Durect Corp.
Annual Report 2017

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-K (Mark One)☒☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017OR☐☐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) Delaware94-3297098(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 ClassName of Each Exchange on Which RegisteredCommon Stock $0.0001 par value per sharePreferred Share Purchase RightsThe NASDAQ Stock Market LLC(The 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 ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 of the Act. YES ☐ NO ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ 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 the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of“large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer☐ Accelerated filer☒Non-accelerated filer☐ (Do not check if a small reporting company) Smaller reporting company☐Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standardsprovided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities ExchangeAct of 1934 (§ 240.12b-2 of this chapter). Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $135,648,965 as of June 30, 2017 based upon the closing sale price on The Nasdaq GlobalMarket reported for such date. Shares of Common Stock held by each officer and director and by each person who may be deemed to be an affiliate have been excluded. This determination of affiliate status is notnecessarily a conclusive determination for other purposes.There were 153,336,970 shares of the registrant’s Common Stock issued and outstanding as of March 2, 2018.DOCUMENTS INCORPORATED BY REFERENCEPart III incorporates information by reference from the definitive Proxy Statement for the 2018 annual meeting of stockholders, which is expected to be filed not later than 120 days after theRegistrant’s fiscal year ended December 31, 2017. DURECT CORPORATIONANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2017TABLE OF CONTENTS Page PART I ITEM 1. Business 1 ITEM 1A. Risk Factors 24 ITEM 1B. Unresolved Staff Comments 52 ITEM 2. Properties 52 ITEM 3. Legal Proceedings 52 ITEM 4. Mine Safety Disclosures 52 PART II ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 53 ITEM 6. Selected Financial Data 56 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 57 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 71 ITEM 8. Financial Statements and Supplementary Data 75 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 104 ITEM 9A. Controls and Procedures 104 ITEM 9B. Other Information 106 PART III ITEM 10. Directors, Executive Officers and Corporate Governance 106 ITEM 11. Executive Compensation 106 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 106 ITEM 13. Certain Relationships and Related Transactions, and Director Independence 106 ITEM 14. Principal Accountant Fees and Services 106 PART IV ITEM 15. Exhibits, and Financial Statement Schedules 106 ITEM 16. Form 10-K Summary 108 Exhibit Index 113 Signatures 114 PART IItem 1.Business.OverviewWe are a biopharmaceutical company with research and development programs broadly falling into two categories: (i) new chemical entities derivedfrom our Epigenetic 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 multiple investigational drug candidates in clinical development. DUR‑928, a new chemical entity inPhase 2 development, is the lead candidate in DURECT’s Epigenetic Regulator Program. An endogenous, orally bioavailable small molecule, DUR-928 hasbeen shown in preclinical studies to play an important regulatory role in lipid homeostasis, inflammation, and cell survival. Human applications mayinclude acute organ injury, chronic metabolic diseases such as nonalcoholic fatty liver disease (NAFLD), nonalcoholic steatohepatitis (NASH), primarysclerosing cholangitis (PSC) and other liver diseases with both broad and orphan populations, and inflammatory skin conditions such as psoriasis and atopicdermatitis. DURECT’s advanced oral and injectable delivery technologies are designed to enable new indications and enhanced attributes for small-molecule and biologic drugs. One late stage development program is REMOXY® ER (oxycodone), an investigational extended release pain relief drug basedon DURECT’s ORADUR® technology, for which DURECT’s licensee Pain Therapeutics has resubmitted the NDA and for which the FDA has set a PDUFAtarget action date of August 7, 2018. Another late-stage development program in this category is POSIMIR® (SABER®-Bupivacaine), an investigationalanalgesic product intended to deliver bupivacaine to provide up to 3 days of pain relief after surgery. In addition, for the assignment of certain patent rights,DURECT may receive a milestone payment upon NDA approval and single digit sales-based earn-out payments from U.S. net sales of Indivior’s RBP-7000investigational drug for schizophrenia, for which Indivior has submitted an NDA and for which the FDA has set a PDUFA target action date of July 28, 2018.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.Epigenetic Regulator Program and New Chemical EntitiesDURECT’s Epigenetic Regulator Program involves a multi-year collaborative effort with the Department of Internal Medicine at VirginiaCommonwealth University (VCU), the VCU Medical Center and the McGuire VA Medical Center. The discoveries from this program are a result of more than20 years of lipid research by Shunlin Ren, M.D., Ph.D., Professor of Internal Medicine at the VCU Medical Center and a recipient of multiple grants from theNational Institutes of Health (NIH) for metabolic disease research. Epigenetic regulation does not change DNA sequences, but regulates the pattern of DNAexpression and subsequent cellular functions. DUR-928 is our program’s lead product candidate. We hold the exclusive worldwide right to develop andcommercialize DUR-928 and related molecules discovered in the program. NOTE: POSIMIR®, SABER®, CLOUD®, ORADUR®, ALZET® and LACTEL® are trademarks of DURECT Corporation. Other trademarks referred tobelong to their respective owners. 1Our major product research and development efforts for new chemical entities derived from our Epigenetic Regulator Program are set forth in thefollowing table: Product Candidate Disease/Indication Collaborator Stage • DUR-928, oral • Metabolic disorders / chronic liverdiseases • DURECT holds worldwidedevelopment and commercializationrights under a license with VirginiaCommonwealth University • Phase 2• DUR-928, injectable • Acute organ injuries • DURECT holds worldwidedevelopment and commercializationrights under a license with VirginiaCommonwealth University • Phase 2• DUR-928, topical • Inflammatory skin conditions such aspsoriasis and atopic dermatitis • DURECT holds worldwidedevelopment and commercializationrights under a license with VirginiaCommonwealth University • Phase 1 During the course of this program, a number of compounds have been identified that may have therapeutic utility for various uncommon (orphan andrare) and common diseases, disorders or syndromes. The lead compound from this program (DUR-928) is an endogenous, orally available small molecule thatmodulates the activity of various nuclear receptors that play important regulatory roles in lipid homeostasis, inflammation and cell survival.The biological activity of DUR-928 has been demonstrated in over 10 different animal disease models involving three animal species. Several ofthese disease models represent chronic metabolic disorders of hepatic lipid accumulation and dysfunction (e.g., nonalcoholic fatty liver disease (NAFLD) andnonalcoholic steatohepatitis (NASH) associated with diabetes) and several represent acute organ injuries (endotoxin shock, ischemic-reperfusion kidneyinjury, acute liver failure and stroke).We are pursuing the development of DUR-928 through three programs for: (i) chronic metabolic disorders or liver diseases using oral administration,(ii) acute organ injury by injection or infusion, and (iii) local skin inflammatory disorders using topical application. We are also evaluating additionalindications beyond these programs.In pharmacokinetic and toxicity studies conducted in mice, hamsters, rats, rabbits, dogs and monkeys, DUR-928 has been found to be orallyavailable, locally tolerable and safe at all doses and in all routes tested to date. These non-clinical results supported the initiation of DUR-928 into humansafety/pharmacokinetics (PK)/proof-of-concept trials.Chronic Metabolic Disease Program with Orally Administered DUR-928Market Opportunity. Non-alcoholic fatty liver disease (NAFLD) affects approximately 30% of adults and 10% of children (about 81 millionindividuals) in the United States. There are many mechanisms, but only one phenotype of steatohepatitis. Non-alcoholic steatohepatitis (NASH), a moresevere and progressive form of NAFLD, is one of the most common chronic liver diseases worldwide, with an estimated prevalence of more than210% of adults in the United States, Europe, Japan and other developed countries. No drug is currently approved for NAFLD or NASH. Moreover, alcoholicfatty liver disease (AFLD) and its more advanced stage, alcoholic steatohepatitis (ASH), develops in approximately 90% of individuals who drink more than60 grams/day of alcohol, but may occur in individuals who drink less, and is a major contributor to the global burden of liver cirrhosis. Alcoholic hepatitis(AH), an acute, inflammatory form of AFLD, occurs in approximately 20% of patients with alcoholism and there are no effective therapeutics available totreat this condition. There is a growing appreciation for the pathological overlap between NASH and ASH. In addition to these liver diseases, there are anumber of orphan liver diseases for which we may seek to develop DUR-928, such as primary sclerosing cholangitis (PSC).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 PK of orally administered DUR-928. The 30-subject study evaluated DUR-928 in five cohorts of healthyvolunteers receiving DUR-928 (n=20 on drug, 10 on placebo) at escalating doses that resulted in peak plasma concentrations greater than 100-fold higherthan endogenous levels. DUR-928 was well-tolerated at all dose levels, with no serious treatment-related adverse events reported. Dose related increases inplasma concentrations were observed with peak plasma concentration at approximately 2-6 hours after dosing. We subsequently conducted a Phase 1multiple-ascending-dose, randomized, double-blinded, placebo-controlled, oral administration trial in 20 healthy subjects (n=16 on drug, 4 onplacebo). Following multiple dosing, DUR-928 was well-tolerated at all doses, with no serious drug-related adverse events reported and no accumulation inplasma concentrations observed with repeat dosing. We also conducted a food effect study with 8 healthy volunteers and observed no food effect onabsorption. Our first patient trial utilizing orally administered DUR-928 was an open-label, single-ascending-dose safety and PK Phase 1b trial in liver functionimpaired (NASH) patients and matched control subjects (MCS) (matched by age, body mass index and gender with normal liver function). This study wasconducted in Australia in two successive dose cohorts (first a low dose of 50 mg and then a high dose of 200 mg) and NASH patients were confirmed to beeither cirrhotic or non-cirrhotic. Both cohorts consisted of 10 NASH patients and 6 MCS. Data from this study was presented at the International LiverCongress™ 2017 organized by the European Association for the Study of the Liver (EASL) in Amsterdam on April 22, 2017. All patients and MCS tolerated DUR-928 well. One patient (with a prior history of arrhythmia and an ongoing viral infection) in the high dosecohort experienced a serious adverse event (shortness of breath), which occurred without unusually abnormal biochemical changes and resolved withoutintervention but was considered possibly treatment related by the physician due to its temporal association with dosing. In both the low and high dosecohorts, the PK parameters were comparable between the NASH patients and the MCS. In addition, the systemic exposure following the low and high dosesof DUR-928 was dose dependent. While this study was not designed to assess efficacy, we observed a dose dependent reduction of certain biomarkers after a single oral dose of DUR-928. Exploratory biomarker analysis indicated that a single oral dose of DUR-928 resulted in statistically significant reductions from baseline in the levelsof both full-length and cleaved cytokeratin-18 (CK-18), bilirubin, hsCRP and IL-18 in the NASH patients. The mean decrease of full-length CK-18 (ageneralized cell death marker) at the measured time point of greatest effect (12 hours after dosing) was 33% in the low dose cohort and 41% in the high dosecohort. The mean decrease of cleaved CK-18 (a cell apoptosis marker) at the measured time point of greatest effect (12 hours after dosing) was 37% in the lowdose cohort and 47% in the high dose cohort. The mean reduction in total bilirubin (a liver function impairment marker) at the measured time point ofgreatest effect (12 hours after dosing) was 27% in the low dose cohort and 31% in the high dose cohort. The mean decrease of high sensitivity C-ReactiveProtein (hsCRP), a marker of inflammation, at the measured time point of greatest effect (24 hours after dosing) was 8% on average in the low dose cohort and13% in the high dose cohort. The mean decrease of IL-18, an inflammatory mediator implicated in both liver and kidney diseases, at the measured timepoint of greatest effect (8 hours after dosing) was 4% in the low dose cohort and 8% in the high dose cohort. 3Collectively, the reduction of these biomarkers plus results from our animal and cell culture studies suggest potential therapeutic activity of DUR-928 for patients with liver diseases. However, additional studies are required to evaluate the safety and efficacy of DUR-928, and there is no assurance thatthese biomarker effects will be associated with clinically relevant benefits, or that DUR-928 will demonstrate safety or efficacy in treating liver diseases inlarger controlled trials. We are conducting a Phase 2a trial in PSC with orally administered DUR-928. The Phase 2a trial is a randomized, open label study with two cohorts(a low dose cohort of 10 mg and a high dose cohort of 50 mg), in which patients (n = 20 per cohort) will receive oral dosing of DUR-928 for 4-weeks withfollow-up for an additional four-weeks. The objectives of this study include safety, PK and pharmacodynamic (PD) markers, including the percent changefrom baseline of serum alkaline phosphatase (ALP) and other biomarkers. As an open label study, we expect to generate data during the course of 2018. PSCis a chronic liver disease characterized by a progression of cholestasis (decrease in bile flow) with inflammation and fibrosis of bile ducts. Over time, PSCleads to liver failure, infections and tumors of the bile duct or liver, and ultimately may require a liver transplant. There is no approved treatment for PSC atthis time. We have received orphan drug designation for DUR-928 to treat patients with PSC. We believe that data generated from this trial will be relevantto other chronic inflammatory, fibrotic and cholestatic liver conditions.Acute Organ Injury Program with Injectable DUR-928Market Opportunity. Acute organ injury is another area of major unmet medical need for which effective pharmaceutical treatment is often lacking.Acute kidney injury (AKI) alone, for example, affects approximately 2.8 million patients per year in the United States and is associated with increasedmortality, prolonged hospital stays, and progression to chronic kidney disease. In addition, AKI is a major cause of mortality in acute liver injury. Alcoholichepatitis is a syndrome characterized by progressive inflammatory liver injury associated with long-term heavy intake of alcohol, and involves a spectrumthat ranges from mild injury to severe, life threatening injury. The prevalence of alcoholic hepatitis has not been accurately determined, but it is believed tooccur in 10-35% of heavy drinkers. There were over 320,000 hospitalizations related to alcoholic hepatitis in 2010, and the hospitalization costs amountedto nearly $50,000 per patient. There are various forms of acute organ injury affecting the liver, the kidney or multiple organs for which we may seek todevelop DUR-928.Clinical Program. The initial Phase 1 trial with injectable administration was a single-site, randomized, double-blinded, placebo-controlled, single-ascending-dose study that evaluated the safety, tolerability and PK of intramuscular (IM) injected DUR-928. The 24-subject study (16 healthy volunteers onthe drug and 8 on placebo) of four escalating dose levels resulted in dose proportionality of systemic exposure. DUR-928 was well-tolerated at all dose levels,with no serious treatment-related adverse events reported. We also conducted a multiple-dose study involving 10 healthy volunteers, in which participantsreceived IM-injected 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. Noserious treatment related adverse events were reported, no subjects withdrew from the study, no accumulation in plasma concentrations were observed withrepeat dosing, and the pain scores and injection site reactions were minimal. We also conducted a single-ascending-dose intravenous infusion (IV) study with16 healthy volunteers and observed no treatment related serious adverse events. The systemic exposure following IV infusion was dose proportional. Our second Phase 1b study with injected DUR-928, also conducted in Australia, was an open-label, single-ascending-dose study in patients withimpaired kidney function (stage 3 and 4 chronic kidney disease (CKD)) and matched control subjects (matched by age, body mass and gender with normalkidney function). This study was conducted in two successive cohorts (first a low dose of 30 mg and then a high dose of 120 mg) evaluating safety and PK ofsingle-dose intramuscular injected DUR-928. The low dose cohort consisted of 6 patients with chronic kidney disease and 3 matched control subjects; thehigh dose cohort consisted of 5 patients with chronic kidney disease and 3 matched control subjects. In this trial, DUR-928 was well tolerated among allsubjects and the PK parameters between the kidney function impaired patients and the matched control subjects were comparable. Although the number ofsubjects involved was small, we did observe decreases in bilirubin and CK-18 when those levels were meaningfully elevated pre-treatment. 4We have been working with our clinical advisors to design several Phase 2a studies for various acute organ injuries. We submitted an initial IND inlate December 2016 for a proposed Phase 2a liver study. The FDA requested certain drug-drug interaction data and made suggestions for the proposedprotocol. In response, we completed Phase 1 drug-drug interaction studies, which demonstrated that neither orally administered nor intravenously injectedDUR-928 had an effect on the safety and PK of midazolam, a drug for detecting potential drug-drug interactions via the enzyme CYP3A4. This enzyme iscommonly associated with clinically relevant drug-drug interactions. We are conducting a Phase 2a trial in alcoholic hepatitis (AH) with DUR-928. The Phase 2a trial is an open label, dose escalation study conducted intwo parts. Part A will include patients with moderate AH (as determined by MELD scores) and Part B will include patients with severe AH. The study will beconducted using three dose levels (30 mg, 90 mg and 150 mg) in Part A, with sequential dose escalation following review of safety and PK results of the priordose level. Patients will receive DUR-928 by intravenous infusion, and the dose may be adjusted in Part B based on the findings from Part A. Patients will beenrolled at multiple clinical sites in the United States and the target number of participants to complete the study is 24-36. The objectives of this studyinclude safety, PK and PD signals, as determined by improvement in liver biochemistry, MELD and Lille scores and other biomarkers. As an open labelstudy, we expect to generate data during the course of 2018. Skin Inflammatory Disorder Program with Topical DUR-928Market opportunity. Skin inflammatory disorders, such as psoriasis or atopic dermatitis, affect approximately 7.5 million and 32 million Americans,respectively. Most currently available topical treatments, typically as first line therapy, either slow down excessive skin cell proliferation or reduceinflammation. Steroids are the most commonly used topical anti-inflammatory agents because they reduce the swelling and redness of lesions. Clinical program. We have conducted an exploratory proof-of-concept (POC) Phase 1b trial in psoriasis patients (9 evaluable patients) inAustralia. The decision to proceed with clinical testing was based on the anti-inflammatory activities of DUR-928, as well as the results of a psoriasis studywith DUR-928 in mice. The double-blinded and placebo-controlled Phase 1b trial was conducted using a micro-plaque assay with intralesional injections ofDUR-928. We feel that the initial results were encouraging and warrant further investigation. As a result, we have developed and selected lead topicalformulations of DUR-928 and have recently completed good laboratory practice (GLP) skin irritation / sensitization studies in two species. We have had pre-IND interactions with the FDA and are incorporating FDA’s comments in our upcoming IND while we conduct a mini-pig skin irritation study to be includedin our IND for a Phase 2 proof-of-concept study with topically applied DUR-928. We expect to initiate this Phase 2 study in the third quarter of 2018.Drug Delivery Programs and Pharmaceutical SystemsWe are developing pharmaceutical systems that will deliver the right drug to the right place, in the right amount and at the right time to treat chronicand episodic diseases and conditions. Our pharmaceutical systems enable optimized therapy for a given disease or patient population by controlling the rateand duration of drug administration. In addition, if advantageous for the therapy, our pharmaceutical systems can target the delivery of the drug to itsintended site of action.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 multiple injection therapy or oraldosing, improving drug efficacy, reducing side effects and ensuring dosing compliance. Our pharmaceutical systems can improve patients’ quality of life byeliminating more repetitive treatments, reducing dependence on caregivers and allowing patients to lead more independent lives.5We currently have several major active drug delivery technology platforms:The SABER and CLOUD Bioerodible Injectable Depot SystemsOur bioerodible injectable depot systems include our SABER and CLOUD platform technologies. SABER uses a high viscosity base component,such as 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 includes various other release rate modifying excipients and/or bioerodible polymers to achieve thedelivery of drugs for periods of days to months from a single injection. We are researching and developing a variety of controlled-release products based onthe 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 systemsare well 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 immediatelyafter injection (also called “burst”). Animal and human studies have shown that our bioerodible injectable depots can be associated with lesspost-injection burst than is typically associated with other commercially available injectable controlled release technologies, while stillachieving controlled 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 istypical with other commercially available injectable controlled release technologies. As a result, smaller injection volumes are possible withthis technology. •Ease of Administration—Prior to injection, our bioerodible injectable depot formulations are fairly liquid and therefore can be injectedthrough small needles. Additionally, because of the higher drug concentration of our bioerodible injectable depot formulations, less volumeis required to be 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 injectabledepot formulations 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 and for which weconducted a Phase 3 trial designed to generate additional clinical data with which to address the issues raised in the Complete Response Letter. The SABERtechnology is also utilized in our ophthalmic program with Santen Pharmaceutical Co., Ltd. (Santen), as well as multiple feasibility programs. In our clinicalstudies thus far, our bioerodible injectable depot formulations have been observed to be safe and well-tolerated, and no significant side effects or adverseevents 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The 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 ER, a unique long-acting oral formulation of the opioid oxycodone designed to discouragecommon methods of opioid misuse and abuse, and for which Pain Therapeutics, Inc. (Pain Therapeutics) received a Complete Response Letter most recentlyin September 2016. The ORADUR technology has also been applied to develop abuse-deterrent formulations of other opioids, including hydromorphone,hydrocodone and oxymorphone, although these programs are not currently under active development. We also have an ORADUR-ADHD program for whichwe and Orient Pharma Co., Ltd. (Orient Pharma) have selected a lead formulation containing the active pharmaceutical ingredient methylphenidate. Thisformulation was selected based on its potential for rapid onset of action, long duration for once-a-day dosing and target pharmacokinetic profile asdemonstrated in a Phase 1 trial. Orient Pharma achieved positive results from a Phase 3 trial in Taiwan in 2017 and is pursuing a new drug application withthe Taiwan Food and Drug Administration.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 achieved with minimal exposure to the remainder of the body andreduced need for systemic analgesics, thus minimizing systemic side effects. POSIMIR is intended to provide local analgesia for up to 3 days, which webelieve generally coincides with the time period of greatest need for post-surgical pain control in most patients.In May 2017, we signed a development and commercialization agreement with Sandoz AG (Sandoz), a division of Novartis, to develop and marketPOSIMIR in the United States. Clinical Program. Our POSIMIR clinical development program has been devised to establish the safety and efficacy of POSIMIR for the treatmentof post-surgical pain for 3 days. Toward that end, 16 clinical studies have been completed, of which 14 clinical studies were with the final formulation ofPOSIMIR in either blinded, randomized controlled trials or open-label trials. The initial 15 trials were included in the Integrated Summary of Safety (ISS)which was included in the POSIMIR NDA. Seven randomized, controlled, parallel design clinical trials of POSIMIR using the instillation method ofadministration and dose proposed for marketing were included in the Integrated Summary of Efficacy (ISE) which was included in the NDA. Seven differentsurgical procedures have been investigated, including inguinal hernia repair, shoulder surgery (primarily subacromial decompression),7appendectomy, abdominal hysterectomy, open laparotomy, laparoscopic cholecystectomy, and laparoscopic colectomy. The incision lengths treated rangedfrom a few centimeters for laparoscopic portals, to open laparotomy incisions of up to 35 cm. The seriousness of the surgery ranged from day surgery herniarepair in relatively healthy patients to major abdominal surgery for colon cancer in elderly patients with substantial co-morbidity who were oftenhospitalized for a week or more. The safety experience from this variety of procedures and patients was designed to allow a more confident extrapolation ofthe safety and efficacy data to a broad general 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 ofSafety (ISS) is not as large as required for a new chemical entity. In the POSIMIR NDA, a total of 1,075 patients were included in the ISS database, 951 ofwhom had been exposed to POSIMIR or SABER-Placebo in volumes ranging from 2.5 to 10 mL. A total of 683 patients had been exposed to POSIMIR withthe dose of bupivacaine ranging from 330 to 990 mg. In addition, a total of 124 patients had been treated with bupivacaine HCl in control groups and 268patients 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 bupivacaineHCl. Local site reactions were observed more frequently in the POSIMIR and SABER-Placebo groups than in the active comparator groups, most frequentlyin abdominal 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 was 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.Hernia 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 opioid8analgesic medication in morphine equivalents), respectively, than the POSIMIR 5 mL treatment group. The median decrease in supplemental opioidanalgesics 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 20%(p=0.012) 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.Efficacy 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).9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 andeffectiveness of a reference drug. In February 2014, we received a Complete Response Letter from the FDA. Based on the Complete Response Letter andsubsequent communications with the FDA, we conducted a new POSIMIR Phase 3 clinical trial (the PERSIST trial) consisting of patients undergoinglaparoscopic cholecystectomy (gallbladder removal) surgery to further evaluate the benefits and risks of POSIMIR. We began recruiting patients for this trialin November 2015 comparing POSIMIR to placebo. Based on advice from the FDA received subsequent to the start of the trial, in April 2016 we decided toamend the PERSIST trial. Starting in August 2016, we began implementing Part 2 of the PERSIST trial to evaluate POSIMIR against standard bupivacaineHCl rather than placebo as we had been doing initially in the study. Additionally, we switched the primary efficacy endpoint (pain reduction on movement)from 0-72 hours after surgery to 0-48 hours after surgery. Assessing pain reduction on movement from 0-72 hours became the key secondary efficacyendpoint and other efficacy endpoints, including 72-hour opioid use, remained the same. In June 2017, we enrolled 296 patients in Part 2 of the PERSISTtrial; we had enrolled 92 patients in Part 1 of the PERSIST trial. In October 2017, we reported that the PERSIST trial did not meet its primary efficacyendpoint of reduction in pain on movement over the first 48 hours after surgery as compared to standard bupivacaine HCl. While results trended in favor ofPOSIMIR versus the comparator, they did not achieve statistical significance. We and Sandoz have been working to understand the trial results more fullyand to consider potential next steps with the program.REMOXY ER (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, plus other extendedrelease oxycodone-based painkillers, accounted for approximately $2.6 billion in U.S. sales in 2016.10Development Strategy. REMOXY ER is an oral, long-acting oxycodone gelatin capsule under development with Pain Therapeutics to which wehave licensed exclusive, worldwide, development and commercialization rights under a development and license agreement entered into in December 2002.REMOXY ER is formulated with our ORADUR technology and is designed to discourage common methods of opioid misuse. Under the agreementwith Pain Therapeutics, subject to and upon the achievement of predetermined development and regulatory milestones, we are entitled to receive milestonepayments of up to $3.0 million in the aggregate for REMOXY ER. We also receive reimbursement for our research and development efforts on REMOXY ER,and a manufacturing profit on our supply of key excipients for use in REMOXY ER. In addition, if commercialized, we will receive royalties for REMOXYER of between 6.0% to 11.5% of net sales depending on sales volumes.Clinical Program. Pain Therapeutics submitted an NDA for REMOXY ER to the FDA in June 2008, and in November 2008 the FDA accepted theNDA and granted priority review. In December 2008, Pain Therapeutics received a Complete Response Letter for its NDA for REMOXY ER in which the FDAdetermined that the NDA was not approved. According to Pain Therapeutics, the FDA indicated that additional non-clinical data would be required tosupport the approval of REMOXY ER, but the FDA had not requested or recommended additional clinical efficacy studies prior to approval. KingPharmaceuticals (King), which had acquired development and commercialization rights for REMOXY ER from Pain Therapeutics, and which wassubsequently acquired by Pfizer, resubmitted the NDA in December of 2010. On June 23, 2011, a Complete Response Letter from the FDA was received byPfizer. The FDA’s June 2011 Complete Response Letter raised concerns related to, among other matters, the Chemistry, Manufacturing, and Controls sectionof the NDA for REMOXY ER. Pfizer undertook efforts to resolve these issues. In October 2013, Pfizer stated that, having achieved technical milestonesrelated to manufacturing, they would continue the development program for REMOXY ER. Following guidance received from the FDA earlier in 2013, Pfizerannounced that they were proceeding with the additional clinical studies and other actions required to address the Complete Response Letter. Pfizer statedthat these new clinical studies would include, in part, a pivotal bioequivalence study with the modified REMOXY ER formulation to bridge to the clinicaldata related to the original REMOXY ER formulation, and an abuse-potential study with the modified formulation. In October 2014, Pfizer notified PainTherapeutics that Pfizer had decided to discontinue development of REMOXY ER, 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 termination date inApril 2015. In April 2015, Pain Therapeutics stated that it had resumed responsibility for REMOXY ER under the terms of a letter agreement with Pfizer. InMarch 2016, Pain Therapeutics resubmitted the NDA for REMOXY ER to the FDA, and in September 2016, Pain Therapeutics received a Complete ResponseLetter. Based on its review, the FDA has determined that the NDA cannot be approved in its present form and specifies additional actions and data that areneeded for drug approval. We understand from its public disclosures that Pain Therapeutics had a meeting with the FDA in February 2017 to discuss theregulatory path forward for REMOXY ER. In March 2017, Pain Therapeutics announced that it planned to resubmit the REMOXY ER NDA after completingtwo additional studies with REMOXY ER based on guidance following the recent meeting with the FDA. The two studies are a clinical abuse potential studyvia the intranasal route of abuse and a non-clinical abuse potential study using household solvents. In December 2017, Pain Therapeutics announced thatthey had successfully concluded a pre-NDA guidance meeting with the FDA. According to Pain Therapeutics, the purpose of a pre-NDA meeting is toacquaint FDA reviewers with the data to be submitted in the NDA, to uncover any major unresolved problems, including whether the NDA resubmissionconstitutes a complete response to the 2016 Complete Response Letter, and to discuss the best approach to the presentation and formatting of data in theNDA. In January 2018, Pain Therapeutics announced positive results from a human abuse potential study using nasal administration of REMOXY ER andthat they had completed all studies necessary to resubmit the REMOXY ER NDA to the FDA. On February 13, 2018, Pain Therapeutics stated that theREMOXY ER NDA had been resubmitted. On March 1, 2018, Pain Therapeutics announced that the FDA has determined that the NDA is sufficientlycomplete to permit a substantive review and the FDA has set a PDUFA target action date of August 7, 2018. Pain Therapeutics also stated that they believethe FDA will hold an open advisory committee meeting to discuss REMOXY ER, although a date has not yet been determined. 