DURECT CORP (Form: 10-Q, Received: 08/05/2010 16:46:54)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

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

For the transition period from to

Commission file number 000-31615

DURECT CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

94-3297098

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2 Results Way

Cupertino, California 95014

(Address of principal executive offices, including zip code)

(408) 777-1417

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of July 31, 2010, there were 86,889,389 shares of the registrant’s Common Stock outstanding.

INDEX


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Balance Sheets As of June 30, 2010 and December 31, 2009	3

	Condensed Statements of Operations For the three and six months ended June 30, 2010 and 2009	4

	Condensed Statements of Cash Flows For the six months ended June 30, 2010 and 2009	5

	Notes to Condensed Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33

Item 4.	Controls and Procedures	33

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 3.	Defaults Upon Senior Securities	50

Item 4.	[Removed and Reserved]	50

Item 5.	Other Information	50

Item 6.	Exhibits	50

	(a) Exhibits

Signatures		51

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

DURECT CORPORATION

CONDENSED BALANCE SHEETS

(in thousands)


	June 30, 2010			December 31, 2009
	(unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	21,273		$	8,287
Short-term investments		32,875			32,834
Short-term restricted investments		66			—
Accounts receivable (net of allowances of $114 and $103 at June 30, 2010 and December 31, 2009, respectively)		3,340			1,700
Inventories		2,852			2,799
Prepaid expenses and other current assets		1,773			1,433

Total current assets		62,179			47,053
Property and equipment (net of accumulated depreciation of $21,505 and $20,190 at June 30, 2010 and December 31, 2009, respectively)		2,656			3,808
Goodwill		6,399			6,399
Intangible assets, net		84			108
Long-term investments		2,591			—
Long-term restricted investments		366			431
Other long-term assets		260			352

Total assets	$	74,535		$	58,151

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	931		$	1,019
Accrued liabilities		4,117			5,337
Contract research liability		1,370			990
Deferred revenue, current portion		8,220			4,703
Other short-term liabilities		219			208

Total current liabilities		14,857			12,257
Deferred revenue, non-current portion		38,888			17,543
Other long-term liabilities		396			508
Commitments
Stockholders’ equity:
Common stock		9			8
Additional paid-in capital		347,200			341,705
Accumulated other comprehensive income		—			10
Accumulated deficit		(326,815	)		(313,880	)

Stockholders’ equity		20,394			27,843

Total liabilities and stockholders’ equity	$	74,535		$	58,151

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

DURECT CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Collaborative research and development and other revenue	$	4,657		$	2,606		$	8,473		$	6,518
Product revenue, net		2,656			2,271			6,506			4,686

Total revenues		7,313			4,877			14,979			11,204

Operating expenses:
Cost of product revenues (1)		861			837			2,239			1,661
Research and development (1)		9,204			7,866			18,625			17,936
Selling, general and administrative (1)		3,584			3,777			7,086			8,034

Total operating expenses		13,649			12,480			27,950			27,631

Loss from operations		(6,336	)		(7,603	)		(12,971	)		(16,427	)
Other income (expense):
Interest and other income		48			106			59			285
Interest expense		(21	)		(11	)		(23	)		(22	)

Net other income		27			95			36			263

Net loss	$	(6,309	)	$	(7,508	)	$	(12,935	)	$	(16,164	)

Net loss per share, basic and diluted	$	(0.07	)	$	(0.09	)	$	(0.15	)	$	(0.20	)

Shares used in computing basic and diluted net loss per share		86,845			82,138			86,801			82,081

(1) Includes stock-based compensation related to the following:
Cost of product revenues	$	86		$	117		$	170		$	195
Research and development		1,290			1,327			2,567			3,608
Selling, general and administrative		663			864			1,332			2,035

Total stock-based compensation	$	2,039		$	2,308		$	4,069		$	5,838

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

DURECT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Six months ended June 30,
	2010			2009
Cash flows from operating activities
Net loss	$	(12,935	)	$	(16,164	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,339			1,508
Stock-based compensation		4,069			5,838
Changes in assets and liabilities:
Accounts receivable		(1,640	)		1,719
Inventories		(68	)		767
Prepaid expenses and other assets		(248	)		(1,279	)
Accounts payable		(88	)		(172	)
Accrued and other liabilities		(102	)		(1,482	)
Contract research liability		380			(379	)
Deferred revenue		24,862			(1,380	)

Total adjustments		28,504			5,140

Net cash provided by (used in) operating activities		15,569			(11,024	)

Cash flows from investing activities
Purchases of property and equipment		(163	)		(85	)
Purchases of available-for-sale securities		(29,920	)		(27,963	)
Proceeds from maturities of available-for-sale securities		25,070			18,193
Proceeds from sales of available-for-sale securities		2,207			1,154

Net cash used in investing activities		(2,806	)		(8,701	)

Cash flows from financing activities
Payments on equipment financing obligations		(23	)		(21	)
Net proceeds from issuances of common stock		246			325

Net cash provided by financing activities		223			304

Net increase (decrease) in cash and cash equivalents		12,986			(19,421	)
Cash and cash equivalents, beginning of the period		8,287			29,445

Cash and cash equivalents, end of the period	$	21,273		$	10,024

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

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Nature of Operations

DURECT Corporation (the Company) was incorporated in the state of Delaware on February 6, 1998. The Company is a pharmaceutical company developing therapies based on its proprietary drug formulations and delivery platform technologies. The Company has several products under development by itself and with third party collaborators. The Company also manufactures and sells osmotic pumps used in laboratory research, and designs, develops and manufactures a wide range of standard and custom biodegradable polymers and excipients for pharmaceutical and medical device clients for use as raw materials in their products. In addition, the Company conducts research and development of pharmaceutical products in collaboration with third party pharmaceutical and biotechnology companies.

Basis of Presentation

The accompanying unaudited financial statements include the accounts of the Company. These financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC), and therefore, do not include all the information and footnotes necessary for a complete presentation of the Company’s results of operations, financial position and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP). The unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position at June 30, 2010, the operating results for the three and six months ended June 30, 2010 and 2009, and cash flows for the six months ended June 30, 2010 and 2009. The balance sheet as of December 31, 2009 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto, included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2009 filed with the SEC.

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

Reclassifications

Certain prior period amounts in the condensed statements of operations have been reclassified to conform to current period presentation. The Company reclassified $167,000 related to the Company’s agreement with Nycomed from research and development expenses to collaborative research and development and other revenue in the six months ended June 30, 2009. Such reclassification did not impact the Company’s net loss or financial position.

Inventories

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

Inventories consisted of the following (in thousands):


	June 30, 2010		December 31, 2009
	(unaudited)
Raw materials	$	543	$	516
Work in process		827		690
Finished goods		1,482		1,593

Total inventories	$	2,852	$	2,799

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS—(Continued)

Revenue Recognition

Revenue from the sale of products is recognized when there is persuasive evidence that an arrangement exists, the product is shipped and title transfers to customers, provided no continuing obligation on the Company’s part exists, the price is fixed or determinable and the collectability of the amounts owed is reasonably assured. The Company enters into license and collaboration agreements under which it may receive up-front license fees, research funding and contingent milestone payments and royalties. The Company’s deliverables under these arrangements typically consist of granting licenses to intellectual property rights and research and development services. The Company evaluates whether there is stand-alone value for the delivered elements and objective and reliable evidence of fair value to allocate revenue to each element in multiple element agreements. When the delivered element does not have stand-alone value or there is insufficient evidence of fair value for the undelivered element(s), the Company recognizes the consideration for the combined unit of accounting in the same manner as the revenue is recognized for the final deliverable, which is generally ratably over the longest period of involvement. Returns or credits related to the sale of products have not had a material impact on our revenues or net loss.

Upfront payments received upon execution of collaborative agreements are recorded as deferred revenue and recognized as collaborative research and development revenue based on a straight-line basis over the period of the Company’s continuing involvement with the third-party collaborator pursuant to the applicable agreement. Such period generally represents the longer of the estimated research and development period or other continuing obligation period defined in the respective agreements between the Company and its third-party collaborators.

Research and development revenue related to services performed under the collaborative arrangements with the Company’s third-party collaborators is recognized as the related research and development services are performed. These research payments received under each respective agreement are not refundable and are generally based on reimbursement of qualified expenses, as defined in the agreements. Research and development expenses under the collaborative research and development agreements generally approximate or exceed the revenue recognized under such agreements over the term of the respective agreements. Deferred revenue may result when the Company does not expend the required level of effort during a specific period in comparison to funds received under the respective agreement. For joint control and funding development activities, the Company recognizes revenue from the net reimbursement of the research and development expenses from our partner and records the net payment of research and development expenses to our partner as additional research and development expense.

Milestone payments under collaborative arrangements are recognized as collaborative research and development revenue upon achievement of the milestone events, which represent the culmination of the earnings process related to that milestone as defined in the agreement. Milestone payments are triggered either by the results of our research and development efforts or by events external to us, such as regulatory approval to market a product or the achievement of specified sales levels by a third-party collaborator. As such, the milestones are substantially at risk at the inception of the collaboration agreement, and revenue is only recognized upon the achievement of a milestone event if the Company has no future performance obligations related to that milestone payment.

Revenue on cost-plus-fee contracts, such as under contracts to perform research and development for others, is recognized as the related services are rendered as determined by the extent of reimbursable costs incurred plus estimated fees thereon.

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS—(Continued)

The collaborative research and development and other revenues associated with the Company’s major third-party collaborators are as follows (in thousands):


	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
Collaborator
King Pharmaceuticals, Inc. (King)(1)	$	2,695	$	1,632	$	5,270	$	3,556
Hospira, Inc. (Hospira)(2)		747		—		747		—
Nycomed Danmark, APS (Nycomed)(3)		595		381		904		930
Pain Therapeutics, Inc. (Pain Therapeutics)		27		46		728		322
Endo Pharmaceuticals, Inc. (Endo)(4)		—		—		—		985
Others		593		547		824		725

Total collaborative research and development and other revenue	$	4,657	$	2,606	$	8,473	$	6,518

Notes:

(1)	Amounts related to the ratable recognition of upfront fees were $804,000 and $1.6 million for the three and six months ended June 30, 2010, respectively, compared to $804,000 and $1.8 million for the corresponding periods in 2009.

(2)	Amounts related to the ratable recognition of upfront fees were $302,000 for the three and six months ended June 30, 2010, compared to zero for the corresponding periods in 2009.

(3)	Amounts related to the ratable recognition of upfront fees were $309,000 and $617,000 for the three and six months ended June 30, 2010, respectively, compared to $381,000 and $763,000 for the corresponding periods in 2009.

(4)	Amounts related to the ratable recognition of upfront fees were zero for the three and six months ended June 30, 2010, respectively, compared to zero and $875,000 for the corresponding periods in 2009. The Company’s agreement with Endo was terminated effective August 26, 2009.

Comprehensive Loss

Other comprehensive income (loss) is comprised entirely of unrealized gains and losses on the Company’s available-for-sale securities for all periods presented, are included in total comprehensive loss as follows (in thousands).


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Net loss	$	(6,309	)	$	(7,508	)	$	(12,935	)	$	(16,164	)
Net change in unrealized gain on available-for-sale investments		(5	)		47			(10	)		(28	)

Comprehensive loss	$	(6,314	)	$	(7,461	)	$	(12,945	)	$	(16,192	)

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS—(Continued)

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding. Diluted net loss per share is computed using the weighted-average number of common shares outstanding and common stock equivalents (i.e., options and warrants to purchase common stock) outstanding during the year, if dilutive, using the treasury stock method for options and warrants.


	Three months ended June 30,		Six months ended June 30,
	2010	2009	2010	2009
Outstanding dilutive securities not included in diluted net loss per share
Options to purchase common stock	19,228	16,361	19,652	16,323
Warrants	1	1	1	1

Total	19,229	16,362	19,653	16,324

Recent Accounting Pronouncements

In September 2009, the FASB issued Update No. 2009-13, “ Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force ” (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21). The revised guidance primarily provides two significant changes: (1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and (2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company expects to adopt ASU 2009-13 prospectively as of January 1, 2011. The Company is currently assessing the future impact of this new accounting update to its financial statements.

In March 2010, Accounting Standards Codification Topic 605, Revenue Recognition (“ASC 605”) was amended to define a milestone and clarify that the milestone method of revenue recognition is a valid application of the proportional performance model when applied to research or development arrangements. Accordingly, a company can make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The Company will adopt this guidance in the third quarter of 2010 on a prospective basis. The Company is currently assessing the future impact of this guidance on its results of operations and financial condition.

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS—(Continued)

Note 2. Strategic Agreements

Agreement with Hospira, Inc.

In June 2010, the Company and Hospira, Inc. (Hospira) entered into a license agreement to develop and market POSIDUR ^™ (SABER ^™ -bupivacaine) in the U.S. and Canada. POSIDUR is the Company’s investigational post-operative pain relief depot currently in Phase III clinical development in the U.S. that utilizes the Company’s patented SABER ^™ technology to deliver bupivacaine to provide up to three days of pain relief after surgery. POSIDUR is licensed to Nycomed for commercialization in Europe and other specified countries, and the Company retains commercialization rights in Japan and all other countries not licensed to Hospira and Nycomed.

Under terms of the agreement, Hospira made an upfront payment of $27.5 million, with the potential for up to an additional $185 million in performance milestone payments based on the successful development, approval and commercialization of POSIDUR in the U.S. and Canada. For the U.S. and Canada, the two companies will jointly direct and equally fund the remaining development costs for POSIDUR, while Hospira will have exclusive commercialization rights upon regulatory approval with sole funding responsibility. In addition, the Company has also granted to Hospira the right to develop and commercialize in the U.S. and Canada, at Hospira’s sole cost, other specified local anesthetic products based on the SABER technology, if any, which come into existence under the Agreement. Hospira will be responsible for commercial manufacture of licensed products under the Agreement, provided that the Company will supply to Hospira a specified excipient for use in the manufacture of licensed products pursuant to a supply agreement entered into by the parties. On a product by product basis, Hospira will pay the Company a royalty on sales of each licensed product commercialized under the Agreement for a defined period, after which the license granted to Hospira for such product shall convert to a fully paid-up, non-royalty bearing and perpetual license. The term of the agreement shall be for the duration of Hospira’s obligation to pay royalties for product sales under the Agreement. The agreement provides each party with specified termination rights, including the right of Hospira to terminate at will after a specified period and each party to terminate the agreement upon material breach of the agreement by the other party. The agreement also contains terms and conditions customary for this type of arrangement, including representations, warranties and indemnities.

