincludes a pending patent application, which if granted, could result in a patent expiring in 2026, plus any eligible patent term adjustments and extensions.In Europe, POSIMIR is covered by four granted patents with two expiring in each of 2025 and 2026, respectively, plus any eligible patent term extensions.In the U.S., REMOXY is covered by five patent families. Two patent families include granted patents expiring in at least 2025 and 2031, respectively.The patent family providing protection until at least 2025 includes ten granted patents. The other three patent families include pending patent applications,which if granted, could result in patents expiring in 2026, 2034, and 2034, respectively, plus any eligible patent term adjustments and extensions. Wecurrently have pending U.S. applications for each of these five patent families. There can be no assurance that the pending patent applications will begranted. In Europe, REMOXY is covered by four granted patents with two expiring in each of 2023 and 2026, respectively, plus any eligible patent termextensions.Our Epigenomic Regulator Program includes six in-licensed patent families. Two patent families each include a granted patent expiring in at least2026 and 2032, respectively. The other patent families include pending patent applications, which if granted, could result in patents expiring in 2033, 2034,2035, and 2035, respectively, plus any eligible patent term adjustments and extensions. There can be no assurance that the pending patent applications willbe granted. Further, there can be no assurance that VCU will not attempt to terminate their license to us, which termination would result in the loss of ourrights to these patent families.The patent positions of pharmaceutical companies, including ours, are uncertain and involve complex legal and factual questions. In addition, thecoverage claimed in a patent application can be significantly reduced before the patent is issued. Consequently, our patent applications or those that arelicensed to us may not issue 40Table of Contentsinto patents, and any issued patents may not provide protection against competitive technologies or may be held invalid if challenged. Our competitors mayalso independently develop products similar to ours or design around or otherwise circumvent patents issued to us or licensed by us. In addition, the laws ofsome foreign countries may not protect our proprietary rights to the same extent as U.S. law.The patent laws of the U.S. have recently undergone changes through court decisions which may have significant impact on us and our industry.Decisions of the U.S. Supreme Court and other courts with respect to the standards of patentability, enforceability, availability of injunctive relief anddamages may make it more difficult for us to procure, maintain and enforce patents. In addition, the America Invents Act was signed into law in September2011, which among other changes to the U.S. patent laws, changes patent priority from “first to invent” to “first to file,” implements a post-grant oppositionsystem for patents and provides a prior user defense to infringement. These judicial and legislative changes have introduced significant uncertainty in thepatent law landscape and may potentially negatively impact our ability to procure, maintain and enforce patents to provide exclusivity for our products.We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. Werequire 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 theindividual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances, and that all inventions arisingout of the individual’s relationship with us will be our exclusive property. These agreements may be breached, and in some instances, we may not have anappropriate remedy available for breach of the agreements. Furthermore, our competitors may independently develop substantially equivalent proprietaryinformation 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 resortto litigation to protect our intellectual property rights, or to determine their scope, validity or enforceability. In addition, interference, derivation, post-grantoppositions, and similar proceedings may be necessary to determine rights to inventions in our patents and patent applications. Enforcing or defending ourproprietary rights is expensive, could cause diversion of our resources and may be unsuccessful. Any failure to enforce or protect our rights could cause us tolose the ability to exclude others from using our technology to develop or sell competing products.Our collaboration agreements may depend on our intellectual propertyWe are party to collaborative agreements with Pain Therapeutics, Zogenix, Orient Pharma, Impax and Santen among others. Our third-partycollaborators have entered into these agreements based on the exclusivity that our intellectual property rights confer on the products being developed. Theloss or diminution of our intellectual property rights could result in a decision by our third-party collaborators to terminate their agreements with us. Inaddition, these agreements are generally complex and contain provisions that could give rise to legal disputes, including potential disputes concerningownership of intellectual property and data under collaborations. Such disputes can lead to lengthy, expensive litigation or arbitration requiring us to devotemanagement time and resources to such dispute which we would otherwise spend on our business. To the extent that our agreements call for future royaltiesto be paid conditional on our having patents covering the royalty-bearing subject matter, the decision by the Supreme Court in the case of MedImmune v.Genentech could encourage our licensees to challenge the validity of our patents and thereby seek to avoid future royalty obligations without losing thebenefit of their license. Should they be successful in such a challenge, our ability to collect future royalties could be substantially diminished. 41Table of ContentsWe may be sued by third parties claiming that our product candidates infringe on their intellectual property rights, particularly because there issubstantial uncertainty about the validity and breadth of medical patentsWe or our collaborators may be exposed to future litigation by third parties based on claims that our product candidates or activities infringe theintellectual property rights of others or that we or our collaborators have misappropriated the trade secrets of others. This risk is exacerbated by the fact thatthe validity and breadth of claims covered in medical technology patents and the breadth and scope of trade secret protection involve complex legal andfactual questions for which important legal principles are unresolved. Any litigation or claims against us or our collaborators, whether or not valid, couldresult in substantial costs, could place a significant strain on our financial resources and could harm our reputation. We also may not have sufficient funds tolitigate against parties with substantially greater resources. In addition, pursuant to our collaborative agreements, we have provided our collaborators with theright, under specified circumstances, to defend against any claims of infringement of the third party intellectual property rights, and such collaborators maynot defend against such claims adequately or in the manner that we would do ourselves. Intellectual property litigation or claims could force us or ourcollaborators 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 pharmaceutical product candidates that incorporate the challenged intellectual property, whichwould 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 reasonableterms, if at all; or ● redesign our product candidates, which would be costly and time-consuming.Technologies and businesses which we acquire or license may be difficult to integrate, disrupt our business, dilute stockholder value or divertmanagement attentionWe may acquire technologies, products or businesses to broaden the scope of our existing and planned product lines and technologies. Futureacquisitions expose us to: ● increased costs associated with the acquisition and operation of the new businesses or technologies and the management of geographicallydispersed 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 or third party collaborators as a result of any integration of new managementpersonnel.Acquisitions may also result in the issuance of dilutive equity securities, the incurrence or assumption of debt or additional expenses associated withthe amortization of acquired intangible assets or potential businesses. Acquisitions may not generate any additional revenue or provide any benefit to ourbusiness.Some of our pharmaceutical product candidates contain controlled substances, the making, use, sale, importation and distribution of which are subjectto regulation by state, federal and foreign law enforcement and other regulatory agenciesSome of our product candidates currently under development contain, and our products in the future may contain, controlled substances which aresubject to state, federal and foreign laws and regulations regarding their manufacture, use, sale, importation and distribution. REMOXY and our otherORADUR-based drug candidates, and certain other product candidates we have under development contain active ingredients which are classified 42Table of Contentsas controlled substances under the regulations of the U.S. Drug Enforcement Agency. For our product candidates containing controlled substances, we andour suppliers, manufacturers, contractors, customers and distributors are required to obtain and maintain applicable registrations from state, federal andforeign 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. These regulations increasethe personnel needs and the expense associated with development and commercialization of drug candidates including controlled substances. Failure toobtain and maintain required registrations or comply with any applicable regulations could delay or preclude us from developing and commercializing ourproduct candidates containing controlled substances and subject us to enforcement action. In addition, because of their restrictive nature, these regulationscould limit our commercialization of our product candidates containing controlled substances. In particular, among other things, there is a risk that theseregulations may interfere with the supply of the drugs used in our clinical trials, and in the future, our ability to produce and distribute our products in thevolume needed to meet commercial demand.Write-offs related to the impairment of long-lived assets, inventories and other non-cash charges, as well as stock-based compensation expenses mayadversely impact or delay our profitabilityWe may incur significant non-cash charges related to impairment write-downs of our long-lived assets, including goodwill and other intangible assets.We will continue to incur non-cash charges related to amortization of other intangible assets. We are required to perform periodic impairment reviews of ourgoodwill at least annually. The carrying value of goodwill on our balance sheet was $6.4 million at December 31, 2015. To the extent these reviews concludethat 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 tomeasure and record an impairment charge to write-down these assets to their realizable values. We completed our last review during the fourth quarter of 2015and determined that goodwill was not impaired as of December 31, 2015. However, there can be no assurance that upon completion of subsequent reviews amaterial impairment charge will not be recorded. If future periodic reviews determine that our assets are impaired and a write-down is required, it willadversely impact or delay our profitability.Inventories, in part, include certain excipients that are sold to customers and included in products in development. These inventories are capitalizedbased on management’s judgment of probable sale prior to their expiration date which in turn is primarily based on management’s internal estimates. Thevaluation of inventory requires us to estimate the value of inventory that may become expired prior to use. We may be required to expense previouslycapitalized inventory costs upon a change in our judgment, due to, among other potential factors, a denial or delay of approval of a product by the necessaryregulatory bodies, changes in product development timelines, or other information that suggests that the inventory will not be saleable. In addition, thesecircumstances may cause us to record a liability related to minimum purchase agreements that we have in place for raw materials. For example, we recordedcharges to cost of goods sold of approximately $1.6 million, of which approximately $1.1 million related to the write-down of the cost basis of inventory andapproximately $500,000 related to the accrual of a liability for the minimum purchase commitment for excipients in the year ended December 31, 2014 as aresult of a change in the forecasted demand for the excipients after Pfizer announced that it had decided to discontinue the development andcommercialization of REMOXY and return its rights to Pain Therapeutics.Global credit and financial market conditions could negatively impact the value of our current portfolio of cash equivalents, short-term investments orlong-term investments and our ability to meet our financing objectivesOur cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. Ourshort-term investments consist primarily of readily marketable debt securities with original maturities of greater than 90 days from the date of purchase butremaining maturities of 43Table of Contentsless than one year from the balance sheet date. Our long-term investments consist primarily of readily marketable debt securities with maturities in one year orbeyond from the balance sheet date. While, as of the date of this filing, we are not aware of any downgrades, material losses, or other significant deteriorationin the fair value of our cash equivalents, short-term investments or long-term investments since December 31, 2015, no assurance can be given thatdeterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents, short-terminvestments or long-term investments or our ability to meet our financing objectives.We depend upon key personnel who may terminate their employment with us at any time, and we may need to hire additional qualified personnelOur success will depend to a significant degree upon the continued services of key management, technical and scientific personnel. In addition, oursuccess will depend on our ability to attract and retain other highly skilled personnel, particularly as we develop and expand our Epigenomic RegulatorProgram. Competition for qualified personnel is intense, and the process of hiring and integrating such qualified personnel is often lengthy. We may beunable to recruit such personnel on a timely basis, if at all. Our management and other employees may voluntarily terminate their employment with us at anytime. The loss of the services of key personnel, or the inability to attract and retain additional qualified personnel, could result in delays to productdevelopment or approval, loss of sales and diversion of management resources.We may not successfully manage our company through varying business cyclesOur success will depend on properly sizing our company through growth and contraction cycles caused in part by changing business conditions, whichplaces a significant strain on our management and on our administrative, operational and financial resources. To manage through such cycles, we mustexpand or contract our facilities, our operational, financial and management systems and our personnel. If we were unable to manage growth and contractionseffectively our business would be harmed.Our business involves environmental risks and risks related to handling regulated substancesIn connection with our research and development activities and our manufacture of materials and pharmaceutical product candidates, we are subject tofederal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling anddisposal of certain materials, biological specimens and wastes. Although we believe that we have complied with the applicable laws, regulations and policiesin all material respects and have not been required to correct any material noncompliance, we may be required to incur significant costs to comply withenvironmental and health and safety regulations in the future. Our research and development involves the use, generation and disposal of hazardousmaterials, including but not limited to certain hazardous chemicals, solvents, agents and biohazardous materials. The extent of our use, generation anddisposal of such substances has increased substantially since we started manufacturing and selling biodegradable polymers. Although we believe that oursafety procedures for storing, handling and disposing of such materials comply with the standards prescribed by state and federal regulations, we cannotcompletely eliminate the risk of accidental contamination or injury from these materials. We currently contract with third parties to dispose of thesesubstances generated by us, and we rely on these third parties to properly dispose of these substances in compliance with applicable laws and regulations. Ifthese third parties do not properly dispose of these substances in compliance with applicable laws and regulations, we may be subject to legal action bygovernmental agencies or private parties for improper disposal of these substances. The costs of defending such actions and the potential liability resultingfrom 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 regulationsgoverning the use, generation and disposal of hazardous materials and chemicals, we could be held liable for any damages that result, and any such liabilitycould exceed our resources. 44Table of ContentsOur corporate headquarters, manufacturing facilities and personnel are located in a geographical area that is seismically activeOur corporate headquarters, primary manufacturing facilities and personnel are located in a geographical area that is known to be seismically activeand 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, development and manufacturing efforts, could be destroyed.We currently have significant debt. Compliance with repayment obligations and other covenants may be difficult, and failure by us to fulfill ourobligations under the applicable loan agreements may cause the repayment obligations to accelerate.In June 2014, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Oxford Finance LLC, pursuant to which Oxford provided a$20 million secured single-draw term loan to us with a maturity date of July 1, 2018. The term loan was fully drawn at close and the proceeds are to be usedfor working capital and general business requirements. The term loan was amended in July 2015. As amended, the term loan repayment schedule provides forinterest only payments until February 1, 2017, followed by consecutive equal monthly payments of principal and interest in arrears starting on February 1,2017 and continuing through the amended maturity date (July 1, 2019), with interest accruing at 7.95% plus an additional payment equal to 10% of theprincipal amount of the term loan, which is due when the term loan becomes due or upon the prepayment of the facility. In addition, if we elect to prepay theloan, there is also a prepayment fee between 1% and 3% of the principal amount of the term loan depending on the timing and circumstances of prepayment.Our debt repayment obligations under the Loan Agreement may prove a burden to the Company as they become due, particularly following the expiration ofthe interest-only period.In addition, the term loan is secured by substantially all of our assets, except that the collateral does not include any equity interests in the Company,any intellectual property (including all licensing, collaboration and similar agreements relating thereto), and certain other excluded assets. The LoanAgreement contains customary representations, warranties and covenants by us, which covenants limit our ability to convey, sell, lease, transfer, assign orotherwise dispose of certain of our assets; engage in any business other than the businesses currently engaged in by us or reasonably related thereto; liquidateor dissolve; make certain management changes; undergo certain change of control events; create, incur, assume, or be liable with respect to certainindebtedness; grant certain liens; pay dividends and make certain other restricted payments; make certain investments; make payments on any subordinateddebt; and enter into transactions with any of our affiliates outside of the ordinary course of business or permit our subsidiaries to do the same. Complyingwith these covenants may make it more difficult for us to successfully execute our business strategy.The Loan Agreement also contains customary events of default, including, among other things, our failure to fulfill certain of our obligations under theLoan Agreement and the occurrence of a material adverse change in our business, operations or condition (financial or otherwise), a material impairment ofthe prospect of repayment of any portion of the loan, or a material impairment in the perfection or priority of lender’s lien in the collateral or in the value ofsuch collateral. In the event of default by us under the Loan Agreement, the lender would be entitled to exercise its remedies thereunder, including the rightto accelerate the debt, upon which we may be required to repay all amounts then outstanding under the Loan Agreement, which could harm our business,operations and financial condition.Risks Related To Our IndustryThe market for our pharmaceutical product candidates is rapidly changing and competitive, and new products or technologies developed by otherscould impair our ability to grow our business and remain competitiveThe pharmaceutical industry is subject to rapid and substantial technological change. Developments by others may render our product candidatesunder development or technologies noncompetitive or obsolete, or we 45Table of Contentsmay be unable to keep pace with technological developments or other market factors. Technological competition in the industry from pharmaceutical andbiotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase.We may face competition from other companies in numerous industries including pharmaceuticals, medical devices and drug delivery. POSIMIR,ELADUR, Relday, REMOXY and other ORADUR-based drug candidates, if approved, will compete with currently marketed oral opioids, transdermalopioids, local anesthetic patches, anti-psychotics, stimulants, implantable and external infusion pumps which can be used for infusion of opioids and localanesthetics. Products of these types are marketed by Purdue Pharma, AbbVie, Janssen, Medtronic, Endo, AstraZeneca, Pernix Therapeutics, Tricumed, HalyardHealth, Cumberland Pharmaceuticals, Pacira, Acorda Therapeutics, Mallinckrodt, Shire, Johnson & Johnson, Eli Lilly, Pfizer, Novartis and others. PurduePharma, Sandoz, Actavis, Collegium Pharmaceutical, Pfizer, Elite Pharmaceuticals, Intellipharmaceutics, Egalet, Teva Pharmaceuticals and others have alsoannounced regulatory approval or development plans for abuse deterrent opioid products. Our ORADUR-ADHD product candidates, if approved, willcompete with currently marketed or approved products by Shire, Johnson & Johnson, UCB, Novartis, Noven, Eli Lilly, Pfizer and others. Relday, if approved,will compete with currently marketed products by Johnson & Johnson, Eli Lilly, Astra Zeneca, Pfizer, Bristol-Myers Squibb, Otsuka, SunovionPharmaceuticals, Teva and others. Competition for DUR-928, if approved, will depend on the specific indications for which DUR-928 is approved. Intercept,Gilead, Shire, Conatus Pharmaceuticals, Galectin Therapeutics, Genfit, Pfizer, Roche, Galmed Pharmaceuticals, Tobira Therapeutics, Enanta Pharmaceuticals,Novo Nordisk, Takeda, Vital Therapies, Akarna Therapeutics and others have development plans for products to treat NAFLD/NASH. Ischemix, ThrasosTherapeutics, AM-Pharma, Complexa, AbbVie, AlloCure, Quark Pharmaceuticals and others have development plans for products to treat acute kidneyinjury. Numerous companies are applying significant resources and expertise to the problems of drug delivery and several of these are focusing or may focuson delivery of drugs to the intended site of action, including Alkermes, Pacira, Immune Pharmaceuticals, Innocoll, Nektar, Kimberly-Clark, AcordaTherapeutics, Flamel, Alexza, Mallinckrodt, Hospira, Pfizer, Cumberland Pharmaceuticals, Egalet, Acura, Elite Pharmaceuticals, Phosphagenics,Intellipharmaceutics, Collegium Pharmaceutical, Heron Therapeutics and others. Some of these competitors may be addressing the same therapeutic areas orindications as we are. Our current and potential competitors may succeed in obtaining patent protection or commercializing products before us. Many ofthese entities have significantly greater research and development capabilities than we do, as well as substantially more marketing, manufacturing, financialand managerial resources. These entities represent significant competition for us. Acquisitions of, or investments in, competing pharmaceutical orbiotechnology 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 inherentin such novel technologies. Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis forcompetitive products. Some of these products may have an entirely different approach or means of accomplishing similar therapeutic effects than our productcandidates. Our competitors may develop products that are safer, more effective or less costly than our product candidates and, therefore, present a seriouscompetitive 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, injectable productsand implantable drug delivery devices which will be competitive with our product candidates. These treatments are widely accepted in the medicalcommunity and have a long history of use. The established use of these competitive products may limit the potential for our product candidates to receivewidespread acceptance if commercialized. 