11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 $10.4 billion in 2016. The 2010 National Survey on DrugUse & 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- Methylphenidate ER) based on our ORADUR Technology for the treatmentof ADHD. This drug candidate is intended to provide once-a-day dosing with added tamper resistant characteristics to address common methods of abuse andmisuse of these types of drugs. In August 2009, we entered into a development and license agreement with Orient Pharma, a diversified multinationalpharmaceutical, healthcare and consumer products company with headquarters in Taiwan, under which we granted to Orient Pharma development andcommercialization rights in certain defined Asian and South Pacific countries to ORADUR-Methylphenidate ER. We retain rights to North America, Europe,Japan and all other countries not specifically licensed to Orient Pharma. Under our agreement with Orient Pharma, the parties will collaborate to perform aclinical development program through a Phase 2 study intended to produce a data package suitable for further development of the drug candidate by us aswell as Orient Pharma in their respective territories. We will be responsible for formulation and study design of the Phase 1 and Phase 2 clinical programwhich Orient Pharma has agreed to fund and execute. Orient Pharma would be responsible for all remaining development and commercialization activities forORADUR- Methylphenidate ER in the licensed territory. If commercialized, we will be entitled to receive a royalty on sales of ORADUR- MethylphenidateER by Orient Pharma. Orient Pharma has committed to supply a portion of our commercial requirements in all territories other than the United States forORADUR- Methylphenidate ER. In 2013, we and Orient Pharma selected a lead formulation based on its potential for rapid onset of action, long duration foronce-a-day dosing and target pharmacokinetic profile as demonstrated in a Phase 1 trial. In addition, this product candidate is expected to utilize a smallcapsule size relative to the leading existing long-acting products on the market.Orient Pharma conducted a Phase 3, multi-center, randomized, double-blind, placebo-controlled, two-way cross-over study designed to observe theefficacy and safety of ORADUR-Methylphenidate ER in children and adolescents with ADHD between the ages of 6 and 18 years. The study was conductedin Taiwan and enrolled 110 subjects, of which 99 evaluable subjects completed the study. The primary efficacy measure in this study was to demonstrate thesuperiority of ORADUR-Methylphenidate ER over placebo using the Swanson, Nolan, and Pelham-IV (SNAP-IV) teacher form score. The SNAP-IV ratingscale contains 26 questions, classified as three components of ADHD symptoms (inattention, hyperactivity/impulsivity and oppositional defiantdisorder). For the primary efficacy endpoint, ORADUR-Methylphenidate ER was superior to placebo in a statistically significant manner (p=0.0044 for theintent to treat population and p=0.0032 for the per protocol population). There were no serious adverse events in this pivotal study. Orient Pharma’s analysisindicates that the incidence of adverse events was generally consistent with other ADHD products.We understand that Orient Pharma is pursuing a New Drug Application with the Taiwan FDA for ORADUR-Methylphenidate ER. DURECT isseeking potential development and commercialization partners for ORADUR-Methylphenidate ER for major markets not licensed to Orient Pharma.ReldayIn July 2011, we entered into a development and license agreement with Zogenix, Inc., (Zogenix) for the purpose of developing and commercializingRelday, a proprietary, long-acting injectable formulation of risperidone using our SABER-controlled release formulation technology potentially incombination with Zogenix’s DosePro® needle-free, subcutaneous drug delivery system. Risperidone is one of the most widely prescribed medications used totreat the symptoms of schizophrenia and bipolar I disorder in adults and teenagers 13 years of age and older. Under the agreement, we granted Zogenixworldwide development and commercialization rights to Relday.12In January 2013, Zogenix reported positive single-dose pharmacokinetic (PK) results from a Phase 1 clinical trial of Relday. According to Zogenix,adverse events in the Phase 1 trial in patients diagnosed with schizophrenia were generally mild to moderate and consistent with other risperidone products.The Phase 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.In August 2017, we and Zogenix terminated the Zogenix Agreement. Under the mutual termination agreement, Zogenix’s development andcommercialization rights are returned to us, and Zogenix will transfer to us all regulatory filings and development information related to Relday.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 and our corporate collaborators also have underway a number of research programs covering medical diseases and conditions other than pain.Such programs include various diseases and disorders of the central nervous system, cardiovascular disease, ophthalmic conditions and metabolic disorders.In conducting our research programs and determining which particular efforts to prioritize for formal development, we employ a rigorous opportunityassessment process that takes into account the unmet medical need, commercial opportunity, technical feasibility, clinical viability, intellectual propertyconsiderations, and the development path including costs to achieve various critical milestones.RBP-7000In September 2017, we entered into an agreement with Indivior, under which we assigned to Indivior certain patents that may provide furtherintellectual property protection for RBP-7000, Indivior’s investigational once-monthly injectable risperidone product for the treatment of schizophrenia. Inconsideration for such assignment, Indivior has made an upfront non-refundable payment to DURECT of $12.5 million, and has also agreed to make anadditional $5 million payment to DURECT contingent upon FDA approval of RBP-7000, as well as quarterly earn-out payments that are based on a singledigit percentage of U.S. net sales for certain products covered by the assigned patent rights, including RBP-7000. In October 2017, Indivior disclosed that itsubmitted a New Drug Application (NDA) to the U.S. Food and Drug Administration on September 28, 2017 to seek marketing approval for RBP-7000. Indivior has stated that this NDA submission includes the results from a pivotal Phase 3 study assessing the efficacy and safety of RBP-7000 and anopen-label, long-terms safety study. Indivior noted that in the pivotal randomized, double-blind, placebo-controlled study, RBP-7000 demonstratedstatistically significant clinical improvement compared to placebo based on changes in mean Positive and Negative Syndrome Scale (PANSS) total andClinical Global Impression-Severity of Illness (CGI-S) scores at 8 weeks. In December 2017, Indivior announced that the FDA had accepted the NDA forRBP-7000 and that the FDA had set a PDUFA (Prescription Drug User Fee Act) target action date of July 28, 2018.13DURECT 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 Epigenetic 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 Epigenetic Regulator Program. We believe that these new chemical entities may have utility for several metabolic diseases such as NAFLD, NASH,PSC and other liver conditions, in acute organ injuries such as AKI and AH, in various orphan diseases, and in inflammatory skin conditions such as psoriasisand atopic dermatitis. We believe that these product candidates may be of interest to larger pharmaceutical companies and that it may be possible to licensethe rights to certain products, formulations, indications or territories from this program while retaining the rights to other product candidates, formulations,indications or territories for either our own development and commercialization or for licensing at a later stage of development.Focus on Certain Acute Indications, Chronic Debilitating Medical Conditions and Certain Local Pain Conditions. 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 Epigenetic Regulator Program through which we have identified new chemical entities that may haveutility in conditions such as acute organ injuries and chronic metabolic/lipid disorders.Diversify Risk by Pursuing Multiple Programs in Development. In order to reduce the risks inherent in pharmaceutical product development, wehave diversified our product pipeline such that, between our own programs and those where we have collaborated, we presently have two programs for whichNew Drug Applications have been filed and Complete Response Letters have been received, and several other programs in various stages of development. Webelieve that having multiple programs in development helps mitigate the negative consequences to us of any setbacks or delays in any one of our programs.Enable Product Development Through Strategic Agreements. We believe that entering into selective strategic collaborations and otherarrangements with respect to our product development programs and technology can enhance the success of our product development andcommercialization, the value of our intellectual property portfolio, mitigate our risk and enable us to better manage our operating costs. Additionally, suchcollaborations and arrangements enable us to leverage investment by third parties and reduce our net cash burn, while retaining significant economic rights.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.Build Our Own Commercial Organization. In the future, we may elect to build our own commercial, sales and marketing capability in order tocapture more 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.14License AgreementsWe have 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 Epigenetic Regulator Program, including DUR-928. Under thislicensing arrangement, we have agreed to undertake certain efforts to bring licensed products to market, prosecute related patents and report on progress toVCU. In addition, we are obligated to pay low single-digit percentage patent royalties on net sales of licensed products, subject to annual minimum paymentsand additional milestone payments. This license includes rights to eight patent families. We may terminate this agreement at any time by written notice, andVirginia Commonwealth University may terminate this agreement by written notice if there is an uncured material breach.Strategic AgreementsWe have entered into the following strategic collaboration and other agreements:Sandoz AG. In May 2017, we and Sandoz entered into a license agreement to develop and market POSIMIR in the United States. In June 2017,following the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR), the agreement becameeffective. POSIMIR is our investigational post-operative pain relief depot that utilizes our patented SABER® technology to deliver bupivacaine to provideup to three days of pain relief after surgery. We retain commercialization rights in the rest of the world. Under the terms of the agreement, Sandoz made a non-refundable upfront payment of $20 million which we received in June 2017, with the potential for up to an additional $43 million in milestone paymentsbased on successful development and regulatory milestones (of which $30 million is currently feasible), and up to an additional $230 million in sales-basedmilestones. We are responsible for the completion of the ongoing PERSIST Phase 3 clinical trial for POSIMIR as well as FDA interactions through potentialapproval. If approved, we also have certain manufacturing obligations under this agreement. Sandoz will have exclusive commercialization rights in theUnited States upon regulatory approval with sole funding responsibility for commercialization activities. Sandoz will pay us a tiered double-digit royalty onproduct sales for a defined period, after which the license granted to Sandoz shall convert to a non-exclusive, fully paid, royalty-free, irrevocable andperpetual license. The term of the agreement shall be for the duration of Sandoz’s obligation to pay royalties for product sales under the Agreement. Theagreement provides each party with specified termination rights, including the right of Sandoz to terminate at will after a specified period and each party toterminate the agreement upon material breach of the agreement by the other party. In October 2017, we announced that PERSIST, the Phase 3 clinical trial forPOSIMIR, did not meet its primary efficacy endpoint of reduction in pain on movement over the first 48 hours after surgery as compared to standardbupivacaine HCl. The failure of the PERSIST trial for POSIMIR to achieve its primary endpoint gives Sandoz a right to terminate our agreement with them onthirty days’ notice, in addition to the rights they have to terminate for convenience on six months’ notice. Indivior UK Ltd. In September 2017, we entered into a patent purchase agreement (the “Indivior Agreement) with Indivior. Pursuant to the IndiviorAgreement, we assigned to Indivior certain patents that may provide further intellectual property protection for RBP-7000, Indivior’s investigational once-monthly injectable risperidone product for the treatment of schizophrenia. In consideration for such assignment, Indivior made an upfront non-refundablepayment to us of $12.5 million, and also agreed to make an additional $5 million payment to us contingent upon the achievement of a regulatory milestone,as well as quarterly earn-out payments that are based on a single digit percentage of U.S. net sales for certain products covered by the assigned patent rights,including RBP-7000. The assigned patent rights include granted patents extending through at least 2026. We also receive a non-exclusive right under theassigned patents to develop and commercialize certain risperidone-containing products and products that do not contain risperidone or buprenorphine. Theagreement contains customary representations, warranties and indemnities of the parties. We received the non-refundable payment of $12.5 million fromIndivior in September 2017 and recognized this amount as revenue from sale of intellectual property rights in the year ended December 31, 2017 as we do nothave any continuing obligations under the purchase agreement.Santen Pharmaceutical Co., Ltd. In December 2014, we and Santen entered into a definitive agreement (the Santen Agreement). Pursuant to theSanten Agreement, we have granted Santen an exclusive worldwide license to our proprietary SABER formulation platform and other intellectual property todevelop and commercialize a sustained release product utilizing our SABER technology to deliver an ophthalmology drug. Santen will control15and fund the development and commercialization program, and the parties will establish a joint management committee to oversee, review and coordinatethe development activities of the parties under the Agreement.In connection with the license agreement, Santen paid us a non-refundable upfront fee of $2.0 million in cash and agreed to make contingent cashpayments to us of up to $76.0 million upon the achievement of certain milestones, of which $13.0 million are development-based milestones (none of whichhas been achieved as of December 31, 2017), and $63.0 million are commercialization-based milestones including milestones requiring the achievement ofcertain product sales targets (none of which has been achieved as of December 31, 2017). Santen will also pay for certain of our costs incurred in thedevelopment of the licensed product. If the product is commercialized, we would also receive a tiered royalty on annual net product sales ranging fromsingle-digit to the low double digits, determined on a country-by-country basis. Santen may terminate the Santen Agreement without cause at any time uponprior written notice, and either party may terminate the Santen Agreement upon certain circumstances including a material uncured breach. As of December31, 2017, the cumulative aggregate payments received by us under this agreement were $3.3 million. In January 2018, we were notified by Santen that due toa shift in near term priorities, Santen has elected to reallocate R&D resources and put our program on pause until further notice.Zogenix, Inc. In July 2011, we and Zogenix entered into a Development and License Agreement (the Zogenix Agreement). We and Zogenix hadpreviously been working together under a feasibility agreement pursuant to which our research and development costs were reimbursed by Zogenix. Underthe Zogenix Agreement, Zogenix was responsible for the clinical development and commercialization of a proprietary, long-acting injectable formulation ofrisperidone using our SABER and other controlled-release depot formulation technologies. We were responsible for non-clinical, formulation and CMCdevelopment activities. We were reimbursed by Zogenix for our research and development efforts on the product. Zogenix paid a non-refundable upfront feeto us of $2.25 million in July 2011. Zogenix was obligated to pay us up to $103 million in total future milestone payments with respect to the productsubject to and upon the achievement of various development, regulatory and sales milestones. Of these potential milestones, $28 million were development-based milestones (none of which had been achieved) and $75 million are sales-based milestones (none of which had been achieved). Zogenix was alsorequired to pay a mid single-digit to low double-digit percentage patent royalty on annual net sales of the product determined on a jurisdiction-by-jurisdiction basis.We granted to Zogenix an exclusive worldwide license, with sub-license rights, to our intellectual property rights related to our proprietarypolymeric and non-polymeric controlled-release formulation technology to make and have made, use, offer for sale, sell and import risperidone products,where risperidone is the sole active agent, for administration by injection in the treatment of schizophrenia, bipolar disorder or other psychiatric relateddisorders in humans. We retained the right to supply Zogenix’s Phase 3 clinical trial and commercial product requirements on the terms set forth in theZogenix Agreement. Zogenix was permitted to terminate the Zogenix Agreement without cause at any time upon prior written notice, and either party waspermitted to terminate the Zogenix Agreement upon certain circumstances. In August 2017, we and Zogenix terminated the Zogenix Agreement. Under themutual termination agreement, Zogenix’s development and commercialization rights are returned to us, and Zogenix will transfer to us all regulatory filingsand development information related to Relday. As of December 31, 2017, the cumulative aggregate payments received by us under this agreement and theprior feasibility agreement were $20.1 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 ER) to King. InFebruary 2011 Pfizer acquired King and thereby assumed the rights and obligations of King with respect to the sublicense agreement. In December 2005, weamended our agreement with Pain Therapeutics in order to specify our obligations with respect to the supply of key excipients for use in the licensedproducts. Under the amended agreement, we are responsible for formulation development, supply of selected key excipients used in the manufacture oflicensed product and other specified tasks. We receive reimbursement for our research and development efforts on the licensed products and a manufacturingprofit on our supply of key product excipients to16Pain Therapeutics for use in the licensed products. In 2015, Pain Therapeutics returned to us all of Pain Therapeutics’ rights and was relieved of itsobligations under 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 ER, hydromorphone and oxymorphone. In 2016, Pain Therapeutics returned to us all of PainTherapeutics’ rights and was relieved of its obligations under our license agreement to develop and commercialize ORADUR-based formulations ofhydromorphone and oxymorphone but without impacting the rights and obligations of the two parties with respect to REMOXY ER. Under the agreementwith Pain Therapeutics, subject to and upon the achievement of predetermined development and regulatory milestones for REMOXY ER, we are entitled toreceive milestone payments of up to $3.0 million in the aggregate. As of December 31, 2017, we had received $1.5 million in cumulative milestonepayments. In addition, if commercialized, we will receive royalties for REMOXY ER of between 6.0% to 11.5% of net sales of the product depending on thesales volumes. This agreement can be terminated by either party for material breach by the other party and by Pain Therapeutics without cause. As ofDecember 31, 2017, the cumulative aggregate payments received by us from Pain Therapeutics under this agreement were $40.4 million.In addition, in 2017, 2016 and 2015, we recognized zero, $653,000 and $96,000 of product revenue, respectively, related to key excipients forREMOXY ER and the associated cost of goods sold was zero, $216,000, and $51,000, 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 16,000 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 April2000.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 our product candidates to leverage the established salesorganizations that certain pharmaceutical companies have in markets we are targeting. In the future, we may elect to build our own commercial, sales andmarketing capability in order to capture more of the economic value of certain products that we may develop. If we choose to enter into third-partycollaborations to commercialize our pharmaceutical product candidates, we may in the future enter into these alliances under circumstances that allow us toparticipate in the sales and marketing of these products. We will continue to pursue strategic alliances and collaborators from time to time consistent with ourstrategy to leverage the established sales organizations of third-party collaborators to achieve greater market penetration for some of our products than wecould on our own.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.17SuppliersWe purchase sucrose acetate isobutyrate, a raw material for our ORADUR and SABER-based pharmaceutical systems, including POSIMIR, REMOXYER and other ORADUR-based drug candidates, pursuant to a supply agreement with Eastman Chemical Company. Our supply agreement with EastmanChemical Company requires us to purchase a certain portion of our requirements for sucrose acetate isobutyrate from Eastman Chemical and obligates us topay a fee per annum if our purchases do not meet specified sales targets. All of the contractually committed amounts under this agreement have been accrued.The agreement may be terminated by either party under certain circumstances, including any material uncured breach by, or the insolvency, liquidation orbankruptcy of, or similar proceedings involving, the other party. We believe that this agreement will provide a sufficient supply of these raw materials tomeet our needs for the foreseeable future. We do not have in place long term supply agreements with respect to all of the components of any of ourpharmaceutical product candidates, however, and are subject to the risk that we may not be able to procure all required components in adequate quantitieswith acceptable quality, within acceptable time frames or at reasonable cost.CustomersOur product revenues principally are derived from the ALZET product line to academic and pharmaceutical industry researchers, the LACTELproduct lines to pharmaceutical and medical device customers, and from the sale of certain key excipients that are included in REMOXY ER 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 2017, Sandoz andIndivior accounted for 41% and 25% of our total revenues. In 2016, Tolmar Inc. accounted for 15% of our total revenues. In 2015, Zogenix and Tolmar Inc.accounted for 26% and 11% of our total revenues, respectively.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 development and commercial manufacturing agreements with third parties for the manufacture of POSIMIR and DUR-928. In addition, we have a small multi-discipline manufacturing facility in California that we have used to manufacture research and clinical supplies ofseveral of our pharmaceutical product candidates under GMP, including POSIMIR and REMOXY ER. In the future, we intend to develop additionalmanufacturing capabilities for our pharmaceutical product candidates and components to meet our demands and those of our third party collaborators bycontracting with third party manufacturers and by potentially constructing additional manufacturing space at our current facilities in California and Alabama.We manufacture our ALZET product line and certain key components for REMOXY ER at one of our California facilities and our LACTEL product line atour Alabama facility.Patents 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 ofothers and 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 ourbusiness. As of March 2, 2018, we owned or exclusively in-licensed over 45 unexpired issued U.S. patents and over 410 unexpired issued foreign patents(which include granted European patent rights that have been validated in various EU member states). In addition, we have over 35 pending U.S. patentapplications and over 100 foreign applications pending 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.18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 inthe scientific 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 obtaina license 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 protectour proprietary technology and processes, in part, by confidentiality agreements with our employees and certain contractors. There can be no assurance thatthese agreements 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.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.19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 Epigenetic Regulator Program willbe 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 FDA, unless the FDA, within the 30-day time period, raisesconcerns or questions about the conduct of the trials as outlined in the IND and imposes a clinical hold. In such a case, the IND sponsor and the FDA mustresolve any outstanding concerns before clinical trials can begin. Our submission of an IND may not result in FDA authorization to commence clinical trials.Further, an independent Institutional Review Board at each medical center proposing to conduct the clinical trials must review and approve any clinicalstudy as well as the related informed consent forms and authorization forms that permit us to use individually identifiable health information of studyparticipants.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 theefficacy of the 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, Phase3 clinical 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 oftenconducted in patients with disease rather than in healthy volunteers. Since these patients already have the target disease or condition, these studies mayprovide initial evidence of efficacy traditionally obtained in Phase 2 trials, and thus these trials are frequently referred to as Phase 1/2 clinical trials. Wecannot be certain that 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 afinding that the subjects or patients are being exposed to an unacceptable health risk. During the clinical development of products, sponsors frequently meetand consult with 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, no assurance 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 fee20goals for the time in which to respond to sponsor applications, we cannot assure you that the FDA will act in any particular timeframe. The FDA may deny anew drug application if the applicable regulatory criteria are not satisfied or may require additional clinical data. Even if such data is submitted, the FDA mayultimately decide that the new drug application does not satisfy the criteria for approval. Once issued, the FDA may withdraw product approval if compliancewith regulatory standards is not maintained or if safety problems occur after the product reaches the market. Requirements for additional Phase 4 studies (postapproval marketing studies) to confirm safety and effectiveness in a broader commercial use population may be imposed as a condition of marketingapproval. In addition, the FDA requires surveillance programs to monitor approved products which have been commercialized, and the agency has the powerto require changes in labeling or to prevent further marketing of a product based on the results of these post-marketing programs. Any comparative claimsthat we would like to make for our products vis-à-vis other dosage forms or products will need to be substantiated 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 actualtime required may vary substantially, based upon the type, complexity and novelty of the pharmaceutical product. Government regulation may delay orprevent marketing of potential products for a considerable period of time and impose costly procedures upon our activities. We cannot be certain that theFDA or any other regulatory agency will grant approval for any of our pharmaceutical systems under development on a timely basis, if at all. Success inpreclinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities is not alwaysconclusive and may be susceptible to varying interpretations which could delay, limit or prevent regulatory approval. Evolving safety concerns can result inthe imposition of new requirements for expensive and time consuming tests, such as for QT interval cardiotoxicity testing. Even if a product receivesregulatory approval, the approval may be significantly limited to specific indications. Further, even after regulatory approval is obtained, later discovery ofpreviously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Anypharmaceutical systems that we may develop and obtain approval for would also be subject to adverse findings of the active drug ingredients being marketedin different dosage forms and formulations. Delays in obtaining, or failures to obtain regulatory approvals would have a material adverse effect on ourbusiness. Marketing our pharmaceutical systems abroad will require similar regulatory approvals and is subject to similar risks. In addition, we cannot predictwhat 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.21For several years, the FDA has required companies engaged in manufacturing and sale of opioid drug products to have a Risk Evaluation andMitigation Strategy (REMS) to ensure that the benefits of the drugs continue to outweigh the risks. The affected opioid drugs include brand name andgeneric products and are formulated with the active ingredients fentanyl, hydromorphone, methadone, morphine, oxycodone, and oxymorphone.All manufacturers of long-acting and extended-release opioids must ensure that training is provided to prescribers of these medications and developinformation that prescribers can use when counseling patients about the risks and benefits of opioid use.More recently, in February 2016, the FDA announced a comprehensive action plan to take concrete steps towards reducing the impact of opioidabuse on American families and communities. As part of this plan, the agency will review product and labelling decisions and re-examine the risk-benefitparadigm for opioids.Certain of our drug candidates, including REMOXY ER, are subject to the REMS requirement. These required REMS programs may cause 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, which could negatively impact the commercial benefits to us and ourcollaborators from the sale of these drug 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 are listed by the DEA as Schedule II under the Controlled Substances Act of 1970. Consequently, their manufacture, research,shipment, storage, sale and use are subject to a high degree of oversight and regulation. For example, all Schedule II drug prescriptions must be signed by aphysician, physically presented to a pharmacist and may not be refilled without a new prescription. Furthermore, the amount of Schedule II substances we canobtain for clinical trials and commercial distribution is limited by the DEA and our quota may not be sufficient to complete clinical trials or meet commercialdemand. There is a risk that DEA regulations may interfere with the supply of the drugs used in our clinical trials, and, in the future, our ability to produceand distribute our products in the volume needed to meet commercial demand, which could negatively impact us and our collaborators.CompetitionWe may face competition from other companies in numerous industries including pharmaceuticals, medical devices and drug delivery. POSIMIR,REMOXY ER and RBP-7000, if approved, will compete with currently marketed oral opioids, transdermal opioids, local anesthetic patches, anti-psychotics,stimulants, implantable and external infusion pumps which can be used for infusion of opioids and local anesthetics. Products of these types are marketed byPurdue Pharma, AbbVie, Janssen, Medtronic, Endo, AstraZeneca, Pernix Therapeutics, Tricumed, Halyard Health, Cumberland Pharmaceuticals, Pacira,Acorda Therapeutics, Mallinckrodt, Shire, Johnson & Johnson, Eli Lilly, Pfizer, Novartis, Egalet and others. Purdue Pharma, Sandoz, Actavis, CollegiumPharmaceutical, Pfizer, Elite Pharmaceuticals, Intellipharmaceutics, Egalet, Charleston Laboratories, Daiichi Sankyo, Teva Pharmaceuticals and others havealso announced 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. RBP-7000, ifapproved, 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. InterceptPharmaceuticals, Gilead, Shire, Conatus Pharmaceuticals, Allergan, Galectin Therapeutics, Genfit, Pfizer, Roche, Galmed Pharmaceuticals, TobiraTherapeutics, Madrigal Therapeutics, Gemphire, Enanta Pharmaceuticals, Novo Nordisk, Takeda, Vital Therapies and others have development plans forproducts to treat NAFLD/NASH and other liver diseases. Ischemix, Thrasos Therapeutics, AM-Pharma, Complexa, AbbVie, AlloCure, Quark Pharmaceuticalsand others have development plans for products to treat acute kidney injury. Bristol Myers Squibb, Novartis, Eli Lilly, Almirall, LEO Pharma, Pfizer, Janssen,Abbvie, Boerhinger-Ingelheim, Amgen, Sandoz, Astra-Zeneca, Anacor, Valeant, Takeda, Merck, Idera Pharmaceuticals and others have development plans forproducts to treat psoriasis and atopic dermatitis. Numerous companies are applying significant resources and expertise to the problems of drug delivery andseveral of these are focusing or may focus on delivery of drugs to the intended site of action, including Alkermes, Pacira,22Immune Pharmaceuticals, Innocoll, Nektar, Kimberly-Clark, Acorda Therapeutics, Flamel, Alexza, Mallinckrodt, Pfizer, Cumberland Pharmaceuticals, Egalet,Acura, Elite Pharmaceuticals, Phosphagenics, Intellipharmaceutics, Collegium Pharmaceutical, Heron Therapeutics and others. Some of these competitorsmay be addressing the same therapeutic areas or indications as we are. Our current and potential competitors may succeed in obtaining patent protection orcommercializing products before us. Many of these entities have significantly greater research and development capabilities than we do, as well assubstantially more marketing, manufacturing, financial and managerial resources. These entities represent significant competition for us. Acquisitions of, orinvestments in, competing pharmaceutical or biotechnology companies by large corporations 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 executiveoffices are located at 10260 Bubb Road, Cupertino, California, 95014. Our telephone number is (408) 777-1417, and our website address is www.durect.com.We make 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 ofcharge on our website as soon as reasonably practicable after we file these reports with the Securities and Exchange Commission (SEC). The SEC maintainsan internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. TheSEC’s