The following table provides a summary of amounts comprising our net share of the research and development costs for POSIDUR under the agreement with Hospira (in thousands):


	Three months ended
	March 31, 2010		June 30, 2010		Total
Research and development expenses reimbursable by Hospira	$	—	$	445	$	445
Research and development expenses reimbursable by the Company		—		—		—

Net payable to Hospira	$	—	$	—	$	—

Net receivable from Hospira	$	—	$	445	$	445

No research and development expenses were incurred under this agreement prior to the three month period ended June 30, 2010.

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS—(Continued)

The following table provides a summary of collaborative research and development revenue recognized under the agreement with Hospira (in thousands). The cumulative aggregate payments received by the Company as of June 30, 2010 were $27.5 million under this agreement.


	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
Ratable recognition of upfront payment (1)	$	302	$	—	$	302	$	—
Research and development expenses reimbursable by Hospira		445		—		445		—

Total collaborative research and development revenue	$	747	$	—	$	747	$	—

(1)	The Company’s estimate of the term of our continuing involvement was based on the later of the research and development period and the term of the Company’s manufacturing obligation under the development and license agreement with Hospira.

Agreement with Alpharma Ireland Limited, an affiliate of Alpharma Inc. (Alpharma) (acquired by King)

Effective October 2008, the Company and Alpharma entered into a development and license agreement granting Alpharma the exclusive worldwide rights to develop and commercialize ELADUR, DURECT’s investigational transdermal bupivacaine patch. As a result of the acquisition of Alpharma by King in December 2008, King has assumed all the rights and obligations of Alpharma under the agreement.

The following table provides a summary of collaborative research and development revenue recognized under the agreement with King with regard to ELADUR (in thousands). The cumulative aggregate payments received by the Company as of June 30, 2010 were $26.6 million under this agreement.


	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
Ratable recognition of upfront payment (1)	$	804	$	804	$	1,609	$	1,818
Research and development expenses reimbursable by King		765		458		1,725		1,369

Total collaborative research and development revenue	$	1,569	$	1,262	$	3,334	$	3,187

(1)	The Company’s estimate of the remaining term of our continuing involvement was modified in the second quarter of 2009 as a result of an updated development plan.

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS—(Continued)

Agreement with Nycomed

In November 2006, the Company entered into a development and license agreement with Nycomed, and this agreement was amended in February 2010. Under the terms of the agreement, the Company licensed to Nycomed the exclusive commercialization rights to POSIDUR for the European Union (E.U.) and certain other countries. Nycomed paid an upfront license fee of $14.0 million in 2006 and a milestone payment of $8.0 million in 2007, with future potential additional milestone payments of up to $181.0 million upon achievement of defined development, regulatory and sales milestones. Prior to the February 2010 amendment, the agreement provided for the Company and Nycomed to jointly direct and equally fund with Nycomed a development program for POSIDUR intended to secure regulatory approval in both the U.S. and the E.U. After the amendment, as between Nycomed and the Company, the Company now has final decision-making authority over clinical trials intended for the U.S. registration of POSIDUR and Nycomed now has decision-making authority over clinical trials for the E.U. and other countries licensed to it. As between Nycomed and the Company, the Company will have funding responsibility for all current and future clinical trials intended for U.S. registration of POSIDUR and, commencing April 1, 2010, Nycomed will have sole funding responsibility for all clinical trials intended for E.U. registration of POSIDUR. The final decision making authority and financial responsibility for the remainder of the development activities, such as the non-clinical and CMC activities, will be jointly managed and funded by the Company and Nycomed. In addition, the Company will manufacture and supply the product to Nycomed for commercial sale in the territory licensed to Nycomed. Nycomed will pay the Company blended royalties on sales in the defined territory of 15-40% depending on annual sales, as well as a manufacturing markup. The Company retains full commercial rights to POSIDUR in all countries not licensed to Nycomed and Hospira. The agreement shall continue in effect until terminated. The agreement provides each party with specified termination rights, including the right of each party to terminate the agreement upon material breach of the agreement by the other party. In addition, Nycomed shall have the right to terminate the agreement after expiration of patents covering POSIDUR in all major market countries in the E.U. and for adverse product events, and within specified periods after clinical trials of POSIDUR.

For joint control and funding development activities, the Company recognizes revenue from the net reimbursement of the research and development expenses from our partner and records the net payment of research and development expenses to our partner as additional research and development expense. The Company and Nycomed each bear 50% of the agreed upon expenses under the collaboration agreement for POSIDUR.

The following tables provide a summary of the amounts comprising our net share of the research and development costs for POSIDUR under the Company’s agreement with Nycomed (in thousands):


	Three months ended
	March 31, 2010			June 30, 2010			Total
Research and development expenses reimbursable by Nycomed	$	523		$	365		$	888
Research and development expenses reimbursable by the Company		(820	)		(78	)		(898	)

Net payable to Nycomed	$	(297	)	$	—		$	(297	)

Net receivable from Nycomed	$	—		$	287		$	287


	Three months ended
	March 31, 2009			June 30, 2009			Total
Research and development expenses reimbursable by Nycomed	$	1,112		$	855		$	1,967
Research and development expenses reimbursable by the Company		(945	)		(1,146	)		(2,091	)

Net payable to Nycomed	$	—		$	(291	)	$	(291	)

Net receivable from Nycomed	$	167		$	—		$	167

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS—(Continued)

The following table provides a summary of collaborative research and development revenue recognized under the agreement with Nycomed with regard to POSIDUR (in thousands). The cumulative aggregate payments received by the Company from Nycomed as of June 30, 2010 were $35.5 million under this agreement. In addition, the cumulative aggregate payments paid by the Company to Nycomed were $8.8 million as of June 30, 2010.


	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
Ratable recognition of upfront payment (1)	$	308	$	381	$	617	$	763
Research and development expenses reimbursable by Nycomed		287		—		287		167

Total collaborative research and development revenue	$	595	$	381	$	904	$	930

(1)	The Company’s estimates of the remaining term of its continuing involvement were modified in the first and fourth quarters of 2009 as a result of an updated development plan for POSIDUR in Europe.

Agreement with Endo Pharmaceuticals

On March 10, 2005, the Company entered into a license agreement with Endo under which the Company granted to Endo the exclusive right to develop, market and commercialize TRANSDUR-Sufentanil in the U.S. and Canada. The Company received an initial payment of $10.0 million in connection with the execution of the agreement. The license agreement was terminated by Endo effective August 26, 2009.

The Company recognized zero as collaborative research and development revenue from the ratable recognition of the $10.0 million upfront fee for the three and six months ended June 30, 2010, compared to zero and $875,000 for the corresponding periods in 2009, respectively. Total collaborative research and development revenue recognized under this arrangement was zero for the three and six months ended June 30, 2010, compared to zero and $985,000 for the corresponding periods in 2009, respectively. The cumulative aggregate payments received by the Company as of June 30, 2010 were $21.5 million under this agreement.

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS—(Continued)

Agreement with Pain Therapeutics

In December 2002, the Company entered into an exclusive agreement with Pain Therapeutics, Inc. (“Pain Therapeutics”) to develop and commercialize on a worldwide basis Remoxy and other oral sustained release, abuse deterrent opioid products incorporating four specified opioid drugs, using the ORADUR technology. Total collaborative research and development revenue recognized under the agreement with Pain Therapeutics was $27,000 and $728,000 for the three and six months ended June 30, 2010, respectively, compared to $46,000 and $322,000 for the corresponding periods in 2009. The cumulative aggregate payments received by the Company as of June 30, 2010 were $31.9 million under this agreement.

In March 2009, King assumed the responsibility for further development of Remoxy from Pain Therapeutics. As a result of this change, the Company continues to perform Remoxy related activities in accordance with the terms and conditions set forth in the license agreement between the Company and Pain Therapeutics, but with King substituted in lieu of Pain Therapeutics with respect to interactions with the Company in the Company’s performance of those activities including the obligation to pay the Company with respect to all Remoxy-related costs incurred by the Company.

Total collaborative research and development revenue recognized for Remoxy-related work performed by the Company for King was $1.1 million and $1.9 million for the three and six months ended June 30, 2010, respectively, compared to $370,000 and $370,000 for the corresponding periods in 2009. Prior to March 2009, the Company recognized collaborative research and development revenue for Remoxy related work under the agreements with Pain Therapeutics. The cumulative aggregate payments received by the Company from King as of June 30, 2010 were $2.3 million under this agreement.

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS—(Continued)

Long Term Supply Agreement with King

During 2008, the Company began to manufacture commercial lots of certain key excipients that are included in Remoxy to meet the anticipated requirements for these components. In addition, during the second, third and fourth quarters of 2008 and the first quarter of 2009, the Company made shipments of these materials to meet the production requirements of King, which has rights to commercialize Remoxy upon approval by the FDA. During these periods, all product revenue and associated cost of goods sold was deferred pending the establishment of definitive final terms and conditions even though cash receipts and expenditures occurred during these periods.

In August 2009, the Company signed an exclusive long term excipient supply agreement with respect to Remoxy with King. This agreement stipulates the terms and conditions under which the Company will supply to King, based on the Company’s manufacturing cost plus a specified percentage mark-up, two key excipients used in the manufacture of Remoxy. In the third quarter of 2009, the Company recognized $3.0 million of product revenue and $2.0 million of cost of goods sold related to its past shipments to King upon execution of the long term supply agreement at which point all criteria of revenue recognition were met.

In the three and six months ended June 30, 2010, respectively, the Company recognized zero and $551,000 of product revenue for shipments made in 2008 and 2009 related to a price settlement after all criteria of revenue recognition were met. The price settlement related to additional manufacturing cost incurred by the Company and certain mark up for the goods produced and shipped in 2008 and 2009 pursuant to the long term excipient supply agreement. In addition, the Company also recognized zero and $410,000 of product revenue related to the shipment of another excipient that is included in Remoxy upon shipment to King in the three and six months ended June 30, 2010, respectively. Total revenue recognized related to these excipients was zero and $961,000 in the three and six months ended June 30, 2010, respectively, and the associated costs of goods sold was zero and $315,000 compared to zero for the corresponding period in 2009. Revenue attributable to shipments of these key components aggregating $1.7 million and cost of goods sold aggregating $1.5 million in the three and six months ended June 30, 2009 was recognized upon the execution of a final supply agreement with King in the third quarter of 2009 rather than the first quarter of 2009.

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS—(Continued)

Note 3. Fair Value Measurements

Fair 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 most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company’s valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company follows a fair value hierarchy 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 for substantially 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 or liabilities.

The following table sets forth the fair value of the Company’s financial assets that were measured at fair value on a recurring basis as of June 30, 2010 (in thousands):


	Level 1		Level 2		Level 3		Total
Money market funds	$	1,242	$	—	$	—	$	1,242
Certificates of deposit		—		432		—		432
Commercial paper		—		14,847		—		14,847
Corporate debt securities		—		2,573		—		2,573
U.S. Government agencies		—		37,643		—		37,643

Total	$	1,242	$	55,495	$	—	$	56,737

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, 2009 (in thousands):


	Level 1		Level 2		Level 3		Total
Money market funds	$	4,157	$	—	$	—	$	4,157
Certificates of deposit		—		431		—		431
Commercial paper		—		9,546		—		9,546
Corporate debt securites		—		2,838		—		2,838
U.S. Government agencies		—		22,800		—		22,800

Total	$	4,157	$	35,615	$	—	$	39,772

The fair value of the Level 2 assets is estimated using pricing models using current observable market information for similar securities. There is a small degree of variation in the pricing sources for these securities, however the potential differences in the estimate of fair value for the Company’s available-for-sale securities are insignificant.

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS—(Continued)

The following is a summary of available-for-sale securities as of June 30, 2010 and December 31, 2009 (in thousands):


	June 30, 2010
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
Money market funds	$	1,242	$	—	$	—		$	1,242
Certificates of deposit		432		—		—			432
Commercial paper		14,847		—		—			14,847
Corporate debt		2,576		1		(4	)		2,573
U.S. Government agencies		37,640		5		(2	)		37,643

	$	56,737	$	6	$	(6	)	$	56,737

Reported as:
Cash and cash equivalents	$	20,839	$	—	$	—		$	20,839
Short-term investments		32,874		5		(4	)		32,875
Short-term restricted investments		66		—		—			66
Long-term investments		2,592		1		(2	)		2,591
Long-term restricted investments		366		—		—			366

	$	56,737	$	6	$	(6	)	$	56,737


	December 31, 2009
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
Money market funds	$	4,157	$	—	$	—		$	4,157
Certificates of deposit		431		—		—			431
Commercial paper		9,545		1		—			9,546
Corporate debt		2,833		5		—			2,838
U.S. Government agencies		22,796		10		(6	)		22,800

	$	39,762	$	16	$	(6	)	$	39,772

Reported as:
Cash and cash equivalents	$	6,507	$	—	$	—		$	6,507
Short-term investments		32,824		16		(6	)		32,834
Long-term restricted investments		431		—		—			431

	$	39,762	$	16	$	(6	)	$	39,772

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS—(Continued)

The following is a summary of the cost and estimated fair value of available-for-sale securities at June 30, 2010, by contractual maturity (in thousands):


	June 30, 2010
	Amortized Cost		Estimated Fair Value
Mature in one year or less	$	54,145	$	54,146
Mature after one year through five years		2,592		2,591

	$	56,737	$	56,737

There were no securities that have had an unrealized loss for more than 12 months as of June 30, 2010 and December 31, 2009.

As of June 30, 2010, unrealized losses on available-for-sale investments are not attributed to credit risk and are considered to be temporary. The Company 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 of the investment. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.

Note 4. Stock-Based Compensation

As of June 30, 2010, the Company has four stock-based employee compensation plans. The employee stock-based compensation cost that has been included in the statements of operations was $2.0 million and $4.1 million for the three and six months ended June 30, 2010, respectively, compared to $2.3 million and $5.8 million for the corresponding periods in 2009.

As of June 30, 2010 and December 31, 2009, $46,000 and $60,000, respectively, of stock-based compensation cost was capitalized in inventory on the Company’s balance sheets.

DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS—(Continued)

The Company uses the Black-Scholes option pricing model to value its stock options. The expected life computation is based on historical exercise patterns and post-vesting termination behavior. The Company considered its historical volatility in developing its estimate of expected volatility.

The Company used the following assumptions to estimate the fair value of options granted and shares purchased under its employee stock purchase plan for the three and six months ended June 30, 2010 and 2009:


	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
Stock options
Risk-free rate	2.11-2.43	%	2.36-2.87	%	2.11-2.92	%	1.98-2.87	%
Expected dividend yield	—		—		—		—
Expected life of option (in years)	6		6		6		6
Volatility	82-83	%	85-87	%	82-83	%	84-87	%
Forfeiture rate	7.04	%	6.10	%	7.04	%	6.10	%

	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
Employee Stock Purchase Plan
Risk-free rate	0.17-1.00	%	0.31-3.95	%	0.17-1.45	%	0.31-3.95	%
Expected dividend yield	—		—		—		—
Expected life of option (in years)	1.25		1.25		1.25		1.25
Volatility	59-101	%	51-150	%	59-150	%	51-150	%

Note 5. Subsequent Events

In July 2010, the Company entered into an equity line of credit facility under which it may sell, subject to certain limitations, up to $50 million of its common stock to Azimuth Opportunity Ltd. over a 24-month period. The Company is not obligated to utilize any of the $50 million facility and Azimuth will not be obligated to purchase shares under the equity line of credit unless specified conditions are met. The Company did not pay a commitment fee or issue any warrants to secure this facility. The Company will determine, at its sole discretion, the timing and the dollar amount and the floor price per share of any drawdown under this facility, subject to certain limitations. Any shares sold under this facility will be sold pursuant to an amended shelf registration statement declared effective by the Securities and Exchange Commission on July 12, 2010.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and six months ended June 30, 2010 and 2009 should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission and “Risk Factors” section included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements are based on current expectations and beliefs. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors.

Forward-looking statements made in this report include, for example, statements about:

•

the progress of our third-party collaborations, including estimated milestones;

•

our intention to seek, and ability to enter into strategic alliances and collaborations;

•

our expectations regarding the benefits and uses of our products;

•

responsibilities of our collaborators, including the responsibility to make cost reimbursement, milestone, royalty and other payments to us, and our expectations regarding our collaborators’ plans with respect to our products;

•

our responsibilities to our collaborators, including our responsibilities to conduct research and development, clinical trials, protect intellectual property and manufacture product;

•

market opportunities for products in our product pipeline;

•

the number of patients enrolled and the timing of patient enrollment in clinical trials;

•

the progress and results of our research and development programs;

•

requirements for us to purchase supplies and raw materials from third parties, and the ability of third parties to provide us with required supplies and raw materials;

•

the results and timing of clinical trials and the commencement of future clinical trials;

•

conditions for obtaining regulatory approval of our product candidates;

•

submission and timing of applications for regulatory approval;

•

the impact of FDA, DEA, E.U. and other government regulation on our business;

•

the impact of potential Risk Evaluation and Mitigation Strategies on our business;

•

uncertainties associated with obtaining and protecting patents and other intellectual property rights;

•

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 required infrastructure in focused specialty areas;

•

our employees, including the number of employees and the continued services of key management, technical and scientific personnel;

•

our future performance, including our anticipation that we will not derive meaningful revenues from our pharmaceutical systems for at least twelve months and our expectations regarding our ability to achieve profitability;

•

sufficiency of our cash resources, anticipated capital requirements and our need for additional financing;

•

our ability to utilize our equity line of credit facility with Azimuth Opportunity Ltd.;

•

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 differ materially from those discussed in the forward-looking statements as a result of various factors. For a more detailed discussion of such forward looking statements and the potential risks and uncertainties that may impact upon their accuracy, see the “Risk Factors” section of this Quarterly Report on Form 10-Q and the “Overview” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements reflect our view only as of the date of this report. We undertake no obligations to update any forward-looking statements. You should also carefully consider the factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission.

Overview

We are an emerging specialty pharmaceutical company focused on the development of pharmaceutical systems based on proprietary drug delivery technology platforms. We are developing and commercializing pharmaceutical systems that will deliver the right drug to the right place in the right amount at the right time to treat chronic or episodic diseases and conditions. By integrating chemistry and engineering advancements, we seek to achieve what drugs or devices alone cannot. Our pharmaceutical systems enable optimized therapy for a given disease or patient population by controlling the rate and duration of drug administration and providing sustained drug delivery.

In addition to developing our own proprietary products, we enter into strategic collaborations with pharmaceutical companies to develop and commercialize proprietary and enhanced pharmaceutical products based on our technologies. We have seven disclosed on-going product candidates in development. Summary descriptions of these product candidates and related activities are below. Additional details of these programs and related strategic agreements are contained in our annual report on Form 10-K for the year ended December 31, 2009 or in Note 2 above.

POSIDUR™ (SABER™-Bupivacaine)

Our post-operative pain relief depot, POSIDUR, is a sustained release injectable using our SABER delivery system to deliver bupivacaine, an off-patent anesthetic agent. SABER is a patented controlled drug delivery technology that can be formulated for systemic or local administration of drugs via the parenteral (i.e., injectable) route. POSIDUR is designed to be administered to a surgical site at the time of surgery for post-operative pain relief and is intended to provide local analgesia for up to 3 days, which we believe coincides with the time period of the greatest need for post surgical pain control in most patients.

Collaborative Agreements

We have entered into two strategic collaborations with respect to POSIDUR. In November 2006, we entered into a development and license agreement with Nycomed (amended in February 2010) under which we licensed to Nycomed the exclusive commercialization rights to POSIDUR for the European Union (E.U.) and certain other countries. In addition, in June 2010, we entered into a development and license agreement with Hospira, Inc. to develop POSIDUR for the U.S. and Canada and under which we licensed to Hospira exclusive commercialization rights in the U.S. and Canada.

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

Clinical Programs

In January 2010, we announced that we had commenced BESST (Bupivacaine Effectiveness and Safety in SABER Trial), which is intended to be the pivotal Phase III clinical trial in the U.S. BESST is an international, multi-center, randomized, double-blind, controlled trial evaluating the safety, efficacy, and pharmacokinetics of POSIDUR in approximately 300 patients undergoing a variety of general abdominal surgical procedures. Eligible patients will be randomly assigned to one of three cohorts:

Cohort 1: An active comparator cohort in which patients are randomized to receive either POSIDUR 5.0 mL or commercially available Bupivacaine HCl solution after laparotomy.

Cohort 2: An active comparator cohort in which patients are randomized to receive either POSIDUR 5.0 mL or commercially available Bupivacaine HCl solution after laparoscopic cholecystectomy.

Cohort 3: A double blind, placebo controlled cohort in which patients are randomized to receive either POSIDUR 5.0 mL or SABER-Placebo after laparoscopically-assisted colectomy.

Efficacy evaluation in the BESST trial will encompass a number of parameters. The two co-primary efficacy endpoints for Cohort 3 will be mean pain intensity on movement (normalized) Area Under the Curve (AUC) during the period 0-72 hours post-dose and mean total morphine equivalent opioid dose for supplemental analgesia during the period 0-72 hours post-dose. An adaptive feature of BESST allows for increasing the patient sample size in Cohort 3 based on pooled and blinded data. The purpose of Cohorts 1 and 2 is to give us additional experience with the use of POSIDUR in a broader group of surgeries and patients.

In April 2010, we had a FDA interaction which increased our confidence that the BESST design and overall NDA strategy, subject to data review from the entire POSIDUR development program, addresses the FDA’s comments provided during past interactions regarding safety and evaluation of a diverse patient population that is likely to be exposed to the marketed product.

Nycomed recently completed a Phase IIb study in hysterectomy patients and is conducting a Phase IIb study in shoulder surgery patients. These trials are conducted by Nycomed in a different manner than U.S. studies and are designed to be suitable for European regulatory approval purposes.

In June 2010, we announced results from a European Phase IIb hysterectomy clinical trial conducted by Nycomed of POSIDUR. This hysterectomy trial is part of Nycomed’s clinical development program for Europe for POSIDUR. In this study, 115 patients were randomly assigned to one of three treatment groups prior to undergoing open hysterectomy surgery: POSIDUR at a dose of 5 mL, an active comparator (commercially available bupivacaine HCI solution) or SABER-Placebo (SABER vehicle without drug). All patients were given a background pain treatment consisting of a daily dose of two or four grams (depending on the patient's weight) of paracetamol (acetaminophen). In addition, each patient was provided supplemental opioid rescue medication, if needed.

With respect to efficacy, the primary endpoints of the study were to show (1) non-inferiority of POSIDUR to SABER-Placebo (with all groups taking the background and supplemental pain treatment as described above) in terms of pain intensity on movement area under the curve (AUC) during the period 1–72 hours post-surgery, and (2) superiority of POSIDUR against SABER-Placebo in the total use of opioid rescue analgesia 0–72 hours post-surgery. Results from this study show that the first primary endpoint was met. With respect to the second primary efficacy endpoint, no statistically significant difference was shown in opioid use between the POSIDUR and SABER-Placebo groups. Secondary comparisons were performed towards the active comparator group with similar results. In this study, patients in all treatment groups only took a meaningful amount of opioids during a shorter period of time after surgery than was expected. In this study, there were no indications of systemic safety issues. The plasma concentration profiles were consistent with previous studies, confirming the sustained release profile of the product. Local observations (most commonly coded as post procedural haematomas) at the surgical site were observed with frequency in the POSIDUR and SABER-Placebo groups and not observed in the active comparator group. These events were temporary and resolved without treatment.

Remoxy ^® and other ORADUR-based opioid products licensed to Pain Therapeutics

In December 2002, we entered into an agreement with Pain Therapeutics, amended in December 2005, under which we granted Pain Therapeutics the exclusive, worldwide right to develop and commercialize selected long-acting oral opioid products using our ORADUR technology incorporating four specified opioid drugs. The first product being developed under the collaboration is Remoxy, a novel long-acting oral formulation of the opioid oxycodone targeted to decrease the potential for oxycodone abuse. Remoxy is intended for patients with chronic pain. In November 2005, Pain Therapeutics and King entered into collaboration and license agreements for the development and commercialization of Remoxy by King.

TRANSDUR™-Sufentanil

Our transdermal sufentanil patch (TRANSDUR-Sufentanil) uses our proprietary TRANSDUR delivery system to deliver sufentanil, an opioid medication. TRANSDUR-Sufentanil is designed to provide extended chronic pain relief for up to seven days, as compared to the two to three days of relief provided with currently available opiate patches. We anticipate that the small size of our sufentanil patch (potentially as small as 1/5 ^th the size of currently marketed transdermal fentanyl patches for a therapeutically equivalent dose) may offer improved convenience and compliance for patients. An end-of-Phase II meeting with the FDA was conducted for this program outlining a potential regulatory pathway for the Phase III program and NDA submission, and we are in discussions with potential third party collaborators regarding licensing of this program.

ELADUR (TRANSDUR™-Bupivacaine)

Our transdermal bupivacaine patch (ELADUR) uses our proprietary TRANSDUR transdermal technology and is intended to provide continuous delivery of bupivacaine for up to three days from a single application, as compared to a wearing time limited to 12 hours with currently available lidocaine patches.

Effective in October 2008, we entered into a development and license agreement with Alpharma granting Alpharma the exclusive worldwide rights to develop and commercialize ELADUR. Alpharma paid us an upfront license fee of $20 million in October 2008. Alpharma was acquired by King in December 2008 and, as a result, the rights and obligations of the agreement are now controlled by King.

In April 2010, King commenced a Phase IIb clinical trial to evaluate ELADUR for the treatment of chronic low back pain. This Phase IIb trial is a 12-week, randomized, double-blind, placebo-controlled trial evaluating the efficacy and safety of ELADUR in patients with chronic low back pain. King expects to enroll approximately 260 patients in the study.

ORADUR-ADHD Program

We are developing a drug candidate (ORADUR-ADHD) based on DURECT’s ORADUR Technology for the treatment of ADHD. This drug candidate is intended to provide once-a-day dosing with added tamper resistant characteristics to address common methods of abuse and misuse of these types of drugs.

In August 2009, we entered into a development and license agreement with Orient Pharma Co., Ltd., a diversified multinational pharmaceutical, healthcare and consumer products company with headquarters in Taiwan, under which we granted to Orient Pharma development and commercialization rights in certain defined Asian and South Pacific countries to ORADUR-ADHD. DURECT retains rights to North America, Europe, Japan and all other countries not specifically licensed to Orient Pharma. In July 2010, we commenced a Phase I study to evaluate multiple formulations of ORADUR-ADHD.

Other Programs

Biologics Programs

The proteins and genes identified by the biotechnology industry are large, complex, intricate molecules, and many are unsuitable as drugs. If these molecules are given orally, they are often digested before they can have an effect; if given by injection, they may be destroyed by the body’s natural processes before they can reach their intended sites of action. The body’s natural elimination processes require frequent, high dose injections that may result in unwanted side effects. As a result, the development of biotechnology molecules for the treatment of human diseases has been limited, and advanced drug delivery systems such as we possess are required to realize the full potential of many of these protein and peptide drugs. We have active programs underway to apply our drug delivery systems to various biotechnology drugs and drug candidates, and have entered into a number of feasibility studies with biotechnology and pharmaceutical companies to test their products in our systems.

Research and Development Programs in Other Therapeutic Categories

We 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 (CNS), including schizophrenia and cardiovascular disease, including congestive heart failure. In conducting our research programs and determining which particular efforts to prioritize for formal development, we employ a rigorous opportunity assessment process that takes into account the unmet medical need, commercial opportunity, technical feasibility, clinical viability, intellectual property considerations, and the development path including costs to achieve various critical milestones.

Product Revenues

We also currently generate product revenue from the sale of three product lines:

•

ALZET ^® osmotic pumps 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.

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

Operating Results

Since our inception in 1998, we have had a history of operating losses. At June 30, 2010, we had an accumulated deficit of $326.8 million and our net losses were $6.3 million and $12.9 million for the three and six months ended June 30, 2010, respectively. Our net losses were $30.3 million, $43.9 million and $24.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. These losses have resulted primarily from costs incurred to research and develop our product candidates and to a lesser extent, from selling, general and administrative costs associated with our operations and product sales. We expect our research and development expenses to increase in the near future as we expect to continue to expand our clinical trials, nonclinical studies and other research and development activities. We expect selling, general and administrative expenses to remain comparable in the near future. We do not anticipate meaningful revenues from our pharmaceutical systems, should they be approved, for at least the next twelve months. Therefore, we expect to incur continuing losses and negative cash flow from operations for the foreseeable future.