46Table of ContentsOur relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws andregulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and futureearningsHealthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of any product candidates forwhich we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuseand other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we would market, selland distribute our products. As a pharmaceutical company, even though we do not and may not control referrals of healthcare services or bill directly toMedicare, Medicaid or other third-party payors, federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are andwill be applicable to our business. These regulations include: ● the Federal Healthcare Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering,receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of anindividual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a federal healthcareprogram such as Medicare and Medicaid, and which will constrain our marketing practices and the marketing practices of our licensees,educational programs, pricing policies, and relationships with healthcare providers or other entities; ● the federal physician self-referral prohibition, commonly known as the Stark Law, which prohibits physicians from referring Medicare or Medicaidpatients to providers of “designated health services” with whom the physician or a member of the physician’s immediate family has an ownershipinterest or compensation arrangement, unless a statutory or regulatory exception applies; ● federal false claims laws that prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claimsfor payment from Medicare, Medicaid, or other government reimbursement programs that are false or fraudulent, and which may expose entitiesthat provide coding and billing advice to customers to potential criminal and civil penalties, including through civil whistleblower or qui tamactions, and including as a result of claims presented in violation of the Federal Healthcare Anti-Kickback Statute, the Stark Law or otherhealthcare-related laws, including laws enforced by the FDA; ● the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for executing ascheme to defraud any healthcare benefit program and also created federal criminal laws that prohibit knowingly and willfully falsifying,concealing or covering up a material fact or making any materially false statements in connection with the delivery of or payment for healthcarebenefits, items or services, and which as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, alsoimposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individuallyidentifiable health information; ● federal physician sunshine requirements under the Affordable Care Act, which requires manufacturers of drugs, devices, biologics and medicalsupplies to report annually to HHS information related to payments and other transfers of value to physicians, other healthcare providers, andteaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family membersand applicable group purchasing organizations; ● the Federal Food, Drug, and Cosmetic Act, which, among other things, strictly regulates drug product marketing, prohibits manufacturers frommarketing drug products for off-label use and regulates the distribution of drug samples; and ● state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to sales ormarketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including privateinsurers, state laws 47Table of Contents requiring pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant complianceguidance promulgated by the federal government and which may require drug manufacturers to report information related to payments and othertransfers of value to physicians and other healthcare providers or marketing expenditures, and state and foreign laws governing the privacy andsecurity of health information in specified circumstances, many of which differ from each other in significant ways and often are not preempted byfederal laws such as HIPAA, thus complicating compliance efforts.Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantialcosts. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or caselaw involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or anyother governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines,imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of ouroperations. If any physicians or other healthcare providers or entities with whom we expect to do business are found to not be in compliance with applicablelaws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.Healthcare reform measures could hinder or prevent our product candidates’ commercial success.In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare systemthat could affect our future revenue and profitability and the future revenue and profitability of our collaborators or potential collaborators. Federal and statelawmakers regularly propose and, at times, enact legislation that results in significant changes to the healthcare system, some of which is intended to containor reduce the costs of medical products and services. For example, in March 2010, the President signed one of the most significant healthcare reform measuresin decades, the Affordable Care Act. It contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursementchanges and fraud and abuse measures, all of which impact existing government healthcare programs and will result in the development of new programs.The Affordable Care Act, among other things: ● imposes a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded prescription drugs”; ● increases the minimum level of Medicaid rebates payable by manufacturers of brand-name drugs from 15.1% to 23.1%; ● requires collection of rebates for drugs paid by Medicaid managed care organizations; ● addresses new methodologies by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that areinhaled, infused, instilled, implanted or injected, and for drugs that are line extension products; ● requires manufacturers to participate in a coverage gap discount program, under which they must agree to offer 50% point-of-sale discounts offnegotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’soutpatient drugs to be covered under Medicare Part D; and ● mandates a further shift in the burden of Medicaid payments to the states.Other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. For example, automatic reductions to severalgovernment programs were enacted during “sequestration”. These reductions included aggregate reductions to Medicare payments to providers of up to2% per fiscal year, which went into effect on April 1, 2013. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012,or the ATRA, which, among other things, further reduced Medicare payments to several 48Table of Contentsproviders, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recoveroverpayments to providers from three to five years. Additional state and federal healthcare reform measures may be adopted in the future, any of which couldlimit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our productcandidates once approved or additional pricing pressures.We could be exposed to significant product liability claims which could be time consuming and costly to defend, divert management attention andadversely impact our ability to obtain and maintain insurance coverageThe 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 topay. Product liability claims or other claims related to our product candidates, regardless of their outcome, could require us to spend significant time andmoney in litigation or to pay significant damages. Any successful product liability claim may prevent us from obtaining adequate product liability insurancein the future on commercially desirable or reasonable terms. In addition, product liability coverage may cease to be available in sufficient amounts or at anacceptable cost. An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claimscould prevent or inhibit the commercialization of our product candidates. A product liability claim could also significantly harm our reputation and delaymarket acceptance of our product candidates.Acceptance of our pharmaceutical product candidates in the marketplace is uncertain, and failure to achieve market acceptance will delay our ability togenerate or grow revenuesOur future financial performance will depend upon the successful introduction and customer acceptance of our products in research and development,including POSIMIR, REMOXY and other ORADUR-based drug candidates, DUR-928, Relday and ELADUR. Even if approved for marketing, our productcandidates 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 advantagesover existing therapeutic products, including oral medication, transdermal drug delivery products such as drug patches, injectable therapeutics, orexternal or implantable drug delivery products; and ● pricing and reimbursement policies of government and third-party payors such as insurance companies, health maintenance organizations,hospital formularies 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 areunable to obtain regulatory approval, commercialize and market our future products when planned and achieve market acceptance, we will not achieveanticipated revenues.If users of our products are unable to obtain adequate reimbursement from third-party payors, or if new restrictive legislation is adopted, marketacceptance of our products may be limited and we may not achieve anticipated revenuesThe continuing efforts of government and insurance companies, health maintenance organizations and other payors of healthcare costs to contain orreduce costs of health care may affect our future revenues and profitability, and the future revenues and profitability of our potential customers, suppliers andthird-party collaborators and the availability of capital. For example, in certain foreign markets, pricing or profitability of 49Table of Contentsprescription pharmaceuticals is subject to government control. In the United States, recent federal and state government initiatives have been directed atlowering 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 prescriptionpharmaceuticals and on the reform of the Medicare and Medicaid systems. While we cannot predict whether any such legislative or regulatory proposals willbe 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 ofour product candidates and related treatment are obtained by governmental authorities, private health insurers and other organizations, such as HMOs. Third-party payors often limit payments or reimbursement for medical products and services. Also, the trend toward managed health care in the United States andthe concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, aswell as legislative proposals to reform health care or reduce government insurance programs, may limit reimbursement or payment for our products. The costcontainment measures that health care payors and providers are instituting and the effect of any health care reform could materially harm our ability tooperate profitably.If we or our third-party collaborators are unable to train physicians to use our pharmaceutical product candidates to treat patients’ diseases or medicalconditions, we may incur delays in market acceptance of our productsBroad use of our product candidates will require extensive training of numerous physicians on the proper and safe use of our product candidates. Thetime 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 product candidates may be unable to rapidly train physicians in numbers sufficient to generate adequate demand for ourproduct candidates. Any delay in training would materially delay the demand for our product candidates and harm our business and financial results. Inaddition, we may expend significant funds towards such training before any orders are placed for our products, which would increase our expenses and harmour financial results.Potential new accounting pronouncements and legislative actions are likely to impact our future financial position or results of operationsFuture changes in financial accounting standards may cause adverse, unexpected fluctuations in the timing of the recognition of revenues or expensesand may affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred withfrequency and may occur in the future and we may make changes in our accounting policies in the future. Compliance with changing regulation of corporategovernance and public disclosure may result in additional expenses. Changing laws, regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, PCAOB pronouncements and NASDAQ rules, are creating uncertainty forcompanies such as ours and insurance, accounting and auditing costs are high as a result of this uncertainty and other factors. We are committed tomaintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply withevolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention fromrevenue-generating activities to compliance activities. 50Table of ContentsRisks Related To Our Common StockOur stock price has in the past and may in the future not meet the minimum bid price for continued listing on the Nasdaq Global Market. Our ability topublicly or privately sell equity securities and the liquidity of our common stock could be adversely affected if we are delisted from The Nasdaq GlobalMarket or if we are unable to transfer our listing to another stock marketOn each of January 16, 2013 and December 9, 2014, we received written notification from Nasdaq informing us that because the closing bid price ofour common stock was below $1.00 for 30 consecutive trading days, our shares no longer complied with the minimum closing bid price requirement forcontinued listing on the Nasdaq Global Market under Nasdaq Marketplace Rule 5450(a)(1). Each time, we were given a period of 180 days from the date ofthe notification to regain compliance with Nasdaq’s listing requirements by having the closing bid price of our common stock listed on Nasdaq be at least$1.00 for at least 10 consecutive trading days.While we regained compliance within the applicable time periods as of February 1, 2013 and March 6, 2015, respectively, if our shares again no longercomply with the minimum closing bid price requirement for continued listing on the Nasdaq Global Market under Nasdaq Marketplace Rule 5450(a)(1) andwe do not regain compliance within the applicable 180-day time period, we may transfer our common stock listing to The Nasdaq Capital Market, providedthat the Company (i) meets the applicable market value of publicly held shares requirement for continued listing and all other applicable requirements forinitial listing on The Nasdaq Capital Market (except for the closing bid price requirement) based on the Company’s most recent public filings and marketinformation and (ii) notifies Nasdaq of its intent to cure this deficiency. Following a transfer to The Nasdaq Capital Market, the Company would be affordedthe remainder of an additional 180 calendar day grace period in order to regain compliance with the minimum closing bid price requirement of $1.00 pershare under The Nasdaq Capital Market, unless it does not appear to NASDAQ that it would be possible for the Company to cure the deficiency.If compliance is not demonstrated within the applicable compliance period, Nasdaq will notify the Company that its securities will be subject todelisting. The Company may appeal Nasdaq’s determination to delist its securities to a Hearings Panel. During any appeal process, shares of the Company’scommon stock would continue to trade on the Nasdaq Global Market or Nasdaq Capital Market, as applicable.There can be no assurance that we will maintain compliance with the requirements for listing our common stock on the Nasdaq Global Market or if wewere not in compliance, that our common stock would be eligible for transfer to the Nasdaq Capital Market and remain in compliance with the requirementsfor listing on that market. Delisting from Nasdaq could adversely affect our ability to raise additional financing through the public or private sale of equitysecurities, would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our common stock.Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewerbusiness development opportunities.Our operating history makes evaluating our stock difficultOur quarterly and annual results of operations have historically fluctuated and we expect will continue to fluctuate for the foreseeable future. Webelieve that period-to-period comparisons of our operating results should not be relied upon as predictive of future performance. Our prospects must beconsidered in light of the risks, expenses and difficulties encountered by companies with no approved pharmaceutical products, particularly companies innew and rapidly evolving markets such as pharmaceuticals, drug delivery and biotechnology. To address these risks, we must, among other things, obtainregulatory 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. 51Table of ContentsInvestors may experience substantial dilution of their investmentInvestors may experience dilution of their investment if we raise capital through the sale of additional equity securities or convertible debt securities orgrant additional stock options to employees and consultants. In November 2015, we filed a shelf registration statement on Form S-3 with the SEC, whichupon being declared effective in November 2015, allowed us to offer up to $125 million of securities from time to time in one or more public offerings of ourcommon stock. In addition, in November 2015, we entered into a Controlled Equity Offering sales agreement with Cantor Fitzgerald, under which we maysell, subject to certain limitations, up to $40 million of common stock through Cantor Fitzgerald, acting as agent. As of February 18, 2016, the Company hadup to $37.6 million of common stock available for sale under the Controlled Equity Offering program and $122.6 million of common stock available for saleunder the shelf registration statement. Any additional sales in the public market of our common stock, under the agreements with Cantor Fitzgerald orotherwise under the shelf registration statement, could adversely affect prevailing market prices for our common stock.The price of our common stock may be volatileThe stock markets in general, and the markets for pharmaceutical stocks in particular, have experienced extreme volatility that has often been unrelatedto the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.Price declines in our common stock could result from general market and economic conditions and a variety of other factors, including: ● failure of third-party collaborators to continue development of the respective product candidates they are developing; ● adverse results (including adverse events or failure to demonstrate safety or efficacy) or delays in our clinical and non-clinical trials of POSIMIR,REMOXY or our other ORADUR-based drug candidates, DUR-928, Relday, ELADUR or other product candidates; ● announcements of FDA non-approval of our product candidates, or delays in the FDA or other foreign regulatory agency review process; ● adverse actions taken by regulatory agencies or law enforcement agencies with respect to our product candidates, clinical trials, manufacturingprocesses or sales and marketing activities, or those of our third party collaborators; ● announcements of technological innovations, patents, product approvals or new products by our competitors; ● regulatory, judicial and patent developments in the United States and foreign countries; ● any lawsuit involving us or our product candidates including intellectual property infringement or product liability suits; ● announcements concerning our competitors, or the biotechnology or pharmaceutical industries in general; ● developments concerning our strategic alliances or acquisitions; ● actual or anticipated variations in our operating results; ● changes in recommendations by securities analysts or lack of analyst coverage; ● deviations in our operating results from the estimates of analysts; ● sales of our common stock by our executive officers or directors or sales of substantial amounts of common stock by us or others; ● potential failure to meet continuing listing standards from The NASDAQ Global Market; 52Table of Contents ● loss or disruption of facilities due to natural disasters; ● changes in accounting principles; or ● loss of any of our key scientific or management personnel.The market price of our common stock may fluctuate significantly in response to factors which are beyond our control. The stock market in general hasrecently experienced extreme price and volume fluctuations. In addition, the market prices of securities of technology and pharmaceutical companies havealso been extremely volatile, and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of thesecompanies. These broad market fluctuations could result in extreme fluctuations in the price of our common stock, which could cause a decline in the valueof our common stock.In the past, following periods of volatility in the market price of a particular company’s securities, litigation has often been brought against thatcompany. If litigation of this type is brought against us, it could be extremely expensive and divert management’s attention and our company’s resources.We have broad discretion over the use of our cash and investments, and their investment may not always yield a favorable returnOur management has broad discretion over how our cash and investments are used and may from time to time invest in ways with which ourstockholders may not agree and that do not yield favorable returns.Executive officers, directors and principal stockholders have substantial control over us, which could delay or prevent a change in our corporatecontrol favored by our other stockholdersOur directors, executive officers and principal stockholders, together with their affiliates, have substantial control over us. The interests of thesestockholders may differ from the interests of other stockholders. As a result, these stockholders, if acting together, could have the ability to exercise controlover 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 and Delaware law contain provisions that could discourage another company from acquiring usProvisions of Delaware law, our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that stockholders mayconsider 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 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 bystockholders at stockholder meetings. 53Table of ContentsItem 1B.Unresolved Staff Comments.None. Item 2.Properties.The following chart indicates the facilities that we lease, the location and size of each such facility and their designated use. Location ApproximateSquare Feet Operation ExpirationCupertino, CA 30,000 sq. ft. Office, Laboratoryand Manufacturing Lease expires 2019 (with an option to renew for an additional five years)Cupertino, CA 20,000 sq. ft. Office and Laboratory Lease expires 2019 (with an option to renew for an additional five years)Vacaville, CA 24,634 sq. ft. Manufacturing Lease expires 2018Birmingham, AL 21,540 sq. ft. Office, Laboratory andManufacturing Lease expires 2021 (with an option to terminate after August 2017 andwith two options to renew the lease term for an additional five yearseach after the current lease expires)We believe that our existing facilities are adequate to meet our current and foreseeable requirements or that suitable additional or substitute space willbe available as needed. Item 3.Legal Proceedings.We are not a party to any material legal proceedings. Item 4.Mine Safety Disclosures.Not applicable. 54Table of ContentsPART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Price Range of Common StockOur common stock has been traded on the NASDAQ Global Market under the symbol “DRRX” since our initial public offering on September 28, 2000.The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported by the NASDAQ Global Market. Common StockPrice Year ended December 31, 2014 Low High First Quarter $1.30 $2.69 Second Quarter 1.26 1.89 Third Quarter 1.42 1.85 Fourth Quarter 0.68 1.48 Year ended December 31, 2015 Low High First Quarter $0.74 $2.05 Second Quarter 1.80 3.42 Third Quarter 1.74 2.87 Fourth Quarter 1.79 2.70 The closing sale price of our common stock as reported on the NASDAQ Global Market on February 18, 2016 was $1.17 per share. As of that date therewere approximately 109 holders of record of the common stock. This does not include the number of persons whose stock is in nominee or “street name”accounts through brokers. The market price of our common stock has been and may continue to be subject to wide fluctuations in response to a number ofevents and factors, such as progress in our development programs, quarterly variations in our operating results, announcements of technological innovationsor new products by us or our competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock performance ofother companies that investors may deem comparable to us, and news reports relating to trends in our markets. These fluctuations, as well as generaleconomic and market conditions, may adversely affect the market price for our common stock.Dividend PolicyWe have never paid cash dividends on our common stock. We currently intend to retain any future earnings to fund the development and growth of ourbusiness. Therefore, we do not currently anticipate paying any cash dividends in the foreseeable future. 55Table of ContentsSTOCK PERFORMANCE GRAPHThe following graph compares the cumulative total stockholder return data for our stock with the cumulative return of (i) The NASDAQ Stock Market(U.S.) Index and (ii) the NASDAQ Biotechnology Index since December 31, 2010. The graph assumes that $100 was invested on December 31, 2010. Thestock price performance on the following graph is not necessarily indicative of future stock price performance. *$100 Invested on 12/31/10 in stock or index—including reinvestment of dividends. Fiscal year ending December 31.DURECT CORPORATION Cumulative Total Return 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 DURECT CORPORATION 100.00 34.20 26.67 50.14 22.90 64.06 NASDAQ STOCK MARKET (U.S.) 100.00 98.20 113.82 157.44 178.53 188.75 NASDAQ BIOTECHNOLOGY 100.00 111.81 147.48 244.24 327.52 364.93 Purchases of Equity Securities by the Issuer and Affiliated PurchasersNone. 