website to access all of this information is www.sec.gov. Our Code of Ethics can be found on our website.EmployeesAs of March 2, 2018, we had 93 employees, including 49 in research and development, 21 in manufacturing and 23 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 March 2, 2018 are as follows: Name Age PositionFelix Theeuwes, D.Sc. 80 Chairman, Distinguished Scientist and DirectorJames E. Brown, D.V.M. 61 President, Chief Executive Officer and DirectorMatthew J. Hogan, M.B.A. 58 Chief Financial OfficerJudy R. Joice 61 Senior Vice President, Operations and Corporate Quality Assurance Felix Theeuwes, D.Sc. co-founded DURECT in February 1998 and has served as our Chairman, Chief Scientific Officer and a Director since July1998. In February 2018, his title became Chairman, Distinguished Scientist and Director. Prior to co-founding DURECT, Dr. Theeuwes held variouspositions at ALZA Corporation, including President of New Ventures from August 1997 to August 1998, President of ALZA Research and Development from1995 to August 1997, President of ALZA Technology Institute from 1994 to April 1995 and Chief Scientist from 1982 to June 1997. Dr. Theeuwes holds aD.Sc. degree in Physics from the University of Leuven (Louvain), Belgium. He also served as a post-doctoral fellow and visiting research assistant professor inthe Department of Chemistry at the University of Kansas and has completed the Stanford Executive Program.23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. If any of the following risks actually occur, ourbusiness, financial condition, results of operations and growth prospects may be materially and adversely affected.Risks Related To Our BusinessNew chemical entities derived from our Epigenetic 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 viable commercialproductsOur Epigenetic Regulator Program is in the early stages of development, involves a novel therapeutic approach and new chemical entities, requiressignificant further research and development and regulatory approvals and is subject to the risks of failure inherent in the development of products based oninnovative approaches. New chemical entities derived from our Epigenetic Regulator Program are molecules that have not previously been approved andmarketed as therapeutics, unlike product candidates in our Drug Delivery Programs, in which we apply our formulation expertise and technologies largely toactive pharmaceutical ingredients whose safety and efficacy have previously been established but which we aim to improve in some manner through a newformulation. As a result, the product candidates from our Epigenetic Regulator Program may face greater risk of unanticipated safety issues or other side-effects, or may not demonstrate efficacy. Further, the regulatory pathway for our new chemical entities may be more demanding than that for productcandidates under our Drug Delivery Programs, for which we may be able to leverage existing data under Section 505(b)(2) of the Act to reduce developmentrisk, time and cost. For example, we have yet to define the therapeutic dose or dosing regimen for DUR-928, the first drug candidate in our EpigeneticRegulator Program.24Also, because our Epigenetic 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.Early indications of activity from Phase 1 clinical trials of DUR-928 may not predict the results of later trialsWhile Phase 1 clinical trials of DUR-928 have shown a dose dependent reduction of certain biomarkers after a single oral dose in patients withNASH, these trials are designed to assess the safety of DUR-928, and are not designed to evaluate its efficacy. Additional controlled Phase 2 and Phase 3 trialswill be required to evaluate the safety and efficacy of DUR-928 to treat any indication, including NASH. There can be no assurance that these studies willdemonstrate the safety or efficacy of DUR-928 in a statistically significant manner. The failure of DUR-928 to show efficacy in Phase 2 or Phase 3 clinicaltrials would significantly harm our business.Plans and prospects for POSIMIR are uncertain following the failure of the PERSIST trial to achieve its primary endpoint.The failure of the PERSIST trial for POSIMIR to achieve its primary endpoint gives Sandoz a right to terminate our agreement with them on thirtydays’ notice, in addition to the right Sandoz has to terminate for convenience on six months’ notice. Sandoz may elect to terminate the agreement, in whichcase we will not receive any milestone or royalty payments under the agreement and will be responsible for commercialization of POSIMIR in the UnitedStates, if approved. Even if Sandoz does not terminate the agreement, we remain responsible for obtaining approval of POSIMIR from the Food and DrugAdministration. The decision whether to continue the development of POSIMIR and seek regulatory approval will require further analysis of the PERSISTtrial data and other clinical data for POSIMIR, as well as possible regulatory approval strategies. We may elect to terminate development of POSIMIR. If weelect to continue to develop and seek approval for POSIMIR, we may be required to make a larger investment than previously planned, which would limit thefunds available for other product development activities or require us to raise capital earlier than anticipated. It may also take longer to receive FDAapproval than anticipated, and such approval may never occur. The FDA may require more information or clinical studies for all of our product candidates, and our product candidates may never be approved.The failure to adequately demonstrate the safety and effectiveness of a pharmaceutical product candidate under development to the satisfaction ofFDA and other regulatory agencies will result in delays to the regulatory approval or non-approvability of our product candidates, and could materially harmour business. Clinical trials may not demonstrate the sufficient levels of safety and efficacy necessary to obtain the requisite regulatory approvals for ourproduct candidates, or may require such significant numbers of patients or additional costs to make it impractical to satisfy the FDA’s requirements, and thusour product candidates may not be approved for marketing. For example, the recent Phase 3 PERSIST trial for POSIMIR did not meet its primary efficacyendpoint of reduction in pain on movement over the first 48 hours after surgery as compared to standard bupivacaine HCl.. In addition, during the reviewprocess, the FDA may request more information regarding the safety of our product candidates, as they have in their Complete Response Letter for POSIMIR,and answering such questions could require significant additional work and expense, and take a significant amount of time, resulting in a material delay ofapproval or the failure to obtain approval. During the review process, the FDA may also request more information regarding the chemistry, manufacturing orcontrols related to our product candidates or to abuse deterrent properties of opioid product candidates, as they have in their Complete Response Letters forREMOXY ER, and answering such questions could require significant additional work and expense, and take a significant amount of time, resulting in amaterial delay of approval or the failure to obtain approval. Additionally, even if our product candidates receive FDA approval, the FDA may require that weconduct additional clinical studies after such approval, place limitations on our products in applicable labels, delay approval to market our products or limitthe use of our products, which may harm our business and results of operations.25We currently have a significant amount of debt. Compliance with repayment obligations and other covenants may be difficult, and failure by us tofulfill our obligations under the applicable loan agreements may cause the repayment obligations to accelerate.In July 2016, we entered into a Loan and Security Agreement (the 2016 Loan Agreement) with Oxford Finance LLC (Oxford Finance), pursuant towhich Oxford Finance provided a $20 million secured single-draw term loan to us with a maturity date of August 1, 2020. The 2016 Loan Agreement replacesa prior term loan agreement with Oxford Finance originally entered into in June 2014. The term loan was fully drawn at close and the proceeds may be usedfor working capital and general business requirements. The term loan repayment schedule provides for interest only payments for the first 18 months,followed by consecutive monthly payments of principal and interest in arrears starting on March 1, 2018 and continuing through the maturity date ofAugust 1, 2020. The 2016 Loan Agreement provides for a floating interest rate (7.95% initially and 8.87% as of December 31, 2017) based on an index rateplus a spread, a $150,000 facility fee that was paid at closing and an additional payment equal to 9.25% of the principal amount of the term loan, which isdue when the term loan becomes due or upon the prepayment of the facility. 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 timing of prepayment. In February 2018, the Company and Oxford Finance entered into a FirstAmendment of the Loan Agreement, which modified the terms of the Loan Agreement to change the first principal payment date from March 1, 2018 toDecember 1, 2018 and to increase the additional payment due when the term loan becomes due or upon the prepayment of the facility from 9.25% of theprincipal amount of the term loan to 10% of such amount. The interest rate and the maturity date remain unchanged, and the Company paid Oxford Financea loan modification fee of $100,000. Our debt repayment obligations under the 2016 Loan Agreement may prove a burden to the Company as they becomedue, particularly following the expiration of the interest-only period.The 2016 Loan Agreement contains customary events of default, including, among other things, our failure to fulfill certain of our obligations underthe 2016 Loan Agreement and the occurrence of a material adverse change in our business, operations or condition (financial or otherwise), a materialimpairment of the prospect of repayment of any portion of the loan, the failure to deliver an unqualified audit report and board approved financial projectionswithin time periods set forth in the Loan Agreement, 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 2016 Loan Agreement, the lender would be entitled to exercise its remedies thereunder, including theright to accelerate the debt, upon which we may be required to repay all amounts then outstanding under the 2016 Loan Agreement, which could harm ourbusiness, operations and financial condition.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 2016 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.We do not control development of REMOXY ER or RBP-7000We have relied on Pain Therapeutics, King, and Pfizer and its subsidiaries to devote time and resources to the development, manufacturing andcommercialization of REMOXY ER. In October 2014, Pfizer notified Pain Therapeutics that Pfizer had decided to discontinue development of REMOXY ERand that Pfizer would return all rights, including responsibility for regulatory activities, to Pain Therapeutics. In September 2016, Pain Therapeutics receiveda Complete Response Letter for REMOXY ER; we are dependent on Pain Therapeutics to address this Complete Response Letter and there can be noassurance that Pain Therapeutics will continue development of REMOXY ER or that an NDA for REMOXY ER will ever be approved by the FDA. Anyfurther delay or26discontinuation in the development of REMOXY ER will significantly harm our prospects and would be likely to have a negative effect on the price of ourcommon stock.We rely on Indivior for the development and commercialization of RBP-7000. There can be no assurance that Indivior will continue development ofRBP-7000, or if Indivior continues development of RBP-7000, there can be no assurance that an NDA for RBP-7000 will ever be approved by the FDA. IfIndivior does not continue development of or commercialize RPB-7000, we will not receive milestone or earn-out payments under our agreement with them.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,market and distribute our pharmaceutical product candidates under development. For each product candidate that we or our third-party collaborators intendto commercialize, 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 properdose of drug over the desired period of time; •determining the appropriate route of administration and 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 achievabledose; •demonstrating abuse deterrent properties to the satisfaction of the FDA for certain products for which abuse-deterrence is considered animportant feature by the FDA, and •completing the manufacturing development and scale-up to permit manufacture of the pharmaceutical product candidate in commercialquantities and at acceptable cost.The 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, includingDUR-928. We may not be able to finalize the design or formulation of any of these product candidates. Further, although we believe our design andformulation of REMOXY ER, POSIMIR and ORADUR-Methylphenidate ER to be substantially complete, there can be no assurance that additionaldevelopments will not be required prior to any regulatory approval of these products. In addition, we may select components, solvents, excipients or otheringredients to include in our product candidates that have not been previously approved for use in pharmaceutical products, which may require us or ourcollaborators to perform additional studies and may delay clinical testing and regulatory approval of our product candidates. Even after we complete thedesign of a product candidate, the product candidate must still complete required clinical trials and additional safety testing in animals before approval forcommercialization. We are continuing testing and development of our product candidates and may explore possible design or formulation changes to addressissues of safety, manufacturing efficiency and performance. We or our collaborators may not be able to complete development of any product candidates thatwill be safe and effective and that will have a commercially reasonable treatment and storage period. If we or our third-party collaborators are unable tocomplete development of DUR-928, ORADUR-Methylphenidate ER, or RBP-7000, or other product candidates, we will not be able to earn revenue fromthem, which would materially harm our business.27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, RBP-7000, REMOXY ER, DUR-928 or our otherproduct candidates 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 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-related adverse events reported. In these studies, there was no accumulation in plasma concentrations observed with repeated dosing, andthere were dose related increases in plasma concentrations. In 2016 and 2017, we conducted a single-ascending-dose Phase 1b clinical trialwith DUR-928 in patients with nonalcoholic steatohepatitis (NASH). This study was conducted in Australia in successive cohorts evaluatingsingle-dose levels (first a low dose and then a high dose) of orally administered DUR-928. Both cohorts consisted of 10 NASH patients and 6matched control subjects. One patient (with a prior history of arrhythmia and an ongoing viral infection) in the high dose cohort experienceda serious adverse event (shortness of breath) which occurred without unusual biochemical changes and resolved without intervention but wasconsidered possibly treatment related by the physician due to its temporal association with dosing. In both the low and high dose cohorts,the PK parameters were comparable between the NASH patients and the matched control subjects. In addition, the systemic exposurefollowing the low and high doses of DUR-928 was dose dependent. While this study was not designed to assess efficacy, we observed a dosedependent reduction of certain biomarkers after a single oral dose of DUR-928. Exploratory biomarker analysis indicated that a single oraldose of DUR-928 resulted in statistically significant reductions from baseline in the levels of both full-length and cleaved cytokeratin-18(CK-18), bilirubin, hsCRP and IL-18. We also conducted in Australia a Phase 1b open-label, single-ascending-dose study in patients withimpaired kidney function (stage 3 and 4 chronic kidney disease) and matched control patients with injected DUR-928. This study wasconducted in two successive cohorts (first a low dose and then a high dose) evaluating the safety and PK of single-dose intramuscularinjected DUR-928. The low dose cohort consisted of 6 kidney function impaired patients and 3 matched control subjects; the high dosecohort consisted of 5 kidney function impaired patients and 3 matched control subjects. In this trial, DUR-928 was well tolerated among allsubjects and the PK parameters between the kidney function impaired patients and the matched control subjects were comparable. We arecurrently conducting a Phase 2a trial in patients with PSC and a Phase 2a trial in patients with Alcoholic Hepatitis. In addition, we conductedan initial exploratory Phase 1b trial in psoriasis patients (9 evaluable patients) in Australia. The Phase 1b trial was conducted withintralesional micro injections of DUR-928, and we feel the results warrant further investigation. As a result, we have developed severaltopical formulations of DUR-928 and plan to evaluate our lead formulation in a future Phase 2 proof-of-concept trial. There can be noassurance that biological activity demonstrated in previous animal disease models will also be seen in human trials, or that any clinicallyrelevant biological activity will be seen in humans. There can also be no assurance that current and future planned trials will be completedon the timetable anticipated, that further human trials will not identify safety issues, or that we will be able to successfully develop DUR-928to obtain marketing approval by the FDA or other regulatory agencies. •RBP-7000 – In September 2017, we entered into an agreement with Indivior, under which we assigned to Indivior certain patents that mayprovide further intellectual property protection for RBP-7000, Indivior’s investigational once-monthly injectable risperidone product for thetreatment of schizophrenia. Indivior submitted a new drug application to the U.S. FDA on September 28, 2017 to seek marketing approvalfor RBP-7000. Indivior has stated that this NDA submission includes the results from a pivotal Phase 3 study assessing the efficacy andsafety of RBP-7000 and an open-label, long-terms safety study. Indivior noted that in the pivotal randomized, double-blind, placebo-controlled28 study, RBP-7000 demonstrated statistically significant clinical improvement compared to placebo based on changes in mean Positive andNegative Syndrome Scale (PANSS) total and Clinical Global Impression-Severity of Illness (CGI-S) scores at 8 weeks. In December 2017,Indivior announced that the FDA had accepted the NDA for RBP-7000 and that the FDA has set a PDUFA (Prescription Drug User Fee Act)target action date of July 28, 2018. There can be no assurance that RBP-7000 will obtain marketing approval from the FDA in a timelymanner or at all. •REMOXY ER—In December 2010, King (now Pfizer) resubmitted the NDA in response to a Complete Response Letter received in December2008 by Pain Therapeutics. In June 2011, a Complete Response Letter from the FDA was received by Pfizer on the resubmission to the NDAfor REMOXY ER. In October 2014, Pfizer notified Pain Therapeutics that Pfizer had decided to discontinue development of REMOXY ER,and that Pfizer would return all rights, including responsibility for regulatory activities, to Pain Therapeutics. In April 2015, PainTherapeutics stated that it had resumed responsibility for REMOXY ER under the terms of a letter agreement with Pfizer. In March 2016, PainTherapeutics announced that it had resubmitted the NDA to the FDA, and in September 2016, Pain Therapeutics received a CompleteResponse Letter from the FDA for REMOXY ER. Based on its review, the FDA has determined that the NDA cannot be approved in itspresent form and specifies additional actions and data that are needed for drug approval. We understand from its public disclosures that PainTherapeutics had a meeting with the FDA in February 2017 to discuss the regulatory path forward for REMOXY ER. In March 2017, PainTherapeutics announced that it plans to resubmit the REMOXY ER NDA after completing two additional studies regarding REMOXY ERbased on guidance following a recent meeting with the FDA. The two studies are a clinical abuse potential study via the intranasal route ofabuse and a non-clinical abuse potential study using household solvents. In December 2017, Pain Therapeutics announced that they hadsuccessfully concluded a pre-NDA guidance meeting with the FDA. According to Pain Therapeutics, the purpose of a pre-NDA meeting is toacquaint FDA reviewers with the data to be submitted in the NDA, to uncover any major unresolved problems, including whether the NDAresubmission constitutes a complete response to the 2016 Complete Response Letter, and to discuss the best approach to the presentationand formatting of data in the NDA. In January 2018, Pain Therapeutics announced positive results from a human abuse potential studyusing nasal administration of REMOXY ER and that they had completed all studies necessary to resubmit the REMOXY ER NDA to theFDA. On February 13, 2018, Pain Therapeutics stated that the REMOXY ER NDA had been resubmitted and that it expected a six-monthreview cycle by the FDA. Pain Therapeutics also stated that it expects to be notified by the FDA of a PDUFA target action date within 60days. There can be no assurance that Pain Therapeutics will successfully obtain marketing approval by the FDA on a timely basis or at all, orthat Pain Therapeutics will obtain a commercialization partner. •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 ofsafety and effectiveness of a reference drug. In February 2014, we received a Complete Response Letter from the FDA. Based on theComplete Response Letter and subsequent communications with the FDA, we conducted a new Phase 3 clinical trial consisting of patientsundergoing laparoscopic cholecystectomy (gallbladder removal) surgery to further evaluate the benefits and risks of POSIMIR. We beganrecruiting patients for this trial in November 2015 comparing POSIMIR to placebo. Based on advice from the FDA received subsequent tothe start of the trial, in April 2016, we decided to amend the PERSIST trial including by incorporating standard bupivacaine HCl as an activecontrol. Starting in August 2016, we began implementing Part 2 of the PERSIST trial to evaluate POSIMIR against standard bupivacaine HClrather than placebo as we have been doing in Part 1. Additionally, we switched in Part 2 the primary efficacy endpoint (pain reduction onmovement) from 0-72 hours after surgery to 0-48 hours after surgery. Assessing pain reduction on movement from 0-72 hours became the keysecondary efficacy endpoint and other efficacy endpoints, including 72-hour opioid use, remained the same. In June 2017, we enrolled thefinal of 296 patients in Part 2 of the PERSIST trial. In October 2017, we reported that PERSIST, the Phase 3 clinical trial for POSIMIR, didnot meet its primary efficacy endpoint of reduction in pain on movement over the first 48 hours after surgery as compared to standardbupivacaine HCl. While results trended in favor of POSIMIR versus the comparator, they did not achieve statistical significance. We andSandoz have been working to understand the trial results more fully and to consider potential next steps. There can be no assurance thatSandoz will continue as our commercial partner for POSIMIR in the United States, that we will continue to develop POSIMIR or thatPOSIMIR will ever successfully obtain regulatory approval from the FDA.29 •ORADUR-ADHD—Since 2010, we and Orient Pharma, our licensee in defined Asian and South Pacific countries, conducted several Phase 1studies to evaluate multiple formulations of ORADUR-Methylphenidate. In 2013, we and Orient Pharma selected a lead formulation basedon its potential for rapid onset of action, long duration for once-a-day dosing and target pharmacokinetic profile as demonstrated in a Phase 1trial. Orient Pharma recently completed a Phase 3, multi-center, randomized, double-blind, placebo controlled, two-way cross-over studydesigned to observe the efficacy and safety of ORADUR-Methylphenidate ER in children and adolescents with ADHD age 6 to 18 yearsold. Conducted in Taiwan, there were 110 subjects enrolled in this study, of which 99 evaluable subjects completed the study. The primaryefficacy measure in this study was the superiority of ORADUR-Methylphenidate ER over placebo using the Swanson, Nolan, and Pelham-IV(SNAP-IV) teacher form score. The SNAP-IV rating scale contains 26 questions, classified as three components of ADHD symptoms(inattention, hyperactivity/impulsivity and oppositional defiant disorder). For the primary efficacy endpoint, ORADUR-Methylphenidatewas superior to placebo in a statistically significant manner (p=0.0044 for the intent to treat population and p=0.0032 for the per protocolpopulation). There were no serious adverse events in this pivotal study. Orient Pharma’s analysis indicates that the incidence of adverseevents was generally consistent with other ADHD products. We have started a process of contacting potential development andcommercialization partners for major markets not licensed to Orient Pharma. There can be no assurance that we will be able to successfullydevelop ORADUR-Methylphenidate ER to obtain marketing approval by the Taiwan FDA or the U.S. FDA or other regulatory agencies, noris there any assurance that we will be able to find a collaborator with respect to the development and commercialization of this drugcandidate for the territories not currently licensed to Orient Pharma.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.Many of our drug candidates under development, including REMOXY ER are subject to mandatory Risk Evaluation and Mitigation Strategy (REMS)programs, which could delay the approval of these drug candidates, reduce demand for them, and increase the cost, burden and liability associatedwith their commercializationFor several years, FDA has required companies engaged in manufacturing and sales of opioid products to have a Risk Evaluation and MitigationStrategy (REMS) to ensure that the benefits of the drugs continue to outweigh the risks. The affected opioid drugs include brand name and generic productsand are formulated with the active ingredients fentanyl, hydromorphone, methadone, morphine, oxycodone, and oxymorphone. All manufacturers of long-acting and extended-release opioids must ensure that training is provided to prescribers of these medications and develop information that prescribers can usewhen counseling patients about the risks and benefits of opioid use. The FDA has also announced safety labeling changes and post-market studyrequirements for extended-release and long-acting opioid analgesics (ER/LA opioids). The updated class-wide labeling changes state that ER/LA opioids areindicated for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatmentoptions are inadequate. The updated indication further clarifies that, because of the risks of addiction, abuse, and misuse, even at recommended doses, andbecause of the greater risks of overdose and death, these drugs should be reserved for use in patients for whom alternative treatment options (e.g., non-opioidanalgesics or immediate-release opioids) are ineffective, not tolerated, or would be otherwise inadequate to provide sufficient management of pain; ER/LAopioid analgesics are not indicated for as-needed pain relief. 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 drug companies that make these products to conduct further post-market studies and clinical trials. Thesechanges may result in a decrease in prescriptions for this class 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 abuse on American familiesand communities. As part of this plan, the agency will review product and labelling decisions and re-examine the risk-benefit paradigm for opioids.30Many of our drug candidates including REMOXY ER are subject to the REMS requirement. The FDA’s REMS requirements have been evolving, anduntil the 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, as well as decreased demand resulting from new labeling requirements, which could negatively impact thecommercial 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 Sandoz, Indivior, Pain Therapeutics, Santen, Orient Pharma and others underwhich we granted such third parties the right to develop, apply for regulatory approval for, market, promote or distribute POSIMIR, RBP-7000, REMOXY ERand other product candidates, subject to payments to us in the form of product royalties, earn-out and other payments. We have limited or no control over theexpertise or resources that any collaborator may devote to the development, clinical trial strategy, regulatory approval, marketing or sale of these productcandidates, or the timing of their activities. Any of our present or future collaborators may not perform their obligations as expected. These collaborators maybreach or terminate their agreement with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Enforcing any ofthese agreements in the event of a breach by the other party could require the expenditure of significant resources and consume a significant amount ofmanagement time and attention. Our collaborators may also conduct their activities in a manner that is different from the manner we would have chosen, hadwe been developing such product candidates ourselves. Further, our collaborators may elect not to develop or commercialize product candidates arising outof our collaborative arrangements or not devote sufficient resources to the development, clinical trials, regulatory approval, manufacture, marketing or sale ofthese product candidates. If any of these events occur, we may not recognize revenue from the commercialization of our product candidates based on suchcollaborations. In addition, these third parties may have similar or competitive products to the ones which are the subject of their collaborations with us, orrelationships with our competitors, which may reduce their interest in developing or selling our product candidates. We may not be able to control publicdisclosures made by some of our third-party collaborators, which could negatively impact our stock price.Cancellation of collaborations regarding our product candidates may 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 July 2017, we were notified by Impax that they were terminating our agreement with respect to ELADUR, and in August2017, we mutually agreed with Zogenix to terminate our agreement with respect to Relday. In both instances, the product rights reverted to us. Sandoz alsohas the right to terminate our agreement with them for commercialization of POSIMIR after a specified notice period. If there have been payments under suchagreements that are being recognized over time, such as the $20 million up-front payment received from Sandoz, termination of such agreements (orprograms) can lead to a near-term increase in our reported revenues resulting from the immediate recognition of the balance of such payments. Terminationdeprives us of potential future economic benefits under such agreements, and may make it more difficult to enter into agreements with other third parties foruse of the assets that were subject to the terminated agreement. Termination of our agreements with Sandoz, Pain Therapeutics, Santen or Orient Pharma couldhave similar effects. Our revenues depend on collaboration agreements with other companies. If we are unable to enter into new agreements or meet our obligations ormanage our relationships with our collaborators under these agreements our revenues may decrease. Acquisitions of our collaborators can bedisruptiveOur 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 have seen recent declines in revenues associated with our existingcollaboration agreements, which31reflect the current development stage of the product candidates subject to those agreements, and our collaborator’s decreased needs for our services. We donot expect our collaboration revenues to increase unless we enter into new collaboration agreements, and there can be no assurance that we will do so. Even ifwe enter into new collaboration agreements, we may not be able to fulfill our obligations or attain milestones set forth in any specific agreement, which couldcause our revenues to fluctuate or be less than anticipated and may expose us to liability for contractual breach. In addition, these agreements may require usto devote significant time and resources to communicating with and managing our relationships with such collaborators and resolving possible issues ofcontractual interpretation which may detract from time our management would otherwise devote to managing our operations. Such agreements are generallycomplex and contain provisions that could give rise to legal disputes, including potential disputes concerning ownership of intellectual property undercollaborations. Such disputes can delay or prevent the development of potential new product candidates, or can lead to lengthy, expensive litigation orarbitration. In general, our collaboration agreements, including our agreements with Sandoz with respect to POSIMIR, Pain Therapeutics with respect toREMOXY ER, Orient Pharma with respect to ORADUR-Methylphenidate ER, and Santen with respect to an ophthalmic product may be terminated by theother 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 theagreement. Acquisitions of our collaborators can lead to turnover of program staff, a review of development programs and strategies by the acquirer, and otherevents that can disrupt a program, resulting in program delays or discontinuations.If we do not enter into new collaboration agreements, and if any of our collaborative agreements are terminated or delayed, our anticipated revenuesmay be reduced or not materialize, and our products in development related to those agreements may not be commercialized.Our 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 of December31, 2017, we had $1.8 million of deferred revenue which will be recognized in future periods and may cause our reported revenues to be greater than cashflows 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 milestonesset forth in our collaboration agreements. Such milestones are typically related to development activities or sales accomplishments. While our involvement isgenerally necessary to the achievement of development-based milestones, the performance of our third-party collaborators is also generally required toachieve those milestones, and in the case of our agreement with Indivior, Indivior is solely responsible for the regulatory milestone as well. Under our third-party collaborative agreements, our third party collaborators will take the lead in commercialization activities and we are typically not involved in theachievement of sales-based milestones. Therefore, we are even more dependent upon the performance of our third-party collaborators in achieving sales-based milestones. To the extent we and our third-party collaborators do not achieve such development-based milestones or our third-party collaborators donot achieve sales-based milestones, we will not receive the associated revenues, which could harm our financial condition and may cause us to defer or cut-back development activities or forego the exploitation of opportunities in certain geographic territories, any of which could have a material adverse effect onour business.32Our business strategy includes the entry into additional collaborative agreements. We may not be able to enter into additional collaborativeagreements or 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, including DUR-928, ORADUR-Methylphenidate ER in markets not already licensed to Orient Pharma, including theUnited States and Europe, and others. 