Critical Accounting Policies and Estimates

General

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

Revenue Recognition

Revenue from the sale of products is recognized when there is persuasive evidence that an arrangement exists, the product is shipped and title transfers to customers, provided no continuing obligation on our part exists, the price is fixed or determinable and the collectibility of the amounts owed is reasonably assured. We enter into license and collaboration agreements under which we may receive upfront license fees, research funding and contingent milestone payments and royalties. Our deliverables under these arrangements typically consist of intellectual property rights and research and development services. We evaluate whether there is stand-alone value for the delivered elements and objective and reliable evidence of fair value for the undelivered element(s) to allocate revenue to each element in multiple element agreements. When the delivered element does not have stand-alone value or there is insufficient evidence of fair value for the undelivered element(s), we recognize the consideration for the combined unit of accounting in the same manner as the revenue is recognized for the final deliverable, which is generally ratably over the longest period of involvement. Returns or credits related to the sale of products have not had a material impact on our revenues or net loss.

Upfront payments received upon execution of collaborative agreements are recorded as deferred revenue and recognized as collaborative research and development revenue based on a straight-line basis over the period of our continuing involvement with the third party collaborator pursuant to the applicable agreement. Such period generally represents the longer of the expected research and development period or other continuing obligation period defined in the respective agreements between us and our third-party collaborators.

Research and development revenue related to services performed under the collaborative arrangements with our corporate collaborators is recognized as the related research and development services are performed and the collectability of the amounts owed is reasonably assured. These research payments received under each respective agreement are not refundable and are generally based on reimbursement of qualified expenses, as defined in the agreements. Research and development expenses under the collaborative research and development agreements generally approximate or exceed the revenue recognized under such agreements over the term of the respective agreements. Deferred revenue may result when we do not expend the required level of effort during a specific period in comparison to funds received under the respective agreement. Pursuant to ASC 808-10, Collaborative Arrangements , for joint control and funding development activities, we recognize revenue from the net reimbursement of the research and development expenses from our partners and record the net payment of research and development expenses to our partners as additional research and development expense.

Milestone payments under collaborative arrangements are recognized as revenue upon achievement of the “at risk” milestone events, which represent the culmination of the earnings process related to that milestone. Milestone payments are triggered either by the results of our research and development efforts or by events external to us, such as regulatory approval to market a product or the achievement of specified sales levels by a third-party collaborator. As such, the milestones are substantially at risk at the inception of the collaboration agreement, and the amounts of the payments assigned thereto are commensurate with the milestone achieved. In addition, upon the achievement of a milestone event, we have no future performance obligations related to that milestone payment.

Research and Development Expenses

Research and development expenses are primarily comprised of salaries, benefits, stock-based compensation and other compensation cost associated with research and development personnel, overhead and facility costs, preclinical and non-clinical development costs, clinical trial and related clinical manufacturing costs, contract services, and other outside costs. Research and development costs are expensed as incurred. Research and development costs paid to third parties under sponsored research agreements are recognized as expense as the related services are performed, generally ratably over the period of service. In addition, net reimbursements of research and development expenses by our partners incurred are recorded as collaborative research and development revenue. Net payments of research and development expenses to our partners are recorded as an addition to our research and development expenses in the period incurred.

Intangible Assets and Goodwill

We record intangible assets when we acquire other companies and intellectual property rights. The cost of an acquisition is allocated to the assets acquired and liabilities assumed, including intangible assets, with the remaining amount being classified as goodwill. Certain intangible assets such as completed or core technologies are amortized over time.

Goodwill is not amortized to expense but rather periodically assessed for impairment. The allocation of the cost of an acquisition to intangible assets and goodwill therefore has a significant impact on our future operating results. The allocation process requires the extensive use of estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets. We are also required to estimate the useful lives of those intangible assets subject to amortization, which determines the amount of amortization that will be recorded in a given future period and how quickly the total balance will be amortized. We periodically review the estimated remaining useful lives of our intangible assets. A reduction in our estimate of remaining useful lives, if any, could result in increased amortization expense in future periods. We assess the impairment of identifiable intangible assets, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

•

new information affecting the commercial value of the asset;

•

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

•

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

•

significant negative industry or economic trends;

•

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

•

our market capitalization relative to net book value.

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

We perform a review for impairment of goodwill at least annually. No impairment of goodwill has been recorded through June 30, 2010. However, there can be no assurance that at the time other periodic reviews are completed, a material impairment charge will not be recorded.

Accrued Liabilities and Contract Research Liabilities

We incur significant costs associated with third party consultants and organizations for 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 unbilled based on management’s estimates of project status. If these good faith estimates are inaccurate, actual expenses incurred could materially differ from our estimates.

Inventories

Inventories include certain excipients that are sold to a customer and included in products awaiting regulatory approval. These inventories are capitalized based on management’s judgment of probable sale prior to their expiration date which in turn is based on non-binding forecasts from our customer. The valuation of inventory requires us to estimate the value of inventory that may become expired prior to use. We may be required to expense previously capitalized inventory costs upon a change in our judgment, due to, among other potential factors, a denial or delay of approval of our customer’s product by the necessary regulatory bodies, or new information that suggests that the inventory will not be saleable. In addition, these circumstances may cause us to record a liability related to minimum purchase agreements that we have in place for raw materials.

Stock-Based Compensation

Employee 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 in a manner similar to other forms of compensation paid to employees.

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 rate that 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 with equivalent remaining terms. We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. For options granted before January 1, 2006, we amortize the fair value on an accelerated basis. For options granted on or after January 1, 2006, we amortize the fair value on a straight-line basis. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods. We may elect to use different assumptions under the Black-Scholes option valuation model in the future, which could materially affect our net income or loss and net income or loss per share.

Results of Operations

Three and six months ended June 30, 2010 and 2009

Revenues. Net revenues were $7.3 million and $15.0 million for the three and six months ended June 30, 2010, compared to $4.9 million and $11.2 million for the corresponding periods in 2009, respectively. The increases in total revenues in the three and six months ended June 30, 2010 were primarily attributable to higher collaborative research and development revenue from King, Hospira and Nycomed as well as higher product revenue from our ALZET and LACTEL product lines. In addition, the increase in the six months ended June 30, 2010 reflected higher product revenue recognized from sale of certain excipients included in Remoxy to King, partially offset by lower collaborative research and development revenue recognized from our agreement with Endo.

Collaborative research and development and other revenue

We recognize revenues from collaborative research and development activities and service contracts. We recorded $4.7 million and $8.5 million of collaborative research and development revenue for the three and six months ended June 30, 2010, compared to $2.6 million and $6.5 million for the corresponding periods in 2009, respectively. Collaborative research and development revenue represents reimbursement of qualified expenses related to collaborative agreements with various third parties to research, develop and commercialize potential products using our drug delivery technologies and revenue recognized from ratable recognition of upfront fees.

The increase in collaborative research and development revenue in the three months ended June 30, 2010 was primarily attributable to higher revenue recognized in connection with our agreements with King, Hospira, Nycomed and feasibility partners, partially offset by lower collaborative research and development revenue recognized in connection with our agreement with Pain Therapeutics compared with the same period in 2009. The increase in collaborative research and development revenue in the six months ended June 30, 2010 was primarily attributable to higher revenue recognized in connection with our agreements with King, Hospira, Pain Therapeutics, Nycomed and feasibility partners, partially offset by lower collaborative research and development revenue recognized in connection with our terminated agreement with Endo compared with the same period in 2009.

We received a $10.0 million upfront fee in connection with the license agreement signed with Endo in March 2005 relating to TRANSDUR-Sufentanil. The $10.0 million upfront fee was recognized as revenue ratably over the term of our continuing involvement with Endo with respect to TRANSDUR-Sufentanil. For the three and six months ended June 30, 2010, we recognized zero in collaborative research and development revenue related to this upfront fee, compared to zero and $875,000 for the corresponding periods in 2009. Our estimate of the remaining term of our continuing involvement was adjusted in the fourth quarter of 2008 as a result of Endo’s termination notice received by us in February 2009. The $10.0 million upfront fee from Endo was fully recognized as of December 31, 2009.

We also received a $14.0 million upfront fee in connection with the development and license agreement with Nycomed in November 2006 relating to POSIDUR. The $14.0 million upfront fee is recognized as collaborative research and development revenue ratably over the term of our continuing involvement with Nycomed with respect to POSIDUR. For the three and six months ended June 30, 2010, we recognized $309,000 and $671,000, respectively, in collaborative research and development revenue related to this upfront fee, compared to $381,000 and $763,000 for the corresponding periods in 2009. Our estimates of the remaining term of our continuing involvement were modified in the first quarter and the fourth quarter of 2009 as a result of updated development plans for POSIDUR in Europe.

We also received a $20.0 million upfront fee in connection with the development and license agreement signed with Alpharma (acquired by King) in September 2008 relating to ELADUR. The $20.0 million upfront fee is recognized as collaborative research and development revenue ratably over the term of our continuing involvement with Alpharma (King) with respect to ELADUR. For the three and six months ended June 30, 2010, we recognized $804,000 and $1.6 million, respectively, in collaborative research and development revenue related to this upfront fee, compared to $804,000 and $1.8 million for the corresponding periods in 2009. Our estimate of the remaining term of our continuing involvement was modified in the second quarter of 2009 as a result of an updated development plan for ELADUR.

We also received a $27.5 million upfront fee in connection with the development and license agreement signed with Hospira, Inc. in June 2010 relating to POSIDUR. The $27.5 million upfront fee is recognized as collaborative research and development revenue ratably over the term of our continuing involvement with Hospira with respect to POSIDUR. For the three and six months ended June 30, 2010, we recognized $302,000 and $302,000, respectively, in collaborative research and development revenue related to this upfront fee, compared to zero for the corresponding periods in 2009.

We expect our collaborative research and development revenue to fluctuate in future periods pending our efforts to enter into potential new collaborations and our existing third party collaborators’ commitment to and progress in the research and development programs. The collaborative research and development and other revenue associated with our major collaborators are as follows (in thousands):


	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
Collaborator
King Pharmaceuticals, Inc. (King)(1)	$	2,695	$	1,632	$	5,270	$	3,556
Hospira, Inc. (Hospira)(2)		747		—		747		—
Nycomed Danmark, APS (Nycomed)(3)		595		381		904		930
Pain Therapeutics, Inc. (Pain Therapeutics)		27		46		728		322
Endo Pharmaceuticals, Inc. (Endo)(4)		—		—		—		985
Others		593		547		824		725

Total collaborative research and development and other revenue	$	4,657	$	2,606	$	8,473	$	6,518

Notes:

(1)	Amounts related to the ratable recognition of upfront fees were $804,000 and $1.6 million for the three and six months ended June 30, 2010, respectively, compared to $804,000 and $1.8 million for the corresponding periods in 2009.

(2)	Amounts related to the ratable recognition of upfront fees were $302,000 for the three and six months ended June 30, 2010 compared to zero for the corresponding periods in 2009.

(3)	Amounts related to the ratable recognition of upfront fees were $309,000 and $617,000 for the three and six months ended June 30, 2010, respectively, compared to $381,000 and $763,000 for the corresponding periods in 2009.

(4)	Amounts related to the ratable recognition of upfront fees were zero for the three and six months ended June 30, 2010, respectively, compared to zero and $875,000 for the corresponding periods in 2009. The Company’s agreement with Endo was terminated effective August 26, 2009.

We recognize upfront fees on a straight-line basis over the period in which we have continuing involvement with a third-party collaborator pursuant to the applicable agreement. Such period generally represents the longer of the expected research and development period or other continuing obligation period defined in the respective agreements between us and our third-party collaborators.

Product revenue

A portion of our revenues is derived from our product sales, which include our ALZET mini pump product line, our LACTEL biodegradable polymer product line and certain excipients that are included in Remoxy. Net product revenues were $2.7 million and $6.5 million in the three and six months ended June 30, 2010, respectively, compared to $2.3 million and $4.7 million for the corresponding periods in 2009. The increases in the three and six months ended June 30, 2010 were primarily due to higher product revenue from our LACTEL polymer product line and our ALZET mini pump product line as a result of higher units sold compared to the corresponding periods in 2009. In addition, the increase in the six months ended June 30, 2010 was also attributable to higher product revenue from the sale of certain excipients included in Remoxy to King; revenues in the 2010 period included $551,000 related to a price settlement for shipments to King that occurred in 2008 and the first quarter of 2009 pursuant to the long term supply agreement executed in the third quarter of 2009 as well as $410,000 of product revenue related to the shipment of another excipient that is included in Remoxy in the first quarter of 2010.

Cost of product revenues. Cost of product revenues was $861,000 and $2.2 million for the three and six months ended June 30, 2010, respectively, compared to $837,000 and $1.7 million for the corresponding periods in 2009. The increases in the cost of product revenue in the three and six months ended June 30, 2010 was primarily the result of higher units sold from our LACTEL polymer product line and our ALZET mini pump product line, partially offset by improved manufacturing efficiency from our LACTEL polymer product line compared to the corresponding periods in 2009. The increase in the cost of product revenue in the six months ended June 30, 2010 was also the result of recognizing $315,000 of cost of goods sold related to the sale of certain excipients to King in the first quarter of 2010. Cost of product revenue and gross profit margin will fluctuate from period to period depending upon the product mix in a particular period. Stock-based compensation expense recognized related to cost of product revenues was $86,000 and $170,000 for the three and six months ended June 30, 2010, respectively, compared to $117,000 and $195,000 for the corresponding periods in 2009.

As of June 30, 2010 and 2009, we had 22 manufacturing employees. We expect the number of employees involved in manufacturing will remain comparable in the near future.

Research and development . Research and development expenses are primarily comprised of salaries, benefits, stock-based compensation and other compensation cost associated with research and development personnel, overhead and facility costs, preclinical and non-clinical development costs, clinical trial and related clinical manufacturing costs, contract services, and other outside costs. Research and development expenses were $9.2 million and $18.6 million for the three and six months ended June 30, 2010, respectively, compared to $7.9 million and $17.9 million for the corresponding periods in 2009. Stock-based compensation expense recognized related to research and development personnel was $1.3 million and $2.6 million for the three and six months ended June 30, 2010, respectively, compared to $1.3 million and $3.6 million for the corresponding periods in 2009.