56Table of ContentsItem 6.Selected Financial Data.The following selected financial data should be read in conjunction with and are qualified by reference to “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and our financial statements and related notes, which are included in this Form 10-K. The statement ofoperations data for the years ended December 31, 2015, 2014 and 2013 and the balance sheet data at December 31, 2015 and 2014 are derived from, and arequalified by reference to, the audited financial statements included elsewhere in this Form 10-K. The statement of operations data for the years endedDecember 31, 2012 and 2011, and the balance sheet data at December 31, 2013, 2012 and 2011 are derived from our audited statements not included in thisForm 10-K. Historical operating results are not necessarily indicative of results in the future. See Note 1 of notes to financial statements for an explanation ofthe determination of the shares used in computing net loss per share. Year Ended December 31, 2015 2014 2013 2012 2011 (in thousands, except per share data) Statement of Operations Data: Collaborative research and development and other revenue (1) $7,832 $8,256 $3,590 $42,494 $22,360 Product revenue, net 11,292 11,145 11,736 10,576 11,127 Total revenue 19,124 19,401 15,326 53,070 33,487 Operating expenses: Cost of revenue 3,905 5,686 4,837 4,654 4,713 Research and development 24,317 22,429 18,945 20,265 34,053 Selling, general and administrative 11,566 12,284 12,706 12,095 13,574 Total operating expenses 39,788 40,399 36,488 37,014 52,340 Income (loss) from operations (20,664) (20,998) (21,162) 16,056 (18,853) Other income (expense): Interest and other income (expenses) 237 39 (284) 151 93 Interest expense (2,236) (1,151) (6) (7) (5) Net other income (expense) (1,999) (1,112) (290) 144 88 Net income (loss) $(22,663) $(22,110) $(21,452)) $16,200 $(18,765) Basic net income (loss) per share $(0.19) $(0.20) $(0.21) $0.18 $(0.21) Diluted net income (loss) per share $(0.19) $(0.20) $(0.21) $0.18 $(0.21) Shares used in computing basic net income (loss) per share 118,523 111,666 103,078 88,433 87,410 Shares used in computing diluted net income (loss) per share 118,523 111,666 103,078 88,589 87,410 As of December 31, 2015 2014 2013 2012 2011 (in thousands) Balance Sheet Data: Cash, cash equivalents and investments $29,290 $34,850 $24,391 $28,932 $30,829 Working capital 30,874 32,526 21,143 29,428 22,410 Total assets 46,772 50,084 40,820 45,935 49,196 Long-term debt, net 19,684 19,824 — — — Other long-term liabilities 2,489 2,035 1,618 1,197 738 Stockholders’ equity 14,883 18,515 30,721 36,331 3,477 (1)The 2012 figure includes the accelerated recognition of $35.4 million in deferred revenue associated with upfront fees previously received underterminated collaboration agreements with Nycomed, Pfizer and Hospira. 57Table of ContentsItem 7.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 as of December 31, 2015, 2014 and 2013 should beread in conjunction with our Financial Statements, including the Notes thereto, and “Risk Factors” section included elsewhere in this Form 10-K. ThisForm 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A ofthe 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 contained herein arebased on current expectations.Forward-looking statements made in this report include, for example, statements about: ● potential regulatory filings for or approval of POSIMIR, REMOXY or any of our other product candidates; ● the progress of our third-party collaborations, including estimated milestones; ● our intention to seek, and ability to enter into and maintain strategic alliances and collaborations; ● the potential benefits and uses of our products; ● responsibilities of our third-party collaborators, including the responsibility to make cost reimbursement, milestone, royalty and other payments tous, and our expectations regarding our collaborators’ plans with respect to our products and continued development of our products; ● our responsibilities to our third-party collaborators, including our responsibilities to conduct research and development, clinical trials andmanufacture products; ● our ability to protect intellectual property, including intellectual property licensed to our collaborators; ● market opportunities for products in our product pipeline; ● the progress and results of our research and development programs; ● requirements for us to purchase supplies and raw materials from third parties, and the ability of third parties to provide us with required suppliesand raw materials; ● the results and timing of clinical trials, including for POSIMIR, REMOXY or DUR-928, and the possible commencement of future clinical trials; ● conditions for obtaining regulatory approval of our product candidates; ● submission and timing of applications for regulatory approval; ● the impact of FDA, DEA, EMEA and other government regulation on our business; ● the impact of potential Risk Evaluation and Mitigation Strategies (REMS) on our business; ● uncertainties associated with obtaining and protecting patents and other intellectual property rights, as well as avoiding the intellectual propertyrights of others; ● products and companies that will compete with the products we license to third-party collaborators; ● the possibility we may commercialize our own products and build up our commercial, sales and marketing capabilities and other requiredinfrastructure; ● the possibility that we may develop additional manufacturing capabilities; ● our employees, including the number of employees and the continued services of key management, technical and scientific personnel; 58Table of Contents ● our future performance, including our anticipation that we will not derive meaningful revenues from our products in development for at least thenext twelve months, potential for future inventory write-offs and our expectations regarding our ability to achieve profitability; ● sufficiency of our cash resources, anticipated capital requirements and capital expenditures, our ability to comply with covenants of our term loan,and our need for additional financing, including potential sales under our shelf registration statement; ● our expectations regarding marketing expenses, research and development expenses, and selling, general and administrative expenses; ● the composition of future revenues; and ● accounting policies and estimates, including revenue recognition policies.Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differmaterially from those discussed in the forward-looking statements as a result of various factors. For a more detailed discussion of such forward lookingstatements and the potential risks and uncertainties that may impact upon their accuracy, see the “Risk Factors” section and “Overview” section of thisManagement’s Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements reflect our view only as of thedate of this report. We undertake no obligations to update any forward-looking statements. You should also carefully consider the factors set forth in otherreports or documents that we file from time to time with the Securities and Exchange Commission.OverviewWe are a biopharmaceutical company with research and development programs broadly falling into two categories: (i) new chemical entities derivedfrom our Epigenomic Regulator Program, in which we attempt to discover and develop molecules which have not previously been approved and marketed astherapeutics, and (ii) Drug Delivery Programs, in which we apply our formulation expertise and technologies largely to active pharmaceutical ingredientswhose safety and efficacy have previously been established but which we aim to improve in some manner through a new formulation. We also manufactureand sell osmotic pumps used in laboratory research and design, develop and manufacture a wide range of standard and custom biodegradable polymers andexcipients for pharmaceutical and medical device clients for use as raw materials in their products.A central aspect of our business strategy involves advancing multiple product candidates at one time, which is enabled by leveraging our resourceswith those of corporate collaborators. Thus, certain of our programs are currently licensed to corporate collaborators on terms which typically call for ourcollaborator to fund all or a substantial portion of future development costs and then pay us milestone payments based on specific development orcommercial achievements plus a royalty on product sales. At the same time, we have retained the rights to other programs, which are the basis of futurecollaborations and which over time may provide a pathway for us to develop our own commercial, sales and marketing organization.Collaborative Research and Development and Other RevenuesCollaborative research and development and other revenues consist of three broad categories: (a) the recognition of upfront license payments on astraight-line basis over the period of our continuing involvement with the third party, (b) the reimbursement of qualified research expenses by third partiesand (c) milestone payments in connection with our collaborative agreements. During the last several years, we generated collaborative research anddevelopment revenues from collaborative agreements with Pain Therapeutics, Pfizer (King), Zogenix, Impax, Santen and others.Product RevenuesWe have historically generated product revenue from the sale of three product lines: ● ALZET osmotic pumps for animal research use; 59®Table of Contents ● LACTEL biodegradable polymers which are used by our customers as raw materials in their pharmaceutical and medical products; and ● certain key excipients that are included in REMOXY and one excipient that is included in a currently marketed animal health product.In the future, we expect to generate modest revenue related to an animal health product which was approved and launched by our licensee in 2011.Because we consider our core business to be developing and commercializing pharmaceuticals, we do not intend to significantly increase our investments inor 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 tocollaborative research and development by entering into additional research and development agreements with third-party collaborators to developpharmaceutical product candidates.Operating ResultsSince our inception in 1998, we have generally had a history of operating losses. At December 31, 2015, we had an accumulated deficit of $405.6million. Our net losses were $22.7 million, $22.1 million and $21.5 million for the years ended December 31, 2015, 2014, and 2013 respectively. Theselosses have resulted primarily from costs incurred to research and develop our product candidates and to a lesser extent, from selling, general andadministrative costs associated with our operations and product sales. We expect our research and development expenses to increase in 2016 compared to2015. We expect selling, general and administrative expenses to remain approximately comparable in 2016 to 2015. We do not anticipate meaningfulrevenues from our products in development, should they be approved, for at least the next twelve months. Therefore, we expect to incur continuing losses andnegative cash flows from operations for the foreseeable future.Critical Accounting Policies and EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financialstatements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenuerecognition, the recoverability of our long-lived assets, including goodwill and other intangible assets, accrued liabilities, contract research liabilities,inventories and stock-based compensation. Actual amounts could differ significantly from these estimates.Inventories and Purchase CommitmentsOur inventories include excipients that are used in the manufacture of REMOXY, POSIMIR and other development programs. These inventories arecapitalized based on management’s judgment of probable sale or use in other development programs prior to their expiration date. The valuation ofinventory requires us to estimate the value of inventory that may become expired prior to use. In October 2014, Pfizer announced that it had decided todiscontinue the development and commercialization of REMOXY and return its rights to Pain Therapeutics. As a result of the change in the forecasteddemand of the inventory from Pfizer, we were required to write-down certain lots of inventory which were no longer considered to be probable for use prior toexpiration. In addition, we recorded a liability related to a minimum purchase agreement that we have in place for the excipients. In the year endedDecember 31, 2014, we recorded charges to cost of goods sold of approximately $1.6 million, of which approximately $1.1 million related to the write-downof the cost basis of inventory and $500,000 related to the accrual of a liability for the minimum purchase commitment for the excipients. As of December 31,2015, the remaining carrying value of the excipients in our inventory was $1.1 million. In addition, we have remaining unrecorded future purchasecommitments totaling $1.5 million through 2018. In the event that we determine that we will not utilize all of these materials, there could be additional write-offs related to this inventory and an additional reserve for future purchase commitments. 60®Table of ContentsRevenue RecognitionWe enter into license and collaboration agreements under which we may receive upfront license fees, research funding and contingent milestonepayments and royalties. We evaluate the accounting treatment under these agreements including whether multiple deliverables exist, how the deliverablesshould be separated and how the consideration should be allocated to one or more units of accounting. For our collaborations with multiple deliverables, wehave concluded that the deliverables are not separable and the arrangements should be accounted for as a combined unit of accounting. As a combined unitof accounting, we recognized the consideration for the combined unit of accounting in the same manner as the revenue was recognized for the finaldeliverable, which was generally ratably over the longest period of involvement. For example, upfront payments received upon execution of collaborativeagreements are recorded as deferred revenue and recognized as collaborative research and development revenue based on a straight-line basis over the periodof our continuing involvement with the third-party collaborator pursuant to the applicable agreement. Such period generally represents the longer of theestimated research and development period or other continuing obligation period defined in the respective agreements between us and our third-partycollaborators. If we determine that the expected timeline for a project and therefore our continuing involvement is materially different than we previouslyassumed, we will adjust the period over which we recognize the deferred revenue.Research and Development ExpensesResearch and development expenses are primarily comprised of salaries, benefits, stock-based compensation and other compensation cost associatedwith research and development personnel, overhead and facility costs, preclinical and non-clinical development costs, clinical trial and related clinicalmanufacturing costs, contract services, and other outside costs. Research and development costs are expensed as incurred. Research and development costspaid to third parties under sponsored research agreements are recognized as expense as the related services are performed, generally ratably over the period ofservice.GoodwillWe record intangible assets when we acquire other companies and intellectual property rights. The cost of an acquisition is allocated to the assetsacquired and liabilities assumed, including intangible assets, with the remaining amount being classified as goodwill.Goodwill is periodically assessed for impairment. Goodwill is evaluated for impairment at the reporting unit level. The Company operates in oneoperating segment and one reporting unit, which is the research, development and manufacturing of pharmaceutical products. We assess the impairment ofgoodwill at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we considerimportant which could trigger an impairment review include the following: ● significant decline in our stock price for a sustained period; ● our market capitalization relative to net book value; ● new information affecting the commercial value of the asset; ● 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; and ● significant negative industry or economic trends.If we determine that the carrying value of our goodwill may not be recoverable based upon the existence of one or more of the above indicators ofimpairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to becommensurate with the risk 61Table of Contentsinherent in our current business model. We would also reconcile our estimate of total enterprise value to our market capitalization. As of December 31, 2015,the carrying value of goodwill was approximately $6.4 million. No impairment of goodwill has been recorded through December 31, 2015. However, therecan 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 LiabilitiesWe incur significant costs associated with third party consultants and organizations for pre-clinical studies, clinical trials, contract manufacturing,validation, testing, and other research and development-related services. We are required to estimate periodically the cost of services rendered but unbilledbased on management’s estimates of project status. If these good faith estimates are inaccurate, actual expenses incurred could materially differ from ourestimates.Stock-Based CompensationEmployee stock-based compensation is estimated at the date of grant based on the employee stock award’s fair value using the Black-Scholes option-pricing model and is recognized as expense ratably over the requisite period.We estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock. We base the risk-free ratethat we use in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues withequivalent remaining terms. We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in theforeseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. We estimate forfeitures at the timeof grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting optionforfeitures and record stock-based compensation expense only for those awards that are expected to vest. For options granted on or after January 1, 2006, weamortize the fair value on a straight-line basis. All options are amortized over the requisite service periods of the awards, which are generally the vestingperiods. We may elect to use different assumptions under the Black-Scholes option valuation model in the future, which could materially affect our netincome or loss and net income or loss per share.Results of OperationsComparison of years ended December 31, 2015, 2014 and 2013Collaborative research and development and other revenueWe recognize revenues from collaborative research and development activities and service contracts. Collaborative research and development revenueprimarily represents net reimbursement of qualified expenses related to the collaborative agreements with various third parties to research, develop andcommercialize potential products using our drug delivery technologies, revenue recognized from ratable recognition of upfront fees, and milestone paymentsin connection with our collaborative agreements. 62Table of ContentsWe expect our collaborative research and development revenue to fluctuate in future periods pending our efforts to enter into potential newcollaborations and our existing third party collaborators’ commitment to and progress in the research and development programs. The collaborative researchand development and other revenues associated with our major collaborators are as follows (in thousands): Year ended December 31, 2015 2014 2013 Collaborator Zogenix, Inc. (Zogenix) (1) $4,898 $4,431 $918 Pain Therapeutics, Inc. (Pain Therapeutics) 1,385 1,359 750 Santen Pharmaceutical Co. Ltd. (Santen) (2) 824 16 — Impax Laboratories, Inc. (Impax) (3) — 2,106 — Pfizer Inc. (Pfizer) — 118 42 Others 725 226 1,880 Total collaborative research and development and other revenue $7,832 $8,256 $3,590 (1)Amounts related to ratable recognition of upfront fees were $255,000 in 2015 and 2014, and $241,000 in 2013. (2)Amounts related to ratable recognition of upfront fees were $274,000 in 2015, $15,000 in 2014, and zero in 2013, respectively; we and Santen signed alicense agreement effective December 11, 2014. (3)Amounts related to recognition of upfront fees were zero in 2015, $2.0 million in 2014 and zero in 2013, respectively; we and Impax signed a licenseagreement effective January 3, 2014.We recorded $7.8 million, $8.3 million and $3.6 million of collaborative research and development revenue in 2015, 2014 and 2013, respectively.The decrease in collaborative research and development revenue in 2015 compared with 2014 was primarily due to lower revenue recognized from ouragreements with Impax and Pfizer, offset by higher collaborative research and development revenue recognized in connection with Santen, Zogenix and PainTherapeutics as our role in the development activities for the Santen ophthalmic program, Relday and certain ORADUR-based opioid products includingREMOXY increased in 2015, as well as higher revenue recognized from our feasibility agreements with other companies.The increase in collaborative research and development revenue in 2014 compared with 2013 was primarily due to higher revenue recognized from ouragreements with Zogenix and Pain Therapeutics as our role in the development activities for Relday and certain ORADUR-based opioid products includingREMOXY increased in 2014, as well as higher revenue recognized from our agreement with Pfizer, partially offset by lower collaborative research anddevelopment revenue recognized in connection with our feasibility agreements with other companies. The increase was also due to revenue recognized fromour agreement with Impax in January 2014 and from our agreement with Santen in December 2014.We received a $2.0 million upfront fee in connection with the license agreement signed with Santen in December 2014. The $2.0 million upfront fee isbeing recognized as collaborative research and development revenue ratably over the term of our continuing involvement with Santen. At December 31,2015, $289,000 of the $2.0 million upfront fee had been recognized as revenue.We received a $2.0 million upfront fee in connection with the license agreement signed with Impax in January 2014 relating to ELADUR. The $2.0million upfront fee was recognized as collaborative research and development revenue in the first quarter of 2014 as revenue was recognized when the licenseto the intellectual property right was delivered and the technology transfer was completed. 63Table of ContentsWe received a $2.25 million upfront fee in connection with the development and license agreement signed with Zogenix in July 2011 relating toRelday. The $2.25 million upfront fee is recognized as collaborative research and development revenue ratably over the term of our continuing involvementwith Zogenix with respect to Relday. At December 31, 2015, $1.2 million of the $2.25 million upfront fee had been recognized as revenue.Product revenueA portion of our revenues is derived from product sales, which include our ALZET mini pump product line, our LACTEL biodegradable polymerproduct line and certain excipients that are included in REMOXY and a currently marketed animal health product. Net product revenues were $11.3 million,$11.1 million and $11.7 million in 2015, 2014 and 2013, respectively.The increase in product revenue in 2015 was primarily attributable to higher revenue from our LACTEL polymer product line as a result of higher unitssold as well as higher product revenue from the sale of certain excipients included in REMOXY and another product, offset by lower product revenue fromour ALZET mini pump product line as a result of lower units sold partially offset by higher prices compared to 2014.The decrease in product revenue in 2014 was primarily attributable to lower product revenue from our LACTEL polymer product line as a result oflower units sold, lower product revenue from the sale of our ALZET mini pump product line as a result of lower units sold partially offset by higher prices,and lower product revenue from the sale of certain excipients included in REMOXY and another product as a result of lower units sold compared to 2013.Revenues in 2015, 2014 and 2013 included $96,000, $33,000 and $273,000 in product revenue related to the shipments of excipients included inREMOXY and a currently marketed animal health product.Cost of product revenuesCost of product revenues was $3.9 million, $5.7 million and $4.8 million in 2015, 2014 and 2013, respectively. Cost of product revenues include thecost of product revenue from our ALZET product line, our LACTEL product line and certain excipients that are included in REMOXY and another product.The decrease in the cost of product revenue in 2015 was primarily the result of charges in 2014 of $1.6 million associated with certain excipientsincluded in REMOXY in light of Pfizer’s decision in the third quarter of 2014 to return to Pain Therapeutics all rights to develop and commercializeREMOXY. Excluding these charges recorded in 2014, cost of product revenues decreased primarily due to lower cost of goods sold from our ALZET productline arising from fewer units sold and lower cost of manufacturing for products sold from our LACTEL product line in 2015 compared to 2014.The increase in the cost of product revenue in 2014 was primarily the result of charges of $1.6 million associated with certain excipients included inREMOXY in the third quarter of 2014, partially offset by lower cost of goods sold from our LACTEL and ALZET mini pump product lines and related to thesale of certain excipients arising from lower units sold in 2014 compared to 2013.Stock-based compensation expense related to cost of product revenues was $108,000, $149,000 and $170,000 in 2015, 2014 and 2013, respectively.As of December 31, 2015, 2014 and 2013, we had 22, 22 and 21 manufacturing employees, respectively. As of February 18, 2016, we had 22employees in manufacturing, which we expect will remain comparable in the near future. 64Table of ContentsResearch and Development. Research and development expenses are primarily comprised of salaries, benefits, stock-based compensation and othercompensation cost associated with research and development personnel, overhead and facility costs, preclinical and non-clinical development costs, clinicaltrial and related clinical manufacturing costs, contract services, and other outside costs. Research and development expenses were $24.3 million, $22.4million and $18.9 million in 2015, 2014 and 2013, respectively. Stock-based compensation expense recognized related to research and developmentpersonnel was $1.4 million, $1.7 million and $2.0 million in 2015, 2014 and 2013, respectively.Research and development expenses increased by $1.9 million in 2015 compared to 2014. The increase in 2015 was primarily attributable to higherresearch and development costs associated with DUR-928, POSIMIR, Relday, REMOXY and the Santen ophthalmic program, partially offset by lowerresearch and development costs associated with depot injectable programs, ORADUR-based opioid products licensed to Pain Therapeutics other thanREMOXY, ELADUR, ORADUR-ADHD and other research programs as more fully discussed below.Research and development expenses increased by $3.5 million in 2014 compared to 2013. The increase in 2014 was primarily attributable to higherdevelopment costs associated with Relday, DUR-928, ORADUR-based opioid products licensed to Pain Therapeutics other than REMOXY, ELADUR,REMOXY and other research programs, partially offset by lower research and development costs associated with POSIMIR, depot injectable programs,ORADUR-ADHD and the Santen ophthalmic program as more fully discussed below.Research and development expenses associated with our major development programs are as follows (in thousands): Year Ended December 31, 2015 2014 2013 DUR-928 $8,276 $5,810 $3,151 POSIMIR (1) 7,220 6,360 8,991 Relday (1) 4,379 4,125 738 Depot Injectable Programs 1,654 2,171 3,796 ORADUR-based opioid products licensed to Pain Therapeutics other than REMOXY (1) 131 1,490 255 ELADUR (1) 125 591 211 ORADUR-ADHD 204 436 692 REMOXY (1) 872 302 206 Santen ophthalmic program (1) 597 83 152 Others 859 1,061 753 Total research and development expenses $24,317 $22,429 $18,945 (1)See Note 2 Strategic Agreements in the financial statements for more details about our agreements with Pain Therapeutics, Zogenix, Impax and Santen.DUR-928Our research and development expenses for DUR-928 increased to $8.3 million in 2015 from $5.8 million in 2014, primarily due to higher employee-related costs, clinical trial expenses, as well as higher contract research and manufacturing expenses incurred for this drug candidate.Our research and development expenses for DUR-928 increased to $5.8 million in 2014 from $3.2 million in 2013, primarily due to higher employee-related costs and higher contract manufacturing expenses, clinical trial expenses and non-clinical related expenses incurred for this drug candidate. 