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 as the collaborators’ own internal product opportunities. We may not be able to consummate additional collaborativeagreements, or we may not be able to negotiate commercially acceptable terms for these agreements. If we do not consummate additional collaborativeagreements, we may have to consume money more rapidly on our product development efforts, defer development activities or forego the exploitation ofcertain geographic territories, 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 nearfuture. We have expended and will continue to expend substantial funds to complete the research, development and clinical testing of our pharmaceuticalproduct candidates. We will require additional funds for these purposes, to establish additional clinical- and commercial-scale manufacturing arrangementsand facilities, and to provide for the marketing and distribution of our product candidates. Additional funds may not be available on acceptable terms, if atall. If adequate funds are unavailable from operations or additional sources of financing, we may have to delay, reduce the scope of or eliminate one or moreof our research or development programs which would materially harm our business, financial condition and results of operations.We believe that our cash, cash equivalents and investments will be adequate to satisfy our capital needs for at least the next 12 months. However, ouractual capital requirements will depend on many factors, including: •success in entering into collaboration agreements and meeting milestones under such agreements; •the continuation of our collaborative agreements that provide financial funding for our activities; •regulatory actions with respect to our product candidates; •continued progress and cost of our research and development programs; •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 pharmaceuticalproduct candidates; •costs involved in establishing manufacturing capabilities for clinical and commercial quantities of our product candidates; •competing technological and market developments; •market acceptance of our product candidates; •costs for recruiting and retaining employees and consultants; and •unexpected legal, accounting and other costs and liabilities related to our business.33We may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding. We may seek to raiseadditional funds through equity or debt financings, convertible debt financings, collaborative arrangements with corporate collaborators or other sources,which may be dilutive to existing stockholders and may cause the price of our common stock to decline. In addition, in the event that additional funds areobtained through arrangements with collaborators or other sources, we may have to relinquish rights to some of our technologies or pharmaceutical productcandidates that we would otherwise seek to develop or commercialize ourselves. If adequate funds are not available, we may be required to significantlyreduce 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 componentsto support the clinical and commercial requirements of our collaborators and ourselves at an acceptable cost or in compliance with applicablegovernment regulations, 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 ER and DUR-928. If we andour third-party collaborators, where relevant, fail to timely complete the development of the manufacturing process for our product candidates, we and ourthird-party collaborators, where relevant, will not be able to timely produce product for clinical trials and commercialization of our product candidates. Wehave also committed to manufacture and supply product candidates or components under a number of our collaborative agreements with third-partycompanies. We have limited experience manufacturing pharmaceutical products, and we may not be able to timely accomplish these tasks. If we and ourthird-party collaborators, where relevant, fail to develop manufacturing processes to permit us to manufacture a product candidate or component at anacceptable cost, then we and our third-party collaborators may not be able to commercialize that product candidate or we may be in breach of our supplyobligations to our third-party collaborators.Our 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 and REMOXY ER. If we experience delays or technical difficulties in scaling up themanufacturing of our product candidates, it could result in delays or added cost in our development programs. We have not manufactured commercialquantities of any of our product candidates. In the future, we intend to develop additional manufacturing capabilities for our product candidates andcomponents to meet our demands and those of our third-party collaborators by contracting with third-party manufacturers and by potentially constructingadditional manufacturing space at our facilities in California and Alabama. We have limited experience building and validating manufacturing facilities, andwe 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 have entered into a commercial manufacturing and packaging agreement with a third party manufacturer for future supply of POSIMIR. This thirdparty is our sole source for the drug product required for development and commercialization of this drug candidate. There may be technical risks associatedwith establishing an alternative commercial manufacturer that could entail delays in supply, quality issues or delays in the possible regulatory approval ofPOSIMIR. Furthermore, we and our contract manufacturer may also need or choose to subcontract with additional third-party contractors to performmanufacturing steps of POSIMIR or supply required components for POSIMIR. Where third party contractors perform manufacturing services for us, we willbe subject to the schedule,34expertise and performance of third parties as well as incur significant additional costs. Failure of third parties to perform their obligations could adverselyaffect our operations, development timeline and financial results. If we proceed with the development of POSIMIR, we expect to put in place in the futuresecond source supply arrangements, which may be costly and time consuming.We have entered into contract manufacturing agreements with multiple vendors for DUR-928. There can be no assurance that we will receivesufficient quantities of DUR-928 to commence and conduct the clinical trials we are planning, and delays in supply could delay development of DUR-928.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 •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, 2017, had an accumulated deficit ofapproximately $443.8 million. We expect to continue to incur significant operating losses over the next several years as we continue to incur significantcosts for research and development, clinical trials, manufacturing, sales, and general and administrative functions. Our ability to achieve profitabilitydepends upon our ability, alone or with others, to successfully complete the development of our proposed product candidates, obtain the required regulatoryclearances, and manufacture and market our proposed product candidates. Development of pharmaceutical product candidates is costly and requiressignificant investment. In addition, we may choose to license from third parties either additional drug delivery platform technology or rights to particulardrugs or other appropriate technology for use in our product candidates. The license fees for these technologies or rights would increase the costs of ourproduct candidates.35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 ALZET product line, from the LACTEL product line and from certain excipient sales, and from paymentsunder collaborative research and development agreements with third parties. We do not expect our product revenues to increase significantly in the nearfuture, and we do not expect that collaborative research and development revenues will exceed our actual operating expenses. We do not anticipatemeaningful revenues to derive from the commercialization and marketing of our product candidates in development in the near future, and therefore do notexpect 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 respectto pharmaceuticals 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. Developing a sales force and commercial group will require substantial expendituresand the hiring of qualified personnel. We have limited sales and marketing experience, and may not be able to effectively recruit, train or retain salespersonnel. If we are not able to put in place an appropriate sales force and commercial group for our products in development, we may not be able toeffectively launch these products. We may not be able to effectively sell our product candidates, if approved, and our failure to do so could limit or materiallyharm our business.We 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, consultants, service providers and suppliers to provide critical services to supportdevelopment, clinical testing, and manufacturing of our product candidates. For example, we currently depend on third-party vendors to manage and monitorour clinical trials and to perform critical manufacturing steps for our product candidates. These third parties may not execute their responsibilities and taskscompetently in compliance with applicable laws and regulations or in a timely fashion. We rely on third-parties to manufacture or perform manufacturingsteps relating to our product candidates or components. We anticipate that we will continue to rely on these and other third-party contractors to supportdevelopment, clinical testing, and manufacturing of our product candidates. Failure of these contractors to provide the required services in a competent ortimely manner or on reasonable commercial terms could materially delay the development and approval of our development products, increase our expensesand materially harm our business, financial condition and results of operations.36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, DUR-928 and REMOXY ER, are currently purchasedfrom a single or a limited number of outside sources. In particular, Eastman Chemical is the sole supplier, pursuant to a supply agreement entered into inDecember 2005, of our requirements of sucrose acetate isobutyrate, a necessary component of POSIMIR, REMOXY ER and certain other pharmaceuticalproduct candidates we have under development, and a third party manufacturer is our sole supplier for future 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.We 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 March 2, 2018, we owned or exclusively in-licensed over 45 unexpired issued U.S. patents and over 410 unexpired issued foreign patents(which include granted European patent rights that have been validated in various EU member states). In addition, we have over 35 pending U.S. patentapplications and over 100 foreign applications pending in Europe, Australia, Japan, Canada and other countries.The patent status of our most advanced drug candidates, REMOXY ER and POSIMIR is as follows:Our Epigenetic Regulator Program includes ten in-licensed patent families and one patent family solely owned by us. Two patent families eachinclude two granted patents expiring in at least 2026 and 2032, respectively. The other patent families include pending patent applications, which if granted,could result in patents expiring in 2033, 2034, 2035, 2037, 2037, 2037, 2038, 2038 and 2039, respectively, plus any eligible patent term adjustments andextensions. Of the ten patent families covering DUR-928 and/or other molecules in the Epigenetic Regulator Program, two were only filed in the UnitedStates, and the other nine have been filed or likely will be filed both in the U.S. and internationally. Since DUR-928 is an endogenous small molecule, patentclaims directed to DUR-928 composition of matter may be more difficult to maintain or enforce in the United States under Myriad Genetics and other recentcourt decisions. One of the U.S. patents issued before Myriad Genetics, and three of the DUR-928 U.S. patents issued after Myriad Genetics. The grantedclaims in the U.S. include both composition of matter and method of treatment claims. There can be no assurance that the pending patent applications will begranted. 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 our rightsto these patent families.37In the United States, our REMOXY ER patent portfolio includes four patent families. Three patent families include granted patents expiring in atleast 2025, 2031, and 2034, respectively. The patent family providing protection until at least 2025 includes eleven granted patents. The patent familyproviding protection until at least 2031 includes two granted patents. The patent family providing protection until at least 2034 includes three grantedpatents. The fourth patent family includes a pending patent application, which if granted, could result in a patent expiring in 2026, plus any eligible patentterm adjustments and extensions. We currently have pending U.S. applications for each of these four patent families. There can be no assurance that thepending patent applications will be granted. In Europe, REMOXY ER is covered by five granted patents with two expiring in 2023 and three expiring in2026, plus any eligible patent term extensions.In the United States, POSIMIR is covered by two patent families. One patent family includes granted patents expiring in at least 2025. Another patentfamily includes a pending patent application, which if granted, could result in a patent expiring in 2026, plus any eligible patent term adjustments andextensions. In Europe, POSIMIR is covered by six granted patents with three expiring in 2025 and three expiring in 2026, plus any eligible patent termextensions.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 into patents, and any issued patents may not provide protection against competitive technologies or may be held invalid ifchallenged. Our competitors may also independently develop products similar to ours or design around or otherwise circumvent patents issued to us orlicensed by us. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as U.S. law.The patent laws of the United States have recently undergone changes through court decisions which may have significant impact on us and ourindustry. Decisions of the U.S. Supreme Court and other courts with respect to the standards of patentability, enforceability, availability of injunctive reliefand damages may make it more difficult for us to procure, maintain and enforce patents. In addition, the America Invents Act was signed into law inSeptember 2011, which among other changes to the U.S. patent laws, changed patent priority from “first to invent” to “first to file,” implemented a post-grantopposition system for patents and provided a prior user defense to infringement. These judicial and legislative changes have introduced significantuncertainty in the patent law landscape and may potentially negatively impact our ability to procure, maintain and enforce patents to provide exclusivity forour 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.38Our collaboration agreements may depend on our intellectual propertyWe are party to collaborative agreements with Sandoz, Pain Therapeutics, Orient Pharma and Santen among others. Our third-party collaborators haveentered into these agreements based on the exclusivity that our intellectual property rights confer on the products being developed. The loss or diminution ofour intellectual property rights could result in a decision by our third-party collaborators to terminate their agreements with us. In addition, these agreementsare generally complex and contain provisions that could give rise to legal disputes, including potential disputes concerning ownership of intellectualproperty and data under collaborations. Such disputes can lead to lengthy, expensive litigation or arbitration requiring us to devote management time andresources to such dispute which we would otherwise spend on our business. To the extent that our agreements call for future royalties to be paid conditionalon our having patents covering the royalty-bearing subject matter, the decision by the Supreme Court in the case of MedImmune v. Genentech couldencourage our licensees to challenge the validity of our patents and thereby seek to avoid future royalty obligations without losing the benefit of theirlicense. Should they be successful in such a challenge, our ability to collect future royalties could be substantially diminished.We 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,which would adversely affect our revenue; •obtain a license from the holder of the infringed intellectual property right, which license may be costly or may not be available onreasonable terms, 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;39 •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 ER, and certain otherproduct candidates we may develop contain active ingredients which are classified as controlled substances under the regulations of the U.S. DrugEnforcement Agency. For our product candidates containing controlled substances, we and our suppliers, manufacturers, contractors, customers anddistributors are required to obtain and maintain applicable registrations from state, federal and foreign law enforcement and regulatory agencies and complywith state, federal and foreign laws and regulations regarding the manufacture, use, sale, importation and distribution of controlled substances. Theseregulations are extensive and include regulations governing manufacturing, labeling, packaging, testing, dispensing, production and procurement quotas,record keeping, reporting, handling, shipment and disposal. These regulations increase the personnel needs and the expense associated with developmentand commercialization of drug candidates including controlled substances. Failure to obtain and maintain required registrations or comply with anyapplicable regulations could delay or preclude us from developing and commercializing our product candidates containing controlled substances andsubject us to enforcement action. In addition, because of their restrictive nature, these regulations could limit our commercialization of our productcandidates containing controlled substances. In particular, among other things, there is a risk that these regulations may interfere with the supply of the drugsused in our clinical trials, and in the future, our ability to produce and distribute our products in the volume needed to meet commercial demand.Write-offs related to the impairment of our goodwill, long-lived assets, inventories and other non-cash charges, as well as stock-based compensationexpenses may adversely impact or delay our profitabilityWe may incur significant non-cash charges related to impairment write-downs of our long-lived assets, including goodwill. We are required toperform periodic impairment reviews of our goodwill at least annually. The carrying value of goodwill on our balance sheet was $6.4 million at December 31,2017. To the extent these reviews conclude that the expected future cash flows generated from our business activities are not sufficient to recover the cost ofour long-lived assets, we will be required to measure and record an impairment charge to write-down these assets to their realizable values. We completed ourlast review during the fourth quarter of 2017 and determined that goodwill was not impaired as of December 31, 2017. However, there can be no assurancethat upon completion of subsequent reviews a material impairment charge will not be recorded. If future periodic reviews determine that our assets areimpaired and a write-down is required, it will adversely impact or delay our profitability.40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 $926,000, of which approximately $426,000 related to the write-down of the cost basis of inventory andapproximately $500,000 related to the prepaid inventory for the minimum purchase commitment for an excipient in the year ended December 31, 2016 as aresult of a change in the forecasted demand for the excipients after Pain Therapeutics received a Complete Response Letter from the FDA on its resubmissionof the NDA for REMOXY ER. In addition, during the year ended December 31, 2017, we recorded charges to cost of goods sold of approximately $2.0million, of which approximately $503,000 related to the write-down of the cost basis of inventory on hand, $500,000 related to the prepaid inventory for theminimum purchase commitment for the excipient, and $1.0 million related to the recognition of our remaining minimum purchase commitment for the sameexcipient after we announced that PERSIST, the Phase 3 clinical trial for POSIMIR, did not meet its primary efficacy endpoint.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 less than one year from the balance sheet date. Our long-term investments consist primarily of readily marketable debt securities withmaturities in one year or beyond from the balance sheet date. While, as of the date of this filing, we are not aware of any downgrades, material losses, or othersignificant deterioration in the fair value of our cash equivalents, short-term investments or long-term investments since December 31, 2017, no assurance canbe given that deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents,short-term investments 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 Epigenetic 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,which places 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.41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 subjectto federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handlingand disposal of certain materials, biological specimens and wastes. Although we believe that we have complied with the applicable laws, regulations andpolicies in all material respects and have not been required to correct any material noncompliance, we may be required to incur significant costs to complywith environmental and health and safety regulations in the future. Our research and development involve 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.Cyber-attacks or other failures in telecommunications or information technology systems could result in information theft, data corruption andsignificant disruption of our business operationsWe utilize information technology, systems and networks to process, transmit and store electronic information in connection with our businessactivities. As use of digital technologies has increased, cyber incidents, including deliberate attacks and attempts to gain unauthorized access to computersystems and networks, have increased in frequency and sophistication. These threats pose a risk to the security of our systems and networks and theconfidentiality, availability and integrity of our data, and may cause a disruption in our operations, harm our reputation and increase our stock trading risk.There can be no assurance that we will be successful in preventing cyber-attacks or successfully mitigating their effects. Similarly, there can be no assurancethat our third-party collaborators, distributors and other contractors and consultants will be successful in protecting our clinical and other data that is storedon their systems. Any cyberattack or destruction or loss of data could have a material adverse effect on our business and prospects. In addition, we may sufferreputational harm or face litigation or adverse regulatory action as a result of cyber-attacks or other data security breaches and may incur significantadditional expense to implement further data protection measures.Our corporate headquarters, certain manufacturing facilities and personnel are located in a geographical area that is seismically activeOur corporate headquarters, certain 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.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 may be unable to keep pace with technological developments or other market factors.Technological competition in the industry from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifyinginto the field is intense and is expected to increase.42We may face competition from other companies in numerous industries including pharmaceuticals, medical devices and drug delivery. Competitionfor 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, Enanta Pharmaceuticals, Novo Nordisk, Takeda, Vital Therapies, Allergan, AkarnaTherapeutics, Inventiva Pharma, Genkyotex, VBL Therapeutics, NGM Biopharmaceuticals, Gemphire Therapeutics, Albireo Pharma, CymaBay Therapeutics,Madrigal Pharmaceuticals, Viking Therapeutics, CohBar, FALK Pharma, Acorda, Albireo Pharma and others have development plans for products to treatNAFLD/NASH, PSC or other liver diseases. Ischemix, Thrasos Therapeutics, AM-Pharma, Complexa, AbbVie, AlloCure, Quark Pharmaceuticals and othershave development plans for products to treat acute kidney injury. Bristol Myers Squibb, Novartis, Eli Lilly, Almirall, LEO Pharma, Pfizer, Janssen, Abbvie,Boerhinger-Ingelheim, Amgen, Sandoz, Astra-Zeneca, Valeant, Takeda, Merck, Idera Pharmaceuticals and others have development plans for products to treatpsoriasis.POSIMIR and REMOXY ER, if approved, will compete with currently marketed oral opioids, transdermal opioids, local anesthetic patches,implantable and external infusion pumps which can be used for infusion of opioids and local anesthetics. Products of these types are marketed by PurduePharma, AbbVie, Janssen, Actavis, Medtronic, Endo, AstraZeneca, Pernix Therapeutics, Tricumed, Halyard Health, Cumberland Pharmaceuticals, Pacira,Acorda Therapeutics, Mallinckrodt, Inspirion Delivery Technologies, Mylan, Shire, Johnson & Johnson, Eli Lilly, Pfizer, Novartis, Egalet, TevaPharmaceuticals, Collegium Pharmaceutical and others. Purdue Pharma, Sandoz, Actavis, Collegium Pharmaceutical, Pfizer, Elite Pharmaceuticals,Intellipharmaceutics, Egalet, Teva Pharmaceuticals and others have also announced regulatory approval or development plans for abuse deterrent opioidproducts. RBP-7000, if approved, will compete with currently marketed or approved products by Johnson & Johnson, Eli Lilly, Otsuka, Alkermes, Merck,Allergan, Novartis, and others. Our ORADUR-ADHD product candidates, if approved, will compete with currently marketed or approved products by Shire,Johnson & Johnson, UCB, Novartis, Noven, Eli Lilly, Pfizer and others.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, Charleston Laboratories, Daiichi Sankyo and others. Some of these competitors may beaddressing the same therapeutic areas or indications as we are. Our current and potential competitors may succeed in obtaining patent protection orcommercializing products before us. Many of these entities have significantly greater research and development capabilities than we do, as well assubstantially more marketing, manufacturing, financial and managerial resources. These entities represent significant competition for us. Acquisitions of, orinvestments in, competing pharmaceutical or biotechnology companies by large corporations could increase such competitors’ financial, marketing,manufacturing and other resources.We are engaged in the development of novel therapeutic technologies. Our resources are limited and we may experience technical challengesinherent in such novel technologies. Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basisfor competitive products. Some of these products may have an entirely different approach or means of accomplishing similar therapeutic effects than ourproduct candidates. Our competitors may develop products that are safer, more effective or less costly than our product candidates and, therefore, present aserious competitive threat to our product offerings.The widespread acceptance of therapies that are alternatives to ours may limit market acceptance of our product candidates even if commercialized.Chronic and post-operative pain are currently being treated by oral medication, transdermal drug delivery systems, such as drug patches, 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.43Our relationships with customers and third-party payers 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 payers will play a primary role in the recommendation and prescription of any product candidatesfor which we obtain marketing approval. Our future arrangements with third-party payers 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 payers, 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 referralof an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a federalhealthcare program such as Medicare and Medicaid, and which will constrain our marketing practices and the marketing practices of ourlicensees, 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 orMedicaid patients to providers of “designated health services” with whom the physician or a member of the physician’s immediate familyhas an ownership interest 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,claims for payment from Medicare, Medicaid, or other government reimbursement programs that are false or fraudulent, and which mayexpose entities that provide coding and billing advice to customers to potential criminal and civil penalties, including through civilwhistleblower or qui tam actions, and including as a result of claims presented in violation of the Federal Healthcare Anti-Kickback Statute,the Stark Law or other healthcare-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 forhealthcare benefits, items or services, and which as amended by the Health Information Technology for Economic and Clinical Health Act, orHITECH, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security andtransmission of individually identifiable health information; •federal physician sunshine requirements under the Affordable Care Act, which requires manufacturers of drugs, devices, biologics andmedical supplies to report annually to HHS information related to payments and other transfers of value to physicians, other healthcareproviders, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and theirimmediate family members and applicable group purchasing organizations; •the Federal Food, Drug, and Cosmetic Act, which, among other things, strictly regulates drug product marketing, prohibits manufacturersfrom marketing drug products for off-label use and regulates the distribution of drug samples; and44 •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 payers, includingprivate insurers, state laws requiring pharmaceutical companies to comply with the pharmaceutical industry’s voluntary complianceguidelines and the relevant compliance guidance promulgated by the federal government and which may require drug manufacturers toreport information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures,and state and foreign laws governing the privacy and security of health information in specified circumstances, many of which differ fromeach other in significant ways and often are not preempted by federal 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 involvesubstantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes,regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any ofthese laws or any other 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 and some non-U.S. jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatorychanges to the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post‑approval activities, affectour ability to profitably sell any product candidates for which we obtain marketing and otherwise affect our future revenue and profitability and the futurerevenue and profitability of our collaborators or potential collaborators.For example, in March 2010, the Affordable Care Act was enacted in the United States to broaden access to health insurance, reduce or constrain thegrowth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries,impose new taxes and fees on the health industry and impose additional health policy reforms. The law has continued the downward pressure on the pricingof medical items and services, especially under the Medicare program, and increased the industry’s regulatory burdens and operating costs. Among theprovisions of the Affordable Care Act of importance to us are the following: •imposes a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded prescription drugs” and biologicagents; •imposes an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States; •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 drugsthat are inhaled, 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 discountsoff negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for themanufacturer’s outpatient drugs to be covered under Medicare Part D;45 •extends manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations; •mandates a further shift in the burden of Medicaid payments to the states; •expands the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; •establishes a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; •establishes a new Patient Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinicaleffectiveness research, along with funding for such research; and •establishes an independent payment advisory board that will submit recommendations to Congress to reduce Medicare spending if projectedMedicare spending exceeds a specified growth rate.Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, and we expect there will beadditional challenges and amendments to the Affordable Care Act in the future. The new Presidential Administration and U.S. Congress will likely continueto seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the Affordable Care Act. It is uncertain the extent to which any such changesmay impact our business or financial condition.In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. These changes include the BudgetControl Act of 2011, which, among other things, resulted in reductions to Medicare payments to providers of 2% per fiscal year and will remain in effectthrough 2025; the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several types of providers andincreased the statute of limitations period for the government to recover overpayments to providers from three to five years; and the Medicare Access andCHIP Reauthorization Act of 2015, which, among other things, ended the use of the sustainable growth rate formula and provides for a 0.5% update tophysician payment rates for each calendar year through 2019, after which there will be a 0% annual update each year through 2025. More recently, there hasbeen heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in severalCongressional inquiries and proposed bills designed to, among other things, bring more transparency to product pricing, review the relationship betweenpricing and manufacturer patient programs, and reform government program reimbursement methodologies for pharmaceutical products.Individual states in the United States have also become increasingly aggressive in passing legislation and implementing regulations designed tocontrol pharmaceutical product and medical device pricing, including price or patient reimbursement constraints, discounts, restrictions on certain productaccess and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulkpurchasing. For example, in October 2017, California passed a new law, to become effective in January 2019, which will require transparency frombiopharmaceutical companies regarding price increases for prescription drugs. In addition, regional healthcare authorities and individual hospitals areincreasingly using bidding procedures to determine what pharmaceutical products and medical devices to purchase and which suppliers will be included intheir prescription drug and other healthcare programs.We expect that the Affordable Care Act, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorouscoverage criteria, new payment methodologies and in additional downward pressure on the price that we receive for any approved or cleared product. Anyreduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. We cannotpredict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States orabroad. If we are slow or unable to adapt to new requirements or policies, or if we are not able to maintain regulatory compliance, our products and productcandidates may lose any regulatory approval that may have been obtained and we may not achieve or sustain profitability, which would adversely affect ourbusiness.46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 againstus. Although we are insured against such risks up to an annual aggregate limit in connection with clinical trials and commercial sales of our productcandidates, our present product liability insurance may be inadequate and may not fully cover the costs of any claim or any ultimate damages we might berequired to pay. Product liability claims or other claims related to our product candidates, regardless of their outcome, could require us to spend significanttime and money in litigation or to pay significant damages. Any successful product liability claim may prevent us from obtaining adequate product liabilityinsurance in the future on commercially desirable or reasonable terms. In addition, product liability coverage may cease to be available in sufficient amountsor at an acceptable cost. An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liabilityclaims could prevent or inhibit the commercialization of our product candidates. A product liability claim could also significantly harm our reputation anddelay market 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 abilityto generate or grow revenuesOur future financial performance will depend upon the successful introduction and customer acceptance of our products in research anddevelopment, including POSIMIR, DUR-928 and REMOXY ER, if approved. Even if approved for marketing, our product candidates may not achieve marketacceptance. 