Excluding the impact of stock-based compensation expenses, research and development expenses increased by $1.4 million and $1.7 million in the three and six months ended June 30, 2010 compared to the corresponding periods in 2009. The increase in the three months ended June 30, 2010 was primarily attributable to higher development costs associated with POSIDUR, Remoxy and other ORADUR-based opioid products licensed to Pain Therapeutics, ELADUR, our biologics programs and ORADUR-ADHD, partially offset by lower development costs associated with TRANSDUR-Sufentanil and other research programs compared to the corresponding period in 2009 as more fully discussed below. The increase in the six months ended June 30, 2010 was primarily attributable to higher development costs associated with POSIDUR, Remoxy and other ORADUR-based opioid products licensed to Pain Therapeutics and ELADUR, partially offset by lower development costs associated with our biologics programs, ORADUR-ADHD, TRANSDUR-Sufentanil and other research programs compared to the corresponding period in 2009 as more fully discussed below.

Research and development expenses associated with our major development programs approximate the following (in thousands):


	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
POSIDUR (1)	$	3,860	$	2,918	$	8,455	$	6,573
Remoxy and other ORADUR-based opioid products		1,356		476		2,206		934
ELADUR		954		694		2,240		2,177
Biologics Programs		486		415		733		1,072
ORADUR-ADHD		302		206		540		1,185
TRANSDUR-Sufentanil		220		353		395		771
Others		2,026		2,804		4,056		5,224

Total research and development expenses	$	9,204	$	7,866	$	18,625	$	17,936

(1)	See Note 2 Strategic Agreements in the condensed financial statements for more details about our agreements with Nycomed and Hospira.

POSIDUR

Our research and development expenses for POSIDUR were $3.9 million and $8.5 million in the three and six months ended June 30, 2010, respectively, compared to $2.9 million and $6.6 million in the corresponding periods in 2009. The increases in the three and six months ended June 30, 2010 were primarily due to higher costs associated with the Phase III clinical trial and higher employee costs for POSIDUR compared with the corresponding periods in 2009.

Remoxy and other select ORADUR-based opioid products

Our research and development expenses for Remoxy and other opioids licensed to Pain Therapeutics were $1.4 million and $2.2 million in the three and six months ended June 30, 2010, respectively, compared to $476,000 and $934,000 in the corresponding periods in 2009. The increases in the three and six months ended June 30, 2010 were primarily due to increased activities to support the resubmission of the Remoxy NDA compared to the corresponding periods in 2009.

ELADUR

Our research and development expenses for ELADUR were $954,000 and $2.2 million in the three and six months ended June 30, 2010, respectively, compared to $694,000 and $2.2 million in the corresponding periods in 2009. The increases were primarily due to higher employee costs and higher animal studies and contract manufacturing expenses related to this product candidate in the three and six months ended June 30, 2010 compared to the corresponding periods in 2009.

Biologics programs

Our research and development expenses for biologics programs were $486,000 and $733,000 in the three and six months ended June 30, 2010, respectively, compared to $415,000 and $1.1 million in the corresponding periods in 2009. The slight increase in the three months ended June 30, 2010 was primarily due to higher external costs incurred in support of these programs compared to the corresponding period in 2009. The decrease in the six months ended June 30, 2010 was primarily due to lower external costs and employee related costs in support of these programs.

ORADUR-ADHD

Our research and development expenses for ORADUR-ADHD were $302,000 and $540,000 in the three and six months ended June 30, 2010, respectively, compared to $206,000 and $1.2 million in the corresponding periods in 2009. The slight increase in the three months ended June 30, 2010 was primarily due to higher employee costs incurred for this drug candidate. The decrease in the six months ended June 30, 2010 was primarily due to decreased formulation and other development activities for this drug candidate.

TRANSDUR-Sufentanil

Our research and development expenses for TRANSDUR-Sufentanil were $220,000 and $395,000 in the three and six months ended June 30, 2010, respectively, compared to $353,000 and $771,000 in the corresponding periods in 2009. The decreases in the three and six months ended June 30, 2010 were primarily due to decreased external and employee costs for this drug candidate.

Other DURECT research programs

Our research and development expenses for all other programs were $2.0 million and $4.1 million in the three and six months ended June 30, 2010, respectively, compared to $2.8 million and $5.2 million in the corresponding periods in 2009. The decreases in the three and six months ended June 30, 2010 were primarily due to lower employee related costs and decreased research and development activities for these programs.

As of June 30, 2010, we had 78 research and development employees compared with 75 as of June 30, 2009. We expect our research and development expenses to increase in the near future.

We cannot reasonably estimate the timing and costs of our research and development programs due to the risks and uncertainties associated with developing pharmaceutical systems, as outlined in the “Risk Factors” section of this report. The duration of development of our research and development programs may 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 the numerous risks and uncertainties associated with developing pharmaceutical products, including significant and changing government regulation, the uncertainties of future preclinical and clinical study results, the uncertainties with our collaborators’ commitment and progress to the programs and the uncertainties associated with process development and manufacturing as well as sales and marketing. In addition, with respect to our development programs subject to third-party collaborations, the timing and expenditures to complete the programs are subject to the control of our collaborators. Therefore, we cannot reasonably estimate the timing and estimated costs of the efforts necessary to complete the research and development programs. For additional information regarding these risks and uncertainties, see “Risk Factors” below.

Selling, general and administrative. Selling, general and administrative expenses are primarily comprised of salaries, benefits, stock-based compensation and other compensation cost associated with finance, legal, business development, sales and marketing and other administrative personnel, overhead and facility costs, and other general and administrative costs. Selling, general and administrative expenses were $3.6 million and $7.1 million for the three and six months ended June 30, 2010, compared to $3.8 million and $8.0 million for the corresponding periods in 2009. Stock-based compensation expense recognized related to selling, general and administrative personnel was $663,000 and $1.3 million for the three and six months ended June 30, 2010, respectively, compared to $864,000 and $2.0 million for the corresponding periods in 2009.

Excluding the impact of stock-based compensation expenses, selling, general and administrative expenses increased by $8,000 and decreased by $245,000 in the three and six months ended June 30, 2010, respectively, compared to the corresponding periods in 2009. The decrease in selling, general and administrative expenses in the six months ended June 30, 2010 was primarily due to lower employee and marketing related expenses compared to the corresponding period in 2009.

As of June 30, 2010 and 2009, we had 29 selling, general and administrative employees. We expect selling, general and administrative expenses to remain comparable in the near future.

Other income (expense). Interest and other income was $48,000 and $59,000 for the three and six months ended June 30, 2010, respectively, compared to $106,000 and $285,000 for the corresponding periods in 2009. The decreases in interest income were primarily the result of lower yields as well as lower average cash and investment balances during the three and six months ended June 30, 2010 compared to the corresponding periods in 2009.

Interest and other expense was $21,000 and $23,000 for the three and six months ended June 30, 2010, compared to $11,000 and $22,000 for the corresponding periods in 2009.

Liquidity and Capital Resources

We had cash, cash equivalents and investments totaling $57.2 million at June 30, 2010 compared to $41.6 million at December 31, 2009. These balances include $432,000 and $431,000 of interest-bearing marketable securities classified as restricted investments on our balance sheets as of June 30, 2010 and December 31, 2009, respectively. The increase in cash, cash equivalents and investments during the six months ended June 30, 2010 was primarily the result of the receipt of a $27.5 million upfront payment from Hospira plus payments received from customers and collaboration partners, partially offset by ongoing operating expenses.

Working capital was $47.3 million and $34.8 million at June 30, 2010 and December 31, 2009, respectively. The increase in working capital was primarily attributable to the receipt of a $27.5 million upfront payment from Hospira, partially offset by an increase in our operating expenditures in the six months ended June 30, 2010.

We received $15.6 million of cash in operating activities for the six months ended June 30, 2010 compared to $11.0 million of cash used for the corresponding period in 2009. The increase in cash provided by operations for the six months ended June 30, 2010 was primarily attributable to the receipt of a $27.5 million upfront payment from Hospira, the decreases in accounts receivable from our third party collaborators and prepaid expenses for the six months ended June 30, 2010, partially offset by increases in accrued liabilities and contract research liability compared to the corresponding period in 2009.

We used $2.8 million of cash for investing activities for the six months ended June 30, 2010 compared to $8.7 million for the corresponding period in 2009. The decrease in cash used in investing activities was primarily due to an increase in net proceeds from maturities of available-for-sale securities for the six months ended June 30, 2010 compared to the corresponding period in 2009.

We received $223,000 of cash from financing activities for the six months ended June 30, 2010 compared to $304,000 for the corresponding period in 2009. The decrease in cash provided by financing activities was primarily due to lower proceeds from exercises of stock options in the six months ended June 30, 2010 compared to the corresponding period in 2009.

We anticipate that cash used in operating and investing activities will increase in the near future as we continue to research, develop and manufacture our products through internal efforts and partnering activities.

During the six months ended June 30, 2010, we believe there have been no significant changes in our future payments due under contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

We anticipate incurring capital expenditures of approximately $500,000 over the next 12 months to purchase research and development and other capital equipment. The amount and timing of these capital expenditures will depend on, among other things, the timing of clinical trials for our products and our collaborative research and development activities.

We believe that our existing cash, cash equivalents and investments will be sufficient to fund our planned operations, existing debt and contractual commitments, and planned capital expenditures through at least the next 12 months. We may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding. Additionally, we do not expect to generate meaningful revenues from our pharmaceutical systems currently under development for at least the next twelve months, if at all. Depending on whether we enter into additional collaborative agreements in the near term, we may be required to raise additional capital 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 or additional capital will be available on favorable terms, if at all. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain of our products, technologies or potential markets, either of which could have a material adverse effect on our business, financial condition and results of operations. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to our existing stockholders.

In July 2010, we entered into an equity line of credit facility with Azimuth Opportunity Ltd., or Azimuth, under which we may sell to Azimuth, subject to certain limitations, up to $50 million of our common stock over a 24-month period. Azimuth will not be obligated to purchase shares under the equity line of credit unless specified conditions are met. If we are unable to meet the specified conditions with respect to any sale of shares under the Azimuth equity line of credit, we may be unable to access this source of financing. Azimuth is also permitted to terminate the equity line of credit under certain circumstances.

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

Off-Balance Sheet Arrangements

We have not utilized “off-balance sheet” arrangements to fund our operations or otherwise manage our financial position.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

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

Our primary investment objective is to preserve principal while at the same time maximizing yields without significantly increasing risk. Our portfolio includes money markets funds, commercial paper, medium-term notes, corporate notes, government securities and corporate bonds.

The diversity of our portfolio helps us to achieve our investment objectives. As of June 30, 2010, approximately 95% of our investment portfolio is composed of investments with original maturities of one year or less and approximately 37% of our investment portfolio matures less than 90 days from the date of purchase.

The following table presents the amounts of our cash equivalents and investments that may be subject to interest rate risk and the average interest rates as of June 30, 2010 (dollars in thousands) by year of maturity. The amounts presented in the table below approximate fair value.


	2010			2011			2012			Total
Cash equivalents:
Fixed rate	$	19,597		$	—		$	—		$	19,597
Average fixed rate		0.26	%		—			—			0.26	%
Variable rate	$	1,242		$	—		$	—		$	1,242
Average variable rate		0.12	%		—			—			0.12	%
Short-term investments:
Fixed rate	$	28,322		$	4,553		$	—		$	32,875
Average fixed rate		0.32	%		0.44	%		—			0.34	%
Long-term investments:
Fixed rate	$	—		$	1,842		$	749		$	2,591
Average fixed rate		—			1.54	%		0.50	%		1.33	%
Restricted investments:
Fixed rate	$	432		$	—		$	—		$	432
Average fixed rate		0.28	%		—			—			0.28	%

Total investment securities	$	49,593		$	6,395		$	749		$	56,737

Average rate		0.28	%		0.93	%		0.50	%		0.41	%

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures : The Company’s principal executive and financial officers reviewed and evaluated the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Form 10-Q. Based on that evaluation, the Company’s principal executive and financial officers concluded that the Company’s disclosure controls and procedures are effective at ensuring that information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting : There were no significant changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

We are not a party to any material legal proceedings.

Item 1A.

Risk Factors

In addition to the other information in this Form 10-Q, a number of factors may affect our business and prospects. These factors include but are not limited to the following, which you should consider carefully in evaluating our business and prospects. Changes to our risk factors contained below relate primarily to updates in the development of our product candidates, financial condition and intellectual property position.

Risks Related To Our Business

Development of our pharmaceutical systems is not complete, and we cannot be certain that our pharmaceutical systems will be able to be commercialized

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

•

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

•

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

•

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

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

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

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completing the manufacturing development and scale-up to permit manufacture of the pharmaceutical system in commercial quantities and at acceptable prices.

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

We or our third-party collaborators must show the safety and efficacy of our drug candidates in animal studies and human clinical trials to the satisfaction of regulatory authorities before they can be sold

Before we or our third-party collaborators can obtain government approval to sell any of our pharmaceutical systems, we or they, as applicable, must demonstrate through laboratory performance studies and safety testing, nonclinical (animal) studies and clinical (human) trials that each system is safe and effective for human use for each targeted indication. The clinical development status of our most advanced publicly announced development programs is as follows:

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Remoxy—An NDA has been submitted, in response to which the FDA has provided a Complete Response Letter. King, which holds the commercialization rights to Remoxy, has stated that it has undertaken a likeability study and a pharmacokinetic trial in volunteers and plans to resubmit the NDA in the fourth quarter of 2010. There can be no assurance that any resubmission of the NDA by King will be timely or sufficient to gain approval of Remoxy.

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POSIDUR—To date, we have completed several Phase II studies in various surgeries and held an end-of-Phase II meeting with the FDA. We are currently conducting BESST (Bupivacaine Effectiveness and Safety in SABER Trial), which is intended to be the pivotal Phase III clinical trial in the U.S. BESST is an international, multi-center, randomized, double-blind, controlled trial evaluating the safety, efficacy, and pharmacokinetics of POSIDUR in approximately 300 patients undergoing a variety of general abdominal surgical procedures. Nycomed is conducting a Phase IIb study in shoulder surgery patients. This trial is being conducted by Nycomed in a different manner than U.S. studies and is designed to be suitable for European regulatory approval purposes. There can be no assurance that either of these trials will be successful. Furthermore, there can be no assurance that our planned development program for POSIDUR will generate data and information that will be deemed sufficient for marketing approval by the FDA or other regulatory agencies.