65Table of ContentsPOSIMIROur research and development expenses for POSIMIR increased to $7.2 million in 2015 from $6.4 million in 2014, primarily due to higher employee-related costs, clinical trial expenses and contract manufacturing related expenses for POSIMIR, partially offset by lower outside consulting expenses forPOSIMIR.Our research and development expenses for POSIMIR decreased to $6.4 million in 2014 from $9.0 million in 2013, primarily due to lower employee-related costs for POSIMIR in 2014 as we incurred higher costs associated with preparing the NDA in 2013, partially offset by higher external costs related tomedical affairs for POSIMIR in 2014.ReldayOur research and development expenses for Relday increased to $4.4 million in 2015 from $4.1 million in 2014 primarily due to increaseddevelopment and technical transfer activities and higher employee-related costs incurred for this drug candidate.Our research and development expenses for Relday increased to $4.1 million in 2014 from $738,000 in 2013 primarily due to increased developmentactivities and higher costs related to non-clinical studies associated with Relday.Depot Injectable programsOur research and development expenses for depot injectable programs decreased to $1.7 million in 2015 from $2.2 million in 2014 primarily due tolower employee-related costs and lower costs related to research supplies.Our research and development expenses for depot injectable programs decreased to $2.2 million in 2014 from $3.8 million in 2013 primarily due tolower employee-related costs.ORADUR-based opioid products licensed to Pain Therapeutics other than REMOXYOur research and development expenses for ORADUR-based opioid products licensed to Pain Therapeutics other than REMOXY decreased to$131,000 in 2015 from $1.5 million in 2014, primarily due to lower employee-related costs as well as lower outside expenses.Our research and development expenses for ORADUR-based opioid products licensed to Pain Therapeutics other than REMOXY increased to $1.5million in 2014 from $255,000 in 2013, primarily due to higher employee-related costs as well as increased external costs.ELADUROur research and development expenses for ELADUR decreased to $125,000 in 2015 from $591,000 in 2014, due to lower employee-related costs.Our research and development expenses for ELADUR increased to $591,000 in 2014 from $211,000 in 2013, primarily due to higher employee-relatedcosts.ORADUR-ADHDOur research and development expenses for ORADUR-ADHD decreased to $204,000 in 2015 from $436,000 in 2014, primarily due to lower employee-related costs. 66Table of ContentsOur research and development expenses for ORADUR-ADHD decreased to $436,000 in 2014 from $692,000 in 2013, primarily due to lower employee-related costs.REMOXYOur research and development expenses for REMOXY increased to $872,000 in 2015 from $302,000 in 2014, primarily due to higher employee-related costs for REMOXY.Our research and development expenses for REMOXY increased to $302,000 in 2014 from $206,000 in 2013, primarily due to higher employee-related costs, as well as increased external costs.Santen ophthalmic programOur research and development expenses for the Santen ophthalmic program increased to $597,000 in 2015 from $83,000 in 2014, primarily due tohigher employee-related costs as a result of increased formulation development activitiesOur research and development expenses for the Santen ophthalmic program decreased to $83,000 in 2014 from $152,000 in 2013, primarily due todecreased formulation activities.Other DURECT Research ProgramsOur research and development expenses for all other research activities decreased to $859,000 in 2015 from $1.1 million in 2014, primarily due tolower employee-related costs.Our research and development expenses for all other research activities decreased to $1.1 million in 2014 from $753,000 million in 2013, primarilydue to lower employee-related costs.As of December 31, 2015, 2014 and 2013, we had 57, 54 and 54 research and development employees. As of February 18, 2016, we had 57 employeesin research and development, which we expect will remain comparable in the near future. We expect research and development expenses to increase in 2016compared to 2015.We cannot reasonably estimate the timing and costs of our research and development programs due to the risks and uncertainties associated withdeveloping pharmaceuticals as outlined in the “Risk Factors” section of this report. The duration of development of our research and development programsmay span as many as ten years or more, and estimation of completion dates or costs to complete would be highly speculative and subjective due to thenumerous risks and uncertainties associated with developing pharmaceutical products, including significant and changing government regulation, theuncertainties of future preclinical and clinical study results, the uncertainties with our collaborators’ commitment to and progress in the programs and theuncertainties associated with process development and manufacturing as well as sales and marketing. In addition, with respect to our development programssubject to third-party collaborations, the timing and expenditures to complete the programs are subject to the control of our collaborators. Therefore, wecannot reasonably estimate the timing and estimated costs of the efforts necessary to complete the research and development programs. For additionalinformation regarding these risks and uncertainties, see “Risk Factors” above.Selling, General and Administrative. Selling, general and administrative expenses are primarily comprised of salaries, benefits and stock-basedcompensation associated with finance, legal, business development, sales and marketing and other administrative personnel, overhead and facility costs, andother general and administrative costs. Selling, general and administrative expenses were $11.6 million, $12.3 million and $12.7 million in 2015, 2014 and2013, respectively. Stock-based compensation expense recognized related to selling, 67Table of Contentsgeneral and administrative personnel was $1.2 million, $1.2 million and $1.3 million in 2015, 2014 and 2013, respectively.Selling, general and administrative expenses decreased by $718,000 in 2015 compared to 2014, primarily due to lower employee related costs andpatent related expenses. Selling, general and administrative expenses decreased by $422,000 in 2014 compared to 2013, primarily due to lowercompensation related costs and marketing related expenses.As of December 31, 2015, 2014 and 2013, we had 26, 25 and 26 selling, general and administrative personnel, respectively. As of February 18, 2016,we had 27 selling, general and administrative employees, which we expect will remain comparable in the near future. We expect selling, general andadministrative expenses to remain approximately comparable in 2016 to 2015.Other Income (Expense). Interest and other income (expense) was $237,000, $39,000 and ($284,000) in 2015, 2014 and 2013, respectively. In 2015,2014 and 2013, interest and other income (expense) included income tax benefit of $8,000, income tax expense of $85,000 and $320,000 related to theimpact of recording a deferred tax liability associated with goodwill related to an asset acquisition in 2000.Interest expense was $2.2 million, $1.2 million and $6,000 in 2015, 2014 and 2013, respectively. The increase in interest expense in 2015 wasprimarily due to interest expense and amortization of debt discount related to a long-term debt arrangement recorded for a full year in 2015. The increase ininterest expense in 2014 was primarily due to interest expense and amortization of debt discount related to a long-term debt arrangement entered into in June2014.Income taxes. As of December 31, 2015, we had net operating loss (NOL) carryforwards for federal income tax purposes of approximately $295.6million, which expire in the years 2019 through 2035, and federal research and development tax credits of approximately $9.9 million, which expire atvarious dates beginning in 2018 through 2035, if not utilized. As of December 31, 2015, we had NOL carryforwards for state income tax purposes ofapproximately $211.3 million, which expire in the years 2016 through 2035, and state research and development tax credits of approximately $10.8 million,which do not expire. Utilization of the net operating losses may be subject to a substantial annual limitation due to federal and state ownership changelimitations. The annual limitation may result in the expiration of net operating losses and credits before utilization.As of December 31, 2015 and 2014, we had net deferred tax assets of $138.1 million and $130.9 million, respectively. Deferred tax assets reflect the nettax effects of net operating loss and credit carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financialreporting and the amounts used for income tax purposes. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amountof which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.Because realization of such tax benefits is uncertain, we provided a 100% valuation allowance as of December 31, 2015 and 2014. Utilization of theNOL and R&D credits carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously orthat could occur in the future provided by Sections 382 and 383 of the Internal Revenue Code of 1986, as well as similar state and foreign provisions. Theseownership changes may limit the amount of NOL and R&D credits carryforwards that can be utilized annually to offset future taxable income and tax,respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or publicgroups in the stock of a corporation by more than 50 percentage points over a three-year period. Since our formation, we have raised capital through theissuance of capital stock on several occasions which, combined with the purchasing shareholders’ subsequent disposition of those shares, may have resultedin a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition. We issued $60.0 million ofconvertible notes in 2003 and subsequently all of these notes 68Table of Contentshad been converted as of December 31, 2008 into approximately 19.0 million shares of our common stock. We also issued approximately 4.4 million sharesof our common stock to an institutional investor in connection with an equity financing in September 2009. In December 2012 and November 2013, wecompleted underwritten public offerings in which we sold an aggregate of approximately 14.0 million shares and approximately 8.2 million shares,respectively, of our common stock pursuant to an effective registration statement. In 2014, 2015 and the first quarter of 2016, we issued approximately2.9 million, 7.1 million and 227,000 shares, respectively, of our common stock in the open market through a Controlled Equity Offering sales agreement withCantor Fitzgerald pursuant to effective registration statements. These transactions may also have resulted in a change of control as defined by Section 382 orcould result in a change of control in the future upon the subsequent disposition of the shares.We have not currently completed a study to assess whether a change in control has occurred or whether there have been multiple changes of controlsince our formation due to the significant complexity and cost associated with such a study and the fact that there could be additional changes in the future.If we have experienced a change of control at any time since our formation, utilization of our NOL or R&D credits carryforwards would be subject to anannual limitation under Sections 382 and 383 which is determined by first multiplying the value of our stock at the time of the ownership change by theapplicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion ofour NOL or R&D credits carryforwards before utilization. Tax years 1998 to 2015 remain subject to future examination by the major tax jurisdictions inwhich we are subject to tax.Liquidity and Capital ResourcesWe had cash, cash equivalents, and investments totaling $29.3 million and $34.9 million at December 31, 2015 and 2014, respectively. This includes$250,000 and $350,000 of interest-bearing marketable securities classified as restricted investments on our balance sheet as of December 31, 2015 and 2014,respectively, which primarily serve as collateral for letters of credit securing our leased facilities in Alabama and California. The letter of credit for our leasedfacility in Alabama will expire in July 2021 and the letter of credit for our leased facility in California will expire in February 2019.We used $20.6 million, $14.2 million and $15.4 million cash in operating activities in the years ended December 31, 2015, 2014, and 2013,respectively. The cash used for operations was primarily to fund operations as well as our working capital requirements. Our cash used in operating activitiesdiffers from our net income (loss) in part due to the timing and recognition of up-front payments under collaborative agreements. Upfront payments receivedupon execution of collaborative agreements are recorded as deferred revenue and generally recognized on a straight-line basis over the period of ourcontinuing involvement with the third-party collaborator pursuant to the applicable agreement. The increase in cash used in operations in 2015 comparedwith 2014 was primarily attributable to increases in prepaid expenses, inventories and accounts receivable, partially offset by increases in accounts payableand contract research liabilities. The decrease in cash used in operations in 2014 compared with 2013 was primarily attributable to the decrease in accountspayable, offset by the increase in contract research liability.We received $6.3 million and $1.1 million of cash in investing activities in the years ended December 31, 2015 and 2013, respectively, and used $15.7million of cash in investing activities in the year ended December 31, 2014. The increase in cash provided by investing activities in 2015 was primarily dueto an increase in net maturities of available-for-sale securities. The increase in cash used in investing activities in 2014 was primarily due to an increase in netpurchases of available-for-sale securities. We anticipate incurring capital expenditures of approximately $100,000 over the next 12 months. The actualamount and timing of capital expenditures will depend, among other things, on the success of clinical trials for our product candidates, our research anddevelopment activities and general equipment replacements.We generated $15.2 million, $24.8 million and $11.0 million of cash from financing activities in the years ended December 31, 2015, 2014 and 2013,respectively. The decrease in cash provided by financing activities in 69Table of Contents2015 was primarily a result of $19.8 million received from a term loan in 2014, partially offset by higher proceeds from the issuances of common stock fromopen market sales, and proceeds from exercises of stock options and from purchases under our Employee Stock Purchase Plan. The increase in cash receivedfrom financing activities in 2014 was primarily a result of proceeds received from the term loan, partially offset by lower proceeds from the issuances ofcommon stock from open market sales, and proceeds from exercises of stock options and from purchases under our Employee Stock Purchase Plan.In November 2013, we completed an underwritten public offering in which we sold an aggregate of 8,214,287 shares of our common stock pursuant toan effective registration statement at a price to the public of $1.40 per share. We received net proceeds of approximately $10.6 million after deductingunderwriting discounts and commissions and estimated offering expenses.In December 2013, we filed a shelf registration statement on Form S-3 with the SEC, which upon being declared effective in January 2014, allowed usto offer up to $100.9 million of securities from time to time in one or more public offerings of our common stock. In addition, in December 2013, we enteredinto a Controlled Equity Offering sales agreement with Cantor Fitzgerald, under which we may sell, subject to certain limitations, up to $25 million ofcommon stock through Cantor Fitzgerald, acting as agent. We also entered into a second Controlled Equity Offering sales agreement with Cantor Fitzgeraldon November 3, 2015, under which we may sell, up to $40 million of common stock through Cantor Fitzgerald, acting as agent, subject to certain limitations,pursuant to a new shelf registration statement on Form S-3 that we filed with the SEC on November 3, 2015, which was declared effective by the SEC onNovember 25, 2015 (at which time the prior registration statement terminated). During the third quarter of 2014, we raised net proceeds (net of commissions)of approximately $4.7 million from the sale of 2,907,664 shares of our common stock in the open market through the December 2013 agreements with CantorFitzgerald at a weighted average price of $1.65 per share. In 2015, we raised net proceeds (net of commissions) of approximately $14.3 million from the saleof 7,066.607 shares of our common stock in the open market through the agreements with Cantor Fitzgerald at a weighted average price of $2.09 per share.During the first quarter of 2016, we raised net proceeds (net of commissions) of approximately $494,000 from the sale of 226,698 shares of our common stockin the open market through the November 2015 agreement with Cantor Fitzgerald at a weighted average price of $2.25 per share. As of February 18, 2016, theCompany had up to $37.6 million of common stock available for sale under the Controlled Equity Offering program and $122.6 million of common stockavailable for sale under the new shelf registration statement. Any additional sales in the public market of our common stock, under the November 2015agreement with Cantor Fitzgerald or otherwise under the November 2015 shelf registration statement, could adversely affect prevailing market prices for ourcommon stock.On June 26, 2014, we entered into the Loan Agreement with Oxford Finance LLC, pursuant to which Oxford provided a $20.0 million secured single-draw term loan to us with a maturity date of July 1, 2018. The term loan was fully drawn at close and the proceeds are to be used for working capital andgeneral business requirements. The term loan repayment schedule provides for interest only payments for the first 18 months, followed by consecutive equalmonthly payments of principal and interest in arrears starting on February 1, 2016 and continuing through the maturity date. The Loan Agreement providesfor a 7.95% interest rate on the term loan, a $150,000 facility fee that was paid at closing and an additional payment equal to 8% of the principal amount ofthe term loan, which is due when the term loan becomes due or upon the prepayment of the facility. If we elect to prepay the loan, there is also a prepaymentfee between 1% and 3% of the principal amount of the term loan depending on the timing and circumstances of prepayment.In connection with the term loan, we received proceeds of $19.8 million, net of debt offering/issuance costs. The debt offering/issuance costs have beenrecorded as debt discount on our balance sheet which together with the additional $1.6 million payment and fixed interest rate payments will be amortized tointerest expense throughout the life of the term loan using the effective interest rate method.The term loan is secured by substantially all of our assets, except that the collateral does not include any equity interests in us, any intellectualproperty (including all licensing, collaboration and similar agreements relating thereto), and certain other excluded assets. The Loan Agreement containscustomary representations, 70Table of Contentswarranties and covenants by us, which covenants limit our ability to convey, sell, lease, transfer, assign or otherwise dispose of certain of our assets; engagein any business other than the businesses currently engaged in by us or reasonably related thereto; liquidate or dissolve; make certain management changes;undergo certain change of control events; create, incur, assume, or be liable with respect to certain indebtedness; grant certain liens; pay dividends and makecertain other restricted payments; make certain investments; and make payments on any subordinated debt.The Loan Agreement also contains customary indemnification obligations and customary events of default, including, among other things, our failureto fulfill certain of our obligations under the Loan Agreement and the occurrence of a material adverse change which is defined as a material adverse changein our business, operations, or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the loan, or a materialimpairment in the perfection or priority of lender’s lien in the collateral or in the value of such collateral. In the event of default by us under the LoanAgreement, the lender would be entitled to exercise its remedies thereunder, including the right to accelerate the debt, upon which we may be required torepay all amounts then outstanding under the Loan Agreement, which could harm our financial condition.In July 2015, the Company and Oxford Finance entered into the First Amendment of the Loan Agreement and modified the terms to the LoanAgreement to change the maturity date from July 1, 2018 to July 1, 2019 and to change the first principal payment date from February 1, 2016 to February 1,2017. The interest rate remains unchanged, the Company paid a loan modification fee of $240,000 and the additional payment originally equal to 8% of theprincipal amount of the term loan, which is due when the term loan becomes due or upon the prepayment of the facility, was increased to 10%.Cash used in our operating activities is heavily influenced by the timing and structure of new corporate collaborations. While one feature of ourbusiness strategy is seeking new corporate collaborations, assuming no new collaborations and no milestone payments, we anticipate that cash used inoperating activities will increase in the near term because of assumed additional clinical trials and contract manufacturing activities for our developmentprograms and as a higher proportion of our research and development efforts are self-funded rather than covered by collaborative partners. In aggregate, weare required to make future payments pursuant to our existing contractual obligations as follows (in thousands): Contractual Obligations 2016 2017 2018 2019 2020 2021 andthereafter Total Capital lease (1) $22 $15 $15 $7 $4 $— $63 Term loan (1) 1,590 8,848 8,848 6,423 — — 25,709 Purchase commitments (2) 500 500 500 — — — 1,500 Operating lease obligations 1,970 2,000 1,948 539 324 194 6,975 Total contractual cash obligations $4,082 $11,363 $11,311 $6,969 $328 $194 $34,247 (1)Includes principal and interest payments. (2)We accrued $500,000 as a loss on a purchase obligation and recorded this amount as a charge in cost of goods sold in the statement of operations andcomprehensive income (loss) for the year ended December 31, 2014.We believe that our existing cash, cash equivalents and investments will be sufficient to fund our planned operations, existing debt and contractualcommitments and planned capital expenditures through at least the next 12 months. We may consume available resources more rapidly than currentlyanticipated, resulting in the need for additional funding. Additionally, we do not expect to generate significant revenues from our pharmaceutical systemscurrently under development for at least the next twelve months, if at all. Depending on whether we enter into additional collaborative agreements in the nearterm and the extent to which we earn milestone revenues, we may be required to raise additional capital through a variety of sources, including: ● the public equity markets; ● private equity financings; 71Table of Contents ● collaborative arrangements; and/or ● public or private debt.There can be no assurance that we will enter into additional collaborative agreements in the near term, will earn milestone revenues or that additionalcapital 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 operationsor to obtain funds through arrangements that may require us to relinquish rights to certain of our products, technologies or potential markets, either of whichcould have a material adverse effect on our business, financial condition and results of operations. To the extent that additional capital is raised through thesale 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 thatmaximize interest income to the extent possible given these two constraints. We satisfy liquidity requirements by investing excess cash in securities withdifferent maturities to match projected cash needs and limit concentration of credit risk by diversifying our investments among a variety of high credit-quality issuers.Off-Balance Sheet ArrangementsWe have not utilized “off-balance sheet” arrangements to fund our operations or otherwise manage our financial position. Item 7A.Quantitative and Qualitative Disclosures About Market Risk.Interest Rate RiskOur exposure to market risk for changes in interest rates relates primarily to our investment portfolio. Fixed rate securities and borrowings may havetheir fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interestrates fall and floating rate borrowings may lead to additional interest expense if interest rates increase. Due in part to these factors, our future investmentincome 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 inmarket 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 portfolioincludes money markets funds, commercial paper, medium-term notes, corporate notes, government securities and corporate bonds. The diversity of ourportfolio helps us to achieve our investment objectives. As of December 31, 2015, approximately 98% of our investment portfolio is composed ofinvestments with original maturities of one year or less and approximately 1% of our investment portfolio matures less than 90 days from the date ofpurchase. 