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 potentialadvantages over existing therapeutic products, including oral medication, transdermal drug delivery products such as drug patches,injectable therapeutics, or external or implantable drug delivery products; and •pricing and reimbursement policies of government and third-party payors such as insurance companies, health maintenance organizations,hospital formularies and other health plan administrators.In addition, market adoption of POSIMIR may depend on what data from clinical studies is included in the product label and market adoption ofREMOXY ER may depend on the extent to which the product label includes claims for abuse deterrence, and there can be no assurance as to what the finalproduct labels will contain. Physicians, patients, payers or the medical community in general may be unwilling to accept, utilize or recommend any of ourproducts. If we are unable to obtain regulatory approval, commercialize and market our future products when planned and achieve market acceptance, we willnot achieve anticipated revenues.If users of our products are unable to obtain adequate reimbursement from third-party payers, 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 payers 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 prescription pharmaceuticals issubject to government control. In the United States, recent federal and state government initiatives have been directed at lowering the total cost of healthcare, and the U.S. Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on thereform of the Medicare and Medicaid systems. While we cannot predict whether any such legislative or regulatory proposals will be adopted, theannouncement or adoption of such proposals could materially harm our business, financial condition and results of operations.47The successful commercialization of our product candidates will depend in part on the extent to which appropriate reimbursement levels for the costof our product candidates and related treatment are obtained by governmental authorities, private health insurers and other organizations, such as HMOs.Third-party payers often limit payments or reimbursement for medical products and services. Also, the trend toward managed health care in the United Statesand the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products,as well as legislative proposals to reform health care or reduce government insurance programs, may limit reimbursement or payment for our products. Thecost containment measures that health care payers 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 ormedical conditions, 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 orexpenses and may affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurredwith frequency and may occur in the future and we may make changes in our accounting policies in the future. Compliance with changing regulation ofcorporate governance and public disclosure may result in additional expenses. Changing laws, regulations and standards relating to corporate governanceand public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, PCAOB pronouncements and NASDAQ rules, are creatinguncertainty for companies such as ours and insurance, accounting and auditing costs are high as a result of this uncertainty and other factors. We arecommitted to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources tocomply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time andattention from revenue-generating activities to compliance activities.Risks 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 Nasdaq. Our ability to continue operationsor to publicly or privately sell equity securities and the liquidity of our common stock could be adversely affected if we are delisted from NasdaqOn 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 nolonger comply with the minimum closing bid price requirement for continued listing on the Nasdaq Global Market under Nasdaq Marketplace Rule 5450(a)(1) and we do not regain compliance within the applicable 180-day time period, we may transfer our common stock listing to The Nasdaq Capital Market,provided that the Company (i) meets the applicable market value of publicly held shares requirement for continued listing and all other applicablerequirements for initial listing on The Nasdaq Capital Market (except for the closing48bid price requirement) based on the Company’s most recent public filings and market information and (ii) notifies Nasdaq of its intent to cure this deficiency.Following a transfer to The Nasdaq Capital Market, the Company would be afforded the remainder of an additional 180 calendar day grace period in order toregain compliance with the minimum closing bid price requirement of $1.00 per share under The Nasdaq Capital Market, unless it does not appear to Nasdaqthat 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 ifwe were not in compliance, that our common stock would be eligible for transfer to the Nasdaq Capital Market and remain in compliance with therequirements for listing on that market. Delisting from Nasdaq would constitute an event of default under our loan facility with Oxford, entitling Oxford toaccelerate our obligations under such facility, among other actions. Under such circumstances, we could be required to renegotiate the repayment terms of ourloan facility, on terms which would not be favorable to the Company as our current terms, or we could be required to take other actions, such as discontinuingsome or all of our operations, selling assets, or other action. Delisting could also adversely affect our ability to raise additional financing through the publicor private sale of equity securities, would significantly affect the ability of investors to trade our securities and would negatively affect the value andliquidity of our common stock. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss ofinstitutional investor interest and fewer business 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.Investors 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 securitiesor grant additional stock options to employees and consultants. In November 2015, we filed a shelf registration statement on Form S-3 with the SEC thatallows us to offer up to $125 million of securities from time to time in one or more public offerings of our common stock. In addition, in November 2015, weentered into a Controlled Equity Offering sales agreement with Cantor Fitzgerald, under which we may sell, subject to certain limitations, up to $40 millionof common stock through Cantor Fitzgerald, acting as agent. In April 2016, we completed an underwritten public offering in which we raised net proceeds of$16.1 million (after deducting underwriting discounts and commissions and offering expenses) through the sale of an aggregate of approximately13.8 million shares of our common stock pursuant to an effective registration statement at a price to the public of $1.25 per share. In 2016, we raised netproceeds (net of commissions) of approximately $7.6 million from the sale of approximately 5.2 million shares of our common stock in the open marketthrough the Controlled Equity Offering program with Cantor Fitzgerald at a weighted average price of $1.50 per share. In 2017, we raised net proceeds (net ofcommissions) of approximately $12.0 million from the sale of approximately 8.9 million shares of our common stock in the open market through theControlled Equity Offering program with Cantor Fitzgerald at a weighted average price of $1.39 per share. Between January 1, 2018 and March 2, 2018, weraised net proceeds (net of commissions) of approximately $2.8 million from the sale of approximately 2.5 million shares of our common stock in the openmarket through the Controlled Equity Offering program with Cantor Fitzgerald at a weighted average price of $1.17 per share. As of March 2, 2018, we hadup to approximately $14.9 million of common stock available for sale under the Controlled Equity Offering program and approximately $67.8 million of49common stock available for sale under the shelf registration statement. Any additional sales in the public market of our common stock, under the ControlledEquity Offering program with Cantor Fitzgerald or otherwise under the shelf registration statement, could adversely affect prevailing market prices for ourcommon 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 beenunrelated to 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 DUR-928 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,manufacturing processes 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; •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 generalhas recently experienced extreme price and volume fluctuations. In addition, the market prices of securities of technology and pharmaceutical companieshave also been extremely volatile, and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance ofthese companies. These broad market fluctuations could result in extreme fluctuations in the price of our common stock, which could cause a decline in thevalue of our common stock.50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 stockholdersmay consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions include: •authorizing the issuance of “blank check” preferred stock without any need for action by stockholders; •providing for a 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 onby stockholders at stockholder meetings.Our bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and ourstockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employeesOur bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought onbehalf of the Company, any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Company, any actionasserting a claim arising pursuant to any provision of the General Corporation Law of Delaware or our Certificate of Incorporation or bylaws or any actionasserting a claim governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forumthat it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors,officers and other employees.51Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable inan action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financialcondition. Item 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 fiveyears) Cupertino, CA 20,000 sq. ft. Office and Laboratory Lease expires 2019 (with an option to renew for an additional fiveyears) Vacaville, CA 24,634 sq. ft. Manufacturing Lease expires 2018 Birmingham, AL 21,540 sq. ft. Office, Laboratory andManufacturing Lease expires 2021 (with two options to renew the lease term for anadditional five years each 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 spacewill be available as needed. Item 3.Legal Proceedings.We are not a party to any material legal proceedings. Item 4.Mine Safety Disclosures.Not applicable. 52PART IIItem 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 GlobalMarket. Common StockPrice Year ended December 31, 2016 Low High First Quarter $0.99 $2.29 Second Quarter 1.14 1.52 Third Quarter 1.08 2.00 Fourth Quarter 1.11 1.45 Year ended December 31, 2017 Low High First Quarter $0.91 $1.37 Second Quarter 0.74 1.59 Third Quarter 1.50 1.90 Fourth Quarter 0.75 2.17 The closing sale price of our common stock as reported on the NASDAQ Global Market on March 2, 2018 was $1.45 per share. As of that date therewere approximately 108 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 ofour business. Therefore, we do not currently anticipate paying any cash dividends in the foreseeable future.53STOCK 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, 2012. The graph assumes that $100 was invested on December 31, 2012. Thestock price performance on the following graph is not necessarily indicative of future stock price performance. *$100 Invested on 12/31/12 in stock or index—including reinvestment of dividends. Fiscal year ending December 31.54DURECT CORPORATION Cumulative Total Return 12/31/2012 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 DURECT CORPORATION 100.00 188.04 85.87 240.22 145.65 100.00 NASDAQ STOCK MARKET (U.S.) 100.00 138.32 156.85 165.84 178.28 228.63 NASDAQ BIOTECHNOLOGY 100.00 165.61 222.08 247.44 193.79 234.60 Purchases of Equity Securities by the Issuer and Affiliated PurchasersNone. 55Item 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 Analysisof Financial 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, 2017, 2016, and 2015 and the balance sheet data at December 31, 2017 and 2016 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, 2014 and 2013, and the balance sheet data at December 31, 2015, 2014 and 2013 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, 2017 2016 2015 2014 2013 (in thousands, except per share data) Statement of Operations Data: Collaborative research and development and other revenue (1) $23,577 $1,880 $7,832 $8,256 $3,590 Product revenue, net 13,093 12,145 11,292 11,145 11,736 Revenue from sale of intellectual property rights 12,500 — — — — Total revenue 49,170 14,025 19,124 19,401 15,326 Operating expenses: Cost of revenue 6,633 5,290 3,905 5,686 4,837 Research and development 31,609 29,274 24,317 22,429 18,945 Selling, general and administrative 13,165 11,825 11,566 12,284 12,706 Total operating expenses 51,407 46,389 39,788 40,399 36,488 Loss from operations (2,237) (32,364) (20,664) (20,998) (21,162)Other income (expense): Interest and other income (expenses) 967 143 237 39 (284)Interest expense (2,425) (2,288) (2,236) (1,151) (6)Net other expense (1,458) (2,145) (1,999) (1,112) (290)Net loss $(3,695) $(34,509) $(22,663) $(22,110) $(21,452)Basic net loss per share $(0.03) $(0.26) $(0.19) $(0.20) $(0.21)Diluted net loss per share $(0.03) $(0.26) $(0.19) $(0.20) $(0.21)Shares used in computing basic net loss per share 145,273 133,163 118,523 111,666 103,078 Shares used in computing diluted net loss per share 145,273 133,163 118,523 111,666 103,078 As of December 31, 2017 2016 2015 2014 2013 (in thousands) Balance Sheet Data: Cash, cash equivalents and investments $36,909 $25,154 $29,290 $34,850 $24,391 Working capital 29,530 3,676 30,874 32,526 21,143 Total assets 53,113 40,508 46,772 50,084 40,820 Term loan, net 19,915 19,853 19,684 19,824 — Other long-term liabilities 2,070 1,541 2,489 2,035 1,618 Stockholders’ equity 21,488 8,338 14,883 18,515 30,721 (1)The 2017 figure includes the recognition of $20.0 million in revenue associated with a nonrefundable upfront payment that we received in June2017 under our license agreement with SANDOZ. 56Item 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, 2017, 2016 and 2015 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: •the clinical trial plans for DUR-928; •potential regulatory filings for or approval of RBP-7000, REMOXY ER, POSIMIR, DUR-928 or any of our or any third parties’ other productcandidates; •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 otherpayments to us, and our expectations regarding our collaborators’ plans with respect to our products and continued development of ourproducts; •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 and our evaluation of additional development programs; •requirements for us to purchase supplies and raw materials from third parties, and the ability of third parties to provide us with requiredsupplies and raw materials; •the results and timing of clinical trials, including for POSIMIR, DUR-928, and REMOXY ER, the possible commencement of future clinicaltrials and announcements of the findings of our 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 intellectualproperty rights 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;57 •our future performance, including our anticipation that we will not derive meaningful revenues from our products in development for at leastthe next 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 termloan, 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 Epigenetic 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 three years, we generated collaborative research anddevelopment revenues from collaborative agreements with Pain Therapeutics, Zogenix, Santen and others.58Product RevenuesWe have historically generated product revenue through three product lines: •ALZET® osmotic pumps which are used for animal research use; •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 ER and one excipient that is included in a currently marketed animal health product.In addition, we currently generate modest revenue related to an animal health product which was approved and launched by our licensee in 2011. Wedo not intend to significantly increase our investments in or efforts to sell or market any of our existing product lines. However, we expect that we willcontinue to make efforts to increase our revenue related to collaborative research and development by entering into additional research and developmentagreements with third-party collaborators to develop pharmaceutical product candidates.Revenue from Sale of Intellectual Property RightsFrom time-to-time, we also enter into arrangements in which we sell intellectual property rights and, in return, may receive upfront payments,contingent milestone payments and earn-outs from third party collaborators. Our deliverable under these arrangements typically consists of the sale ofintellectual property rights, and does not include any substantive continuing obligations subsequent to the transfer of the related rights, title, and interest tothe buyer. We recognize the upfront payment as revenue because such arrangement is part of our revenue-earning activities and is in line with our ordinarycourse of ongoing business operations. In September 2017, we entered into a patent purchase agreement with Indivior and received a non-refundablepayment of $12.5 million.Operating ResultsSince our inception in 1998, we have generally had a history of operating losses. At December 31, 2017, we had an accumulated deficit of $443.8million. Our net losses were $3.7 million, $34.5 million and $22.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. These losseshave resulted primarily from costs incurred to research and develop our product candidates and to a lesser extent, from selling, general and administrativecosts associated with our operations and product sales. We expect our research and development expenses to decrease in 2018 compared to 2017. We expectselling, general and administrative expenses to decrease in 2018 compared to 2017. We do not anticipate meaningful revenues from our products indevelopment, should they be approved, for at least the next twelve months. Therefore, we expect to incur continuing losses and negative cash flows fromoperations 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, in part, include certain excipients that are sold to a customer for a currently marketed animal health product and included in severalproducts in development or awaiting regulatory approval. These inventories are capitalized based on management’s judgment of probable sale prior to theirexpiration dates. The valuation of inventory requires management to estimate the value of inventory that may become expired prior to use. We may berequired to expense previously capitalized inventory costs upon a change in management’s judgment due to, among59other potential factors, a denial or delay of approval of a customer’s product by the necessary regulatory bodies, or new information that suggests that theinventory will not be saleable. In addition, these circumstances may cause us to record a liability related to minimum purchase agreements that we have inplace for raw materials. In October 2017, we announced that PERSIST, the Phase 3 clinical trial for POSIMIR, did not meet its primary efficacy endpoint ofreduction in pain on movement over the first 48 hours after surgery as compared to standard bupivacaine HCl. As a result, during the year ended December31, 2017, we recorded charges to cost of goods sold of approximately $2.0 million, of which approximately $503,000 related to the write-down of the costbasis of inventory on hand, $500,000 related to the prepaid inventory for the minimum purchase commitment for the excipient, and $1.0 million related tothe recognition of our remaining minimum purchase commitment for the same excipient. As of December 31, 2017, the remaining carrying value of theexcipient residing within our inventory was $69,000. In the event that management determines that we will not utilize all of these materials, there could be apotential write-off related to this inventory. If we are able to subsequently sell products made with raw materials that were previously written down, we willreport an unusually high gross profit as there will be no associated cost of goods for these materials.Revenue 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.GoodwillGoodwill is periodically assessed and evaluated for impairment at the reporting unit level. The Company operates in one operating segment and alsohas only one reporting unit, which is the research, development and manufacturing of pharmaceutical products. We assess the impairment of goodwill at leastannually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important whichcould trigger an impairment review include the following: •significant decline in our stock price for a prolonged 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;60 •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.As of December 31, 2017, the carrying value of goodwill was approximately $6.4 million and no impairment of goodwill has been recorded for anyof the periods presented. However, there can be no assurance that at the time other periodic reviews are completed, a material impairment charge will not berecorded.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. We amortize the fair value of options granted on astraight-line basis. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods. We may elect to usedifferent assumptions under the Black-Scholes option valuation model in the future, which could materially affect our net income or loss and net income orloss per share.Results of OperationsComparison of years ended December 31, 2017, 2016 and 2015Collaborative research and development and other revenueWe recognize revenues from collaborative research and development activities and service contracts. Collaborative research and developmentrevenue primarily represents 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 non-refundable upfront fees, andmilestone payments in connection with our collaborative agreements.61We 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, 2017 2016 2015 Collaborator Sandoz AG (Sandoz) (1) $20,000 $— $— Zogenix, Inc. (Zogenix) (2) 835 555 4,898 Santen Pharmaceutical Co. Ltd. (Santen) (3) 294 514 824 Pain Therapeutics, Inc. (Pain Therapeutics) 109 670 1,385 Other 2,339 141 725 Total collaborative research and development and other revenue $23,577 $1,880 $7,832 (1)Amounts related to recognition of upfront fees were $20.0 million in 2017 and zero in 2016 and 2015; we and Sandoz signed a license agreementeffective June 2017. As of December 31, 2017, all of the $20.0 million upfront fee had been recognized as revenue as our contractual performanceobligations had been fulfilled.(2)Amounts related to ratable recognition of upfront fees were $833,000 in 2017, $208,000 in 2016 and $255,000 in 2015; we and Zogenix signed alicense agreement effective July 2011. In August 2017, we and Zogenix terminated the license agreement. As a result, we recognized as revenue all ofthe remaining upfront fees in the twelve months ended December 31, 2017 that had previously been deferred.(3)Amounts related to ratable recognition of upfront fees were $199,000 in 2017, $228,000 in 2016 and $274,000 in 2015, respectively; we and Santensigned a license agreement effective December 2014. In January 2018, we were notified by Santen that due to a shift in near term priorities, Santenhas elected to reallocate R&D resources and put our program on pause until further notice.The increase in collaborative research and development revenue in 2017 compared with 2016 was primarily due to higher revenue recognized fromour agreements with Sandoz and Zogenix and higher revenue recognized from our feasibility agreements with other companies. The increase was partiallyoffset by lower revenue recognized from our agreements with Pain Therapeutics and Santen. In 2016, our role in the development activities for certainORADUR-based opioid products, including REMOXY ER, and the Santen ophthalmic program decreased.The decrease in collaborative research and development revenue in 2016 compared with 2015 was primarily due to lower revenue recognized fromour agreements with Zogenix, Pain Therapeutics and Santen, as our role in the development activities for Relday, certain ORADUR-based opioid productsincluding REMOXY ER, and the Santen ophthalmic program decreased in 2016, as well as lower revenue recognized from our feasibility agreements withother companies.We received a $20.0 million upfront fee in connection with the license agreement signed with Sandoz in June 2017. At December 31, 2017, all of the$20.0 million upfront fee had been recognized as revenue as our contractual performance obligations had been fulfilled.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 feeis being recognized as collaborative research and development revenue ratably over the term of our continuing involvement with Santen. At December 31,2017, $717,000 of the $2.0 million upfront fee had been recognized as revenue.We 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 was being recognized as collaborative research and development revenue ratably over the term of our continuinginvolvement with Zogenix with respect to Relday. As a result of the termination of the Zogenix agreement in August 2017, we recognized revenue during the62third quarter of 2017 for the remaining $750,000 of deferred revenue related to the upfront fee as we had no remaining performance obligations under theagreement; this recognition of revenue did not result in additional cash proceeds to us. At December 31, 2017, all of the $2.25 million upfront fee had beenrecognized as revenue.As of March 2, 2018, we had potential milestones of up to $337.5 million that we may receive in the future under our collaborative arrangements, ofwhich $44.5 million are development-based milestones and $293.0 million are sales-based milestones. Within the category of development-basedmilestones, $2.0 million are related to early stage clinical testing (defined as Phase 1 or 2 activities), $3.0 million are related to late stage clinical testing(defined as Phase 3 activities), $8.0 million are related to regulatory filings, and $31.5 million are related to regulatory approvals. No payments were receivedbetween December 31, 2017 and March 2, 2018.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 ER and in a currently marketed animal health product. Net product revenues were $13.1million, $12.1 million and $11.3 million in 2017, 2016 and 2015, respectively.The increase in product revenues in 2017 was primarily attributable to higher revenue from our LACTEL product line as a result of higher units sold,partially offset by lower product revenue from the sale of certain excipients included in REMOXY ER and in a currently marketed animal health product aswell as lower product revenue from our ALZET mini pump product line as a result of lower units sold compared to 2016.The increase in product revenues in 2016 was primarily attributable to higher revenue from the sale of certain excipients included in REMOXY ERand another product as well as higher revenue from our LACTEL product line and ALZET mini pump product line as a result of higher average selling pricesfor these two product lines compared to 2015.Revenues in 2017, 2016 and 2015 included $53,000, $653,000 and $96,000 in product revenue related to the sale of excipients included inREMOXY ER and a currently marketed animal health product.Revenue from sale of intellectual property rightsRevenue from the sale of intellectual property rights was $12.5 million in 2017 compared to zero in each of 2016 and 2015. We entered into a patentpurchase agreement with Indivior and received a non-refundable payment of $12.5 million in September 2017. We recognized the $12.5 million as revenuefrom sale of intellectual property rights in 2017 as we did not have any substantive continuing obligations under the purchase agreement. We are notexpecting any material revenues from the sale of intellectual property rights in 2018.Cost of product revenuesCost of product revenues was $6.6 million, $5.3 million and $3.9 million in 2017, 2016 and 2015, respectively. Cost of product revenues includesthe cost of product revenue from our ALZET product line, our LACTEL product line and certain excipients that are included in several products indevelopment or awaiting regulatory approval by partners and a currently marketed animal health product.The increase in the cost of product revenue in 2017 was primarily the result of charges of approximately $2.0 million associated with the write-downof an excipient in light of the failure of PERSIST, the Phase 3 clinical trial of POSIMIR, to achieve the primary efficacy endpoint, compared with $926,000associated with the write-down of the excipient included in REMOXY ER in light of the Complete Response Letter received by Pain Therapeutics forREMOXY ER in 2016. Excluding the charges associated with the write-down of certain excipients included in 2017 and 2016, respectively, the increase inthe cost of product revenue in 2017 was primarily the result of higher cost of goods sold related to our LACTEL product line arising from higher units sold,partially offset by lower cost of goods sold related to our ALZET product line arising from lower units sold and from lower cost of goods sold related to thesale of certain excipients included in REMOXY ER and another product compared to 2016.63The increase in the cost of product revenues in 2016 was primarily the result of a charge of $926,000 associated with the write-down of certainexcipients in light of the Complete Response Letter received by Pain Therapeutics for REMOXY ER in September 2016. In addition, we experienced highercost of goods sold from the sale of certain excipients in 2016 arising from higher units sold, as well as higher cost of goods sold from our LACTEL productline and ALZET mini pump product line arising from higher manufacturing costs for these two product lines compared to 2015.Stock-based compensation expense related to cost of product revenues was $109,000, $106,000 and $108,000 in 2017, 2016 and 2015, respectively.As of December 31, 2017, 2016 and 2015, we had 21, 20 and 22 manufacturing employees, respectively.Research 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 $31.6 million, $29.3million and $24.3 million in 2017, 2016 and 2015, respectively. Stock-based compensation expense recognized related to research and developmentpersonnel was $1.4 million in each of 2017, 2016 and 2015, respectively.Research and development expenses increased by $2.3 million in 2017 compared to 2016. The increase in 2017 was primarily attributable to higherresearch and development costs associated with POSIMIR and depot injectable programs, partially offset by lower research and development costs associatedwith DUR-928, Relday, REMOXY ER, the Santen ophthalmic program, and ORADUR-ADHD and other research programs as more fully discussed below.Research and development expenses increased by $5.0 million in 2016 compared to 2015. The increase in 2016 was primarily attributable to higherresearch and development costs associated with DUR-928 and POSIMIR, partially offset by lower research and development costs associated with Relday,REMOXY ER, depot injectable programs, the Santen ophthalmic program, and ORADUR-ADHD and other research programs as more fully discussed below.Research and development expenses associated with our major development programs are as follows (in thousands): Year Ended December 31, 2017 2016 2015 POSIMIR (1) $15,075 $11,680 $7,220 DUR-928 13,279 13,739 8,276 Depot injectable programs 2,437 1,407 1,654 REMOXY ER (1) 115 525 872 ORADUR-ADHD 104 177 204 Santen ophthalmic program (1) 99 366 597 Relday (1) 39 463 4,379 Other 461 917 1,115 Total research and development expenses $31,609 $29,274 $24,317 (1)See Note 2 Strategic Agreements in the financial statements for more details about our agreements with Sandoz, Pain Therapeutics, Zogenix andSanten.POSIMIROur research and development expenses for POSIMIR increased to $15.1 million in 2017 from $11.7 million in 2016, primarily due to higher clinicaltrial expenses and other outside expenses for POSIMIR.64Our research and development expenses for POSIMIR increased to $11.7 million in 2016 from $7.2 million in 2015, primarily due to higheremployee-related costs, clinical trial expenses and contract manufacturing expenses, partially offset by lower expenses for outside supplies for POSIMIR.DUR-928Our research and development expenses for DUR-928 decreased to $13.3 million in 2017 from $13.7 million in 2016, primarily due to lower contractmanufacturing expenses, partially offset by higher clinical trial expenses and higher employee-related costs incurred for this drug candidate.Our research and development expenses for DUR-928 increased to $13.7 million in 2016 from $8.3 million in 2015, primarily due to increaseddevelopment activities, including higher employee-related costs, clinical trial expenses, non-clinical related expenses, contract manufacturing and contractresearch expenses incurred for this drug candidate.Depot injectable programsOur research and development expenses for depot injectable programs increased to $2.4 million in 2017 from $1.4 million in 2016 primarily due tohigher employee-related costs for these programs.Our research and development expenses for depot injectable programs decreased to $1.4 million in 2016 from $1.7 million in 2015 primarily due tolower employee-related costs and lower costs related to research supplies.REMOXY EROur research and development expenses for REMOXY ER decreased to $115,000 in 2017 from $525,000 in 2016, primarily due to lower employee-related costs for REMOXY ER.Our research and development expenses for REMOXY ER decreased to $525,000 in 2016 from $872,000 in 2015, primarily due to lower employee-related costs for REMOXY ER.ORADUR-ADHDOur research and development expenses for ORADUR-ADHD decreased to $104,000 in 2017 from $177,000 in 2016, primarily due lower employee-related costs for ORADUR-Methylphenidate ER.Our research and development expenses for ORADUR-ADHD decreased to $177,000 in 2016 from $204,000 in 2015, primarily due to loweremployee-related costs for ORADUR-Methylphenidate ER.Santen ophthalmic programOur research and development expenses for the Santen ophthalmic program decreased to $99,000 in 2017 from $366,000 in 2016, primarily due todecreased formulation development activities and lower employee-related costs associated with this drug candidate.Our research and development expenses for the Santen ophthalmic program decreased to $366,000 in 2016 from $597,000 in 2015, primarily due tolower employee-related costs as a result of decreased formulation development activities for this drug candidate.ReldayOur research and development expenses for Relday decreased to $39,000 in 2017 from $463,000 in 2016 primarily due to decreased developmentactivities and lower employee-related costs incurred for this drug candidate.65Our research and development expenses for Relday decreased to $463,000 in 2016 from $4.4 million in 2015 primarily due to decreaseddevelopment activities and lower employee-related costs incurred for this drug candidate.Other DURECT research programsOur research and development expenses for all other research activities decreased to $462,000 in 2017 from $917,000 in 2016, primarily due to loweremployee-related costs incurred for these programs.Our research and development expenses for all other research activities decreased to $917,000 in 2016 from $1.1 million in 2015, primarily due tolower employee-related costs incurred for these programs.As of December 31, 2017, 2016 and 2015, we had 49, 52 and 57 research and development employees, respectively.