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TRANSDUR-Sufentanil Patch—In February 2009, an end-of-Phase II meeting with the FDA was conducted for this program outlining a potential regulatory pathway for the Phase III program and NDA submission. During 2009, we transitioned the program back to our control from Endo Pharmaceuticals. We are in discussions with potential partners regarding licensing development and commercialization rights to this program to which we hold worldwide rights. There can be no assurance that our planned development program for TRANSDUR-Sufentanil will generate data and information that will be deemed sufficient for marketing approval by the FDA or other regulatory agencies or that we will be able to find a collaborator with respect to the development and commercialization of this drug candidate.

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ELADUR—A Phase IIa clinical trial was completed and positive results were reported in the fourth quarter of 2007. King, to whom we have granted worldwide development and commercialization rights for ELADUR, has begun a Phase IIb clinical trial to evaluate ELADUR for the treatment of chronic low back pain. There can be no assurance that King will be able to successfully develop ELADUR to obtain marketing approval by the FDA or other regulatory agencies.

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ORADUR-ADHD—In July 2010, we commenced a Phase I study to evaluate multiple formulations of ORADUR-ADHD. There can be no assurance that we will be able to successfully develop ORADUR-ADHD to obtain marketing approval by the FDA or other regulatory agencies.

We are currently in the clinical, preclinical or research stages with respect to all our other pharmaceutical systems under development. We plan to continue extensive and costly tests, clinical trials and safety studies in animals to assess the safety and effectiveness of our pharmaceutical systems. These studies include laboratory performance studies and safety testing, clinical trials and animal toxicological studies necessary to support regulatory approval of development products in the United States and other countries of the world. These studies are costly, complex and last for long durations, and may not yield data supportive of the safety or efficacy of our drug candidates or required for regulatory approval.

While some of our clinical trials described above have shown indications of safety and efficacy of our product candidates, there can be no assurance that these results will be confirmed in subsequent clinical trials. In addition, side effects observed in clinical trials, or other side effects that appear in later clinical trials, may adversely affect our or our collaborators’ ability to obtain regulatory approval or market our product candidates. Side effects, toxicity or other safety issues associated with the use of our drug candidates that could require us to perform additional studies or halt development of our drug candidates. We and our collaborators may not be permitted to begin or continue our planned clinical trials for our potential pharmaceutical systems. If our trials are permitted, our potential pharmaceutical systems may not prove to be safe or produce their intended effects. In addition, we or our collaborators may be required by regulatory agencies to conduct additional animal or human studies regarding the safety and efficacy of our pharmaceutical systems which we have not planned or anticipated. For example, according to Pain Therapeutics, the FDA has indicated that additional non-clinical data will be required prior to regulatory approval for Remoxy. There can be no assurance that our collaborators and us will be able to generate such data to the satisfaction of the FDA, and the time required to generate such data may delay commercialization of Remoxy and harm our business and financial condition.

The length of clinical trials will depend upon, among other factors, the rate of trial site and patient enrollment and the number of patients required to be enrolled in such studies. We or our third-party collaborators may fail to obtain adequate levels of patient enrollment in our clinical trials. Delays in planned patient enrollment may result in increased costs, delays or termination of clinical trials, which could have a material adverse effect on us. In addition, even if we or our third-party collaborators enroll the number of

patients we expect in the time frame we expect, such clinical trials may not provide the data necessary to support regulatory approval for the pharmaceutical systems for which they were conducted. Additionally, we or our third-party collaborators may fail to effectively oversee and monitor these clinical trials, which would result in increased costs or delays of our clinical trials. Even if these clinical trials are completed, we or our third-party collaborators may fail to complete and submit a new drug application as scheduled.

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

Regulatory action or failure to obtain product approvals could delay or limit development and commercialization of our pharmaceutical systems and result in failure to achieve anticipated revenues

The manufacture and marketing of our pharmaceutical systems and our research and development activities are subject to extensive regulation for safety, efficacy and quality by numerous government authorities in the United States and abroad. We or our third-party collaborators must obtain clearance or approval from applicable regulatory authorities before we or they, as applicable, can perform clinical trials, market or sell our products in development in the United States or abroad. Clinical trials, manufacturing and marketing of products are subject to the rigorous testing and approval process of the FDA and equivalent foreign regulatory authorities. In particular, recent recalls of and reported adverse side effects of marketed drugs have made regulatory agencies, including the FDA, increasingly focus on the safety of drug products. Regulatory agencies are requiring more extensive and ever increasing showings of safety at every stage of drug development and commercialization from initial clinical trials to regulatory approval and beyond. These rigorous and evolving standards may delay and increase the expenses of our development efforts. The FDA or other foreign regulatory agency may, at any time, halt our and our collaborators’ development and commercialization activities due to safety concerns, in which case our business will be harmed. In addition, the FDA or other foreign regulatory agency may refuse or delay approval of our or our collaborators’ drug candidates for failure to collect sufficient clinical or animal safety data, and require us or our collaborators to conduct additional clinical or animal safety data which may cause lengthy delays and increased costs to our programs.

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

We or our third-party collaborators, as applicable, may also encounter delays or rejections based upon additional government regulation from future legislation, administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. We or our third-party collaborators, as applicable, may encounter similar delays in foreign countries. Sales of our pharmaceutical systems outside the United States are subject to foreign regulatory standards that vary from country to country.

The time required to obtain approvals from foreign countries may be shorter or longer than that required for FDA approval, and requirements for foreign licensing may differ from FDA requirements. We or our third-party collaborators, as applicable, may be unable to obtain requisite approvals from the FDA and foreign regulatory authorities, and even if obtained, such approvals may not be on a timely basis, or they may not cover the clinical uses that we specify. If we or our third-party collaborators, as applicable, fail to obtain timely clearance or approval for our development products, we or they will not be able to market and sell our pharmaceutical systems, which will limit our ability to generate revenue.

Many of our drug candidates under development including Remoxy and TRANSDUR-Sufentanil are subject to mandatory Risk Evaluation and Mitigation Strategy (REMS) programs, a new requirement by the FDA, which could delay the approval of these drug candidates and increase the cost, burden and liability associated with the commercialization of these drug candidates

On February 6, 2009, the FDA sent letters to manufacturers of certain opioid drug products, indicating that these drugs will be required to have a Risk Evaluation and Mitigation Strategy (REMS) to ensure that the benefits of the drugs continue to outweigh the risks. The affected opioid drugs include brand name and generic products and are formulated with the active ingredients fentanyl, hydromorphone, methadone, morphine, oxycodone, and oxymorphone. The FDA has authority to require a REMS under the Food and Drug Administration Amendments Act of 2007 (FDAAA) when necessary to ensure that the benefits of a drug outweigh the risks.

According to the FDA, opioid drugs have benefit when used properly and are a necessary component of pain management for certain patients. Opioid drugs have serious risks when used improperly. The FDA, drug manufacturers, and others have taken a number of steps in the past to prevent misuse, abuse and accidental overdose of these drugs, including providing additional warnings in product labeling, implementing risk management plans, conducting inter-agency collaborations, and issuing direct communications to both prescribers and patients. Despite these efforts, the rates of misuse and abuse, and of accidental overdose of opioids, have risen over the past decade. The FDA believes that establishing a REMS for opioids will reduce these risks, while still ensuring that patients with legitimate need for these drugs will continue to have appropriate access.

According to the FDA, it recognizes the need to achieve balance between appropriate access and risk mitigation, and believes an effective strategy would benefit from input from industry, patient advocacy groups, the pain and addiction treatment communities, the general public, and other stakeholders. In the first of a series of meetings with stakeholders, the FDA invited those companies that market the affected opioid drugs to a meeting with the agency on March 3, 2009 to discuss REMS development. Additional steps will include discussions with other federal agencies and non-government institutions, including patient and consumer advocates, representatives of the pain and addiction treatment communities, other health care professionals, and other interested parties. The FDA also held public meetings on May 27 and 28, 2009 to allow for broader public input and participation. On December 4, 2009, FDA held a public meeting with the drug company sponsors to hear from them about the status of the development of a proposed REMS and their views regarding the specific features of the REMS. The FDA held an additional meeting on July 22 and 23, 2010 to solicit feedback from an advisory committee and the public on a proposal from FDA for a class-wide opioid REMS. In addition, the FDA held another meeting on July 27 and 28, 2010 to solicit input from concerned parties regarding REMS for a broader class of pharmaceuticals (including but not limited to REMS). Through this process, the FDA hopes to gain valuable information that will lead to practical and effective solutions for development of a REMS and for appropriate use of these opioid drug products.

Many of our drug candidates including Remoxy, our other ORADUR-opioid drug candidates and TRANSDUR-Sufentanil are subject to the REMS requirement. Until the contours of required REMS programs are established by the FDA and understood by drug developers and marketers such as ourselves and our collaborators, there may be delays in marketing approvals for these drug candidates. In addition, there may be increased cost, administrative burden and potential liability associated with the marketing and sale of these types of drug candidates subject to the REMS requirement, which could negatively impact the commercial benefits to us and our collaborators from the sale of these drug candidates.

We depend to a large extent on third-party collaborators, and we have limited or no control over the development, sales, distribution and disclosure for our pharmaceutical systems which are the subject of third-party collaborative or license agreements

Our performance depends to a large extent on the ability of our third-party collaborators to successfully develop and obtain approvals for our pharmaceutical systems. We have entered into agreements with Pain Therapeutics, Hospira, Nycomed, Alpharma (acquired by King), Orient Pharma and others under which we granted such third parties the right to develop, apply for regulatory approval for, market, promote or distribute Remoxy and other ORADUR-based products, POSIDUR, ELADUR and other product candidates, respectively, subject to payments to us in the form of product royalties and other payments. We have limited or no control over the expertise or resources that any collaborator may devote to the development, clinical trial strategy, regulatory approval, marketing or sale of these pharmaceutical systems, or the timing of their activities. Any of our present or future collaborators may not perform their obligations as expected. These collaborators may breach or terminate their agreement with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. They may also conduct their activities in a manner that is different from the manner we would have chosen, had we been developing such pharmaceutical systems ourselves. Further, our collaborators may elect not to develop or commercialize pharmaceutical systems arising out of our collaborative arrangements or not devote sufficient resources to the development, clinical trials, regulatory approval, manufacture, marketing or sale of these pharmaceutical systems. If any of these events occur, we may not recognize revenue from the commercialization of our pharmaceutical systems based on such collaborations. In addition, these third parties may have similar or competitive products to the ones which are the subject of their collaborations with us, or relationships with our competitors, which may reduce their interest in developing or selling our pharmaceutical systems. We may not be able to control public disclosures made by some of our third-party collaborators, which could negatively impact our stock price.

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

Our near-term revenues are based to a significant extent on collaborative arrangements with third parties, pursuant to which we receive payments based on our performance of research and development activities set forth in these agreements. We may not be able to fulfill our obligations or attain milestones set forth in any specific agreement, which could cause our revenues to fluctuate or be less than anticipated and may expose us to liability for contractual breach. In addition, these agreements may require us to devote significant time and resources to communicating with and managing our relationships with such collaborators and resolving possible issues of contractual interpretation which may detract from time our management would otherwise devote to managing our operations. Such agreements are generally complex and contain provisions that could give rise to legal disputes, including potential disputes concerning ownership of intellectual property under collaborations. Such disputes can delay or prevent the development of potential new pharmaceutical systems, or can lead to lengthy, expensive litigation or arbitration. In general, our collaboration agreements, including our agreements with Pain Therapeutics with respect to Remoxy and other ORADUR-based products incorporating specified opioids, Hospira and Nycomed with respect to POSIDUR, Alpharma (acquired by King) with respect to ELADUR and Orient Pharma with respect to ORADUR-ADHD, may be terminated by the other party at will or upon specified conditions including, for example, if we fail to satisfy specified performance milestones or if we breach the terms of the agreement.

If any of our collaborative agreements are terminated, our revenues may be reduced or not materialize, and our products in development related to those agreements may not be commercialized.

Our near-term revenues also depend on milestone payments based on achievements by our third-party collaborators. Failure of such collaborators to attain such milestones would result in our not receiving additional revenues

In addition to payments based on our performance of research and development activities, our revenues also depend on the attainment of milestones set forth in our collaboration agreements. Such milestones are typically related to clinical trial developments, regulatory approvals or sales accomplishments. To the extent third-party collaborators do not achieve such 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 on our business.

Our business strategy includes the entry into additional collaborative agreements. We may not be able to enter into additional collaborative agreements or may not be able to negotiate commercially acceptable terms for these agreements

Our current business strategy includes the entry into additional collaborative agreements for the development and commercialization of our pharmaceutical systems. The negotiation and consummation of these type of agreements typically involve simultaneous discussions with multiple 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 with product opportunities as well the collaborators’ own internal product opportunities. We may not be able to consummate additional collaborative agreements, or we may not be able to negotiate commercially acceptable terms for these agreements. If we do not consummate additional collaborative agreements, we may have to consume money more rapidly on our product development efforts, defer development activities or forego the exploitation of certain geographic territories, any of which could have a material adverse effect on our business.

We may have difficulty raising needed capital in the future

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

In July 2010, we entered into an equity line of credit facility with Azimuth under which we may sell to Azimuth, subject to certain limitations, up to $50 million of our common stock over a 24-month period. Azimuth will not be obligated to purchase shares under the equity line of credit unless specified conditions are met. If we are unable to meet the specified conditions with respect to any sale of shares under the Azimuth equity line of credit, we may be unable to access this source of financing. Azimuth is also permitted to terminate the equity line of credit under certain circumstances.

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

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continued progress and cost of our research and development programs;

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the continuation of our collaborative agreements that provide financial funding for our activities;

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

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progress with preclinical studies and clinical trials;

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the time and costs involved in obtaining regulatory clearance;

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

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costs of developing sales, marketing and distribution channels and our ability and that of our collaborators to sell our pharmaceutical systems;

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costs involved in establishing manufacturing capabilities for clinical and commercial quantities of our pharmaceutical systems;

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competing technological and market developments;

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market acceptance of our pharmaceutical systems;

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costs for recruiting and retaining employees and consultants; and

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unexpected legal, accounting and other costs and liabilities related to our business.