72Table of ContentsThe following table presents the amounts of our cash equivalents and investments that may be subject to interest rate risk and the average interest ratesas of December 31, 2015 by year of maturity (dollars in thousands): 2016 2017 Total Cash equivalents: Fixed rate $200 $— $200 Average fixed rate 0.36% — 0.36% Variable rate $81 $— $81 Average variable rate 0.01% — 0.01% Short-term investments: Fixed rate $25,457 $— $25,457 Average fixed rate 0.39% — 0.39% Long-term investments: Fixed rate $— $— $— Average fixed rate — — — Restricted investments: Fixed rate $250 $— $250 Average fixed rate 0.10% — 0.10% Total investment securities $25,988 $— $25,988 Average rate 0.38% — 0.38% As of December 31, 2015, the fair value of our term loan was estimated to be $19.7 million. The term loan repayment schedule, as amended, providesfor interest only payments for the first 30 months after the June 26, 2014 closing date, followed by consecutive equal monthly payments of principal andinterest in arrears starting on February 1, 2017 and continuing through the maturity date of July 1, 2019. The term loan bears a fixed rate of 7.95% and anadditional payment equal to 10% of the principal amount of the term loan, which is due when the term loan becomes due or upon the prepayment of thefacility. If we elect to prepay the loan, there is also a prepayment fee between 1% and 3% of the principal amount of the term loan depending on the timingand circumstances of prepayment. The obligation under the term loan is subject to interest rate risk because the interest rates under the obligation may exceedcurrent interest rates. 73Table of ContentsThe following table presents the amounts of our cash equivalents and investments that may be subject to interest rate risk and the average interest ratesas of December 31, 2014 by year of maturity (dollars in thousands): 2015 2016 Total Cash equivalents: Fixed rate $— $— $— Average fixed rate — — — Variable rate $1,558 $— $1,558 Average variable rate 0.01% — 0.01% Short-term investments: Fixed rate $30,016 $— $30,016 Average fixed rate 0.26% — 0.26% Long-term investments: Fixed rate $— $1,804 $1,804 Average fixed rate — 0.43% 0.43% Restricted investments: Fixed rate $350 $— $350 Average fixed rate 0.10% — 0.10% Total investment securities $31,924 $1,804 $33,728 Average rate 0.25% 0.43% 0.26% 74Table of ContentsItem 8.Financial Statements and Supplementary Data.DURECT CORPORATIONINDEX TO FINANCIAL STATEMENTS Page No. Report of Independent Registered Public Accounting Firm 76 Balance Sheets 77 Statements of Operations and Comprehensive Loss 78 Statement of Stockholders’ Equity 79 Statements of Cash Flows 80 Notes to Financial Statements 81 75Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders of DURECT CorporationWe have audited the accompanying balance sheets of DURECT Corporation as of December 31, 2015 and 2014, and the related statements ofoperations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits alsoincluded the financial statement schedule listed in the Index at Item 15(a) (2). These financial statements and schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of DURECT Corporation atDecember 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, inconformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation tothe basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), DURECT Corporation’sinternal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated March 1, 2016 expressed an unqualifiedopinion thereon./S/ ERNST & YOUNG LLPRedwood City, CaliforniaMarch 1, 2016 76Table of ContentsDURECT CORPORATIONBALANCE SHEETS(in thousands, except per share amounts) December 31, 2015 2014 A S S E T S Current assets: Cash and cash equivalents $3,583 $2,680 Short-term investments 25,457 30,016 Accounts receivable (net of allowances of $161 at December 31, 2015 and $211 at December 31, 2014) 2,222 2,122 Inventories 3,917 3,642 Prepaid expenses and other current assets 3,142 1,034 Total current assets 38,321 39,494 Property and equipment, net 1,566 1,749 Goodwill 6,399 6,399 Long-term investments — 1,804 Long-term restricted investments 250 350 Other long-term assets 236 288 Total assets $46,772 $50,084 L I A B I L I T I E S A N D S T O C K H O L D E R S’ E Q U I T Y Current liabilities: Accounts payable $1,286 $1,021 Accrued liabilities 4,970 5,051 Contract research liabilities 575 358 Deferred revenue, current portion 616 538 Total current liabilities 7,447 6,968 Deferred revenue, non-current portion 2,269 2,742 Long-term debt, net 19,684 19,824 Other long-term liabilities 2,489 2,035 Commitments and contingencies Stockholders’ equity: Preferred stock, $0.0001 par value: 10,000 shares authorized; none issued and outstanding — — Common stock, $0.0001 par value: 200,000 shares authorized; 121,839 and 113,733 shares issued and outstandingat December 31, 2015 and 2014, respectively 12 11 Additional paid-in capital 420,453 401,322 Accumulated other comprehensive income (loss) (14) 87 Accumulated deficit (405,568) (382,905) Stockholders’ equity 14,883 18,515 Total liabilities and stockholders’ equity $46,772 $50,084 The accompanying notes are an integral part of these financial statements. 77Table of ContentsDURECT CORPORATIONSTATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(in thousands, except per share amounts) Year ended December 31, 2015 2014 2013 Collaborative research and development and other revenue $7,832 $8,256 $3,590 Product revenue, net 11,292 11,145 11,736 Total revenues 19,124 19,401 15,326 Operating expenses: Cost of product revenues 3,905 5,686 4,837 Research and development 24,317 22,429 18,945 Selling, general and administrative 11,566 12,284 12,706 Total operating expenses 39,788 40,399 36,488 Loss from operations (20,664) (20,998) (21,162) Other income (expense): Interest and other income (expenses) 237 39 (284) Interest expense (2,236) (1,151) (6) Net other income (expense) (1,999) (1,112) (290) Net loss (22,663) (22,110) (21,452) Net change in unrealized gain (loss) on available-for-sale securities, net of tax (101) 86 (5) Total comprehensive loss $(22,764) $(22,024) $(21,457) Net loss per share Basic $(0.19) $(0.20) $(0.21) Diluted $(0.19) $(0.20) $(0.21) Weighted-average shares used in computing net loss per share Basic 118,523 111,666 103,078 Diluted 118,523 111,666 103,078 The accompanying notes are an integral part of these financial statements. 78Table of ContentsDURECT CORPORATIONSTATEMENT OF STOCKHOLDERS’ EQUITY(in thousands) Common Stock AdditionalPaid-InCapital AccumulatedOtherComprehensiveIncome AccumulatedDeficit TotalStockholders’Equity Shares Amount Balance at December 31, 2012 101,880 10 375,658 6 (339,343) 36,331 Issuance of common stock upon exercise of stock options and purchases ofESPP shares 315 — 315 — — 315 Issuance of common stock upon equity financing, net of issuance costs of$825 8,214 1 10,674 — — 10,675 Stock-based compensation expense from stock options and ESPP shares — — 4,857 — — 4,857 Net loss — — — — (21,452) (21,452) Change in unrealized gain on available-for-sale securities, net of tax — — — (5) — (5) Balance at December 31, 2013 110,409 11 391,504 1 (360,795) 30,721 Issuance of common stock upon exercise of stock options and purchases ofESPP shares 416 — 399 — — 399 Issuance of common stock upon equity financings, net of issuance costs of$192 2,908 — 4,618 — — 4,618 Stock-based compensation expense from stock options and ESPP shares — — 4,801 — — 4,801 Net loss — — — — (22,110) (22,110) Change in unrealized gain on available-for-sale securities, net of tax — — — 86 — 86 Balance at December 31, 2014 113,733 $11 $401,322 $87 $(382,905) $18,515 Issuance of common stock upon exercise of stock options and purchases ofESPP shares 1,039 — 1,175 — — 1,175 Issuance of common stock upon equity financings, net of issuance costs of$491 7,067 1 14,289 — — 14,290 Stock-based compensation expense from stock options and ESPP shares — — 3,667 — — 3,667 Net loss — — — — (22,663) (22,663) Change in unrealized gain on available-for-sale securities, net of tax — — — (101) — (101) Balance at December 31, 2015 121,839 $12 $420,453 $(14) $(405,568) $14,883 The accompanying notes are an integral part of these financial statements. 79Table of ContentsDURECT CORPORATIONSTATEMENTS OF CASH FLOWS(in thousands) Year ended December 31, 2015 2014 2013 Cash flows from operating activities Net loss $(22,663) $(22,110) $(21,452) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 425 601 558 Stock-based compensation 2,660 3,080 3,426 Inventory write-off 303 1,227 574 Amortization of debt issuance cost 100 38 — Realized gain from sale of marketable equity security, net of tax (117) — — Changes in assets and liabilities: Accounts receivable (100) 227 (183) Inventories (579) (1,369) (681) Prepaid expenses and other assets (2,056) 854 370 Accounts payable 265 285 (1,049) Accrued liabilities 1,385 1,200 3,734 Contract research liability 217 29 (154) Deferred revenue (395) 1,729 (591) Total adjustments 2,108 7,901 6,004 Net cash used in operating activities (20,555) (14,209) (15,448) Cash flows from investing activities Purchases of property and equipment (225) (204) (69) Purchases of available-for-sale securities (34,318) (31,823) (20,403) Proceeds from maturities of available-for-sale securities 40,619 16,294 21,580 Proceeds from sales of short-term investment 178 — — Net cash provided by (used in) investing activities 6,254 (15,733) 1,108 Cash flows from financing activities Payments on equipment financing obligations (21) (17) (9) Net proceeds from issuances of common stock upon exercise of stock options, and purchases of ESPP shares 1,175 399 315 Net proceeds from issuances of common stock in connection with equity financings 14,290 4,618 10,675 Payment of additional issuance cost for long-term debt (240) — — Net proceeds from issuance of long-term debt — 19,786 — Net cash provided by financing activities 15,204 24,786 10,981 Net increase (decrease) in cash and cash equivalents 903 (5,156) (3,359) Cash and cash equivalents at beginning of year 2,680 7,836 11,195 Cash and cash equivalents at end of year $3,583 $2,680 $7,836 Supplemental disclosure of cash flow information Cash paid for interest $1,595 $691 $6 The accompanying notes are an integral part of these financial statements. 80Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS1. Summary of Significant Accounting PoliciesNature of OperationsDURECT Corporation (the Company) was incorporated in the state of Delaware on February 6, 1998. The Company is a biopharmaceutical companydeveloping therapies based on its proprietary drug formulations and delivery platform technologies and its expertise in drug development. The Company hasseveral products under development by itself and with third party collaborators. The Company also manufactures and sells osmotic pumps used in laboratoryresearch, and designs, develops and manufactures a wide range of standard and custom biodegradable polymers and excipients for pharmaceutical andmedical device clients for use as raw materials in their products. In addition, the Company conducts research and development of pharmaceutical products incollaboration with third party pharmaceutical and biotechnology companies.Basis of Presentation and Use of EstimatesThe Company’s financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). Certain otherexpense balances on the statements of operations and comprehensive income (loss) have been reclassified to conform to the current period presentation. Thepreparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the reported period and relateddisclosures. Actual results could differ materially from those estimates.Cash, Cash Equivalents and InvestmentsThe Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents. Investmentswith original maturities of greater than 90 days from the date of purchase but less than one year from the balance sheet date are classified as short-terminvestments, while investments with maturities in one year or beyond one year from the balance sheet date are classified as long-term investments.Management determines the appropriate classification of its cash equivalents and investment securities at the time of purchase and re-evaluates suchdetermination as of each balance sheet date. Management has classified the Company’s cash equivalents and investments as available-for-sale securities inthe accompanying financial statements. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a component ofaccumulated other comprehensive loss. Realized gains and losses are included in interest income. There were no material realized gains or losses in theperiods presented. The cost of securities sold is based on the specific identification method.The Company invests in debt instruments of government agencies and corporations, and money market funds with high credit ratings. The Companyhas established guidelines regarding diversification of its investments and their maturities with the objectives of maintaining safety and liquidity, whilemaximizing yield.Concentrations of Credit RiskFinancial instruments that potentially subject the Company to credit risk consist principally of interest-bearing investments and trade receivables. TheCompany maintains cash, cash equivalents and investments with various major financial institutions. The Company performs periodic evaluations of therelative credit standing of these financial institutions. In addition, the Company performs periodic evaluations of the relative credit quality of its investments.Pharmaceutical companies and academic institutions account for a substantial portion of the Company’s trade receivables. The Company providescredit in the normal course of business to its customers and collateral 81Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) for these receivables is generally not required. The risk associated with this concentration is limited to a certain extent due to the large number of accountsand their geographic dispersion. The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business.The Company maintains reserves for estimated credit losses and, to date, such losses have been within management’s expectations.Customer and Product Line ConcentrationsA portion of the Company’s revenue is derived from its ALZET mini pump product line, LACTEL biodegradable polymer product line and the sale ofcertain excipients for REMOXY and another product. In 2015, revenue from the ALZET product line and the LACTEL product line accounted for 36% and22% of total revenue, respectively. In 2014, revenue from the ALZET product line and the LACTEL product line accounted for 37% and 19% of totalrevenue, respectively. In 2013, revenue from the ALZET product line and the LACTEL product line accounted for 48% and 26% of total revenue,respectively.In 2015, Zogenix and Tolmar accounted for 26% and 11% of the Company’s total revenues. In 2014, Zogenix and Impax accounted for 23% and 11%of the Company’s total revenues. In 2013, Tolmar accounted for 15% of the Company’s total revenues.Total revenue by geographic region for the years 2015, 2014 and 2013 are as follows (in thousands): Year ended December 31, 2015 2014 2013 United States $14,289 $15,532 $11,087 Japan 1,897 898 1,104 Europe 1,817 1,986 2,089 Other 1,121 985 1,046 Total $19,124 $19,401 $15,326 Revenue by geography is determined by the location of the customer.InventoriesInventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. Inventories, in part, include certain excipients thatare sold to a customer and included in products awaiting regulatory approval. These inventories are capitalized based on management’s judgment ofprobable sale prior to their expiration date which in turn is primarily based on non-binding forecasts from our customers as well as management’s internalestimates. The valuation of inventory requires management to estimate the value of inventory that may become expired prior to use. The Company may berequired to expense previously capitalized inventory costs upon a change in management’s judgment, due to, among other potential factors, a denial or delayof approval of a customer’s product by the necessary regulatory bodies, or new information that suggests that the inventory will not be saleable. In addition,these circumstances may cause the Company to record a liability related to minimum purchase agreements that the Company has in place for raw materials. In2014, the Company recorded charges to cost of goods sold of approximately $1.6 million, of which approximately $1.1 million related to the write-down ofthe cost basis of inventory and $500,000 related to the accrual of a liability for the minimum purchase commitment for the excipients. As of December 31,2015, the remaining carrying value of the excipients in the Company’s inventory was $1.1 million. In addition, the Company has remaining unrecordedfuture purchase commitments totaling $1.5 million through 2018. In the event that management determines that the Company will not utilize all of thesematerials, there could be a potential write-off related to this inventory and a reserve for future purchase commitments. 82Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) The Company’s inventories consisted of the following (in thousands): December 31, 2015 2014 Raw materials $1,168 $1,242 Work in-process 1,412 1,120 Finished goods 1,337 1,280 Total inventories $3,917 $3,642 Property and EquipmentProperty and equipment are stated at cost less accumulated depreciation, which is computed using the straight-line method over the estimated usefullives of the assets, which range from three to five years. Leasehold improvements are amortized using the straight-line method over the estimated useful livesof the assets, or the terms of the related leases, whichever are shorter.Acquired Intangible Assets and GoodwillAcquired intangible assets consist of patents, developed technology, trademarks and customer lists related to the Company’s acquisitions accountedfor using the purchase method. Amortization of these purchased intangibles is calculated on a straight-line basis over the respective estimated useful lives ofthe assets ranging from four to seven years. The Company assesses goodwill for impairment at least annually.Impairment of Long-Lived AssetsThe Company reviews long-lived assets, including property and equipment, intangible assets, and other long-term assets, for impairment wheneverevents or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable.An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventualdisposition is less than its carrying amount. Impairment, if any, is calculated as the amount by which an asset’s carrying value exceeds its fair value, typicallyusing discounted cash flows to determine fair value. Through December 31, 2015, there have been no material impairment losses.Stock-Based CompensationThe Company accounts for share-based payments using a fair-value based method for costs related to all share-based payments, including stockoptions and stock issued under the Company’s employee stock purchase plan (ESPP). The Company estimates the fair value of share-based payment awardson the date of grant using an option-pricing model. See Note 8 for further information regarding stock-based compensation.Revenue RecognitionRevenue from the sale of products is recognized when there is persuasive evidence that an arrangement exists, the product is shipped and title transfersto customers, provided no continuing obligation on the Company’s part exists, the price is fixed or determinable and the collectability of the amounts owedis reasonably assured. The Company enters into license and collaboration agreements under which it may receive upfront 83Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) license fees, research funding and contingent milestone payments and royalties. The Company’s deliverables under these arrangements typically consist ofgranting licenses to intellectual property rights and providing research and development services. The accounting standards contain a presumption thatseparate contracts entered into at or near the same time with the same entity or related parties were negotiated as a package and should be evaluated as asingle agreement.For multiple element arrangements entered into prior to January 1, 2011, the Company determined whether the elements had value on a stand-alonebasis and whether there was objective and reliable evidence of fair value. When the delivered element did not have stand-alone value or there was insufficientevidence of fair value for the undelivered element(s), the Company recognized the consideration for the combined unit of accounting in the same manner asthe revenue was recognized for the final deliverable, which was generally ratably over the longest period of involvement. For example, upfront paymentsreceived upon execution of collaborative agreements are recorded as deferred revenue and recognized as collaborative research and development revenuebased on a straight-line basis over the period of the Company’s continuing involvement with the third-party collaborator pursuant to the applicableagreement. Such period generally represents the longer of the estimated research and development period or other continuing obligation period defined inthe respective agreements between the Company and its third-party collaborators. Returns or credits related to the sale of products have not had a materialimpact on the Company’s revenues or net loss.Research and development revenue related to services performed under the collaborative arrangements with the Company’s third-party collaborators isrecognized as the related research and development services are performed. These research payments received under each respective agreement are notrefundable and are generally based on reimbursement of qualified expenses, as defined in the agreements. Research and development expenses under thecollaborative research and development agreements generally approximate or exceed the revenue recognized under such agreements over the term of therespective agreements. Deferred revenue may result when the Company does not expend the required level of effort during a specific period in comparison tofunds received under the respective agreement. For joint control and funding development activities, the Company recognizes revenue from the netreimbursement of the research and development expenses from our collaborators and records the net payment of research and development expenses to ourcollaborators as additional research and development expense.Milestone payments under collaborative arrangements are triggered either by the results of the Company’s research and development efforts or byspecified sales results by a third-party collaborator. Milestones related to the Company’s development-based activities may include initiation of variousphases of clinical trials, successful completion of a phase of development or results from a clinical trial, acceptance of a New Drug Application by the FDA oran equivalent filing with an equivalent regulatory agency in another territory, or regulatory approval by the FDA or by an equivalent regulatory agency inanother territory. Due to the uncertainty involved in meeting these development-based milestones, the development-based milestones are considered to besubstantial (i.e., not just achieved through passage of time) at the inception of the collaboration agreement. In addition, the amounts of the paymentsassigned thereto are considered to be commensurate with the enhancement of the value of the delivered intellectual property as a result of the Company’sperformance. The Company’s involvement is necessary to the achievement of development-based milestones. The Company would account for development-based milestones as revenue upon achievement of the substantive milestone events. Milestones related to sales-based activities may be triggered upon eventssuch as the first commercial sale of a product or when sales first achieve a defined level. Under the Company’s collaborative agreements, the Company’sthird-party collaborators will take the lead in commercialization activities and the Company is typically not involved in the achievement of sales-basedmilestones. These sales-based milestones would be achieved after the completion of the Company’s development activities. The Company would account forthe sales-based milestones in the same 84Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) manner as royalties, with revenue recognized upon achievement of the milestone. In addition, upon the achievement of either development-based or sales-based milestone events, the Company has no future performance obligations related to any milestone payments.Revenue on cost-plus-fee contracts, such as under contracts to perform research and development for others, is recognized as the related services arerendered as determined by the extent of reimbursable costs incurred plus estimated fees thereon.Research and Development ExpensesResearch and development expenses are primarily comprised of salaries and benefits associated with research and development personnel, overheadand facility costs, preclinical and non-clinical development costs, clinical trial and related clinical manufacturing costs, contract services, and other outsidecosts. Research and development costs are expensed as incurred. Research and development costs paid to third parties under sponsored research agreementsare recognized as the related services are performed. In addition, net reimbursements of research and development expenses incurred by the Company’spartners are recorded as collaborative research and development revenue. Net payments of research and development expenses to the Company’s partners arerecorded as an addition to research and development expenses in the period incurred.Comprehensive Income (Loss)Accumulated other comprehensive income (loss) as of December 31, 2015, 2014 and 2013 is entirely comprised of unrealized gains or losses onavailable-for-sale securities.Segment ReportingThe Company operates in one operating segment, which is the research, development and manufacturing of pharmaceutical products. 85Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) Net Loss Per ShareBasic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding. Diluted net loss per share iscomputed using the weighted-average number of common shares outstanding and common stock equivalents (i.e., options and warrants to purchase commonstock) outstanding during the period, if dilutive, using the treasury stock method for options and warrants. The numerators and denominators in thecalculation of basic and diluted net loss per share were as follows (in thousands except per share amounts): Year Ended December 31, 2015 2014 2013 Numerators: Net loss $(22,663) $(22,110) $(21,452) Denominators: Weighted average shares used to compute basic net loss per share 118,523 111,666 103,078 Effect of dilutive securities: Dilution from stock options — — — Dilution from ESPP — — — Dilutive common shares — — — Weighted average shares used to compute basic net loss per share 118,523 111,666 103,078 Net loss per share: Basic $(0.19) $(0.20) $(0.21) Diluted $(0.19) $(0.20) $(0.21) The computation of diluted net loss per share for the years ended December 31, 2015, 2014 and 2013 excludes the impact of options to purchase16.5 million, 20.0 million and 19.6 million shares of common stock outstanding, respectively, at December 31, 2015, 2014 and 2013, as such impact wouldbe antidilutive.Shipping and HandlingCosts related to shipping and handling are included in cost of revenues for all periods presented.Operating LeasesThe Company leases administrative, manufacturing and laboratory facilities under operating leases. Lease agreements may include rent holidays, rentescalation clauses and tenant improvement allowances. The Company recognizes scheduled rent increases on a straight-line basis over the lease termbeginning with the date the Company takes possession of the leased space. The Company records tenant improvement allowances as deferred rent liabilitiesand amortizes the deferred rent over the terms of the lease to rent expense on the statements of operations and comprehensive loss.Recent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (FASB) issued guidance codified in ASC 606, Revenue Recognition—Revenue fromContracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition. The core principle of the guidance is that an entity shouldrecognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the 86Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) company expects to be entitled in exchange for those goods or services. The guidance provides companies with two implementation methods. Companiescan choose to apply the standard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with thecumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includesthe date of initial application (modified retrospective application). The standard was to have been effective for public entities for annual and interim periodsbeginning after December 15, 2016. In July 2015, the FASB voted to delay the effective date for this guidance. This guidance is effective for the Company inthe first quarter of 2018. Early adoption up to the first quarter of 2017 is permitted. The Company is currently evaluating the impact of the provisions of ASC606.In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40):Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). This update is intended to define management’sresponsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnotedisclosures. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certainprinciples that are currently in U.S. auditing standards. Specifically, the amendments: (1) provide a definition of the term substantial doubt; (2) require anevaluation every reporting period including interim periods; (3) provide principles for considering the mitigating effect of management’s plans; (4) requirecertain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans; (5) require an express statement and otherdisclosures when substantial doubt is not alleviated; and (6) require an assessment for a period of one year after the date that the financial statements areissued (or available to be issued). ASU 2014-15 will be effective for annual periods ending after December 15, 2016 and interim periods within annualperiods beginning after December 15, 2016, with early adoption permitted. ASU 2014-15 will be effective for the Company beginning with its annual reportfor fiscal 2016 and interim periods thereafter. The Company is currently evaluating the impact that ASU 2014-15 will have on its financial statements.In November 2015, the FASB issued Accounting Standards Update 2015-17(ASU 2015-17), Balance Sheet Classification of Deferred Taxes to simplifythe presentation of deferred income taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent on thebalance sheet instead of separating deferred taxes into current and noncurrent amounts. The new guidance will be effective for public business entities infiscal years beginning after December 15, 2016, including interim periods within those years (i.e., in the first quarter of 2017 for calendar year-endcompanies). Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The guidance may be applied eitherprospectively, for all deferred tax assets and liabilities, or retrospectively (i.e., by reclassifying the comparative balance sheet). The Company has elected toearly adopt ASU 2015-17, on a prospective basis, for the year ended December 31, 2015. Prior periods were not retrospectively adjusted. There is no impactto the balance sheet amounts as a result of early adoption. 87Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) 2. Strategic AgreementsThe collaborative research and development and other revenues associated with the Company’s major third-party collaborators are as follows (inthousands): Year ended December 31, 2015 2014 2013 Collaborator Zogenix, Inc. (Zogenix) (1) $4,898 $4,431 $918 Pain Therapeutics, Inc. (Pain Therapeutics) 1,385 1,359 750 Santen Pharmaceutical Co. Ltd. (Santen) (2) 824 16 — Impax Laboratories, Inc. (Impax) (3) — 2,106 — Pfizer Inc. (Pfizer) — 118 42 Others 725 226 1,880 Total collaborative research and development and other revenue $7,832 $8,256 $3,590 (1)Amounts related to ratable recognition of upfront fees were $255,000 in 2015 and 2014, and $241,000 in 2013. (2)Amounts related to ratable recognition of upfront fees were $274,000 in 2015, $15,000 in 2014, and zero in 2013, respectively; the Company andSanten signed a license agreement effective December 11, 2014. (3)Amounts related to recognition of upfront fees were zero in 2015, $2.0 million in 2014 and zero in 2013, respectively; the Company and Impax signeda license agreement effective January 3, 2014.As of February 18, 2016, the Company had potential milestones of up to $245.5 million that the Company may receive in the future under itscollaborative arrangements, of which $77.5 million are development-based milestones and $168.0 million are sales-based milestones. Within the category ofdevelopment-based milestones, $5.0 million are related to early stage clinical testing (defined as Phase 1 or 2 activities), $12.5 million are related to latestage clinical testing (defined as Phase 3 activities), $20.5 million are related to regulatory filings, and $39.5 million are related to regulatory approvals. Nopayments were received between December 31, 2015 and February 18, 2016.Agreement with Pain Therapeutics, Inc.In December 2002, the Company entered into an exclusive agreement with Pain Therapeutics, Inc. (Pain Therapeutics) to develop and commercializeon a worldwide basis REMOXY and other oral sustained release, abuse deterrent opioid products incorporating four specified opioid drugs, using theORADUR technology. Total collaborative research and development revenue recognized under the agreements with Pain Therapeutics was $1.4 million in2015, $1.4 million in 2014, and $750,000 in 2013. In May 2015, Pain Therapeutics sent a letter to the Company that provided the Company with formalwritten notice that Pain Therapeutics was deleting, effective as of January 12, 2015, the opioid drug hydrocodone (and only hydrocodone) as a licensedproduct under the agreement. The letter did not alter the terms of the agreement regarding the remaining three licensed products (REMOXY, hydromorphoneor oxymorphone) or otherwise amend the agreement. Under the agreement with Pain Therapeutics, subject to and upon the achievement of predetermineddevelopment and regulatory milestones for the three drug candidates, the Company is entitled to receive milestone payments of up to $7.2 million in theaggregate. The cumulative aggregate payments received by the Company from Pain Therapeutics as of December 31, 2015 were $38.5 million under thisagreement. 88Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) Under the terms of this agreement, Pain Therapeutics paid the Company an upfront license fee of $1.0 million, with the potential for an additional $7.2million in performance milestone payments based on the successful development and approval of the three ORADUR-based opioids. Of these potentialmilestones, all $7.2 million are development-based milestones. There are no sales-based milestones under the agreement. As of December 31, 2015, theCompany had received $1.7 million in cumulative milestone payments.In March 2009, King Pharmaceuticals (King) assumed the responsibility for further development of REMOXY from Pain Therapeutics. As a result ofthis change, the Company continued to perform REMOXY-related activities in accordance with the terms and conditions set forth in the license agreementbetween the Company and Pain Therapeutics. King was substituted in lieu of Pain Therapeutics with respect to interactions with the Company in itsperformance of those activities including the obligation to pay the Company with respect to all REMOXY-related costs incurred by the Company. InFebruary 2011, Pfizer acquired King and thereby assumed the rights and obligations of King with respect to REMOXY; accordingly, amounts attributed toKing are shown as Pfizer figures. In October 2014, Pfizer notified Pain Therapeutics that Pfizer had decided to discontinue development of REMOXY, andthat Pfizer would return all rights, including responsibility for regulatory activities, to Pain Therapeutics and that Pfizer would continue ongoing activitiesunder the agreement until the scheduled termination date in April 2015. In July 2015, Pain Therapeutics stated that it had substantially completed thetransition of REMOXY from Pfizer, and that Pain Therapeutics expected to resubmit the NDA in the first quarter of 2016.Total collaborative research and development revenue recognized for REMOXY-related work performed by the Company for Pfizer was zero, $118,000and $42,000 for the years ended December 31, 2015, 2014 and 2013, respectively. Total collaborative research and development revenue recognized forREMOXY-related work performed by the Company for Pain Therapeutics was $740,000, zero and zero for the years ended December 31, 2015, 2014 and2013, respectively. Prior to March 2009 and after November 2014, the Company recognized collaborative research and development revenue for REMOXY-related work under the agreement with Pain Therapeutics. The cumulative aggregate payments received by the Company from Pfizer as of December 31, 2015were $7.1 million under this agreement.Long Term Supply Agreement with King (now Pfizer)In August 2009, the Company signed an exclusive long term excipient supply agreement with respect to REMOXY with King. In February 2011, Pfizeracquired King and thereby assumed the rights and obligations of King with respect to this long term supply agreement. This agreement stipulated the termsand conditions under which the Company would supply to King, based on the Company’s manufacturing cost plus a specified percentage mark-up, two keyexcipients used in the manufacture of REMOXY. The term of the agreement commenced in August 2009 and continued in effect until April 2015, when therelated development and license agreement between Pain Therapeutics and King terminated.In 2015, 2014 and 2013, the Company recognized $96,000, $33,000 and $273,000 of product revenue, respectively, related to key excipients forREMOXY and the associated cost of goods sold was $51,000, zero and $165,000, respectively.Agreement with Zogenix, Inc.On July 11, 2011, the Company and Zogenix, Inc., (Zogenix), entered into a Development and License Agreement (the Zogenix Agreement). TheCompany and Zogenix had previously been working together under a feasibility agreement pursuant to which the Company’s research and developmentcosts were reimbursed by Zogenix. Under the Zogenix Agreement, Zogenix will be responsible for the clinical development and 89Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) commercialization of a proprietary, long-acting injectable formulation of risperidone using the Company’s SABER controlled-release formulationtechnology potentially in combination with Zogenix’s DosePro needle-free, subcutaneous drug delivery system. DURECT will be responsible for non-clinical, formulation and CMC development activities. The Company will be reimbursed by Zogenix for its research and development efforts on the product.Zogenix paid a non-refundable upfront fee to the Company of $2.25 million in July 2011. The Company’s research and development services areconsidered integral to utilizing the licensed intellectual property and, accordingly, the deliverables are accounted for as a single unit of accounting. The$2.25 million upfront fee is being recognized as collaborative research and development revenue ratably over the term of the Company’s continuing researchand development involvement with Zogenix with respect to this product candidate. Zogenix is obligated to pay the Company up to $103 million in totalfuture milestone payments with respect to the product subject to and upon the achievement of various developments, regulatory and sales milestones. Ofthese potential milestones, $28 million are development-based milestones (none of which has been achieved as of December 31, 2015), and $75 million aresales-based milestones (none of which has been achieved as of December 31, 2015). Zogenix is also required to pay a mid single-digit to low double-digitpercentage patent royalty on annual net sales of the product determined on a jurisdiction-by-jurisdiction basis. The patent royalty term is equal to the later ofthe expiration of all DURECT technology patents or joint patent rights in a particular jurisdiction, the expiration of marketing exclusivity rights in suchjurisdiction, or 15 years from first commercial sale in such jurisdiction. After the patent royalty term, Zogenix will continue to pay royalties on annual netsales of the product at a reduced rate for so long as Zogenix continues to sell the product in the jurisdiction. Zogenix is also required to pay to the Company atiered percentage of fees received in connection with any sublicense of the licensed rights.The Company granted to Zogenix an exclusive worldwide license, with sub-license rights, to the Company’s intellectual property rights related to theCompany’s proprietary polymeric and non-polymeric controlled-release formulation technology to make and have made, use, offer for sale, sell and importrisperidone products, where risperidone is the sole active agent, for administration by injection in the treatment of schizophrenia, bipolar disorder or otherpsychiatric related disorders in humans. The Company retains the right to supply Zogenix’s Phase III clinical trial and commercial product requirements onthe terms set forth in the Zogenix Agreement. Zogenix may terminate the Zogenix Agreement without cause at any time upon prior written notice, and eitherparty may terminate the Zogenix Agreement upon certain circumstances including written notice of a material uncured breach.The following table provides a summary of collaborative research and development revenue recognized under the agreements with Zogenix (inthousands). The cumulative aggregate payments received by the Company as of December 31, 2015 were $19.3 million under these agreements. Year Ended December 31, 2015 2014 2013 Ratable recognition of upfront payment $255 $255 $241 Research and development expenses reimbursable by Zogenix 4,643 4,176 677 Total collaborative research and development revenue $4,898 $4,431 $918 Agreement with Impax Laboratories, Inc.On January 3, 2014, the Company and Impax Laboratories, Inc. (Impax) entered into a definitive agreement (the Impax Agreement). Pursuant to theImpax Agreement, the Company granted Impax an exclusive worldwide 90®Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) license to the Company’s proprietary TRANSDUR transdermal delivery technology and other intellectual property to develop and commercialize ELADUR,the Company’s investigational transdermal bupivacaine patch for the treatment of pain associated with post-herpetic neuralgia (PHN), in addition to sellingcertain assets and rights in and related to the product. Impax will control and fund the development and commercialization programs, and the partiesestablished a joint management committee to oversee, review and coordinate the development and commercialization activities of the parties under theImpax Agreement. Impax will reimburse the Company for certain future research and development it may be requested to conduct on the product.In connection with the Impax Agreement, Impax paid a non-refundable upfront fee to the Company of $2.0 million in January 2014. The Company’stechnology transfer activities were considered integral to utilizing the licensed intellectual property and, accordingly, the deliverables were accounted for asa single unit of accounting. The $2.0 million upfront fee was recognized as collaborative research and development revenue in the first quarter of 2014 whenthe license to the intellectual property right was delivered and the technology transfer with respect to this product candidate was completed. Impax agreed tomake contingent cash payments to the Company of up to $61.0 million payable based upon the achievement of predefined milestones, of which $31.0million are development-based milestones and $30.0 million are sales-based milestones (none of which has been achieved as of December 31, 2015). Sincethe milestones are expected to be achieved at a point in time when there are no performance obligations or remaining deliverables of the Company, themilestones are expected to be recognized in full upon achievement. Upon the first commercialization of ELADUR by Impax, the Company would alsoreceive a tiered mid single-digit to low double-digit royalty on annual net product sales determined on a country-by-country basis. Impax is also required topay to the Company a percentage of fees received in connection with any sublicense of the licensed rights. Impax may terminate the Impax Agreementwithout cause at any time upon prior written notice, and either party may terminate the Impax Agreement upon certain circumstances including written noticeof a material uncured breach.The following table provides a summary of collaborative research and development revenue recognized under the Impax Agreement (in thousands).The cumulative aggregate payments received by the Company as of December 31, 2015 were $2.1 million under the agreement. Year Ended December 31, 2015 2014 2013 Ratable recognition of upfront payment $— $2,000 $— Research and development expenses reimbursable by Impax — 106 — Total collaborative research and development revenue $— $2,106 $— Agreement with Santen Pharmaceutical Co., Ltd.On December 11, 2014, the Company and Santen Pharmaceutical Co., Ltd. (Santen) entered into a definitive agreement (the Santen Agreement).Pursuant to the Santen Agreement, the Company granted Santen an exclusive worldwide license to the Company’s proprietary SABER formulation platformand other intellectual property to develop and commercialize a sustained release product utilizing the Company’s SABER technology to deliver anophthalmology drug. Santen controls and funds the development and commercialization program, and the parties established a joint management committeeto oversee, review and coordinate the development activities of the parties under the Santen Agreement.In connection with the Santen agreement, Santen agreed to pay the Company an upfront fee of $2.0 million in cash and to make contingent cashpayments to the Company of up to $76.0 million upon the achievement of certain milestones, of which $13.0 million are development-based milestones and$63.0 million are 91Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) commercialization-based milestones including milestones requiring the achievement of certain product sales targets (none of which has been achieved as ofDecember 31, 2015). Santen will also pay for certain Company costs incurred in the development of the licensed product. If the product is commercialized,the Company would also receive a tiered royalty on annual net product sales ranging from single-digit to the low double digits, determined on a country-by-country basis. As of December 31, 2015, the cumulative aggregate payments received by the Company under this agreement were $2.4 million.The following table provides a summary of collaborative research and development revenue recognized under the Santen Agreement (in thousands). Year Ended December 31, 2015 2014 2013 Ratable recognition of upfront payment $274 $15 $— Research and development expenses reimbursable by Santen 550 1 — Total collaborative research and development revenue $824 $16 $— 3. Intangible Assets and GoodwillIntangible assets recorded in connection with the Company’s acquisitions consist of developed technology, patents and certain other intangible assets.The intangible assets were being amortized on a straight-line basis over estimated useful lives ranging from four to seven years. The net amount ofintangible assets at December 31, 2015 and 2014 was zero.Goodwill totaled $6.4 million at December 31, 2015. The Company evaluates goodwill for impairment at least annually. In 2015, 2014 and 2013goodwill was evaluated and no indicators of impairment were noted. Should goodwill become impaired, the Company may be required to record animpairment charge. To date, the Company has not recorded any impairment charge to goodwill.4. Financial InstrumentsFair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company’s valuationtechniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company follows a fair valuehierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.These levels of inputs are the following: ● Level 1—Quoted prices in active markets for identical assets or liabilities. ● Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quotedprices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the fullterm of the assets or liabilities. ● Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 92Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) The Company’s financial instruments are valued using quoted prices in active markets or based upon other observable inputs. The following table setsforth the fair value of the Company’s financial assets that were measured at fair value on a recurring basis as of December 31, 2015 (in thousands): Level 1 Level 2 Level 3 Total Money market funds $81 $— $— $81 Certificates of deposit — 250 — 250 Commercial paper — 898 — 898 Corporate debt — 5,211 — 5,211 U.S. Government agencies — 19,548 — 19,548 Total $81 $25,907 $— $25,988 The following table sets forth the fair value of our financial assets that were measured at fair value on a recurring basis as of December 31, 2014 (inthousands): Level 1 Level 2 Level 3 Total Money market funds $1,558 $— $— $1,558 Certificates of deposit — 350 — 350 Marketable equity security 155 — — 155 Commercial paper — 1,250 — 1,250 Corporate debt — 7,740 — 7,740 U.S. Government agencies — 22,675 — 22,675 Total $1,713 $32,015 $— $33,728 The fair value of the Level 2 assets is estimated using pricing models using current observable market information for similar securities. TheCompany’s Level 2 investments include U.S. government-backed securities and corporate securities that are valued based upon observable inputs that mayinclude benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference dataincluding market research publications. The fair value of commercial paper is based upon the time to maturity and discounted using the three-month treasurybill rate. The average remaining maturity of the Company’s Level 2 investments as of December 31, 2015 is less than twelve months and these investmentsare rated by S&P and Moody’s at AAA or AA- for securities and A1 or P1 for commercial paper. 93Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) The following is a summary of available-for-sale securities as of December 31, 2015 and 2014 (in thousands): December 31, 2015 AmortizedCost UnrealizedGain UnrealizedLoss EstimatedFairValue Money market funds $81 $— $— $81 Certificates of deposit 250 — — 250 Commercial paper 898 — — 898 Corporate debt 5,215 1 (5) 5,211 U.S. Government agencies 19,558 1 (11) 19,548 $26,002 $2 $(16) $25,988 Reported as: Cash and cash equivalents $281 $— $— $281 Short-term investments 25,471 2 (16) 25,457 Long-term restricted investments 250 — — 250 $26,002 $2 $(16) $25,988 December 31, 2014 AmortizedCost UnrealizedGain UnrealizedLoss EstimatedFairValue Money market funds $1,558 $— $— $1,558 Certificates of deposit 350 — — 350 Marketable equity security — 155 — 155 Commercial paper 1,250 — — 1,250 Corporate debt 7,744 — (4) 7,740 U.S. Government agencies 22,678 2 (5) 22,675 $33,580 $157 $(9) $33,728 Reported as: Cash and cash equivalents $1,558 $— $— $1,558 Short-term investments 29,867 157 (8) 30,016 Long-term investments 1,805 — (1) 1,804 Long-term restricted investments 350 — — 350 $33,580 $157 $(9) $33,728 The following is a summary of the cost and estimated fair value of available-for-sale securities at December 31, 2015, by contractual maturity (inthousands): December 31, 2015 AmortizedCost EstimatedFairValue Mature in one year or less $25,921 $25,907 Mature after one year through five years — — $25,921 $25,907 94Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) There were no securities that have had an unrealized loss for more than 12 months as of December 31, 2015.As of December 31, 2015, unrealized losses on available-for-sale investments are not attributed to credit risk and are considered to be temporary. TheCompany believes that it is more-likely-than-not that investments in an unrealized loss position will be held until maturity or the recovery of the cost basis ofthe investment. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in marketvalue.5. Property and EquipmentProperty and equipment consist of the following (in thousands): December 31, 2015 2014 Equipment $12,372 $12,161 Leasehold improvement 9,987 9,968 Construction-in-progress 178 227 22,537 22,356 Less accumulated depreciation and amortization (20,971) (20,607) Property and equipment, net $1,566 $1,749 Depreciation expense was $425,000, $582,000 and $541,000 in 2015, 2014 and 2013, respectively. Amortization expense was $1,000, $17,000 and$9,000 in 2015, 2014 and 2013 for assets held under capital leases, respectively.As of December 31, 2015, the Company has recorded $669,500 as a liability which was included in other long-term liabilities on its balance sheet forasset retirement obligations associated with the estimated restoration cost for its leased buildings.6. Restricted InvestmentsAs of December 31, 2015 and 2014, the Company had $250,000 and $350,000, respectively, recorded as restricted investments, which primarily servedas collateral for letters of credit securing its leased facilities in Alabama and California.7. CommitmentsOperating LeasesThe Company has lease arrangements for its facilities in California and Alabama. Under these leases, the Company is required to pay certainmaintenance expenses in addition to monthly rent. Rent expense is recognized on a straight-line basis over the lease term for leases that have scheduledrental payment increases. Rent expense under all operating leases was $1.9 million, $1.8 million, and $1.5 million, for the years ended December 31, 2015,2014 and 2013, respectively. 95Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) Future minimum payments under these noncancelable leases are as follows (in thousands): Year ending December 31, OperatingLeases 2016 $1,970 2017 2,000 2018 1,948 2019 539 Thereafter 518 $6,975 Other Purchase CommitmentsIn 2005, the Company entered into a supply agreement with a vendor. The remaining minimum purchase commitments under this agreement are$500,000 per year through 2018. The Company accrued $500,000 as a loss on a purchase obligation and recorded this amount as a charge in cost of goods ofsold in the statement of operations and comprehensive income (loss) for the year ended December 31, 2014.8. Long-Term DebtOn June 26, 2014, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Oxford Finance LLC, pursuant to whichOxford provided a $20 million secured single-draw term loan to the Company with a maturity date of July 1, 2018. The term loan was fully drawn at closeand the proceeds are to be used for working capital and general business requirements. The term loan repayment schedule provides for interest only paymentsfor the first 18 months, followed by consecutive equal monthly payments of principal and interest in arrears starting on February 1, 2016 and continuingthrough the maturity date. The Loan Agreement provides for a 7.95% interest rate on the term loan, a $150,000 facility fee that was paid at closing and anadditional payment equal to 8% of the principal amount of the term loan, which is due when the term loan becomes due or upon the prepayment of thefacility. If the Company elects to prepay the loan, there is also a prepayment fee between 1% and 3% of the principal amount of the term loan depending onthe timing and circumstances of prepayment.In connection with the term loan, the Company received proceeds of $19.8 million, net of debt offering/issuance costs. The debt offering/issuance costshave been recorded as debt discount on the Company’s balance sheet which together with the final $1.6 million payment and fixed interest rate paymentswill be amortized to interest expense throughout the life of the term loan using the effective interest rate method.The term loan is secured by substantially all of the assets of the Company, except that the collateral does not include any intellectual property(including licensing, collaboration and similar agreements relating thereto), and certain other excluded assets. The Loan Agreement contains customaryrepresentations, warranties and covenants by the Company, which covenants limit the Company’s ability to convey, sell, lease, transfer, assign or otherwisedispose of certain assets of the Company; engage in any business other than the businesses currently engaged in by the Company or reasonably relatedthereto; liquidate or dissolve; make certain management changes; undergo certain change of control events; create, incur, assume, or be liable with respect tocertain indebtedness; grant certain liens; pay dividends and make certain other restricted payments; make certain investments; and make payments on anysubordinated debt.The Loan Agreement also contains customary indemnification obligations and customary events of default, including, among other things, our failureto fulfill certain obligations of the Company under the Loan 96Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) Agreement and the occurrence of a material adverse change which is defined as a material adverse change in the Company’s business, operations, orcondition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the loan, or a material impairment in the perfection orpriority of lender’s lien in the collateral or in the value of such collateral. In the event of default by the Company under the Loan Agreement, the lenderwould be entitled to exercise its remedies thereunder, including the right to accelerate the debt, upon which the Company may be required to repay allamounts then outstanding under the Loan Agreement, which could harm the Company’s financial condition. The conditionally exercisable call optionrelated to the event of default is considered to be an embedded derivative which is required to be bifurcated and accounted for as a separate financialinstrument. In the periods presented, the value of the embedded derivative is not material, but could become material in future periods if an event of defaultbecame more probable than is currently estimated.In July 2015, the Company and Oxford Finance entered into the First Amendment of the Loan Agreement and modified the terms to the LoanAgreement to change the maturity date from July 1, 2018 to July 1, 2019 and to change the first principal payment date from February 1, 2016 to February 1,2017. The interest rate remains unchanged, the Company paid a loan modification fee of $240,000 and the additional payment originally equal to 8% of theprincipal amount of the term loan, which is due when the term loan becomes due or upon the prepayment of the facility, was increased to 10%.As of December 31, 2015, the Company was in compliance with all material covenants under the Loan Agreement and there had been no materialadverse change.The fair value of the term loan approximates the carrying value. Future maturities and interest payments under the term loan as of December 31, 2015,are as follows (in thousands): 2016 $1,590 2017 8,848 2018 8,848 2019 6,423 Total minimum payments 25,709 Less amount representing interest (5,709) Gross balance of long-term debt 20,000 Less unamortized debt discount (316) Carrying value of long-term debt 19,684 Less current portion of long-term debt — Long-term debt, less current portion and unamortized debt discount $19,684 9. Stockholders’ EquityCommon StockIn December 2013, the Company filed a shelf registration statement on Form S-3 with the SEC, which upon being declared effective in January 2014,allowed for the offer of up to $100.9 million of securities from time to time in one or more public offerings of common stock. In addition, the Companyentered into a Controlled Equity Offering sales agreement with Cantor Fitzgerald & Co., (Cantor Fitzgerald), under which it may sell, subject to certainlimitations, up to $25 million of common stock through Cantor Fitzgerald, acting as agent. In November 2015, we filed a new shelf registration statement onForm S-3 with the SEC, which upon being declared effective in November 2015, terminated the December 2013 registration statement and allowed us to 97Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) offer up to $125.0 million of securities from time to time in one or more public offerings of our common stock. In addition, we entered into a ControlledEquity Offering sales agreement with Cantor Fitzgerald & Co., (Cantor Fitzgerald), under which we may sell, subject to certain limitations, up to $40 millionof common stock through Cantor Fitzgerald, acting as agent.During 2014, we raised net proceeds (net of commissions) of approximately $4.7 million from the sale of 2,907,664 shares of common stock in theopen market through the December 2013 agreement with Cantor Fitzgerald at a weighted average price of $1.65 per share. In 2015, we raised net proceeds(net of commissions) of approximately $14.3 million from the sale of 7,066.607 shares of our common stock in the open market through the agreements withCantor Fitzgerald at a weighted average price of $2.09 per share.Description of Stock-Based Compensation Plans2000 Stock Plan (Incentive Stock Plan)In January 2000, the Company’s Board of Directors and stockholders adopted the DURECT Corporation 2000 Stock Plan, under which incentive stockoptions and non-statutory stock options and stock purchase rights may be granted to employees, consultants and non-employee directors. The 2000 StockPlan was amended by written consent of the Board of Directors in March 2000 and written consent of the stockholders in August 2000.In April 2005, the Board of Directors approved certain amendments to the 2000 Stock Plan. At the Company’s annual stockholders meeting in June2005, the stockholders approved the amendments of the 2000 Stock Plan to: (i) expand the types of awards that the Company may grant to eligible serviceproviders under the Stock Plan to include restricted stock units, stock appreciation rights and other similar types of awards (including other awards underwhich recipients are not required to pay any purchase or exercise price) as well as cash awards; and (ii) include certain performance criteria that may beapplied to awards granted under the Stock Plan.In April 2010, the Board of Directors approved certain amendments to the 2000 Stock Plan. At the Company’s annual stockholders meeting in June2010, the stockholders approved the amendments of the 2000 Stock Plan to: (i) provide that the number of shares that remain available for issuance will bereduced by two shares for each share issued pursuant to an award (other than an option or stock appreciation right) granted on or after the date of the 2010Annual Meeting; (ii) expand the types of transactions that might be considered repricings and option exchanges for which stockholder approval is required;(iii) provide that shares tendered or withheld in payment of the exercise price of an option or withheld to satisfy a withholding obligation, and all shares withrespect to which a stock appreciation right is exercised, will not again be available for issuance under the Stock Plan; (iv) require that options and stockappreciation rights have an exercise price or base appreciation amount that is at least fair market value on the grant date, except in connection with certaincorporate transactions, and that stock appreciation rights may not have longer than a 10-year term; (v) add new performance goals that may be used toprovide “performance-based compensation” under the 2000 Stock Plan; (vi) extend the term of the 2000 Stock Plan to the date that is ten (10) yearsfollowing the stockholders meeting; and (vii) expand the treatment of outstanding awards in connection with certain changes of control of the Company tocover mergers in which the consideration payable to stockholders is not solely securities of the successor corporation.In March 2011, the Board of Directors approved an amendment to the 2000 Stock Plan. At the Company’s annual stockholders meeting in June 2011,the stockholders approved the amendment of the 2000 Stock Plan to increase the number of shares of the Company’s common stock available for issuance by5,500,000 shares. A total of 29,294,260 shares of common stock have been reserved for issuance under this plan. The plan expires in June 2020. 98Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) In April 2013, the Board of Directors approved certain amendments to the 2000 Stock Plan to: (i) increase the number of stock options granted to anon-employee director on the date which such person first becomes a director from 30,000 to 70,000 shares of common stock; each option shall have a ten-year term, become exercisable in installments of one-third of the total number of options granted on each anniversary of the grant and have a two-year periodfollowing termination of Director status in which the former director can exercise the option; (ii) modify the exercise period for future option grants to a non-employee director in which a former director can exercise the option following termination of Director status from a one year period to a two-year period.Options granted under the 2000 Stock Plan expire no later than ten years from the date of grant. Options may be granted with different vesting termsfrom time to time not to exceed five years from the date of grant. The option price of an incentive stock option granted to an employee or of a nonstatutorystock option granted to any person who owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company(or any parent or subsidiary) shall be no less than 110% of the fair market value per share on the date of grant. The option price of an incentive stock optiongranted to any other employee shall be no less than 100% of the fair market value per share on the date of grant.As of December 31, 2015, 2,405,807 shares of common stock were available for future grant and options to purchase 26,888,453 shares of commonstock were outstanding under the 2000 Stock Plan.2000 Directors’ Stock Option PlanIn March 2000, the Board of Directors adopted the 2000 Directors’ Stock Option Plan. A total of 300,000 shares of common stock had been reservedinitially for issuance under this plan. The directors’ plan provides that each person who becomes a non-employee director of the Company after the effectivedate of the Company’s initial public offering will be granted a non-statutory stock option to purchase 20,000 shares of common stock on the date on whichthe optionee first becomes a non-employee director of the Company. This plan also provides that each option granted to a new director shall vest at the rateof 33/3% per year and each annual option of 5,000 shares shall vest in full at the end of one year.At the Company’s annual stockholders meeting in June 2002, the stockholders approved an amendment of the 2000 Directors’ Stock Option Plan to:(i) increase the number of stock options granted to a non-employee director on the date which such person first becomes a director from 20,000 to 30,000shares of common stock; (ii) increase the number of stock options granted to each non-employee director on the date of each annual meeting of thestockholders after which the director remains on the Board from 5,000 to 12,000 shares of common stock; and (iii) reserve 200,000 additional shares ofcommon stock for issuance under the 2000 Directors’ Stock Option Plan so that the total number of shares reserved for issuance is 500,000.In April 2005, the Board of Directors approved certain amendments to the 2000 Directors’ Stock Option Plan. At the Company’s annual stockholdersmeeting in June 2005, the stockholders approved the amendments of the 2000 Directors’ Stock Option Plan to: (i) increase the number of shares of commonstock issuable under the Director’s Plan by an additional 425,000 shares, to an aggregate of 925,000 shares; (ii) increase the number of option shares issued tononemployee directors annually in connection with their continued service on the Board from 12,000 shares to 20,000 shares; and (iii) modify the vesting ofsuch annual option grants so that such shares vest completely on the day before the first anniversary of the date of grant. The plan expired in September 2010.Awards to our non-employee directors have been granted under the 2000 Stock Plan following that date.As of December 31, 2015, no shares of common stock were available for future grant and options to purchase 410,000 shares of common stock wereoutstanding under the 2000 Director’s Stock Option Plan. 99 1Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) 2000 Employee Stock Purchase PlanIn August 2000, the Company adopted the 2000 Employee Stock Purchase Plan. This purchase plan is implemented by a series of overlapping offeringperiods of approximately 24 months’ duration, with new offering periods, other than the first offering period, beginning on May 1 and November 1 of eachyear and ending April 30 and October 31, respectively, two years later. The purchase plan allows eligible employees to purchase common stock throughpayroll deductions at a price equal to the lower of 85% of the fair market value of the Company’s common stock at the beginning of each offering period or atthe end of each purchase period. The initial offering period commenced on the effectiveness of the Company’s initial public offering.In April 2010, the Board of Directors approved certain amendments to the 2000 Employee Stock Purchase Plan. At the Company’s annual stockholdersmeeting in June 2010, the stockholders approved the amendments of the 2000 Employee Stock Purchase Plan to: (i) increase the number of shares of ourcommon stock authorized for issuance under the ESPP by 250,000 shares; (ii) extend the term of the ESPP to the date that is ten (10) years following thestockholders meeting; (iii) provide for six-month consecutive offering periods beginning on November 1, 2010; (iv) revise certain provisions to reflect thefinal regulations issued under Section 423 of the Code by the Internal Revenue Service; and (v) provide for the cash-out of options outstanding under anoffering period in effect prior to the consummation of certain corporate transactions as an alternative to providing for a final purchase under such offeringperiod.In March 2015, the Board of Directors approved certain amendments to the 2000 Employee Stock Purchase Plan. At the Company’s annualstockholders meeting in June 2015, the stockholders approved the amendments of the 2000 Employee Stock Purchase Plan to: (i) increase the number ofshares of our common stock authorized for issuance under the ESPP by 350,000 shares; and (ii) extend the term of the ESPP to the date that is ten (10) yearsfollowing the stockholders meeting.The plan expires in June 2025. A total of 2,550,000 shares of common stock have been reserved for issuance under this plan. As of December 31, 2015,366,340 shares of common stock were available for future grant and 2,183,660 shares of common stock have been issued under the 2000 Employee StockPurchase Plan.As of December 31, 2015, shares of common stock reserved for future issuance consisted of the following: December 31,2015 Stock options outstanding 27,298,453 Stock options available for grant 2,405,807 Employee Stock Purchase Plan 366,340 30,070,600 100Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) A summary of stock option activity under all stock-based compensation plans is as follows: Number ofOptions WeightedAverageExercisePrice Per Share WeightedAverage RemainingContractual Term(in Years) AggregateIntrinsicValue(in millions) Outstanding at December 31, 2012 20,902,156 $3.07 5.41 $— Options granted 4,592,849 $1.21 Options exercised (187,014) $1.01 Options forfeited (94,055) $1.38 Options expired (1,517,352) $3.17 Outstanding at December 31, 2013 23,696,584 $2.73 5.45 $5.2 Options granted 3,747,428 $1.94 Options exercised (300,602) $0.99 Options forfeited (144,611) $1.50 Options expired (2,758,960) $2.95 Outstanding at December 31, 2014 24,239,839 $2.61 5.72 $— Options granted 4,299,290 $1.09 Options exercised (925,636) $1.13 Options forfeited (15,990) $1.34 Options expired (299,050) $3.58 Outstanding at December 31, 2015 27,298,453 $2.41 5.39 $13.5 Exercisable at December 31, 2015 23,222,277 $2.59 4.86 $10.1 Vested and expected to vest at December 31, 2015 27,028,688 $2.42 5.36 $13.2 The aggregate intrinsic value in the table above represents the total intrinsic value (i.e., the difference between the Company’s closing stock price onthe last trading day of 2015 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holdershad all option holders exercised their options on December 31, 2015. This amount changes based on the fair market value of the Company’s common stock.The total intrinsic value of options exercised was $985,000, $178,000, and $77,000 for the years ended December 31, 2015, 2014 and 2013, respectively.In January 2015, January 2014 and February 2013, the Company granted its employees stock options to purchase $1.5 million, 966,000, and1.7 million shares, respectively, of the Company’s common stock, which vested immediately on the grant date. The weighted-average grant-date fair value ofall options granted with exercise prices equal to fair market value was $0.65 in 2015, $1.53 in 2014 and $0.85 in 2013 determined by the Black-Scholesoption valuation method. There were no options granted with exercise prices lower than fair market value in 2015, 2014 and 2013.Expenses for non-employee stock options are recorded over the vesting period of the options, with the value determined by the Black-Scholes optionvaluation method and remeasured over the vesting term. 101Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) As of December 31, 2015, the Company had three stock-based equity compensation plans, which are described above. The employee stock-basedcompensation cost that has been included in the statements of operations and comprehensive loss is shown as below (in thousands): Year ended December 31, 2015 2014 2013 Cost of product revenues $108 $149 $170 Research and development 1,400 1,697 1,999 Selling, general and administrative 1,152 1,234 1,257 $2,660 $3,080 $3,426 Because the Company had a net operating loss carryforward as of December 31, 2015, no excess tax benefits for the tax deductions related to stock-based compensation expense were recognized in the statement of operations. Additionally, no incremental tax benefits were recognized from stock optionsexercised during 2015, which would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in netcash provided by financing activities.Determining Fair ValueValuation and Expense Recognition. The Company estimates the fair value of stock options granted using the Black-Scholes option valuationmodel. The Company recognizes the expense on a straight-line basis. The expense for options is recognized over the requisite service periods of the awards,which is generally the vesting period.Expected Term. The expected term of options granted represents the period of time that the options are expected to be outstanding. The Companydetermines the expected life using historical options experience. This develops the expected life by taking the weighted average of the actual life of optionsexercised and cancelled and assumes that outstanding options are exercised uniformly from the current holding period through the end of the contractual life.Expected Volatility. The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of theCompany’s common stock.Risk-Free Rate. The Company bases the risk-free rate that it uses in the Black-Scholes option valuation model on the implied yield in effect at thetime of option grant on U.S. Treasury zero-coupon issues with substantially equivalent remaining terms.Dividends. The Company has never paid any cash dividends on its common stock and the Company does not anticipate paying any cash dividendsin the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. 102Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) The Company used the following assumptions to estimate the fair value of options granted (including fully vested options issued in January 2015 and2014, and February 2013) and shares purchased under its stock plans and employee stock purchase plan for the years ended December 31, 2015, 2014 and2013: Year ended December 31, 2015 2014 2013 Stock Options Risk-free rate 1.5-2.4% 1.9-2.8% 0.9-2.9% Expected dividend yield — — — Expected term (in years) 6.5-10.0 6.5-10.0 5.3-10.0 Volatility 78-85% 76-85% 77-86% Forfeiture rate 6.0% 7.2% 8.4% Year ended December 31, 2015 2014 2013 Employee Stock Purchase Plan Risk-free rate 0.1-0.3% 0.1% 0.1-0.2% Expected dividend yield — — — Expected term (in years) 0.5 0.5 0.5 Volatility 68-95% 60-81% 64-81% There were 113,625, 115,412 and 128,433 shares purchased under the Company’s employee stock purchase plan during the years ended December 31,2015, 2014 and 2013, respectively. Included in the statement of operations and comprehensive loss for the year ended December 31, 2015, 2014 and 2013was $62,000, $43,000 and $56,000, respectively, in stock-based compensation expense related to the recognition of expenses related to shares purchasedunder the Company’s employee stock purchase plan.As of December 31, 2015, $3.5 million of total unrecognized compensation costs related to nonvested stock options is expected to be recognized overthe respective vesting terms of each award through 2018. The weighted average term of the unrecognized stock-based compensation expense is 2.1 years.The following table summarizes information about stock options outstanding at December 31, 2015: Options Outstanding Options Exercisable Range of Exercise Price Number ofOptionsOutstanding Weighted-AverageRemainingContractual Life(In years) Weighted-AverageExercisePrice Number ofOptionsExercisable Weighted-AverageExercisePrice $0.73 – 0.87 2,494,482 6.18 $0.78 2,346,554 $0.78 $0.88 – 0.88 3,235,932 9.02 $0.88 1,631,647 $0.88 $1.00 – 1.20 388,855 7.63 $1.08 310,292 $1.10 $1.21 – 1.21 3,537,417 7.09 $1.21 3,015,494 $1.21 $1.24 – 1.93 1,436,463 8.16 $1.46 1,033,358 $1.46 $2.09 – 2.09 3,956,166 6.73 $2.09 2,949,018 $2.09 $2.13 – 2.77 2,739,429 4.32 $2.22 2,636,205 $2.21 $2.80 – 3.26 4,166,269 4.38 $3.16 3,956,269 $3.18 $3.29 – 5.27 3,695,694 0.81 $4.59 3,695,694 $4.59 $5.38 – 6.32 1,647,746 1.92 $5.91 1,647,746 $5.91 $0.73 – 6.32 27,298,453 5.39 $2.41 23,222,277 $2.59 103Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) The Company received $1.0 million, $299,000 and $188,000 in cash from option exercises under all stock-based compensation plans for the yearsended December 31, 2015, 2014 and 2013, respectively.10. Income TaxesThe Company accounts for income taxes using the liability method under ASC 740, Income Taxes. Under this method, deferred tax assets andliabilities are determined based on temporary differences resulting from the different treatment of items for tax and financial reporting purposes. Deferred taxassets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expectedto reverse. Additionally, the Company must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. TheCompany has provided a full valuation allowance on the Company’s deferred tax assets because the Company believes it is more likely than not that itsdeferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets on a quarterly basis. The Company recorded adeferred tax liability of $397,000 and $405,000 on its balance sheet at December 31, 2015 and 2014, respectively, that arose from tax amortization of anindefinitely-lived intangible asset. The Company also recorded a deferred tax benefit of $8,000, a tax provision of $85,000 and $320,000 related to thedeferred tax liability in the years ended December 31, 2015, 2014, and 2013, respectively. In addition, the Company recorded an income tax expense of$61,000 in 2015, related to the reversing tax benefit on the unrealized gain on a marketable equity security which was recorded in the year endedDecember 31, 2014.The reconciliation of income tax expenses (benefit) at the statutory federal income tax rate of 34% to net income tax benefit included in the statementsof operations and comprehensive loss for the years ended December 31, 2015, 2014 and 2013 is as follows (in thousands): Year Ended December 31, 2015 2014 2013 U.S. federal taxes provision (benefit) at statutory rate $(7,681) $(7,502) $(7,184) State taxes — — — Change in valuation allowance 7,725 6,854 9,517 Stock-based compensation 530 1,139 375 Change in deferreds 56 (2) (1,718) Other (577) (465) (670) Total income tax provision $53 $24 $320 104Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) In 2015, 2014 and 2013, total income tax provision expense was $53,000, $24,000 and $320,000, respectively. The Company has presented the$53,000, $24,000 and $320,000 of deferred income tax provision in interest and other income (expenses) in its statements of operation and comprehensiveincome (loss). Deferred tax assets and liabilities reflect the net tax effects of net operating loss and research and other credit carryforwards and the temporarydifferences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significantcomponents of the Company’s deferred tax assets and liabilities are as follows (in thousands): December 31, 2015 2014 Deferred tax assets: Net operating loss carryforwards $111,696 $105,609 Research and other credits 12,001 10,995 Capitalized research and development expenses 132 456 Deferred revenue 1,045 516 Stock-based compensation 9,605 9,402 Other 3,645 3,967 Total deferred tax assets 138,124 130,945 Valuation allowance for deferred tax assets (138,124) (130,945) Deferred tax liabilities—Intangibles (397) (405) Net deferred tax assets and liabilities $(397) $(405) Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the netdeferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $7.2, $8.9 million, and $11.7 million during 2015,2014 and 2013, respectively.As of December 31, 2015, the Company had net operating loss carryforwards for federal income tax purposes of approximately $295.6 million, whichexpire in the years 2019 through 2035, and federal research and development tax credits of approximately $9.9 million which expire at various datesbeginning in 2018 through 2035, if not utilized.As of December 31, 2015, the Company had net operating loss carryforwards for state income tax purposes of approximately $211.3 million, whichexpire in the years 2015 through 2035, if not utilized, and state research and development tax credits of approximately $10.8 million, which do not expire.Utilization of the net operating losses may be subject to a substantial annual limitation due to federal and state ownership change limitations. Theannual limitation may result in the expiration of net operating losses before utilization.At December 31, 2015 and December 31, 2014, the Company had unrecognized tax benefits of approximately $7.0 and $5.7 million, respectively(none of which, if recognized, would affect the Company’s effective tax rate). The Company does not believe there will be any material changes in itsunrecognized tax positions over the next twelve months. 