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 costs of the efforts necessary to complete the research and development programs. For additional informationregarding 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 $13.2 million, $11.8 million and $11.6 million in 2017, 2016 and2015, respectively. Stock-based compensation expense recognized related to selling, general and administrative personnel was $1.1 million in 2017 and2016, and $1.2 million in 2015, respectively.Selling, general and administrative expenses increased by approximately $1.4 million in 2017 compared to 2016, primarily due to an advisory feerelated to the execution of the Sandoz agreement which occurred in the second quarter of 2017 and higher general legal expenses. Selling, general andadministrative expenses increased by $259,000 in 2016 compared to 2015, primarily due to higher employee related costs and general legal expenses.As of December 31, 2017, 2016 and 2015, we had 24, 24 and 26 selling, general and administrative personnel, respectively.Other income (expense). Interest and other income was $967,000, $143,000 and $237,000 in 2017, 2016 and 2015, respectively. The increase ininterest and other income in 2017 compared to 2016 was primarily the result of a gain of $500,000 from selling certain intellectual property rights in 2017which were not part of our ordinary course of business. In addition, we recorded a deferred tax benefit of $153,000 in 2017 as a result of the Tax Cuts andJobs Act compared to zero in 2016. The increase in interest and other income in 2017 was also due to higher interest income generated from our investmentsas a result of higher yields and higher average balances in 2017 compared to 2016. The decrease in interest and other income in 2016 compared to 2015 wasprimarily the result of a realized gain from the sale of a marketable equity security in 2015, partially offset by higher interest income generated from ourinvestments in 2016.Interest expense was $2.4 million, $2.3 million and $2.2 million in 2017, 2016 and 2015, respectively. The increase in interest expense in 2017compared to 2016 was primarily due to higher interest expenses recorded for the term loan refinanced in July 2016 compared to 2016. The increase in interestexpense in 2016 compared to 2015 was66primarily due to slightly higher interest expense and amortization of debt discount related to a long-term debt arrangement amended in July 2015 andrefinanced in July 2016.Income taxes. As of December 31, 2017, we had net operating loss (NOL) carryforwards for federal income tax purposes of approximately $327.1million, which expire in the years 2019 through 2036, and federal research and development tax credits of approximately $12.5 million, which expire atvarious dates beginning in 2018 through 2037, if not utilized. As of December 31, 2017, we had NOL carryforwards for state income tax purposes ofapproximately $204.9 million, which expire in the years 2028 through 2036, and state research and development tax credits of approximately $13.7 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, 2017 and 2016, we had net deferred tax assets of $106.4 million and $149.5 million, respectively. Deferred tax assets reflect thenet tax 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, 2017 and 2016. 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 had been converted as of December 31, 2008 into approximately 19.0 million shares of ourcommon stock. We also issued approximately 4.4 million shares of our common stock to an institutional investor in connection with an equity financing inSeptember 2009. In December 2012, November 2013 and April 2016, we completed underwritten public offerings in which we sold an aggregate ofapproximately 14.0 million, 8.2 million and 13.8 million shares, respectively, of our common stock pursuant to effective registration statements. In 2015,2016, 2017 and from January 1, 2018 to March 2, 2018, we issued approximately 7.1 million, 5.2 million, 8.9 million and 2.5 million shares, respectively, ofour common stock in the open market through Controlled Equity Offering sales agreements with Cantor Fitzgerald pursuant to effective registrationstatements. These transactions may also have resulted in a change of control as defined by Section 382 or could result in a change of control in the futureupon 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 2017 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 $36.9 million and $25.2 million at December 31, 2017 and 2016, respectively. Thisincludes $150,000 of interest-bearing marketable securities classified as restricted investments on our balance sheet as of December 31, 2017 and 2016,which primarily serve as collateral for a letter67of credit securing our leased facility in California. The letter of credit for our leased facility in California will expire in February 2019.We used $1.3 million, $27.3 million and $20.8 million of cash in operating activities in the years ended December 31, 2017, 2016 and 2015,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 loss in part due to the timing and recognition of up-front payments under collaborative agreements. Upfront payments received uponexecution of collaborative agreements are recorded as deferred revenue and generally recognized on a straight-line basis over the period of our continuinginvolvement with the third-party collaborator pursuant to the applicable agreement. The decrease in cash used in operations in 2017 compared with 2016 wasprimarily due to the receipt of the $20.0 million non-refundable upfront fee from Sandoz and the $12.5 million non-refundable upfront fee from Indivior,partially offset by cash used to fund operations as well as our working capital requirements and reflected a net loss of $3.7 million as well as changes inaccrued and other liabilities. The increase in cash used in operations in 2016 compared with 2015 reflected an increase in net loss of $11.8 million, partiallyoffset by changes in accounts receivable, prepaid expenses and other assets, and in accrued liabilities.We received $12.7 million, $6.0 million and $6.5 million of cash from investing activities in the years ended December 31, 2017, 2016 and 2015,respectively. The increase in cash provided by investing activities in 2017 compared to 2016 was primarily due to a decrease in purchase of available-for-salesecurities offset by a decrease in net maturities of available-for-sale securities. The decrease in cash provided by investing activities in 2016 was primarilydue to a decrease in net maturities of available-for-sale securities offset by a decrease in purchase of available-for-sale securities. We anticipate incurringcapital expenditures of approximately $100,000 over the next 12 months. The amount and timing of these capital expenditures will depend on, among otherthings, our research and development activities and needs, and the need for equipment replacements.We generated $12.6 million, $23.1 million and $15.2 million of cash from financing activities in the years ended December 31, 2017, 2016 and2015, respectively. The decrease in cash provided by financing activities in 2017 compared to 2016 was primarily due to lower net proceeds received fromissuances of common stock. The increase in cash provided by financing activities in 2016 compared to 2015 was primarily the result of higher proceeds fromthe issuances of common stock from open market sales, partially offset by a partial final payment for a term loan in connection with refinancing of the debtarrangement in July 2016 as well as lower proceeds from exercises of stock options and from purchases under our Employee Stock Purchase Plan.We entered into a Controlled Equity Offering sales agreement with Cantor Fitzgerald on November 3, 2015, under which we may sell up to $40million of common stock through Cantor Fitzgerald, acting as agent, subject to certain limitations, pursuant to a shelf registration statement on Form S-3 thatwe filed with the SEC on November 3, 2015, which was declared effective by the SEC on November 25, 2015. In 2015, we raised net proceeds (net ofcommissions) of approximately $14.3 million from the sale of approximately 7.1 million shares of our common stock in the open market through theControlled Equity Offering program with Cantor Fitzgerald at a weighted average price of $2.09 per share. In 2016, we raised net proceeds of approximately$16.1 million (after deducting underwriting discounts and commissions and offering expenses) through the sale of an aggregate of 13.8 million shares of ourcommon stock in an underwritten public offering at a price to the public of $1.25 per share and raised net proceeds (net of commissions) of approximately$7.6 million from the sale of approximately 5.2 million shares of our common stock in the open market through the Controlled Equity Offering program withCantor Fitzgerald at a weighted average price of $1.50 per share. In 2017, we raised net proceeds (net of commissions) of approximately $12.0 million fromthe sale of approximately 8.9 million shares of our common stock in the open market through the Controlled Equity Offering program with Cantor Fitzgeraldat a weighted average price of $1.39 per share. From January 1, 2018 to March 2, 2018, we raised net proceeds (net of commissions) of approximately $2.8million from the sale of 2.5 million shares of our common stock in the open market through the Controlled Equity Offering program with Cantor Fitzgerald ata weighted average price of $1.17 per share. As of March 2, 2018, the Company had up to approximately $14.9 million of common stock available for saleunder the Controlled Equity Offering program and approximately $67.8 million of common stock available for sale under the shelf registration statement.Any additional sales in the public market of our common stock, under the Controlled Equity Offering program with Cantor Fitzgerald or otherwise under theNovember 2015 shelf registration statement, could adversely affect prevailing market prices for our common stock.68On June 26, 2014, we entered into a loan agreement (the 2014 Loan Agreement) with Oxford Finance LLC, pursuant to which Oxford Financeprovided 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 areto be used for working capital and general business requirements. The term loan repayment schedule provided for interest only payments for the first 18months, followed by consecutive equal monthly payments of principal and interest in arrears starting on February 1, 2016 and continuing through thematurity date. The 2014 Loan Agreement provided 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 was due when the term loan becomes due or upon the prepayment of thefacility. If we elected to prepay the loan, there was also a prepayment fee between 1% and 3% of the principal amount of the term loan depending on thetiming and circumstances of prepayment. In connection with the term loan, we received proceeds of $19.8 million, net of debt offering/issuance costs. Thedebt offering/issuance costs were recorded as debt discount on our balance sheet which together with the additional $1.6 million payment and fixed interestrate payments was being amortized to interest expense throughout the life of the term loan using the effective interest rate method.In July 2015, we and Oxford Finance entered into the First Amendment of the 2014 Loan Agreement and modified the terms to the Loan Agreementto 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. Theinterest rate remained unchanged, we paid a loan modification fee of $240,000 and the additional payment originally 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, was increased to 10%.In July 2016, we renegotiated the terms of our $20.0 million secured single-draw term loan with Oxford Finance with such renegotiated terms beingformalized in a new Loan and Security Agreement (the 2016 Loan Agreement). The 2016 Loan Agreement provides for interest only payments for the first 18months, followed by consecutive monthly payments of principal and interest in arrears starting on March 1, 2018 and continuing through the maturity dateof the term loan of August 1, 2020. The 2016 Loan Agreement also provides for a floating interest rate (7.95% initially and 8.87% as of December 31, 2017)based on an index rate plus a spread, a $150,000 facility fee that was paid at closing and an additional payment equal to 9.25% of the principal amount of theterm 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 prepayment feebetween 1% and 3% of the principal amount of the term loan depending on the timing of prepayment. The facility fee and other debt offering/issuance costshave been recorded as debt discount on our balance sheet and together with the final $1.9 million payment and interest rate payments will be amortized tointerest expense throughout the life of the term loan using the effective interest rate method. In connection with this renegotiation, we also paid OxfordFinance $886,000, which represented a portion of the final payment under the 2014 Loan Agreement which would have been payable to Oxford Financewhen that loan became due.The term loan is secured by substantially all of our assets, except that the collateral does not include any intellectual property (including licensing,collaboration and similar agreements relating thereto), and certain other excluded assets. The 2016 Loan Agreement contains customary representations,warranties and covenants by us, which covenants limit our ability to convey, sell, lease, transfer, assign or otherwise dispose of certain assets; engage in anybusiness 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 2016 Loan Agreement also contains customary indemnification obligations and customary events of default, including, among other things,our failure to fulfill certain obligations under the 2016 Loan Agreement and the occurrence of a material adverse change which is defined as a materialadverse change in our business, operations, or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of theloan, or a material impairment 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 usunder the 2016 Loan Agreement, the lender would be entitled to exercise its remedies thereunder, including the right to accelerate the debt, upon which wemay be required to repay all amounts then outstanding under the 2016 Loan Agreement. As a result, that portion of the term loan that is due more than 12months after December 31, 2017 has been classified within non-current liabilities.69In February 2018, the Company and Oxford Finance entered into a First Amendment of the Loan Agreement, which modified the terms of the LoanAgreement to change the first principal payment date from March 1, 2018 to December 1, 2018 and to increase the additional payment due when the termloan becomes due or upon the prepayment of the facility from 9.25% of the principal amount of the term loan to 10% of such amount. The interest rate andthe maturity date remain unchanged, and the Company paid Oxford Finance a loan modification fee of $100,000.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 as we received a non-refundable upfront fee of $20.0 million from Sandoz and a non-refundable upfront feeof $12.5 million from Indivior in 2017.In aggregate, we are required to make future payments pursuant to our existing contractual obligations as follows (in thousands): Contractual Obligations 2018 2019 2020 2021 2022 Total Capital lease (1) $15 $7 $4 $1 $— $27 Term loan (1) 8,698 8,724 6,642 — — 24,064 Purchase commitments (2) 500 — — — — 500 Operating lease obligations 1,948 539 324 193 — 3,004 Total contractual cash obligations $11,161 $9,270 $6,970 $194 $— $27,595 (1)Includes principal and interest payments and assumes no acceleration of obligations.(2)Recorded as an accrued liability on our balance sheet at December 31, 2017.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 from the date of this Annual Report on Form 10-K. We may consumeavailable resources more rapidly than currently anticipated, resulting in the need for additional funding. Additionally, we do not expect to generatesignificant revenues from our pharmaceutical products currently under development for at least the next twelve months, if at all. Depending on whether weenter into additional collaborative agreements in the near term and the extent to which we earn milestone revenues, we may be required to raise additionalcapital through a variety of sources, including: •the public equity markets; •private equity financings; •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 (assuming anyconvertible debt securities were converted into shares).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.70Recent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts withCustomers (ASU 2014-09), 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 company expects to beentitled in exchange for those goods or services. The guidance provides companies with two implementation methods. Companies can choose to apply thestandard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with the cumulative effect of initiallyapplying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application(modified retrospective application). The standard will be effective for us in the first quarter of 2018. To date, our revenues have been derived from product sales, license and collaboration agreements, and sale of intellectual property rights. Based onour analysis, we do not currently anticipate a material quantitative impact on product revenue as the timing of revenue recognition for product sales is notexpected to change as product revenue will continue to be recognized when control of the goods is transferred to the customer. For our license andcollaboration agreements, the consideration we are eligible to receive under these agreements typically consists of upfront payments, research anddevelopment funding, milestone payments, and royalties. For our agreements related to sale of intellectual property rights, the consideration we are eligibleto receive under these agreements typically consists of upfront payments, milestone payments, and earn-outs. We have substantially completed our review ofthe impact that this new standard will have on our collaboration and license arrangements and intellectual property purchase agreements as well as on ourfinancial statement disclosures. We will select the modified retrospective method to adopt the standard effective the first quarter of 2018. We expect that the impact of adopting thenew standard will not be material. We do not expect a material cumulative-effect adjustment to accumulated deficit on January 1, 2018 upon adoption of thenew standard. The new standard requires more robust disclosures than required by previous guidance, including disclosures related to disaggregation ofrevenue into appropriate categories, performance obligations, the judgments made in revenue recognition determinations, adjustments to revenue whichrelate to activities from previous quarters or years, any significant reversals of revenue, and costs to obtain or fulfill contracts.In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842), which amends the existingaccounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (withthe exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement. This ASUbecomes effective for us in the first quarter of fiscal year 2019 and early adoption is permitted. This ASU is required to be applied with a modifiedretrospective approach and requires application of the new standard at the beginning of the earliest comparative period presented. We are currentlyevaluating the impact that ASU 2016-02 will have on its financial statements.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 and to our term loan. Fixed rate securities andborrowings may have their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less incomethan expected if interest rates fall and floating rate borrowings may lead to additional interest expense if interest rates increase. Due in part to these factors,our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securitieswhich have declined in market value due to changes in interest rates. Our interest expense on the term loan may rise if the interest rates increase.71Our primary investment objective is to preserve principal while at the same time maximizing yields without significantly increasing risk. Ourportfolio includes money markets funds, certificates of deposit, commercial paper, corporate debt, and U.S. government agencies. The diversity of ourportfolio helps us to achieve our investment objectives. As of December 31, 2017, approximately 100% of our investment portfolio is composed ofinvestments with original maturities of one year or less and approximately 78.7% of our investment portfolio matures less than 90 days from the date ofpurchase.The following table presents the amounts of our cash equivalents and investments that may be subject to interest rate risk and the average interestrates as of December 31, 2017 by year of maturity (dollars in thousands): 2018 Cash equivalents: Fixed rate $568 Average fixed rate 1.16% Variable rate $27,220 Average variable rate 1.58% Short-term investments: Fixed rate $7,384 Average fixed rate 1.39% Long-term investments: Fixed rate $— Average fixed rate — Restricted investments: Fixed rate $150 Average fixed rate 1.00% Total investment securities $35,322 Average rate 1.51% The following table presents the amounts of our cash equivalents and investments that may be subject to interest rate risk and the average interestrates as of December 31, 2016 by year of maturity (dollars in thousands): 2017 Cash equivalents: Fixed rate $693 Average fixed rate 0.41% Variable rate $2,449 Average variable rate 0.66% Short-term investments: Fixed rate $19,600 Average fixed rate 0.67% Long-term investments: Fixed rate $— Average fixed rate — Restricted investments: Fixed rate $150 Average fixed rate 0.24% Total investment securities $22,892 Average rate 0.64% As of December 31, 2017, the fair value of our term loan was estimated to be $19.9 million. The term loan repayment schedule provides for interestonly payments for the first 18 months after July 2016, followed by consecutive monthly payments of principal and interest in arrears starting on March 1,2018 and continuing through the maturity date of the term loan of August 1, 2020. The term loan also provides for a floating interest rate (7.95% initially and8.87% as of December 31, 2017) based on an index rate plus a spread and an additional payment equal72to 9.25% of the principal amount of the term loan, which is due when the term loan becomes due or upon the prepayment of the facility. If the Companyelects 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 timing of prepayment.The obligation under the term loan is subject to interest rate risk because the interest rates under the obligation may exceed current interest rates. 73Item 8.Financial Statements and Supplementary Data.DURECT CORPORATIONINDEX TO FINANCIAL STATEMENTS Page No.Report of Independent Registered Public Accounting Firm 75 Balance Sheets 76 Statements of Operations and Comprehensive Loss 77 Statement of Stockholders’ Equity 78 Statements of Cash Flows 79 Notes to Financial Statements 80 74Report of Independent Registered Public Accounting FirmTo the Stockholders and the Board of Directors of DURECT CorporationOpinion on the Financial StatementsWe have audited the accompanying balance sheets of DURECT Corporation (the Company) as of December 31, 2017 and 2016, and the relatedstatements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, andthe related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “financial statements”). In ouropinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the resultsof its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accountingprinciples. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), theCompany’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated March 8, 2018 expressed an unqualifiedopinion thereon.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’sfinancial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to theCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and thePCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performingprocedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond tothose risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits alsoincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of thefinancial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLPWe have served as the Company’s auditor since 1998.San Francisco, CaliforniaMarch 8, 2018 75DURECT CORPORATIONBALANCE SHEETS(in thousands, except per share amounts) December 31, 2017 2016 A S S E T S Current assets: Cash and cash equivalents $29,375 $5,404 Short-term investments 7,384 19,600 Accounts receivable (net of allowances of $155 at December 31, 2017 and $73 at December 31, 2016) 2,376 1,154 Inventories 3,163 3,782 Prepaid expenses and other current assets 3,060 2,486 Total current assets 45,358 32,426 Property and equipment, net 929 1,297 Goodwill 6,399 6,399 Long-term restricted investments 150 150 Other long-term assets 277 236 Total assets $53,113 $40,508 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 $1,520 $2,086 Accrued liabilities 5,511 5,060 Contract research liabilities 834 783 Deferred revenue, current portion 682 968 Term loan, current portion, net 7,281 19,853 Total current liabilities 15,828 28,750 Deferred revenue, non-current portion 1,093 1,879 Term loan, non-current portion, net 12,634 — Other long-term liabilities 2,070 1,541 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; 150,837 and 141,297 shares issued and outstanding at December 31, 2017 and 2016, respectively 15 14 Additional paid-in capital 465,246 448,404 Accumulated other comprehensive loss (1) (3)Accumulated deficit (443,772) (440,077)Stockholders’ equity 21,488 8,338 Total liabilities and stockholders’ equity $53,113 $40,508 The accompanying notes are an integral part of these financial statements. 76DURECT CORPORATIONSTATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(in thousands, except per share amounts) Year ended December 31, 2017 2016 2015 Collaborative research and development and other revenue $23,577 $1,880 $7,832 Product revenue, net 13,093 12,145 11,292 Revenue from sale of intellectual property rights 12,500 — — Total revenues 49,170 14,025 19,124 Operating expenses: Cost of product revenues 6,633 5,290 3,905 Research and development 31,609 29,274 24,317 Selling, general and administrative 13,165 11,825 11,566 Total operating expenses 51,407 46,389 39,788 Loss from operations (2,237) (32,364) (20,664)Other income (expense): Interest and other income 967 143 237 Interest expense (2,425) (2,288) (2,236)Net other expense (1,458) (2,145) (1,999)Net loss (3,695) (34,509) (22,663)Net change in unrealized gain (loss) on available-for-sale securities, net of tax 2 11 (101)Total comprehensive loss $(3,693) $(34,498) $(22,764)Net loss per share Basic $(0.03) $(0.26) $(0.19)Diluted $(0.03) $(0.26) $(0.19)Weighted-average shares used in computing net loss per share Basic 145,273 133,163 118,523 Diluted 145,273 133,163 118,523 The accompanying notes are an integral part of these financial statements. 77DURECT CORPORATIONSTATEMENT OF STOCKHOLDERS’ EQUITY(in thousands) Common Stock AdditionalPaid-In AccumulatedOtherComprehensive Accumulated TotalStockholders’ Shares Amount Capital Income Deficit Equity 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 of ESPP 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 Issuance of fully vested options to settle accrued liabilities — — 1,007 — — 1,007 Stock-based compensation expense from stock options and ESPP shares — — 2,660 — — 2,660 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 Issuance of common stock upon exercise of stock options and purchases of ESPP shares 413 — 410 — — 410 Issuance of common stock upon equity financings, net of issuance costs of $1,364 19,045 2 23,743 — — 23,745 Issuance of fully vested options to settle accrued liabilities — — 1,143 — — 1,143 Stock-based compensation expense from stock options and ESPP shares — — 2,655 — — 2,655 Net loss — — — — (34,509) (34,509)Change in unrealized gain on available-for-sale securities, net of tax — — — 11 — 11 Balance at December 31, 2016 141,297 $14 $448,404 $(3) $(440,077) $8,338 Issuance of common stock upon exercise of stock options and purchases of ESPP shares 667 — 649 — — 649 Issuance of common stock upon equity financings, net of issuancecosts of $374 8,873 1 11,988 — — 11,989 Issuance of fully vested options to settle accrued liabilities — — 1,600 — — 1,600 Stock-based compensation expense from stock options and ESPP shares — — 2,605 — — 2,605 Net loss — — — — (3,695) (3,695)Change in unrealized gain on available-for-sale securities, net of tax — — — 2 — 2 Balance at December 31, 2017 150,837 $15 $465,246 $(1) $(443,772) $21,488 The accompanying notes are an integral part of these financial statements. 78 DURECT CORPORATIONSTATEMENTS OF CASH FLOWS(in thousands) Year ended December 31, 2017 2016 2015 Cash flows from operating activities Net loss $(3,695) $(34,509) $(22,663)Adjustments to reconcile net loss to net cash used in operating activities: Sale of intellectual property rights for non-operating purposes (500) — — Depreciation and amortization 437 416 425 Stock-based compensation 2,605 2,655 2,660 Inventory write-down 2,259 687 303 Amortization of debt issuance cost 62 104 100 Loss on debt extinguishment — 9 — Net accretion/amortization on investments (41) (216) (278)Realized gain from sale of marketable equity security, net of tax — — (117)Changes in assets and liabilities: Accounts receivable (1,222) 1,068 (100)Inventories (140) (552) (579)Prepaid expenses and other assets (1,115) 656 (2,056)Accounts payable (566) 800 265 Accrued liabilities 1,594 1,419 1,385 Contract research liability 51 208 217 Deferred revenue (1,072) (38) (395)Total adjustments 2,352 7,216 1,830 Net cash used in operating activities (1,343) (27,293) (20,833)Cash flows from investing activities Sale of intellectual property rights for non-operating purposes 500 — — Purchases of property and equipment (69) (147) (225)Purchases of available-for-sale securities (8,373) (24,400) (34,040)Proceeds from maturities of available-for-sale securities 20,632 30,584 40,619 Proceeds from sales of short-term investment — — 178 Net cash provided by investing activities 12,690 6,037 6,532 Cash flows from financing activities Payments on equipment financing obligations (14) (19) (21)Net proceeds from issuances of common stock upon exercise of stock options, and purchases of ESPP shares 649 410 1,175 Net proceeds from issuances of common stock in connection with equity financings 11,989 23,745 14,290 Payment of additional issuance cost for term loan — (173) (240)Payment of final payment for term loan — (886) — Net cash provided by financing activities 12,624 23,077 15,204 Net increase in cash and cash equivalents 23,971 1,821 903 Cash and cash equivalents at beginning of year 5,404 3,583 2,680 Cash and cash equivalents at end of year $29,375 $5,404 $3,583 Supplemental disclosure of cash flow information Cash paid for interest $1,703 $1,611 $1,595 Supplementary disclosure of non-cash financing information Fully vested options issued to settle accrued liabilities $1,600 $1,143 $1,007 The accompanying notes are an integral part of these financial statements. 79DURECT CORPORATIONNOTES TO FINANCIAL STATEMENTS 1.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 companywith research and development programs broadly falling into two categories: (i) new chemical entities derived from our Epigenetics Regulator Program, inwhich the Company attempts to discover and develop molecules which have not previously been approved and marketed as therapeutics, and (ii) DrugDelivery Programs, in which the Company applies its formulation expertise and technologies largely to active pharmaceutical ingredients whose safety andefficacy have previously been established but which the Company aims to improve in some manner through a new formulation. The Company has severalproducts 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). Thepreparation of the accompanying Financial Statements conforms to accounting principles generally accepted in the U.S. which requires management to makejudgments, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures. On anongoing basis, management evaluates its estimates including, but not limited to, those related to revenue recognition, the period of performance,identification of deliverables and evaluation of milestones with respect to our collaborations, the amounts of revenues, recoverability of inventory, certainaccrued liabilities including accrued clinical trial liability, and stock-based compensation. The Company bases its estimates on historical experience and onvarious other market-specific and other relevant assumptions that the Company believe to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differmaterially from those estimates.Liquidity and Need to Raise Additional CapitalAs of December 31, 2017, the Company has an accumulated deficit of $443.8 million as well as negative cash flows from operating activities.The Company historically has had negative cash flows from operating activities and expects its negative cash flows to continue. The Company willcontinue to require substantial funds to continue research and development, including clinical trials of its product candidates. Management’s plans in orderto meet its operating cash flow requirements include seeking additional collaborative agreements for certain of its programs and achieving milestone andother payments under its collaboration and licensing agreements as well as financing activities such as public offerings and private placements of its commonstock, preferred stock offerings, issuances of debt and convertible debt instruments.There are no assurances that such additional funding will be obtained and that the Company will succeed in its future operations. If the Companycannot successfully raise additional capital and implement its strategic development plan, its liquidity, financial condition and business prospects will bematerially and adversely affected.80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 other than the gain realized from sale of a marketable equity security in the year ended December 31, 2015. The cost of securities sold isbased on the specific identification method.The Company invests in debt instruments of government agencies, corporations, and money market funds with high credit ratings. The Company hasestablished 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.The Company 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 for these receivables is generally not required. The risk associated with thisconcentration is limited to a certain extent due to the large number of accounts and their geographic dispersion. The Company monitors the creditworthinessof 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, suchlosses have been immaterial in all periods presented.