We may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding. We may seek to raise any necessary additional 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 are obtained through arrangements with collaborators or other sources, we may have to relinquish rights to some of our technologies or pharmaceutical systems that we would otherwise seek to develop or commercialize ourselves. If adequate funds are not available, we may be required to significantly reduce or refocus our product development efforts, resulting in loss of sales, increased costs, and reduced revenues.

We and our third-party collaborators may not be able to manufacture sufficient quantities of our pharmaceutical systems and components to support the clinical and commercial requirements of our collaborators and ourselves at an acceptable cost or in compliance with applicable government regulations, and we have limited manufacturing experience

We or our third-party collaborators to whom we have assigned such responsibility must manufacture our pharmaceutical systems and components in clinical and commercial quantities, either directly or through third parties, in compliance with regulatory requirements and at an acceptable cost. The manufacturing processes associated with our pharmaceutical systems are complex. Except with respect to Remoxy, we and our third-party collaborators, where relevant, have not yet completed development of the manufacturing process for any pharmaceutical systems or components, including POSIDUR, TRANSDUR-Sufentanil, ELADUR, and other ORADUR-based drug candidates. If we and our third-party collaborators, where relevant, fail to timely complete the development of the manufacturing process for our pharmaceutical systems, we and our third-party collaborators, where relevant, will not be able to timely produce product for clinical trials and commercialization of our pharmaceutical systems. We have also committed to manufacture and supply pharmaceutical systems or components under a number of our collaborative agreements with third-party companies. We have limited experience manufacturing pharmaceutical products, and we may not be able to timely accomplish these tasks. If we and our third-party collaborators, where relevant, fail to develop manufacturing processes to permit us to manufacture a pharmaceutical system or component at an acceptable cost, then we and our third-party collaborators may not be able to commercialize that pharmaceutical system or we may be in breach of our supply obligations 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 of our pharmaceutical systems under good manufacturing practices (GMP), including POSIDUR, TRANSDUR-Sufentanil, ELADUR, Remoxy and other ORADUR-based drug candidates. We have not manufactured commercial quantities of any of our pharmaceutical systems. In the future, we intend to develop additional manufacturing capabilities for our pharmaceutical systems and components to meet our demands and those of our third-party collaborators by contracting with third-party manufacturers and by construction of additional manufacturing space at our current facilities in Cupertino, CA, Vacaville, CA and Pelham, AL. We have limited experience building and validating manufacturing facilities, and we may not be able to accomplish these tasks in a timely manner.

If we and our third-party collaborators, where relevant, are unable to manufacture pharmaceutical systems or components in a timely manner or at an acceptable cost, quality or performance level, and are unable to attain and maintain compliance with applicable regulations, the clinical trials and the commercial sale of our pharmaceutical systems and those of our third-party collaborators could be delayed. Additionally, we may need to alter our facility design or manufacturing processes, install additional equipment or do additional construction or testing in order to meet regulatory requirements, optimize the production process, increase efficiencies or production capacity or for other reasons, which may result in additional cost to us or delay production of product needed for the clinical trials and commercial launch of our pharmaceutical systems and those of our third-party collaborators.

We have entered into a supply agreement with Corium International, Inc. for clinical and commercial supplies of ELADUR and a supply agreement with Hospira Worldwide, Inc. for clinical and commercial supplies of POSIDUR. These third parties are currently our sole source for drug product required for development and commercialization of these drug candidates. Furthermore, we and our third-party collaborators, where relevant, may also need or choose to subcontract with additional third-party contractors to perform manufacturing steps of our pharmaceutical systems or supply required components for our pharmaceutical systems. Where third party contractors perform manufacturing services for us, we will be subject to the schedule, expertise and performance of third parties as well as incur significant additional costs. Failure of third parties to perform their obligations could adversely affect our operations, development timeline and financial results.

If we or our third-party collaborators cannot manufacture pharmaceutical systems or components in time to meet the clinical or commercial 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 systems could materially harm our business in the future

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

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failure to obtain or maintain requisite governmental approvals;

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failure to obtain approvals for clinically intended uses of our pharmaceutical systems under development; or

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FDA required product withdrawals or warnings arising from identification of serious and unanticipated adverse side effects in our pharmaceutical systems.

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 current good manufacturing practices regulations is difficult and costly. Manufacturing facilities are subject to ongoing periodic inspection by the FDA and corresponding state agencies, including unannounced inspections, and must be licensed before they can be used for the commercial manufacture of our development products. We and/or our present or future suppliers and distributors may be unable to comply with the applicable good manufacturing practice regulations and other FDA regulatory requirements. We have not been subject to a good manufacturing regulation inspection by the FDA relating to our pharmaceutical systems. If we, our third-party collaborators or our respective suppliers do not achieve compliance for our pharmaceutical systems we or they manufacture, the FDA may refuse or withdraw marketing clearance or require product recall, which may cause interruptions or delays in the manufacture and sale of our pharmaceutical systems.

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

We have incurred significant operating losses since our inception in 1998 and, as of June 30, 2010, had an accumulated deficit of approximately $326.8 million. We expect to continue to incur significant operating losses over the next several years as we continue to incur significant costs for research and development, clinical trials, manufacturing, sales, and general and administrative functions. Our ability to achieve profitability depends upon our ability, alone or with others, to successfully complete the development of our proposed pharmaceutical systems, obtain the required regulatory clearances, and manufacture and market our proposed pharmaceutical systems. Development of pharmaceutical systems is costly and requires significant investment. In addition, we may choose to license from third parties either additional drug delivery platform technology or rights to particular drugs or other appropriate technology for use in our pharmaceutical systems. The license fees for these technologies or rights would increase the costs of our pharmaceutical systems.

To date, we have not generated significant revenue from the commercial sale of our pharmaceutical systems and do not expect to do so in the near future. Our current product revenues are from the sale of the ALZET product line, the sale of LACTEL biodegradable polymers and certain excipient sales, and from payments under collaborative research and development agreements with third parties. We do not expect our product revenues to increase significantly in the near future, and we do not expect that collaborative research and development revenues will exceed our actual operating expenses. We do not anticipate meaningful revenues to derive from the commercialization and marketing of our pharmaceutical systems in development in the near future, and therefore do not expect to generate sufficient revenues to cover expenses or achieve profitability in the near future.

We may develop our own sales force to market future products but we have limited sales experience and may not be able to do so effectively

We may choose to develop our own sales force to market in the United States products that we may develop in the future. Developing a sales force will require substantial expenditures. We have limited sales and marketing experience, and may not be able to effectively recruit, train or retain sales personnel. We may not be able to effectively sell our pharmaceutical systems, if approved, and our failure to do so could limit or materially harm our business.

We and our third-party collaborators may not sell our pharmaceutical systems effectively

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

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fail to satisfy financial or contractual obligations to us;

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fail to adequately market our pharmaceutical systems;

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cease operations with little or no notice to us;

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offer, design, manufacture or promote competing product lines;

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fail to maintain adequate inventory and thereby restrict use of our pharmaceutical systems; or

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

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

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

We rely on third-party contract research organizations, service providers and suppliers to provide critical services to support development, clinical testing, and manufacturing of our pharmaceutical systems. For example, we currently depend on third-party vendors to manage and monitor our clinical trials and to perform critical manufacturing steps for our pharmaceutical systems. These third parties may not execute their responsibilities and tasks competently or in a timely fashion. We rely on third-parties to manufacture or perform manufacturing steps relating to our pharmaceutical systems or components. We anticipate that we will continue to rely on these and other third-party contractors to support development, clinical testing, and manufacturing of our pharmaceutical systems. Failure of these contractors to provide the required services in a competent or timely manner or on reasonable commercial terms could materially delay the development and approval of our development products, increase our expenses and materially harm our business, financial condition and results of operations.

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

Certain components and drug substances used in our pharmaceutical systems (including POSIDUR, TRANSDUR-Sufentanil, ELADUR, Remoxy and our other ORADUR-based drug candidates) are currently purchased from a single or a limited number of outside sources. In particular, Eastman Chemical is the sole supplier, pursuant to a supply agreement entered into in December 2005, of our requirements of sucrose acetate isobutyrate, a necessary component of POSIDUR, Remoxy, our other ORADUR-opioids and certain other pharmaceuticals systems we have under development. The reliance on a sole or limited number of suppliers could result in:

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delays associated with redesigning a pharmaceutical system due to a failure to obtain a single source component;

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

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reduced control over pricing, quality and delivery time.

We have supply agreements in place for certain components of our pharmaceuticals systems, but do not have in place long term supply agreements with respect to all of the components of any of our pharmaceutical system candidates. Therefore the supply of a particular component could be terminated at any time without penalty to the supplier. In addition, we may not be able to procure required components or drugs from third-party suppliers at a quantity, quality and cost acceptable to us. Any interruption in the supply of single source components could cause us to seek alternative sources of supply or manufacture these components internally. Furthermore, in some cases, we are relying on our third-party collaborators to procure supply of necessary components. If the supply of any components for our pharmaceutical systems is interrupted, components from alternative suppliers may not be available in sufficient volumes or at acceptable quality levels within required timeframes, if at all, to meet our needs or those of our third-party collaborators. This could delay our ability to complete clinical trials and obtain approval for commercialization and marketing of our pharmaceutical systems, 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 valuable assets, experience reduced market share or incur costly litigation to protect our rights or our third-party collaborators may choose to terminate their agreements with us

Our success will depend in part on our ability to obtain and maintain patents, maintain trade secret protection and operate without infringing the proprietary rights of others. As of July 31, 2010, we held 58 issued U.S. patents and 411 issued foreign patents (which include granted European patent rights that have been validated in various EU member states). In addition, we have 81 pending U.S. patent applications and have filed 107 patent applications under the Patent Cooperation Treaty, from which 498 national phase applications are currently pending in Europe, Australia, Japan, Canada and other countries. Our patents expire at various dates starting in 2012.

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

The patent laws of the U.S. have recently undergone changes through court decisions which may have significant impact on us and our industry. The recent decisions of the U.S. Supreme Court (e.g., KSR v. Teleflex, eBay v. MercExchange ) and other courts (e.g., In re Seagate ) with respect to the standards of patentability, enforceability, availability of injunctive relief and damages may make it more difficult for us to procure, maintain and enforce patents. In addition, bills are pending before the U.S. Congress that may fundamentally change the patent laws of the U.S. on issues ranging from priority entitlement, filing and prosecution matters to enforcement and damages. These changes and proposed reforms have introduced significant uncertainty in the patent law landscape and may potentially negatively impact our ability to procure, maintain and enforce patents to provide exclusivity for our products.

We are party to several collaborative agreements. Our third-party collaborators have entered into these agreements based on the exclusivity that our intellectual property rights confer on the products being developed. The loss or diminution of our intellectual property rights could result in a decision by our third-party collaborators to terminate their agreements with us. In addition, these agreements are generally complex and contain provisions that could give rise to legal disputes, including potential disputes concerning ownership of intellectual property and data under collaborations. Such disputes can lead to lengthy, expensive litigation or arbitration requiring us to devote management time and resources to such dispute which we would otherwise spend on our business. To the extent that our agreements call for future royalties to be paid conditional on our having patents covering the royalty-bearing subject matter, the decision by the Supreme Court in the case of MedImmune v. Genentech could encourage our licensees to challenge the validity of our patents and thereby seek to avoid future royalty obligations without losing the benefit of their license. Should they be successful in such a challenge, our ability to collect future royalties could be substantially diminished.

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

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

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

We and our collaborators may be exposed to future litigation by third parties based on claims that our pharmaceutical systems or activities infringe the intellectual property rights of others or that we or our collaborators have misappropriated the trade secrets of others. This risk is exacerbated by the fact that the validity and breadth of claims covered in medical technology patents and the breadth and scope of trade secret protection involve complex legal and factual questions for which important legal principles are unresolved. Any litigation or claims against us or our collaborators, whether or not valid, could result in substantial costs, could place a significant strain on our financial resources and could harm our reputation. We also may not have sufficient funds to litigate against parties with substantially greater resources. In addition, pursuant to our collaborative agreements, we have provided our collaborators with the right, under specified circumstances, to defend against any claims of infringement of the third party intellectual property rights, and such collaborators may not defend against such claims adequately or in the manner that we would do ourselves. Intellectual property litigation or claims could force us or our collaborators 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 systems that incorporate the challenged intellectual property, which would adversely affect our revenue;

•

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

•

redesign our pharmaceutical systems, which would be costly and time-consuming.

We may be required to obtain rights to certain drugs

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

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

We may acquire technologies, products or businesses to broaden the scope of our existing and planned product lines and technologies. Future acquisitions expose us to:

•

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

•

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

•

the diversion of resources from our existing business and technologies;

•

the inability to generate revenues to offset associated acquisition costs;

•

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

•

the impairment of relationships with employees and customers or third party collaborators as a result of any integration of new management personnel.

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

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

Some of our pharmaceutical systems currently under development contain, and our products in the future may contain, controlled substances which are subject to state, federal and foreign laws and regulations regarding their manufacture, use, sale, importation and distribution. The TRANSDUR-Sufentanil patch, Remoxy and our other ORADUR-based drug candidates, and other pharmaceutical systems we have under development contain active ingredients which are classified as controlled substances under the regulations of the U.S. Drug Enforcement Agency. For our pharmaceutical systems containing controlled substances, we and our suppliers, manufacturers, contractors, customers and distributors are required to obtain and maintain applicable registrations from state, federal and foreign law enforcement and regulatory agencies and comply with state, federal and foreign laws and regulations regarding the manufacture, use, sale, importation and distribution of controlled substances. These regulations are extensive and include regulations governing manufacturing, labeling, packaging, testing, dispensing, production and procurement quotas, record keeping, reporting, handling, shipment and disposal. These regulations increase the personnel needs and the expense associated with development and commercialization of drug candidates including controlled substances. Failure to obtain and maintain required registrations or comply with any applicable regulations could delay or preclude us from developing and commercializing our pharmaceutical systems containing controlled substances and subject us to enforcement action. In addition, because of their restrictive nature, these regulations could limit our commercialization of our pharmaceutical systems containing controlled substances. In particular, among other things, there is a risk that these regulations may interfere with the supply of the drugs used in our clinical trials, and in the future, our ability to produce and distribute our products in the volume needed to meet commercial demand.