105Table of ContentsDURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS—(Continued) A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): December 31, 2015 2014 Balance at beginning of the year $5,702 $5,252 Increases (decrease) related to prior year tax positions 737 — Increases (decrease) related to current year tax positions 526 450 Settlements — — Reductions due to lapse of applicable statute of limitations — — Balance at end of the year $6,965 $5,702 Interest and penalty costs related to unrecognized tax benefits, if any, are classified as a component of interest income and other income (expense), netin the accompanying Statements of Operations and Comprehensive Loss. The Company did not recognize any interest and penalty expense related tounrecognized tax benefits for the years ended December 31, 2015, 2014 and 2013.The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal and stateincome tax examination for calendar tax years ending 1998 through 2015 due to unutilized net operating losses and research credits.11. Unaudited Selected Quarterly Financial Data (in thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter 2015 2014 2015 2014 2015 2014 2015 2014 Revenue $4,773 $6,293 $4,441 $4,581 $4,743 $4,258 $5,167 $4,269 Net loss $(4,853) $(3,600) $(5,478) $(5,478) $(6,487) $(7,092) $(5,845) $(5,940) Basic net loss per share $(0.04) $(0.03) $(0.05) $(0.05) $(0.05) $(0.06) $(0.05) $(0.05) Diluted net loss per share $(0.04) $(0.03) $(0.05) $(0.05) $(0.05) $(0.06) $(0.05) $(0.05) 12. Subsequent EventDuring the first quarter of 2016, the Company raised net proceeds (net of commissions) of approximately $494,000 from the sale of 226,698 shares ofthe Company’s common stock in the open market through the November 2015 Controlled Equity Offering agreement with Cantor Fitzgerald at a weightedaverage price of $2.25 per share. As of February 18, 2016, the Company had up to $37.6 million of common stock available for sale under the ControlledEquity Offering program and $122.6 million of common stock available for sale under its shelf registration statement. 106Table of ContentsItem 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.Not applicable. Item 9A.Controls and Procedures.Disclosure Controls and ProceduresAs required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, DURECT’s management, including our Chief Executive Officer and ChiefFinancial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of DURECT’s disclosure controls andprocedures as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that DURECT’s disclosure controls and procedures were effective as of the end of the period covered by this report.Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inExchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision of our Chief Executive Officer and Chief Financial Officer and with the participation ofour management, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014 based on theframework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013Framework). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2015.Our independent registered public accountants, Ernst & Young LLP, audited the financial statements included in this Annual Report on Form 10-K andhave issued an audit report on our internal control over financial reporting which appears below.Changes in Internal Control Over Financial ReportingThere were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) ofExchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect,our internal control over financial reporting. 107Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders of DURECT CorporationWe have audited DURECT Corporation’s internal control over financial reporting as of December 31, 2015, based on criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).DURECT Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting.Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures aswe considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.In our opinion, DURECT Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015,based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2015 financialstatements of DURECT Corporation and the financial statement schedule listed in the Index at Item 15(a)(2) and our report dated March 1, 2016 expressed anunqualified opinion thereon./S/ ERNST & YOUNG LLPRedwood City, CaliforniaMarch 1, 2016 108Table of ContentsItem 9B.Other Information.NonePART IIIThe definitive proxy statement for our 2016 annual meeting of stockholders, when filed, pursuant to Regulation 14A of the Securities Exchange Act of1934, will be incorporated by reference into this Form 10-K pursuant to General Instruction G (3) of Form 10-K and will provide the information requiredunder Part III (Items 10-14), except for the information with respect to our executive officers, which is included in “Part I—Executive Officers of theRegistrant.”PART IV Item 15.Exhibits and Financial Statement Schedules. (a)The following documents are filed as part of this report: (1)Financial Statements SeeItem 8 of this Form 10-K (2)Financial Statement Schedules ScheduleII—Valuation and Qualifying AccountsSchedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in thefinancial statements or notes thereto. (3)Exhibits are incorporated herein by reference or are filed in accordance with Item 601 of Regulation S–K. Number Description2.1 Agreement and Plan of Merger dated April 18, 2001, among the Company, Target and Magnolia Acquisition Corporation (incorporatedby reference to Exhibit 2.1 to our Current Report on Form 8-K (File No. 000-31615) filed on May 15, 2001).2.2 Agreement and Plan of Merger dated August 15, 2003, among the Company, Birmingham Polymers, Inc., Absorbable PolymerTechnologies, Inc. and the Principal Shareholders of Absorbable Polymer Technologies, Inc. (incorporated by reference to Exhibit 2.2 toour Registration Statement on Form S-3, as amended (File No. 333-108396), initially filed on August 29, 2003).3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.3 to our RegistrationStatement on Form S-1, as amended (File No. 333-35316), initially filed on April 20, 2000).3.2 Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit3.4 to our Post-Effective Amendment No. 1 to our Registration Statement on Form S-3, filed on July 1, 2010.3.3 Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of DURECT Corporation(incorporated by reference to Exhibit 3.3 to our Registration Statement on Form S-3 (File No. 333-128979) initially filed on October 13,2005).3.4 Certificate of Amendment to Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock ofDURECT Corporation (incorporated by reference to Exhibit 3.7 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed onAugust 5, 2010). 109Table of ContentsNumber Description3.5 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K (File No.000-31615), filed on December 17, 2014).4.1 Second Amended and Restated Investors’ Rights Agreement (incorporated by reference to Exhibit 4.2 to our Registration Statement onForm S-1, as amended (File No. 333-35316), initially filed on April 20, 2000).10.1+ Form of Indemnification Agreement between the Company and each of its Officers and Directors (incorporated by reference to Exhibit10.1 to our Registration Statement on Form S-1, as amended (File No. 333-35316), initially filed on April 20, 2000).10.2+ 2000 Stock Plan, as amended (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-31615) filed onJune 16, 2015).10.3+ 2000 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.4 to our Registration Statement on Form S-1, as amended(File No. 333-35316), initially filed on April 20, 2000).10.4+ 2000 Directors’ Stock Option Plan (incorporated by reference to Exhibit 10.5 to our Registration Statement on Form S-1, as amended (FileNo. 333-35316), initially filed on April 20, 2000).10.5 Modified Net Single Tenant Lease Agreement between the Company and DeAnza Enterprises, Ltd. dated as of February 18, 1999(incorporated by reference to Exhibit 10.11 to our Registration Statement on Form S-1, as amended (File No. 333-35316), initially filed onApril 20, 2000).10.6 Common Stock Purchase Agreement between the Company and ALZA Corporation dated April 14, 2000 (incorporated by reference toExhibit 10.17 to our Registration Statement on Form S-1, as amended (File No. 333-35316), initially filed on April 20, 2000).10.7** Asset Purchase Agreement between the Company and IntraEAR, Inc. dated as of September 24, 1999 (incorporated by reference to Exhibit10.20 to our Registration Statement on Form S-1, as amended (File No. 333-35316), initially filed on April 20, 2000).10.8** Supply Agreement between the Company and Mallinckrodt, Inc. dated as of October 1, 2000 (incorporated by reference to Exhibit 10.25to our Annual Report on Form 10-K (File No. 000-31615) filed on March 30, 2001).10.9** License & Option Agreement and Mutual Release between Southern BioSystems, Inc, an Alabama corporation and wholly-ownedsubsidiary of the Company (now merged into the Company), and Thorn BioScience LLC dated as of July 26, 2002 (incorporated byreference to Exhibit 10.30 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed on November 14, 2002).10.10** Development and License Agreement between the Company, Southern BioSystems, Inc., an Alabama corporation and wholly-ownedsubsidiary of the Company (now merged into the Company), and Pain Therapeutics, Inc. dated as of December 19, 2002 (incorporated byreference to Exhibit 10.34 to our Annual Report on Form 10-K(File No. 000-31615) filed on March 14, 2003).10.11 Lease between the Company and Renault & Handley Employee Investments Co. with commencement date of January 1, 2005(incorporated by reference to Exhibit 10.36 to our Annual Report on Form 10-K (File No. 000-31615) filed on March 11, 2004).10.12** Amendment dated December 21, 2005 to Development and License Agreement dated December 19, 2002 between the Company and PainTherapeutics, Inc. (incorporated by reference to Exhibit 10.45 to our Annual Report on Form 10-K (File No. 000-31615) filed on March16, 2006).10.13** Sucrose Acetate Isobutyrate Pharmaceutical Grade Supply Agreement between the Company and Eastman Chemical Company dated as ofDecember 30, 2005 (incorporated by reference to Exhibit 10.46 to our Annual Report on Form 10-K (File No. 000-31615) filed on March16, 2006). 110Table of ContentsNumber Description10.14** Development and License Agreement between the Company and Alpharma Ireland Limited dated as of September 19, 2008 (incorporatedby reference to Exhibit 10.52 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed on November 4, 2008).10.15 First Lease Extension between the Company and Renault & Handley Employee Investments Co. effective March 1, 2009 (incorporated byreference to Exhibit 10.54 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed on May 7, 2009).10.16** Excipient Manufacturing and Supply Agreement between King Pharmaceuticals, Inc. and the Company dated as of August 5, 2009(incorporated by reference to Exhibit 10.55 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed on November 2, 2009).10.17 Second Amendment to Lease between De Anza Enterprises and the Company dated as of August 6, 2009 (incorporated by reference toExhibit 10.56 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed on November 2, 2009).10.18 Lease between the Company and DRA/CLP Riverchase Center Birmingham, LLC dated as of October 19, 2010 (incorporated by referenceto Exhibit 10.62 to our Annual Report on Form 10-K (File No. 000-31615) filed with the SEC on March 3, 2011).10.19 Third Amendment to Lease between De Anza Enterprises and the Company dated as of December 21, 2010 (incorporated by reference toExhibit 10.63 to our Annual Report on Form 10-K (File No. 000-31615) filed with the SEC on March 3, 2011).10.20** Development and License Agreement between the Company and Zogenix, Inc. effective July 11, 2011 (incorporated by reference toExhibit 10.66 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed on November 7, 2011).10.21** Amendment dated March 18, 2013 to Development and License Agreement dated July 11, 2011 between the Company and Zogenix, Inc(incorporated by reference to Exhibit 10.69 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed with the SEC on May 3,2013).10.22 Fourth Amendment to Lease between De Anza Enterprises and the Company dated as of August 20, 2013 (incorporated by reference toExhibit 10.69 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed with the SEC on November 5, 2013).10.23 Addendum II to Lease between the Company and Northwest Asset Management Company dated as of August 27, 2013 (incorporated byreference to Exhibit 10.69 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed with the SEC on November 5, 2013).10.24 Second Amendment to Lease between Handley Management Corporation, as successor-by-merger to Renault & Handley EmployeeInvestments Co. and the Company dated November 11, 2013 (incorporated by reference to Exhibit 10.73 to our Annual Report on Form10-K (File No. 000-31615) filed with the SEC on February 27, 2014).10.25 Executive Change of Control Policy, asam ended December 12, 2013 (incorporated by reference to Exhibit 10.74 to our Annual Report onForm 10-K (File No. 000-31615) filed with the SEC on February 27, 2014).10.26** Asset Transfer and License Agreement between the Company and Impax Laboratories, Inc. effective January 3, 2014 (incorporated byreference to Exhibit 10.75 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed with the SEC on May 2, 2014).10.27 Loan and Security Agreement between the Company and Oxford Finance, LLC dated June 26, 2014 (incorporated by reference to Exhibit10.1 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed with the SEC on August 8, 2014). 111Table of ContentsNumber Description10.28** License Agreement between the Company and Santen Pharmaceutical Co., Ltd. dated December 11, 2014 (incorporated by reference toExhibit 10.28 to our Annual Report on Form 10-K (File No. 000-31615) filed with the SEC on March 3, 2015).10.29** Exclusive License Agreement between the Company and Virginia Commonwealth University Intellectual Property Foundation datedDecember 5, 2012 (incorporated by reference to Exhibit 10.29 to our Annual Report on Form 10-K (File No. 000-31615) filed with theSEC on March 3, 2015).10.30 First Amendment to Loan and Security Agreement and First Amendment to Disbursment Letter between the Company and Oxford Finance,LLC dated July 31, 2015 (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed withthe SEC on November 3, 2015).12.1* Ratio of Earnings to Fixed Charges.23.1* Consent of Independent Registered Public Accounting Firm.24.1* Power of Attorney (see signature page of this Form 10-K).31.1* Rule 13a-14(a) Section 302 Certification.31.2* Rule 13a-14(a) Section 302 Certification.32.1* Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2* Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.101.INS* XBRL Instance Document101.SCH* XBRL Taxonomy Extension Schema Document101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document101.DEF* XBRL Taxonomy Extension Definition Linkbase Document101.LAB* XBRL Taxonomy Extension Labels Linkbase Document101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document *Filed herewith. **Confidential treatment granted with respect to certain portions of this Exhibit. +Indicates a management contract or compensatory plan or arrangement. 112Table of ContentsSCHEDULE II—VALUATION AND QUALIFYING ACCOUNTSYear Ended December 31, 2015, 2014 and 2013(in thousands) Balance atbeginningof the year Provision Recoveries/Write-Offs Balance atend of theyear December 31, 2015 Allowance for doubtful accounts $211 $(38) $(12) $161 December 31, 2014 Allowance for doubtful accounts $144 $88 $(21) $211 December 31, 2013 Allowance for doubtful accounts $154 $(20) $10 $144 113Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. DURECT CORPORATIONBy: /S/ JAMES E. BROWN James E. BrownPresident and Chief Executive OfficerDate: March 1, 2016POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James E. Brown and FelixTheeuwes, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign anyamendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities andExchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes may do or cause to bedone by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date/s/ JAMES E. BROWN James E. Brown President, Chief Executive Officer andDirector (Principal Executive Officer) March 1, 2016/s/ FELIX THEEUWES Felix Theeuwes Chairman and Chief Scientific Officer March 1, 2016/s/ MATTHEW J. HOGAN Matthew J. Hogan Chief Financial Officer(Principal Accounting Officer) March 1, 2016/s/ SIMON X. BENITO Simon X. Benito Director March 1, 2016/s/ TERRENCE F. BLASCHKE Terrence F. Blaschke Director March 1, 2016/s/ DAVID R. HOFFMANN David R. Hoffmann Director March 1, 2016/s/ ARMAND P. NEUKERMANS Armand P. Neukermans Director March 1, 2016/s/ JON S. SAXE Jon S. Saxe Director March 1, 2016/s/ JAY SHEPARD Jay Shepard Director March 1, 2016 114Table of ContentsEXHIBIT INDEX Number Description12.1* Ratio of Earnings to Fixed Charges.23.1* Consent of Independent Registered Public Accounting Firm.24.1* Power of Attorney (see signature page of this Form 10-K).31.1* Rule 13a-14(a) Section 302 Certification.31.2* Rule 13a-14(a) Section 302 Certification.32.1* Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2* Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.101.INS* XBRL Instance Document101.SCH* XBRL Taxonomy Extension Schema Document101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document101.DEF* XBRL Taxonomy Extension Definition Linkbase Document101.LAB* XBRL Taxonomy Extension Labels Linkbase Document101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document *Filed herewith. 115Exhibit 12.1COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESThe following table sets forth our ratio of earnings to fixed charges for each of the periods indicated (in thousands): Year Ended December 31, 2015 2014 2013 2012 2011 Earnings: Net income (loss) $(22,663) $(22,110) $(21,452) $16,200 $(18,765) Fixed charges 2,978 1,858 607 620 828 Total Earnings $(19,685) $(20,252) $(20,845) $16,820 $(17,937) Fixed Charges: Interest expense $2,236 $1,151 $6 $7 $46 Portion of rent expense representative of interest 742 707 601 613 782 Total Fixed Charges $2,978 $1,858 $607 $620 $828 Ratio of Earnings to Fixed Charges (1) — — — 27.1 — (1)For purposes of computing the ratio of earnings to fixed charges, earnings consist of net income (loss) plus fixed charges. Fixed charges consist ofinterest expense, amortization of debt expense and discount or premium related to indebtedness, whether expensed or capitalized, and that portion ofrental payments under operating leases we believe to be representative of interest. Earnings were insufficient to cover fixed charges by $22.7 million,$22.1 million, $21.5 million, and $18.8 million for the years ended December 31, 2015, 2014, 2013 and 2011, respectively. Earnings for the yearended December 31, 2012 included recognition of $35.4 million of collaborative research and development revenue as a result of the termination ofthe Company’s agreements with Nycomed, Pfizer and Hospira. Excluding the recognition of $35.4 million of deferred revenue, earnings would havebeen insufficient to cover fixed charges by $19.2 million for the year ended December 31, 2012.Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the following Registration Statements: (1)Registration Statements (Form S-8 Nos. 333-126990 and 333-98939) pertaining to the DURECT Corporation 2000 Directors’ Stock Option Plan, (2)Registration Statements (Form S-8 Nos. 333-166700, 333-161025, 333-152968, 333-124701, 333-86110 and 333-206084) pertaining to theDURECT Corporation 2000 Employee Stock Purchase Plan and the DURECT Corporation 2000 Stock Plan, (3)Registration Statements (Form S-8 Nos. 333-197980, 333-176113, 333-120405 and 333-108390) pertaining to the DURECT Corporation 2000Stock Plan, (4)Registration Statements (Form S-8 No. 333-170349) pertaining to the DURECT Corporation 2000 Employee Stock Purchase Plan, (5)Registration Statement (Form S-8 No. 333-47400) pertaining to the DURECT Corporation 2000 Employee Stock Purchase Plan, the DURECTCorporation 1998 Stock Option Plan, the DURECT Corporation 2000 Stock Plan and the DURECT Corporation 2000 Directors’ Stock OptionPlan, (6)Registration Statement (Form S-8 No. 333-61224) pertaining to the DURECT Corporation 2000 Employee Stock Purchase Plan, the DURECTCorporation 2000 Stock Plan, the Southern BioSystems, Inc. 1993 Stock Option Plan and the Southern Research Technologies, Inc. 1995Nonqualified Stock Option Plan, (7)Registration Statement (Form S-8 No. 333-76622) pertaining to the Southern BioSystems, Inc. 1993 Stock Option Plan and the SouthernResearch Technologies, Inc. 1995 Nonqualified Stock Option Plan, (8)Registration Statement (Form S-3 No. 333-128979) of DURECT Corporation, (9)Registration Statement (Form S-3 No. 333-108398) of DURECT Corporation, (10)Registration Statement (Form S-3 No. 333-108396) of DURECT Corporation, (11)Registration Statement (Form S-3 No. 333-155042) of DURECT Corporation, (12)Registration Statement (Form S-3 No. 333-181174) of DURECT Corporation (13)Registration Statement (Form S-3 No. 333-193009) of DURECT Corporation, and (14)Registration Statement (Form S-3 No. 333-207776) of DURECT Corporation,of our reports dated March 1, 2016, with respect to the financial statements and schedule of DURECT Corporation, and the effectiveness of internal controlover financial reporting of DURECT Corporation included in this Annual Report (Form 10-K) of DURECT Corporation for the year ended December 31,2015./s/ ERNST & YOUNG LLPRedwood City, CaliforniaMarch 1, 2016Exhibit 31.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, James E. Brown, certify that: 1.I have reviewed this report on Form 10-K 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe 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 inExchange 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor 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 theeffectiveness 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely 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 the registrant’s board of directors (or persons performing the equivalent functions): (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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 internalcontrol over financial reporting.March 1, 2016 /S/ JAMES E. BROWNJames E. BrownChief Executive OfficerExhibit 31.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Matthew J. Hogan, certify that: 1.I have reviewed this report on Form 10-K 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe 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 inExchange 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor 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 theeffectiveness 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely 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 the registrant’s board of directors (or persons performing the equivalent functions): (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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 internalcontrol over financial reporting.March 1, 2016 /S/ MATTHEW J. HOGANMatthew J. HoganChief Financial Officer and Principal Accounting OfficerExhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of DURECT Corporation (the “Company”) on Form 10-K for the year ended December 31, 2015 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, James E. Brown, Chief Executive Officer of the Company, certify, pursuant to 18U.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 results of operations of the Company.March 1, 2016 /S/ JAMES E. BROWNJames E. BrownChief Executive OfficerExhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of DURECT Corporation (the “Company”) on Form 10-K for the year ended December 31, 2015 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Matthew J. Hogan, Chief Financial Officer and Principal Accounting Officer of theCompany, 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 results of operations of the Company.March 1, 2016 /S/ MATTHEW J. HOGANMatthew J. HoganChief Financial Officer and Principal Accounting Officer

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