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 saleof certain excipients for REMOXY ER and one excipient that is included in a currently marketed animal health product.In 2017, revenue from the sale of products from the ALZET product line and the LACTEL product line accounted for 14% and 12% of total revenue,respectively. In 2016, revenue from the ALZET product line and the LACTEL product line accounted for 51% and 31% of total revenue, respectively. In2015, revenue from the ALZET product line and the LACTEL product line accounted for 36% and 22% of total revenue, respectively. In 2017, Sandoz and Indivior accounted for 41% and 25% of the Company’s total revenues. In 2016, Tolmar accounted for 15% of the Company’stotal revenues. In 2015, Zogenix and Tolmar accounted for 26% and 11% of the Company’s total revenues. 81Total revenue by geographic region for the years 2017, 2016 and 2015 are as follows (in thousands): Year ended December 31, 2017 2016 2015 United States $11,323 $9,082 $14,289 Europe 34,261 1,945 1,817 Japan 1,395 1,413 1,897 Others 2,191 1,585 1,121 Total $49,170 $14,025 $19,124 Revenue by geography is determined by the location of the customer.InventoriesInventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventories, in part, include certainexcipients that are sold to a customer for a currently marketed animal health product and included in several products in development or awaiting regulatoryapproval. In October 2017, the Company announced that PERSIST, the Phase 3 clinical trial for POSIMIR, did not meet its primary efficacy endpoint. As aresult, the Company wrote down certain lots of inventory which are no longer considered to be probable for use prior to expiration and prepaid inventoryrelated to a minimum purchase agreement for an excipient. In addition, the Company recorded a liability related to a minimum purchase agreement for thesame excipient. In 2017, the Company recorded charges to cost of goods sold of approximately $2.0 million, of which approximately $503,000 related to thewrite-down of the cost basis of inventory on hand, $500,000 related to the prepaid inventory for the minimum purchase commitment for this excipient, and$1.0 million related to the accrual of a liability for the remaining minimum purchase commitment for the same excipient. As of December 31, 2017, theremaining carrying value of the excipient in the Company’s inventory was $69,000. In the event that management determines that the Company will notutilize all of these materials, there could be a potential write-off related to this inventory. If the Company is able to subsequently sell products made with rawmaterials that were previously written down, the Company will report an unusually high gross profit as there will be no associated cost of goods for thesematerials. The Company’s inventories consisted of the following (in thousands): December 31, 2017 2016 Raw materials $282 $745 Work in-process 1,182 1,672 Finished goods 1,699 1,365 Total inventories $3,163 $3,782 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.82GoodwillGoodwill is periodically assessed and evaluated for impairment at the reporting unit level. The Company operates in one operating segment and alsohas only one reporting unit, which is the research, development and manufacturing of pharmaceutical products. The Company assesses the impairment ofgoodwill at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Companyconsiders important which could trigger an impairment review include the following: •significant decline in our stock price for a prolonged 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 the Company’s overall business; and •significant negative industry or economic trends.As of December 31, 2017, the carrying value of goodwill was approximately $6.4 million and no impairment of goodwill has been recorded for anyof the periods presented. The Company evaluates goodwill for impairment at least annually. In 2017, 2016 and 2015, goodwill was evaluated and noindicators of impairment were identified. Should goodwill become impaired, the Company may be required to record an impairment charge. To date, theCompany has not recorded any impairment charge related to goodwill.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, 2017, 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 9 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 titletransfers to customers, provided no continuing obligation on the Company’s part exists, the price is fixed or determinable and the collectability of theamounts owed is reasonably assured. The Company enters into license and collaboration agreements under which it may receive upfront license fees, researchfunding and contingent milestone payments and royalties. The Company’s deliverables under these arrangements typically consist of granting licenses tointellectual property rights and providing research and development services. For multiple-element arrangements, each deliverable within a multipledeliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items havevalue to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery orperformance of the undelivered item(s) is considered probable and substantially in the Company’s control. The accounting standards contain a presumptionthat separate contracts entered into at or83near the same time with the same entity or related parties were negotiated as a package and should be evaluated as a single agreement. Deferred revenueassociated with a non-refundable payment received under a license and collaboration agreement for which the performance obligations are terminated willresult in an immediate recognition of any remaining deferred revenue in the period that termination occurred provided that all performance obligations havebeen satisfied.From time-to-time, the Company also enters into sales of intellectual property rights under which it may receive upfront payments, contingentmilestone payments and earn-outs from third party collaborators. The Company’s deliverable under these arrangements typically consists of sale ofintellectual property rights, and does not contain any substantive continuing obligations subsequent to the transfer of the related rights, title, and interest tothe buyer. The Company recognizes the upfront payment as revenue because such arrangement constitutes the Company's revenue-earning activities and is inline with its ordinary course of ongoing business operations.Research and development revenue related to services performed under the collaborative arrangements with the Company’s third-party collaboratorsis recognized 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.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 besubstantive (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 generally necessary to the achievement of development-based milestones. The Company would account fordevelopment-based milestones as revenue upon achievement of the substantive milestone events. Milestones related to sales-based activities may betriggered upon events such as the first commercial sale of a product or when sales first achieve a defined level. Under the Company’s collaborativeagreements, the Company’s third-party collaborators will take the lead in commercialization activities and the Company is typically not involved in theachievement of sales-based milestones. These sales-based milestones would be achieved after the completion of the Company’s development activities. TheCompany would account for the sales-based milestones in the same manner as royalties, with revenue recognized upon achievement of the milestone. Inaddition, upon the achievement of either development-based or sales-based milestone events, the Company has no future performance obligations related toany milestone payments.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, reimbursements of research and development expenses incurred by the Company’s partnersare recorded as collaborative research and development revenue.84Comprehensive Income (Loss)Components of other comprehensive income (loss) are comprised entirely of unrealized gains and losses on the Company’s available-for-salesecurities for all periods presented. Total comprehensive loss has been disclosed in the Company’s Statements of Comprehensive Loss.Segment ReportingThe Company operates in one operating segment, which is the research, development and manufacturing of pharmaceutical products.Net Loss Per ShareBasic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding. Diluted net loss pershare is computed using the weighted-average number of common shares outstanding and common stock equivalents (i.e., options to purchase commonstock) outstanding during the period, if dilutive, using the treasury stock method for options.The numerators and denominators in the calculation of basic and diluted net loss per share were as follows (in thousands except per share amounts): Year Ended December 31, 2017 2016 2015 Numerators: Net loss $(3,695) $(34,509) $(22,663)Denominators: Weighted average shares used to compute basic net loss per share 145,273 133,163 118,523 Effect of dilutive securities: Dilution from stock options — — — Dilution from ESPP — — — Dilutive common shares — — — Weighted average shares used to compute diluted net loss per share 145,273 133,163 118,523 Net loss per share: Basic $(0.03) $(0.26) $(0.19)Diluted $(0.03) $(0.26) $(0.19) The computation of diluted net loss per share for the years ended December 31, 2017, 2016 and 2015 excludes the impact of options to purchase 20.1million, 18.7 million and 16.5 million shares of common stock outstanding, respectively, at December 31, 2017, 2016 and 2015, as such impact would beantidilutive.Shipping and HandlingCosts related to shipping and handling are included in cost of revenues for all periods presented.85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 Accounting Standards Update 2014-09, Revenue from Contracts withCustomers (ASU 2014-09), 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 company expects to beentitled in exchange for those goods or services. The guidance provides companies with two implementation methods. Companies can choose to apply thestandard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with the cumulative effect of initiallyapplying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application(modified retrospective application). The standard will be effective for the Company in the first quarter of 2018. To date, the Company’s revenues have been derived from product sales, license and collaboration agreements, and sale of intellectual property rights.Based on the Company’s analysis, it does not currently anticipate a material quantitative impact on product revenue as the timing of revenue recognition forproduct sales is not expected to change as product revenue will continue to be recognized when control of the goods is transferred to the customer. For theCompany’s license and collaboration agreements, the consideration the Company is eligible to receive under these agreements typically consists of upfrontpayments, research and development funding, milestone payments, and royalties. For the Company’s agreements related to sale of intellectual propertyrights, the consideration the Company is eligible to receive under these agreements typically consists of upfront payments, milestone payments, and earn-outs. The Company has substantially completed its review of the impact that this new standard will have on its collaboration and license arrangements andintellectual property purchase agreements as well as on its financial statement disclosures. The Company will select the modified retrospective method to adopt the standard effective the first quarter of 2018. The Company expects that theimpact of adopting the new standard will not be material. The Company does not expect a material cumulative-effect adjustment to accumulated deficit onJanuary 1, 2018 upon adoption of the new standard. The new standard requires more robust disclosures than required by previous guidance, includingdisclosures related to disaggregation of revenue into appropriate categories, performance obligations, the judgments made in revenue recognitiondeterminations, adjustments to revenue which relate to activities from previous quarters or years, any significant reversals of revenue, and costs to obtain orfulfill contracts.In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842), which amends the existingaccounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (withthe exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement. This ASUbecomes effective for the Company in the first quarter of fiscal year 2019 and early adoption is permitted. This ASU is required to be applied with a modifiedretrospective approach and requires application of the new standard at the beginning of the earliest comparative period presented. The Company is currentlyevaluating the impact that ASU 2016-02 will have on its financial statements. 86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, 2017 2016 2015 Collaborator Sandoz AG (Sandoz) (1) $20,000 $— $— Zogenix, Inc. (Zogenix) (2) 835 555 4,898 Santen Pharmaceutical Co. Ltd. (Santen) (3) 294 514 824 Pain Therapeutics, Inc. (Pain Therapeutics) 109 670 1,385 Others 2,339 141 725 Total collaborative research and development and other revenue $23,577 $1,880 $7,832 (1)Amounts related to ratable recognition of upfront fees were $20.0 million in 2017 and zero in 2016 and 2015; the Company and Sandoz signed alicense agreement effective June 2017. As of December 31, 2017, all of the $20.0 million upfront fee had been recognized as revenue as theCompany’s contractual performance obligations had been fulfilled.(2)Amounts related to ratable recognition of upfront fees were $833,000 in 2017, $208,000 in 2016 and $255,000 in 2015, respectively. The Companyand Zogenix signed a license agreement effective July 2011. In August 2017, the Company and Zogenix terminated the license agreement. As aresult, the Company recognized as revenue all of the remaining upfront fees in the twelve months ended December 31, 2017 that had previously beendeferred.(3)Amounts related to recognition of upfront fees were $199,000 in 2017, $228,000 in 2016 and $274,000 in 2015, respectively. The Company andSanten signed a license agreement effective December 2014. As of March 2, 2018, the Company had potential milestones of up to $337.5 million that the Company may receive in the future under itscollaborative arrangements, of which $44.5 million are development-based milestones and $293.0 million are sales-based milestones. Within the category ofdevelopment-based milestones, $2.0 million are related to early stage clinical testing (defined as Phase 1 or 2 activities), $3.0 million are related to late stageclinical testing (defined as Phase 3 activities), $8.0 million are related to regulatory filings, and $31.5 million are related to regulatory approvals. Nopayments were received between December 31, 2017 and March 2, 2018.Agreement with Sandoz AG.In May 2017, the Company and Sandoz AG (“Sandoz”) entered into a license agreement to develop and market POSIMIR in the United States.Following expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR), the agreement becameeffective in June 2017. POSIMIR is the Company’s investigational post-operative pain relief depot that utilizes the Company’s patented SABER technologyto deliver bupivacaine to provide up to three days of pain relief after surgery. The Company retains commercialization rights in the rest of the world. Underterms of the agreement, Sandoz made an upfront payment of $20 million, with the potential for up to an additional $43 million in milestone payments basedon successful development and regulatory milestones (of which $30 million is currently feasible), and up to an additional $230 million in sales-basedmilestones. DURECT was responsible for the completion of the ongoing PERSIST Phase 3 clinical trial for POSIMIR as well as FDA interactions throughpotential approval. If approved, DURECT also has certain manufacturing obligations under this agreement. Sandoz will have exclusive commercializationrights in the United States upon regulatory approval with sole funding responsibility for commercialization activities. Sandoz will pay the Company a tiereddouble-digit royalty on product sales for a defined period, after which the license granted to Sandoz shall convert to a non-exclusive, fully paid, royalty-free,irrevocable and perpetual license. The term of the agreement shall be for the duration of Sandoz’s obligation to pay royalties for product sales under theAgreement. The agreement provides each party with specified termination rights, including the right of Sandoz to terminate at will after a specified periodand each party to terminate the agreement upon material breach of the agreement by the other party. The failure of the PERSIST trial for POSIMIR to achieveits primary endpoint gives87Sandoz a right to terminate our agreement with them on thirty days’ notice, in addition to the rights they have to terminate for convenience on six months’notice.The Company evaluated the agreement under the accounting guidance for multiple element arrangements and identified three deliverables: thelicense to develop and market POSIMIR, the research and development services and the manufacturing services. Given that the delivery of themanufacturing services by the Company is dependent upon approval of POSIMIR by the FDA, and that the fee to be received by the Company for theseservices, should they be delivered, is consistent with their estimated selling price, the Company considers the manufacturing services to be a contingentdeliverable and has excluded them from the initial measurement and allocation of the arrangement consideration. The Company evaluated the licensedeliverable and concluded that it did not have stand alone value separate from the research and development services and accordingly combined thesedeliverables into a single unit of accounting. The Company allocated the arrangement consideration, which consists of the $20.0 million upfront payment,to this single unit of accounting. As of December 31, 2017, all of the $20.0 million upfront fee had been recognized as revenue as the Company’s contractualperformance obligations had been fulfilled. The effect of a change made to the estimated performance period, and the related ratably recognized revenue,would occur on a prospective basis in the period that the change was made. The Company considers the development and regulatory milestones to besubstantive, and will recognize the associated milestone payments as revenue when the underlying milestone events are achieved.Total collaborative research and development revenue recognized by the Company for Sandoz was $20.0 million for 2017, compared with zero for2016 and 2015. The cumulative aggregate payments received by the Company from Sandoz as of December 31, 2017 were $20.0 million under thisagreement. Patent Purchase Agreement with IndiviorOn September 26, 2017, the Company entered into a Patent Purchase Agreement (the “Agreement”) with Indivior UK Limited (“Indivior”). Pursuantto the Agreement, the Company has assigned to Indivior certain patents that may provide further intellectual property protection for RBP-7000, Indivior’sinvestigational once-monthly injectable risperidone product for the treatment of schizophrenia. In consideration for such assignment, Indivior has made anupfront non-refundable payment to DURECT of $12.5 million, and has also agreed to make an additional $5.0 million payment to DURECT contingent uponthe achievement of a regulatory milestone, as well as quarterly earn-out payments that are based on a single digit percentage of U.S. net sales for certainproducts covered by the assigned patent rights, including RBP-7000. The assigned patent rights include granted patents extending through at least 2026. DURECT also receives a non-exclusive right under the assigned patents to develop and commercialize certain risperidone-containing products and productsthat do not contain risperidone or buprenorphine. The agreement contains customary representations, warranties and indemnities of the parties. TheCompany received the payment of $12.5 million from Indivior in September 2017 and recognized the $12.5 million as revenue from sale of intellectualproperty rights in 2017 as the Company does not have any continuing obligations under the purchase agreement. 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 ER and other oral sustained release, abuse deterrent opioid products incorporating four specified opioid drugs, using theORADUR technology. This agreement currently covers only REMOXY ER.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$3.0 million in performance milestone payments based on the successful development and approval of REMOXY ER. Of these potential milestones, all $3.0million are development-based milestones. There are no sales-based milestones under the agreement. As of December 31, 2017, the Company had received$1.5 million in cumulative milestone payments.In March 2016, Pain Therapeutics resubmitted a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA), and in September2016, Pain Therapeutics received a Complete Response Letter from the88FDA for REMOXY ER. Based on its review, the FDA has determined that the NDA cannot be approved in its present form and specifies additional actions anddata that are needed for drug approval. In February 2018, Pain Therapeutics stated that they had resubmitted the REMOXY ER NDA. In March 2018, PainTherapeutics announced that the NDA had been accepted by the FDA and that the FDA has set a PDUFA target action date of August 7, 2018.Total collaborative research and development revenue recognized under the agreements with Pain Therapeutics was $109,000 in 2017, $670,000 in2016 and $1.4 million in 2015. In May 2015, Pain Therapeutics sent a letter to the Company that provided the Company with formal written notice that PainTherapeutics was deleting, effective as of January 12, 2015, the opioid drug hydrocodone (and only hydrocodone) as a licensed product under the agreement.The letter did not alter the terms of the agreement regarding the remaining three licensed products (REMOXY ER, hydromorphone or oxymorphone) orotherwise amend the agreement. In December 2016, Pain Therapeutics returned to the Company all of Pain Therapeutics’ rights and was relieved of itsobligations under the Company’s license agreement to develop and commercialize ORADUR-based formulations of hydromorphone and oxymorphone butwithout impacting the rights and obligations of the two parties with respect to REMOXY ER. The cumulative aggregate payments received by the Companyfrom Pain Therapeutics as of December 31, 2017 were $40.4 million under this agreement.The Company recognized no product revenue related to key excipients for REMOXY ER for 2017 compared to $653,000 for 2016 and $96,000 for2015. The associated cost of goods sold were zero for 2017, compared to $216,000 for 2016 and $51,000 for 2015. Recent orders for these excipients fromPain Therapeutics have been processed through mutually agreeable purchase orders, in the absence of an existing long-term contract. Pursuant to theCompany’s 2002 agreement with Pain Therapeutics, the Company is to be the exclusive supplier of certain defined excipients for products in thecollaboration. 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 was responsible for the clinical development and commercialization of aproprietary, long-acting injectable formulation of risperidone using the Company’s SABER controlled-release formulation technology potentially incombination with Zogenix’s DosePro® needle-free, subcutaneous drug delivery system. DURECT was responsible for non-clinical, formulation and CMCdevelopment activities. The Company was to 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 were considered integral toutilizing the licensed intellectual property and, accordingly, the deliverable were accounted for as a single unit of accounting. The $2.25 million upfront feehad been recognized as collaborative research and development revenue ratably over the term of the Company’s research and development involvement withZogenix with respect to this product candidate.The Company granted to Zogenix an exclusive worldwide license, with sub-license rights, to the Company’s intellectual property rights related tothe Company’s proprietary polymeric and non-polymeric controlled-release formulation technology to make and have made, use, offer for sale, sell andimport risperidone products, where risperidone is the sole active agent, for administration by injection in the treatment of schizophrenia, bipolar disorder orother psychiatric related disorders in humans. The Company retained the right to supply Zogenix’s Phase 3 clinical trial and commercial productrequirements on the terms set forth in the Zogenix Agreement. Zogenix was permitted to terminate the Zogenix Agreement without cause at any time uponprior written notice, and either party was permitted to terminate the Zogenix Agreement upon certain circumstances including written notice of a materialuncured breach.In August 2017, the Company and Zogenix terminated the Zogenix Agreement. Under the mutual termination agreement, Zogenix’s developmentand commercialization rights were returned to the Company, and Zogenix will transfer to the Company all regulatory filings and development informationrelated to Relday. As a result of the termination of the Zogenix agreement, the Company recognized revenue during the third quarter of 2017 for the89remaining $750,000 of deferred revenue related to the upfront fee as the Company had no remaining performance obligations under the agreement; thisrecognition of revenue did not result in additional cash proceeds to the Company.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, 2017 were $20.1 million under these agreements. Year Ended December 31, 2017 2016 2015 Ratable recognition of upfront payment $833 $208 $255 Research and development expenses reimbursable by Zogenix 2 347 4,643 Total collaborative research and development revenue $835 $555 $4,898 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 commercialization-based milestones including milestones requiring the achievement of certain product sales targets (none of which hasbeen achieved as of December 31, 2017). Santen will also pay for certain Company costs incurred in the development of the licensed product. If the productis 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, 2017, the cumulative aggregate payments received by the Company under this agreementwere $3.3 million.The following table provides a summary of collaborative research and development revenue recognized under the Santen Agreement (in thousands). Year Ended December 31, 2017 2016 2015 Ratable recognition of upfront payment $199 $228 $274 Research and development expenses reimbursable by Santen 95 286 550 Total collaborative research and development revenue $294 $514 $824 903.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;quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data forsubstantially the full term 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 orliabilities.The Company’s financial instruments are valued using quoted prices in active markets or based upon other observable inputs. The following tablesets forth the fair value of the Company’s financial assets that were measured at fair value on a recurring basis as of December 31, 2017 (in thousands): Level 1 Level 2 Level 3 Total Money market funds $568 $— $— $568 Certificates of deposit — 150 — 150 Commercial paper — 33,307 — 33,307 Corporate debt — 1,297 — 1,297 Total $568 $34,754 — $35,322 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, 2016 (inthousands): Level 1 Level 2 Level 3 Total Money market funds $693 $— $— $693 Certificates of deposit — 150 — 150 Commercial paper — 4,947 — 4,947 Corporate debt — 2,643 — 2,643 U.S. Government agencies — 14,459 — 14,459 Total $693 $22,199 $— $22,892 The Company’s financial instruments are valued using quoted prices in active markets or based upon other observable inputs. Money market fundsare classified as Level 1 financial assets. Certificates of deposit, commercial paper, corporate debt securities, and U.S. Government agency securities areclassified as Level 2 financial assets. The fair value of the Level 2 assets is estimated using pricing models using current observable market information forsimilar securities. The Company’s Level 2 investments include U.S. government-backed securities and corporate securities that are valued based uponobservable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids,offers and reference data including market research publications. The fair value of commercial paper is based upon the time to maturity and discounted usingthe three-month treasury bill rate. The average remaining maturity of the Company’s Level 2 investments as of December 31, 2017 is less than twelve monthsand these investments are rated by S&P and Moody’s at AAA or AA- for securities and A1 or P1 for commercial paper.91The following is a summary of available-for-sale securities as of December 31, 2017 and 2016 (in thousands): December 31, 2017 AmortizedCost UnrealizedGain UnrealizedLoss EstimatedFairValue Money market funds $568 $— $— $568 Certificates of deposit 150 — — 150 Commercial paper 33,307 — — 33,307 Corporate debt 1,298 — (1) 1,297 $35,323 $— $(1) $35,322 Reported as: Cash and cash equivalents $27,788 $— $— $27,788 Short-term investments 7,385 — (1) 7,384 Long-term restricted investments 150 — — 150 $35,323 $— $(1) $35,322 December 31, 2016 AmortizedCost UnrealizedGain UnrealizedLoss EstimatedFairValue Money market funds $693 $— $— $693 Certificates of deposit 150 — — 150 Commercial paper 4,947 — — 4,947 Corporate debt 2,644 — (1) 2,643 U.S. Government agencies 14,461 1 (3) 14,459 $22,895 $1 $(4) $22,892 Reported as: Cash and cash equivalents $3,142 $— $— $3,142 Short-term investments 19,603 1 (4) 19,600 Long-term restricted investments 150 — — 150 $22,895 $1 $(4) $22,892 The following is a summary of the cost and estimated fair value of available-for-sale securities at December 31, 2017, by contractual maturity (inthousands): December 31, 2017 AmortizedCost EstimatedFairValue Mature in one year or less $34,755 $34,754 $34,755 $34,754 There were no securities that have had an unrealized loss for more than 12 months as of December 31, 2017.As of December 31, 2017, 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. 924.Property and EquipmentProperty and equipment consist of the following (in thousands): December 31, 2017 2016 Equipment $12,688 $12,633 Leasehold improvement 9,929 10,007 Construction-in-progress 119 33 22,736 22,673 Less accumulated depreciation and amortization (21,807) (21,376)Property and equipment, net $929 $1,297 Depreciation expense was $437,000, $416,000 and $425,000 in 2017, 2016 and 2015, respectively. Amortization expense was zero in 2017 and2016, and $1,000 in 2015 for assets held under capital leases, respectively.As of December 31, 2017, the Company has recorded $611,000 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. 5.Restricted InvestmentsAs of December 31, 2017 and 2016, the Company had $150,000 recorded as restricted investments, which primarily served as collateral for letters ofcredit securing its leased facility in California. 6.CommitmentsOperating LeasesThe Company has lease arrangements for its facilities in California and Alabama as follows. Location ApproximateSquare Feet Operation ExpirationCupertino, CA 30,000 sq. ft. Office, Laboratoryand Manufacturing Lease expires 2019 (with an option to renew for an additional fiveyears) Cupertino, CA 20,000 sq. ft. Office and Laboratory Lease expires 2019 (with an option to renew for an additional fiveyears) Vacaville, CA 24,634 sq. ft. Manufacturing Lease expires 2018 Birmingham, AL 21,540 sq. ft. Office, Laboratory andManufacturing Lease expires 2021 (with two options to renew the lease term for anadditional five years each after the current lease expires)Under these leases, the Company is required to pay certain maintenance expenses in addition to monthly rent. Rent expense is recognized on astraight-line basis over the lease term for leases that have scheduled rental payment increases. Rent expense under all operating leases was $1.9 million forthe years ended December 31, 2017, 2016 and 2015, respectively.93Future minimum payments under these noncancelable leases are as follows (in thousands): Year ending December 31, OperatingLeases 2018 $1,948 2019 539 2020 324 2021 193 $3,004 Other Purchase CommitmentsIn 2005, the Company entered into a supply agreement with a vendor. The remaining minimum purchase commitment under this agreement is$500,000 in 2018, which has been recorded as an accrued liability on the Company’s Balance Sheet at December 31, 2017, and which was charged to cost ofgoods sold in the Company’s Statements of Operations and Comprehensive Loss in 2017. 7.Term LoanOn June 26, 2014, the Company entered into a Loan and Security Agreement (2014 Loan Agreement) with Oxford Finance LLC, pursuant to whichOxford Finance 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 atclose and the proceeds are to be used for working capital and general business requirements. The term loan repayment schedule provided for interest onlypayments for the first 18 months, followed by consecutive equal monthly payments of principal and interest in arrears starting on February 1, 2016 andcontinuing through the maturity date. The 2014 Loan Agreement provided for a 7.95% interest rate on the term loan, a $150,000 facility fee that was paid atclosing and an additional payment equal to 8% of the principal amount of the term loan, which is due when the term loan becomes due or upon theprepayment of the facility. If the Company elects to prepay the loan, there is also a prepayment fee between 1% and 3% of the principal amount of the termloan depending on the 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/issuancecosts had been recorded as debt discount on the Company’s balance sheet which together with the final $1.6 million payment and fixed interest ratepayments was being amortized to interest expense throughout the life of the term loan using the effective interest rate method.In July 2015, the Company and Oxford Finance entered into the First Amendment of the 2014 Loan Agreement and modified the terms of the 2014Loan Agreement 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 toFebruary 1, 2017. The interest rate remained unchanged, the Company paid a loan modification fee of $240,000 and the additional payment originally equalto 8% of the principal amount of the term loan, which was due when the term loan becomes due or upon the prepayment of the facility, was increased to 10%.Consistent with the accounting treatment noted above for the final payment, the loan modification fee has been recorded on the balance sheet as a debtdiscount and was being amortized to interest expense over the remaining life of the term loan using the effective interest method.In July 2016, the Company renegotiated the terms of its $20.0 million secured single-draw term loan with Oxford Finance LLC (Oxford Finance) withsuch renegotiated terms being formalized in a new Loan and Security Agreement (2016 Loan Agreement). The 2016 Loan Agreement supersedes the 2014Loan Agreement with Oxford Finance and the 2015 amendment to such agreement. The 2016 Loan Agreement provides for interest only payments for thefirst 18 months, followed by consecutive monthly payments of principal and interest in arrears starting on March 1, 2018 and continuing through thematurity date of the term loan of August 1, 2020. The 2016 Loan Agreement also provides for a floating interest rate (7.95% initially and 8.87% as ofDecember 31, 2017) based on an index rate plus a spread, a $150,000 facility fee that was paid at closing and an additional payment equal to 9.25% of theprincipal amount of the term loan, which is due when the term loan becomes due or upon the prepayment of the facility. If the Company elects 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 of prepayment. The facility fee andother debt94offering/issuance costs have been recorded as debt discount on the Company’s balance sheet and together with the final $1.9 million payment are beingamortized to interest expense during 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 2016 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 2016 Loan Agreement also contains customary indemnification obligations and customary events of default, including, among other things, theCompany’s failure to fulfill certain obligations of the Company under the 2016 Loan Agreement and the occurrence of a material adverse change which isdefined as a material adverse change in the Company’s business, operations, or condition (financial or otherwise), a material impairment of the prospect ofrepayment 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 of suchcollateral. In the event of default by the Company under the 2016 Loan Agreement, the lender would be entitled to exercise its remedies thereunder,including the right to accelerate the debt, upon which the Company may be required to repay all amounts then outstanding under the 2016 Loan Agreement,which could harm the Company’s financial condition. The conditionally exercisable call option related to the event of default is considered to be anembedded derivative which is required to be bifurcated and accounted for as a separate financial instrument. In the periods presented, the value of theembedded derivative is not material, but could become material in future periods if an event of default became more probable than is currently estimated.As of December 31, 2017, the Company was in compliance with all material covenants under the Loan Agreement and there had been no materialadverse change. In accordance with ASC 470-10-45-2, the term loan had been classified as a current liability on the Company’s balance sheet as of December31, 2016 due to recurring losses, liquidity concerns and a subjective acceleration clause in the Company’s 2016 Loan Agreement. The Company hassufficient resources to meet its plans for the next twelve months following the issuance of these financial statements and as a result, that portion of the termloan that is due more than 12 months after December 31, 2017 has been classified within non-current liabilities. The fair value of the term loan approximates the carrying value. Future maturities and interest payments under the term loan as of December 31, 2017,are as follows (in thousands): 2018 $8,698 2019 8,724 2020 6,642 Total minimum payments 24,064 Less amount representing interest (4,064)Gross balance of term loan 20,000 Less unamortized debt discount (85)Carrying value of term loan 19,915 Less term loan, current portion, net (7,281)Term loan, non-current portion, net $12,634In February 2018, the Company and Oxford Finance entered into a First Amendment of the Loan Agreement (see Note 11. Subsequent Events). 958.Stockholders’ EquityCommon StockIn November 2015, the Company filed a shelf registration statement on Form S-3 with the SEC, which upon being declared effective in November2015, terminated the December 2013 registration statement and allowed the Company to offer up to $125.0 million of securities from time to time in one ormore public offerings of its common stock. In addition, the Company entered into a Controlled Equity Offering sales agreement with Cantor Fitzgerald, underwhich the Company may sell, subject to certain limitations, up to $40 million of common stock through Cantor Fitzgerald, acting as agent.In 2015, the Company raised net proceeds (net of commissions) of approximately $14.3 million from the sale of approximately 7.1 million shares ofits common stock in the open market through the Controlled Equity Offering program with Cantor Fitzgerald at a weighted average price of $2.09 per share.In 2016, the Company raised net proceeds of approximately $16.1 million (after deducting underwriting discounts and commissions and offering expense)through the sale of approximately 13.8 million shares of its common stock in an underwritten public offering at a price to the public of $1.25 per share andraised net proceeds (net of commissions) of approximately $7.6 million from the sale of approximately 5.2 million shares of its common stock in the openmarket through the Controlled Equity Offering program with Cantor Fitzgerald at a weighted average price of $1.50 per share. In 2017, the Company raisednet proceeds (net of commissions) of approximately $12.0 million from the sale of approximately 8.9 million shares of common stock in the open marketthrough the Controlled Equity Offering program with Cantor Fitzgerald at a weighted average price of $1.39 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 incentivestock options and non-statutory stock options and stock purchase rights may be granted to employees, consultants and non-employee directors. The 2000Stock Plan 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.At the Company’s annual stockholders meeting in June 2010, the stockholders approved amendments of the 2000 Stock Plan to: (i) provide that thenumber of shares that remain available for issuance will be reduced by two shares for each share issued pursuant to an award (other than an option or stockappreciation right) granted on or after the date of the 2010 Annual Meeting; (ii) expand the types of transactions that might be considered repricings andoption exchanges for which stockholder approval is required; (iii) provide that shares tendered or withheld in payment of the exercise price of an option orwithheld to satisfy a withholding obligation, and all shares with respect to which a stock appreciation right is exercised, will not again be available forissuance under the Stock Plan; (iv) require that options and stock appreciation rights have an exercise price or base appreciation amount that is at least fairmarket value on the grant date, except in connection with certain corporate transactions, and that stock appreciation rights may not have longer than a 10-year term; (v) add new performance goals that may be used to provide “performance-based compensation” under the 2000 Stock Plan; (vi) extend the term ofthe 2000 Stock Plan to the date that is ten (10) years following the stockholders meeting; and (vii) expand the treatment of outstanding awards in connectionwith certain changes of control of the Company to cover mergers in which the consideration payable to stockholders is not solely securities of the successorcorporation.At the Company’s annual stockholders meeting in June 2011, June 2014 and June 2016, the stockholders approved amendments of the 2000 StockPlan to increase the number of shares of the Company’s common stock available for issuance by 5,500,000 shares, 4,000,000 shares and 5,000,000 shares,respectively, each of which had96previously been approved by the Board of Directors. A total of 33,449,989 shares of common stock have been reserved for issuance under this plan. The planexpires in June 2020.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, 2017, 3,348,584 shares of common stock were available for future grant and options to purchase 30,101,405 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, which provided for the issuance of stock options to non-employee directors of the Company. As of December 31, 2017, options to purchase 200,000 shares of common stock were outstanding under this plan, all ofwhich were vested. The 2000 Directors’ Stock Option Plan expired in September 2000. Grants of stock options to our non-employee directors are madethrough the 2000 Stock Plan since September 2000. 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 overlappingoffering periods of 24 months’ duration, with new offering periods, other than the first offering period, beginning on May 1 and November 1 of each year andending April 30 and October 31, respectively, two years later. The purchase plan allows eligible employees to purchase common stock through payrolldeductions 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 at theend 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 annualstockholders meeting in June 2010, 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 250,000 shares; (ii) extend the term of the ESPP to the date that is ten (10) yearsfollowing the stockholders meeting; (iii) provide for six-month consecutive offering periods beginning on November 1, 2010; (iv) revise certain provisionsto reflect the final regulations issued under Section 423 of the Code by the Internal Revenue Service; and (v) provide for the cash-out of options outstandingunder an offering period in effect prior to the consummation of certain corporate transactions as an alternative to providing for a final purchase under suchoffering period.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.97The plan expires in June 2025. A total of 2,900,000 shares of common stock have been reserved for issuance under this plan. As of December 31,2017, 480,282 shares of common stock were available for future grant and 2,419,718 shares of common stock have been issued under the 2000 EmployeeStock Purchase Plan.As of December 31, 2017, shares of common stock reserved for future issuance consisted of the following: December 31,2017 Stock options outstanding 30,301,405 Stock options available for grant 3,348,584 Employee Stock Purchase Plan 480,282 34,130,271 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, 2016 28,463,737 $2.09 5.11 $3.9 Options granted 4,660,594 $1.33 Options exercised (545,088) $1.03 Options forfeited (285,470) $1.26 Options expired (1,992,368) $4.06 Outstanding at December 31, 2017 30,301,405 $1.87 5.18 $0.4 Exercisable at December 31, 2017 26,280,797 $1.96 4.69 $0.4 Vested and expected to vest at December 31, 2017 30,301,405 $1.87 5.18 $0.4 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 2017 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 in-the-money options on December 31, 2017. This amount changes based on the fair market value of the Company’scommon stock. The total intrinsic value of options exercised was $328,000, $158,000 and $985,000 for the years ended December 31, 2017, 2016 and 2015,respectively.In lieu of providing cash bonuses to certain employees, in January 2017, 2016 and 2015, the Company granted its employees stock options topurchase 1.7 million, 1.4 million and 1.5 million shares, respectively, of the Company’s common stock, which vested immediately on the grant date. Theweighted-average grant-date fair value of all options granted with exercise prices equal to fair market value was $0.92 in 2017, $0.81 in 2016 and $0.65 in2015 determined by the Black-Scholes option valuation method. There were no options granted with exercise prices lower than fair market value in 2017,2016 and 2015.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.98As of December 31, 2017, 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, 2017 2016 2015 Cost of product revenues $109 $106 $108 Research and development 1,415 1,433 1,400 Selling, general and administrative 1,081 1,116 1,152 $2,605 $2,655 $2,660 Because the Company had a net operating loss carryforward as of December 31, 2017, 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 2016, 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.The Company used the following assumptions to estimate the fair value of options granted (including fully vested options issued in January 2017,2016 and 2015) and shares purchased under its stock plans and employee stock purchase plan for the years ended December 31, 2017, 2016 and 2015: Year ended December 31, 2017 2016 2015 Stock Options Risk-free rate 2.0-2.5% 1.3-2.4% 1.5-2.4% Expected dividend yield — — — Expected term (in years) 6.8-10.0 6.5-10.0 6.5-10.0 Volatility 75-86% 76-83% 78-85% Forfeiture rate 0.0% 4.2% 6.0% (1)Effective January 1, 2017, the Company elected to account for forfeitures as they occur.99 Year ended December 31, 2017 2016 2015 Employee Stock Purchase Plan Risk-free rate 0.6-1.3% 0.3-0.6% 0.1-0.3% Expected dividend yield — — — Expected term (in years) 0.5 0.5 0.5 Volatility 44-146% 65-81% 68-95% There were 122,033, 114,025 and 113,625 shares purchased under the Company’s employee stock purchase plan during the years ended December31, 2017, 2016 and 2015, respectively. Included in the statement of operations and comprehensive loss for the year ended December 31, 2017, 2016 and2015 was $34,000, $45,000 and $62,000, respectively, in stock-based compensation expense related to the recognition of expenses related to sharespurchased under the Company’s employee stock purchase plan.As of December 31, 2017, $3.0 million of total unrecognized compensation costs related to nonvested stock options is expected to be recognizedover the respective vesting terms of each award through 2021. The weighted average term of the unrecognized stock-based compensation expense is 2.2years.The following table summarizes information about stock options outstanding at December 31, 2017: Options Outstanding Options Exercisable Range ofExercise Price Number ofOptionsOutstanding Weighted-AverageRemainingContractual Life(In years) Weighted-AverageExercisePrice Number ofOptionsExercisable Weighted-AverageExercisePrice $0.73 - $0.88 5,220,108 5.69 $0.84 4,600,285 $0.83 $0.93 - $1.16 3,199,479 7.66 $1.15 2,299,333 $1.15 $1.19 - $1.20 254,293 7.61 $1.19 251,793 $1.19 $1.21 - $1.21 3,390,536 5.10 $1.21 3,372,536 $1.21 $1.24 - $1.26 140,938 5.16 $1.26 140,938 $1.26 $1.31 - $1.31 3,606,656 8.59 $1.31 2,020,733 $1.31 $1.33 - $2.04 2,442,795 7.55 $1.49 1,686,929 $1.47 $2.09 - $2.09 3,802,601 4.68 $2.09 3,683,939 $2.09 $2.13 - $3.11 4,767,668 2.06 $2.61 4,747,980 $2.61 $3.26 - $6.29 3,476,331 1.66 $4.39 3,476,331 $4.39 $0.73 - $6.29 30,301,405 5.18 $1.87 26,280,797 $1.96 The Company received $562,000, $290,000 and $1.0 million in cash from option exercises under all stock-based compensation plans for the yearsended December 31, 2017, 2016 and 2015, respectively. 9.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 $244,000 and $397,000 on its balance sheet at both December 31, 2017 and 2016, that arose from tax amortization of an indefinite-lived intangible asset. The Company also recorded a deferred tax benefit of $153,000, zero and $8,000 related to the deferred tax liability in the years endedDecember 31, 2017,1002016 and 2015, respectively. The Company recorded an income tax expense in 2017 for state tax expense of $3,000. In addition, the Company recorded anincome tax expense of $61,000 in 2015, related to the reversing tax benefit on a previously recorded unrealized gain on a marketable equity security.The reconciliation of income tax expenses (benefit) at the statutory federal income tax rate of 34% to net income tax benefit included in thestatements of operations and comprehensive loss for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands): Year Ended December 31, 2017 2016 2015 U.S. federal taxes benefit at statutory rate $(1,307) $(11,733) $(7,681)State taxes 3 — — Change in valuation allowance (41,865) 10,847 7,725 Stock-based compensation 1,832 2,045 530 Change in deferreds 12 (3) 56 Deferred Tax Remeasurement 42,528 — — Other (1,353) (1,156) (577)Total income tax (benefit) provision $(150) $— $53 In 2017, 2016 and 2015, total income tax provision (benefit) expense was $(150,000), zero and $53,000, respectively. The Company has presentedthese amounts within interest and other income, net in the Statements of Operations and Comprehensive Loss. Deferred tax assets and liabilities reflect the nettax effects of net operating loss and research and other credit carryforwards and the temporary differences between the carrying amounts of assets andliabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilitiesare as follows (in thousands): December 31, 2017 2016 Deferred tax assets: Net operating loss carryforwards $82,369 $123,107 Research and other credits 16,303 13,441 Capitalized research and development expenses — 10 Deferred revenue 395 874 Stock-based compensation 5,053 8,693 Other 2,261 3,405 Total deferred tax assets 106,381 149,530 Valuation allowance for deferred tax assets (106,381) (149,530)Deferred tax liabilities—Intangibles (244) (397)Net deferred tax assets and liabilities $(244) $(397) The Company recognizes deferred tax assets to the extent that the Company believes that these assets are more likely than not to be realized. Inmaking such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences,projected future taxable income, tax-planning strategies, and results of recent operations. If it is determined that the Company would be able to realizedeferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance,which would reduce the provision for income taxes. The recognition and measurement of tax benefits requires significant judgment. Judgments concerningthe recognition and measurement of tax benefit might change as new information becomes available. Given the Company’s history of operating losses, thenet deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by $43.1 million during 2017 and increased by$11.4 million and $7.2 million during 2016 and 2015, respectively.As of December 31, 2017, the Company had net operating loss carryforwards for federal income tax purposes of approximately $327.1 million, whichexpire in the years 2019 through 2036, and federal research and101development tax credits of approximately $12.5 million, which expire at various dates beginning in 2018 through 2037, if not utilized.As of December 31, 2017, the Company had net operating loss carryforwards for state income tax purposes of approximately $204.9 million, whichexpire in the years 2028 through 2036, if not utilized, and state research and development tax credits of approximately $13.7 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, 2017 and December 31, 2016, the Company had unrecognized tax benefits of approximately $7.8 and $7.0 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.A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): December 31, 2017 2016 Balance at beginning of the year $6,982 $6,965 Decreased related to prior year tax positions — (737)Increased related to current year tax positions 867 754 Settlements — — Reductions due to lapse of applicable statute of limitations — — Balance at end of the year $7,849 $6,982 Interest and penalty costs related to unrecognized tax benefits, if any, are classified as a component of interest income and other income, net in theStatements of Operations and Comprehensive Loss. The Company did not recognize any interest and penalty expense related to unrecognized tax benefits forthe years ended December 31, 2017, 2016 and 2015.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 2017 due to unutilized net operating losses and research credits.On December 22, 2017, the 2017 Tax Cut and Jobs Act (the Act) was enacted into law. Among other provisions, the Act reduces the Federal statutorycorporate income tax rate from 35% to 21%, effective January 1, 2018. The Company is required to recognize the effect of the tax law changes in the periodof enactment, such as the re-measuring our U.S. deferred tax assets and liabilities at a 21% rate, as well as reassessing the net realizability of our deferred taxassets and liabilities. The provisional amount related to the re-measurement of our deferred tax balance is a reduction of approximately $43.1 million. Due tothe corresponding valuation allowance fully offsetting deferred taxes, there is no statement of operations impact.Given the significance of the legislation, in December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax AccountingImplications of the Tax Cuts and Jobs Act (SAB 118) which allows companies us to record provisional amounts during a measurement period not to extendbeyond one year of the enactment date. Since the Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation areexpected over the next 12 months, the Company considers the accounting of the deferred tax re-measurements to be incomplete. The Company expects tocomplete its analysis within the measurement period in accordance with SAB 118. The Company does not expect any material subsequent adjustment tothese amounts. Any adjustments, if any, will have no impact to the statement of operations due to the Company’s full valuation allowance.102 10.Unaudited Selected Quarterly Financial Data (in thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter 2017 2016 2017 2016 2017 2016 2017 2016 Revenue $4,567 $3,608 $4,319 $3,157 $20,746 $3,743 $19,538 $3,517 Net income (loss) $(8,114) $(7,852) $(9,927) $(9,014) $6,111 $(8,832) $8,235 $(8,811)Basic net income (loss) per share $(0.06) $(0.06) $(0.07) $(0.07) $0.04 $(0.06) $0.06 $(0.06)Diluted net income (loss) per share $(0.06) $(0.06) $(0.07) $(0.07) $0.04 $(0.06) $0.05 $(0.06) 11.Subsequent EventsAs of March 2, 2018, the Company raised net proceeds (net of commissions) of approximately $2.8 million from the sale of 2.5 million shares of theCompany’s common stock in the open market through the Controlled Equity Offering program with Cantor Fitzgerald at a weighted average price of $1.17per share. As of March 2, 2018, the Company had up to approximately $14.9 million of common stock available for sale under the Controlled EquityOffering program and approximately $67.8 million of common stock available for sale under its shelf registration statement. In February 2018, the Company and Oxford Finance entered into a First Amendment of the Loan Agreement, which modified the terms of the LoanAgreement to change the first principal payment date from March 1, 2018 to December 1, 2018 and to increase the additional payment due when the termloan becomes due or upon the prepayment of the facility from 9.25% of the principal amount of the term loan to 10% of such amount. The interest rate andthe maturity date remain unchanged, and the Company paid Oxford Finance a loan modification fee of $100,000. 103Item 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, 2017 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, 2017.Our independent registered public accountants, Ernst & Young LLP, audited the financial statements included in this Annual Report on Form 10-Kand have 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. 104Report of Independent Registered Public Accounting FirmTo the Stockholders and the Board of Directors of DURECT CorporationOpinion on Internal Control over Financial Reporting We have audited DURECT Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).In our opinion, DURECT Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December31, 2017, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balancesheets as of December 31, 2017 and 2016, and the related statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each ofthe three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and ourreport dated March 8, 2018 expressed an unqualified opinion thereon.Basis for Opinion The Company’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 Financing Reporting.Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testingand evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting 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 assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effecton the financial 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. /s/ Ernst & Young LLP San Francisco, CaliforniaMarch 8, 2018 105 Item 9B.Other Information.None PART III Item 10.Directors, Executive Officers and Corporate GovernanceThe names of the executive officers of the Company and their ages, titles and biographies as of the date hereof are incorporated by reference from PartI, Item 1, above,Information required by this item will be contained in our definitive proxy statement to be filed with the Securities and Exchange Commission onSchedule 14A in connection with our 2018 Annual Meeting of Stockholders (the Proxy Statement), which is expected to be filed not later than 120 days afterthe end of our fiscal year ended December 31, 2017, under the headings “Election of Directors,” “The Board, Board Committees and Meetings,” “Code ofEthics,” and “Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference.Item 11.Executive CompensationInformation required by this item will be contained in the Proxy Statement under the headings “Executive Compensation,” “DirectorCompensation,” and “Compensation Committee Report” and is incorporated herein by reference.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersInformation required by this item will be contained in the Proxy Statement under the headings “Common Stock Ownership of Certain BeneficialOwners and Management” and “Equity Compensation Plan Information,” and is incorporated herein by reference.Item 13.Certain Relationships, Related Transactions and Director IndependenceInformation required by this item will be contained in the Proxy Statement under the headings “Certain Relationships,” “Other Transactions,” and“The Board, Board Committees and Meetings,” and is incorporated herein by reference.Item 14.Principal Accountant Fees and ServicesInformation required by this item will be contained in the Proxy Statement under the heading “Fees Billed for Services Rendered by PrincipalAccountant,” and is incorporated herein by reference. PART IVItem 15.Exhibits and Financial Statement Schedules. (a)The following documents are filed as part of this report: (1)Financial StatementsSee Item 8 of this Form 10-K (2)Financial Statement SchedulesSee Schedule II—Valuation and Qualifying Accounts, immediately following Item 16 of this Form 10-K106 Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financialstatements or notes thereto. (3)The list of exhibits filed as part of this report is set forth on the Exhibit Index immediately preceding the signature page of this reportand is incorporated herein by reference in this Item 5(a)(3) or is filed in accordance with Item 601 of Regulation S–K. 107 Item 16.Form 10-K Summary.The Company has elected not to include summary information. Number Description 2.1 Agreement and Plan of Merger dated April 18, 2001, among the Company, Target and Magnolia Acquisition Corporation (incorporated byreference 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 to ourRegistration 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 Registration Statementon 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 on August5, 2010). 3.5 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 Exhibit 10.1to 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 (FileNo. 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).108 Number Description 10.8** Supply Agreement between the Company and Mallinckrodt, Inc. dated as of October 1, 2000 (incorporated by reference to Exhibit 10.25 toour 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 (incorporatedby 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 March 16,2006). 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). 10.14** 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 to Exhibit10.66 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 10.70 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed with the SEC on May 3, 2013). 109 Number Description10.22 Fourth Amendment to Lease between De Anza Enterprises and the Company dated as of August 20, 2013 (incorporated by reference toExhibit 10.71 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 10.72 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 Form 10-K (File No. 000-31615) filed with the SEC on February 27, 2014). 10.25 Executive Change of Control Policy, as amended 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). 10.28** 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 the SECon March 3, 2015). 10.30 First Amendment to Loan and Security Agreement and First Amendment to Disbursement 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). 10.31 Loan and Security Agreement between the Company and Oxford Finance LLC dated July 28, 2016. (incorporated by reference to Exhibit10.1 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed with the SEC on November 1, 2016). 10.32** Development and Commercialization Agreement between the Company and SANDOZ AG dated May 5, 2017. (incorporated by reference toExhibit 10.2 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed with the SEC on August 9, 2017). 10.33** Patent purchase agreement between the Company and Indivior UK Limited dated as of September 26, 2017. (incorporated by reference toExhibit 10.1 to our Quarterly Report on Form 10-Q (File No. 000-31615) filed with the SEC on November 2, 2017). 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 2002.110 Number Description 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 Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* XBRL Taxonomy Extension Labels Linkbase Document 101.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. 111 SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTSYear Ended December 31, 2017, 2016 and 2015(in thousands) Balance atbeginningof the year Additions(Reduction) toallowances Deductions Balance atend of theyear Allowance for doubtful accounts Year ended December 31, 2017 $73 $165 $(83) $155 Year ended December 31, 2016 $161 $(70) $(18) $73 Year ended December 31, 2015 $211 $(38) $(12) $161 112 EXHIBIT INDEX Number Description 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 Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* XBRL Taxonomy Extension Labels Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document *Filed herewith. 113 SIGNATURESPursuant 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 CORPORATION By:/s/ James E. Brown James E. BrownPresident and Chief Executive Officer Date: March 8, 2018POWER 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 President, Chief Executive Officer andDirector (Principal Executive Officer) March 8, 2018James E. Brown /s/ Felix Theeuwes Chairman and Chief Scientific Officer March 8, 2018Felix Theeuwes /s/ Matthew J. Hogan Chief Financial Officer(Principal Accounting Officer) March 8, 2018Matthew J. Hogan /s/ Simon X. Benito Director March 8, 2018Simon X. Benito /s/ Terrence F. Blaschke Director March 8, 2018Terrence F. Blaschke /s/ David R. Hoffmann Director March 8, 2018David R. Hoffmann /s/ Armand P. Neukermans Director March 8, 2018Armand P. Neukermans /s/ Jon S. Saxe Director March 8, 2018Jon S. Saxe 114Exhibit 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, 2017 2016 2015 2014 2013 Earnings: Net loss $(3,695) $(34,509) $(22,663) $(22,110) $(21,452)Fixed charges 3,167 3,030 2,978 1,858 607 Total Earnings $(528) $(31,479) $(19,685) $(20,252) $(20,845)Fixed Charges: Interest expense $2,425 $2,288 $2,236 $1,151 $6 Portion of rent expense representative of interest 742 742 742 707 601 Total Fixed Charges $3,167 $3,030 $2,978 $1,858 $607 Ratio of Earnings to Fixed Charges (1) — — — — — (1)For purposes of computing the ratio of earnings to fixed charges, earnings consist of loss plus fixed charges. Fixed charges consist of interest expense,amortization of debt expense and discount or premium related to indebtedness, whether expensed or capitalized, and that portion of rental paymentsunder operating leases we believe to be representative of interest. Earnings were insufficient to cover fixed charges by $3.7 million, $34.5 million,$22.7 million, $22.1 million and $21.5 million for the years ended December 31, 2017, 2016, 2015, 2014, and 2013, respectively.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 OptionPlan, (2)Registration Statements (Form S-8 Nos. 333-166700, 333-161025, 333-152968, 333-124701, 333-86110) pertaining to theDURECT Corporation 2000 Employee Stock Purchase Plan and the DURECT Corporation 2000 Stock Plan, (3)Registration Statements (Form S-8 Nos. 333-212842,333-197980, 333-176113, 333-120405 and 333-108390) pertaining to theDURECT Corporation 2000 Stock Plan, (4)Registration Statements (Form S-8 No. 333-219832, 333-206084 and 333-170349) pertaining to the DURECT Corporation 2000 EmployeeStock 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-3 No. 333-128979) of DURECT Corporation, (8)Registration Statement (Form S-3 No. 333-108398) of DURECT Corporation, (9)Registration Statement (Form S-3 No. 333-108396) of DURECT Corporation, (10)Registration Statement (Form S-3 No. 333-155042) of DURECT Corporation, (11)Registration Statement (Form S-3 No. 333-181174) of DURECT Corporation (12)Registration Statement (Form S-3 No. 333-193009) of DURECT Corporation, and (13)Registration Statement (Form S-3 No. 333-207776) of DURECT Corporation,of our reports dated March 8, 2018, 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 31,2017./s/ ERNST & YOUNG LLPSan Francisco, CaliforniaMarch 8, 2018Exhibit 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 makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 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 definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-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 usby others within those entities, particularly during the period in which this report is being prepared; (b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under 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 8, 2018 /S/ JAMES E. BROWNJames E. BrownChief Executive Officer Exhibit 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 makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 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 definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-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 usby others within those entities, particularly during the period in which this report is being prepared; (b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under 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 8, 2018 /S/ MATTHEW J. HOGANMatthew J. HoganChief Financial Officer and Principal Accounting Officer Exhibit 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, 2017 as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Brown, Chief Executive Officer of the Company, certify, pursuant to18 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 8, 2018 /S/ James E. BrownJames E. BrownChief Executive Officer Exhibit 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, 2017 as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Matthew J. Hogan, Chief Financial Officer and Principal Accounting Officer ofthe Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.March 8, 2018 /S/ Matthew J. HoganMatthew J. HoganChief Financial Officer and Principal Accounting Officer 

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