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

We may incur significant non-cash charges related to impairment write-downs of our long-lived assets, including goodwill and other intangible assets. We will continue to incur non-cash charges related to amortization of other intangible assets. For example, we had a $13.5 million non-cash write down of deferred royalties and commercial rights related to CHRONOGESIC in the fourth quarter of 2008, which impacted our financial statements. We are required to perform periodic impairment reviews of our goodwill at least annually. To the extent these reviews conclude that the expected future cash flows generated from our business activities are not sufficient to recover the cost of our long-lived assets, we will be required to measure and record an impairment charge to write-down these assets to their realizable values. We completed our last review during the fourth quarter of 2009 and determined that goodwill was not impaired as of December 31, 2009. However, there can be no assurance that upon completion of subsequent reviews a material impairment charge will not be recorded. If future periodic reviews determine that our assets are impaired and a write-down is required, it will adversely impact or delay our profitability.

Global credit and financial market conditions could negatively impact the value of our current portfolio of cash equivalents, short-term investments or long-term investments and our ability to meet our financing objectives

Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. Our short-term investments consist primarily of readily marketable debt securities with original maturities of greater than 90 days from the date of purchase but remaining maturities of less than one year from the balance sheet date. Our long-term investments consist primarily of readily marketable debt securities with maturities 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 other significant deterioration in the fair value of our cash equivalents, short-term investments or long-term investments since June 30, 2010, no assurance can be given that further 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 personnel

Our success will depend to a significant degree upon the continued services of key management, technical and scientific personnel, including Felix Theeuwes, our Chairman and Chief Scientific Officer and James E. Brown, our President and Chief Executive Officer. In addition, our success will depend on our ability to attract and retain other highly skilled personnel. Competition for qualified personnel is intense, and the process of hiring and integrating such qualified personnel is often lengthy. We may be unable to recruit such personnel on a timely basis, if at all. Our management and other employees may voluntarily terminate their employment with us at any time. The loss of the services of key personnel, or the inability to attract and retain additional qualified personnel, could result in delays to product development or approval, loss of sales and diversion of management resources.

We may not successfully manage our company through varying business cycles

Our 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 must expand or contract our facilities, our operational, financial and management systems and our personnel. If we were unable to manage growth and contractions effectively our business would be harmed.

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

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

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

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

Risks Related To Our Industry

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

The pharmaceutical industry is subject to rapid and substantial technological change. Developments by others may render our pharmaceutical systems under development or technologies noncompetitive or obsolete, or we may be unable to keep pace with technological developments or other market factors. Technological competition in the industry from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase.

We may face competition from other companies in numerous industries including pharmaceuticals, medical devices and drug delivery. POSIDUR, TRANSDUR-Sufentanil, ELADUR, Remoxy and other ORADUR-based drug candidates, if approved, will compete with currently marketed oral opioids, transdermal opioids, local anesthetic patches, stimulants, implantable and external infusion pumps which can be used for infusion of opioids and local anesthetics. Products of these types are marketed by Purdue Pharma, King, Knoll, Janssen, Medtronic, Endo, AstraZeneca, Arrow International, Tricumed, I-Flow (Kimberly-Clark), Cumberland Pharmaceuticals, Covidien, Shire, Johnson & Johnson, Eli Lilly and Novartis. Numerous companies are applying significant resources and expertise to the problems of drug delivery and several of these are focusing or may focus on delivery of drugs to the intended site of action, including Alkermes, Pacira Pharmaceuticals, EpiCept, Innocoll, Nektar, I-Flow (Kimberly-Clark), NeurogesX, Flamel, Alexza, Cadence Pharmaceuticals, Hospira, Cumberland Pharmaceuticals, Egalet, Acura and others. Some of these competitors may be addressing the same therapeutic areas or indications as we are. Our current and potential competitors may succeed in obtaining patent protection or commercializing products before us. Many of these entities have significantly greater research and development capabilities than we do, as well as substantially more marketing, manufacturing, financial and managerial resources. These entities represent significant competition for us. Acquisitions of, or investments in, competing pharmaceutical or biotechnology companies by large corporations could increase such competitors’ financial, marketing, manufacturing and other resources.

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

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

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

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

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

Our future financial performance will depend upon the successful introduction and customer acceptance of our future products, including POSIDUR, TRANSDUR-Sufentanil, ELADUR, Remoxy and other ORADUR-based drug candidates. Even if approved for marketing, our pharmaceutical systems may not achieve market acceptance. The degree of market acceptance will depend upon a number of factors, including:

•

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

•

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

•

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

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

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

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

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

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

Broad use of our pharmaceutical systems will require extensive training of numerous physicians on the proper and safe use of our pharmaceutical systems. The time required to begin and complete training of physicians could delay introduction of our products and adversely affect market acceptance of our products. We or third parties selling our pharmaceutical systems may be unable to rapidly train physicians in numbers sufficient to generate adequate demand for our pharmaceutical systems. Any delay in training would materially delay the demand for our pharmaceutical systems and harm our business and financial results. In addition, we may expend significant funds towards such training before any orders are placed for our products, which would increase our expenses and harm our financial results.

Potential new accounting pronouncements and legislative actions are likely to impact our future financial position or results of operations

Future changes in financial accounting standards may cause adverse, unexpected fluctuations in the timing of the recognition of revenues or expenses and may affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with frequency and may occur in the future and we may make changes in our accounting policies in the future. Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, PCAOB pronouncements and NASDAQ rules, are creating uncertainty for companies such as ours and insurance, accounting and auditing costs are increasing as a result of this uncertainty and other factors. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

Risks Related To Our Common Stock

Our operating history makes evaluating our stock difficult

Our quarterly and annual results of operations have historically fluctuated and we expect will continue to fluctuate for the foreseeable future. We believe that period-to-period comparisons of our operating results should not be relied upon as predictive of future performance. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies with no approved pharmaceutical products, particularly companies in new and rapidly evolving markets such as pharmaceuticals, drug delivery and biotechnology. To address these risks, we must, among other things, obtain regulatory approval for and commercialize our pharmaceutical systems, 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 pharmaceutical systems and to fund operating losses to be incurred in the next several years.

Investors may experience substantial dilution of their investment

Investors may experience dilution of their investment if we raise capital through the sale of additional equity securities or convertible debt securities or grant additional stock options to employees and consultants. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices for our common stock.

The price of our common stock may be volatile

The stock markets in general, and the markets for pharmaceutical stocks in particular, have experienced extreme volatility that has often been unrelated 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 our third-party collaborators (such as Pain Therapeutics or its commercialization sub-licensee King, Hospira, Nycomed, Alpharma (now owned by King) and Orient Pharma) to successfully develop and commercialize the respective pharmaceutical systems 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 POSIDUR, TRANSDUR-Sufentanil, ELADUR, Remoxy, our other ORADUR-based drug candidates or other pharmaceutical systems;

•

announcements of FDA non-approval of our pharmaceutical systems, 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 pharmaceutical systems, clinical trials, manufacturing processes or sales and marketing activities, or those of our third party collaborators;

•

announcements of technological innovations, patents or new products by our competitors;

•

regulatory developments in the United States and foreign countries;

•

any lawsuit involving us or our pharmaceutical systems 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 others;

•

changes in accounting principles; or

•

loss of any of our key scientific or management personnel.

The market price of our common stock may fluctuate significantly in response to factors which are beyond our control. The stock market in general has recently experienced extreme price and volume fluctuations. In addition, the market prices of securities of technology and pharmaceutical companies have also been extremely volatile, and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could result in extreme fluctuations in the price of our common stock, which could cause a decline in the value of our common stock.

In the past, following periods of volatility in the market price of a particular company’s securities, litigation has often been brought against that company. 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 return

Our management has broad discretion over how our cash and investments are used and may from time to time invest in ways with which our stockholders 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 corporate control favored by our other stockholders

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

•

the election of directors;

•

the amendment of charter documents;

•

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

•

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

•

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

•

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

•

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

•

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

•

providing for a classified board of directors with staggered terms;

•

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

•

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

•

prohibiting stockholder action by written consent; and

•

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

None

Item 4.

[Removed And Reserved]

Item 5.

Other Information

On August 4, 2010, the Company filed an amendment to its Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock to increase the authorized number of shares of Series A Participating Preferred Stock from 100,000 to 150,000 shares.

Item 6.

Exhibits



3.7		Certificate of Amendment to Certificate of Designations of Rights, Preferences and Privileges of Series A Participating Preferred Stock of DURECT Corporation.

10.58		Amendment to Commercial Lease between the Company and EWE, Inc. effective May 10, 2010.

10.59		Development and License Agreement between DURECT Corporation and Hospira, Inc. dated June 1, 2010. *

10.60		Supply Agreement between DURECT Corporation and Hospira, Inc. dated June 1, 2010.*

31.1		Rule 13a-14(a) Section 302 Certification of James E. Brown.

31.2		Rule 13a-14(a) Section 302 Certification of Matthew J. Hogan.

32.1		Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of James E. Brown.

32.2		Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Matthew J. Hogan.

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

SIGNATURES

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


DURECT CORPORATION

By:		/ S / J AMES E. B ROWN
		James E. Brown
		Chief Executive Officer

Date: August 5, 2010



By:		/ S / M ATTHEW J. H OGAN
		Matthew J. Hogan Chief Financial Officer and Principal Accounting Officer

Date: August 5, 2010

EXHIBIT INDEX



3.7		Certificate of Amendment to Certificate of Designations of Rights, Preferences and Privileges of Series A Participating Preferred Stock of DURECT Corporation.

10.58		Amendment to Commercial Lease between the Company and EWE, Inc. effective May 10, 2010.

10.59		Development and License Agreement between DURECT Corporation and Hospira, Inc. dated June 1, 2010. *

10.60		Supply Agreement between DURECT Corporation and Hospira, Inc. dated June 1, 2010.*

31.1		Rule 13a-14(a) Section 302 Certification of James E. Brown.

31.2		Rule 13a-14(a) Section 302 Certification of Matthew J. Hogan.

32.1		Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of James E. Brown.

32.2		Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Matthew J. Hogan.

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

Exhibit 3.7

CERTIFICATE OF AMENDMENT TO

CERTIFICATE OF DESIGNATION OF

RIGHTS, PREFERENCES AND PRIVILEGES OF

SERIES A PARTICIPATING PREFERRED STOCK OF

DURECT CORPORATION

DURECT C ORPORATION , a corporation organized and existing under the General Corporation Law of the State of Delaware does hereby certify that:

F IRST : The name of the corporation is DURECT Corporation (the “Company”).

S ECOND : The Company was originally incorporated on February 6, 1998 under the name “Durect Therapeutics Corporation.”

T HIRD : No shares of the Company’s Series A Participating Preferred Stock have been issued.

F OURTH : Paragraph 1 of the resolution of the Board of Directors of the Company as it appears in the Company’s Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock, filed on July 9, 2001 (the “Certificate of Designation”), is hereby amended and restated to read in its entirety as follows:

“1. Designation and Amount . The shares of such series shall be designated as “Series A Participating Preferred Stock”, par value $0.0001 per share, and the number of shares constituting such series shall be One Hundred Fifty Thousand (150,000).”

F IFTH : In accordance with the provisions of Section 151(g) of the General Corporation Law of the State of Delaware, the foregoing amendment to the Certificate of Designation been duly adopted by the Company’s Board of Directors pursuant to the authority conferred upon the Board of Directors by the Company’s Amended and Restated Certificate of Incorporation of the Company.

I N W ITNESS W HEREOF , DURECT C ORPORATION has caused this Certificate to be signed this 4th day of August, 2010.

DURECT C ORPORATION

/s/ James E. Brown

James E. Brown

President and Chief Executive Officer

Exhibit 10.58

April 27, 2010

EWE, Inc.

13884 Catawba Circle

Athens, AL 35611

Attention: James P. English

Re: Amendment to Commercial Real Estate Lease

Reference is made to that Commercial Real Estate Lease (the “Lease”) entered into by and between Durect Corporation, a Delaware corporation, (“LESSEE”) and EWE, Inc., an Alabama corporation dated September 21, 2004 (“LESSOR”). All capitalized terms used herein shall have the meaning ascribed to such terms in the Lease.

LESSOR and LESSEE hereby agree as follows, effective on the date that both LESSOR and LESSEE have executed this Amendment:

The term of the Lease set forth in Paragraph 3 shall be extended by one year such that the Lease shall terminate on September 30, 2011 instead of September 30, 2010.

The rent payable during the period from October 1, 2010 to September 30, 2011 shall be the same rent as payable during Year 6 as set forth in Paragraph 6 of the Lease.

Except as expressly modified above, all remaining terms of the Lease shall remain the same. LESSOR and LESSEE have hereunto set or caused to be set their respective signatures and seals on this dates set forth herein.

Sincerely,

/s/ James E. Brown

James E. Brown

CEO


AGREED TO BY EWE, INC.

By:		/s/ James P. English
Title:		Vice President
Date:		05/10/2010

Exhibit 10.59

Confidential treatment has been sought for portions of this Agreement. The copy filed herewith omits the information subject to the confidential treatment request. Omissions are designated as * * *. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

DEVELOPMENT AND LICENSE AGREEMENT

BETWEEN

DURECT CORPORATION

AND

HOSPIRA, INC.

DATED AS OF

JUNE 1, 2010

DEVELOPMENT AND LICENSE AGREEMENT

THIS DEVELOPMENT AND LICENSE AGREEMENT (this “ Agreement ”) is entered into on June 1, 2010 (“ Effective Date ”), by and between Durect Corporation, a corporation organized and existing under the laws of the State of Delaware, having offices located at 2 Results Way, Cupertino, CA 95014 (“ Durect ”), and Hospira, Inc., a corporation organized under the laws of the State of Delaware, having offices located at 275 N Field Drive, Lake Forest, IL 60045 (“ Hospira ”).

PRELIMINARY STATEMENTS

A. Durect owns and controls rights in and to the product known as POSIDUR™ currently under development by Durect.

B. Hospira is a pharmaceutical company possessing expertise in the development and marketing of pharmaceutical products.

C. Hospira desires to participate in the development of POSIDUR and other specified products and obtain a license for the development, manufacturing and commercialization of such products in a specified territory, and Durect desires for Hospira to participate in the development of such products and to grant a license for development, manufacturing and commercialization of such products in such territory to Hospira.

D. Durect and Hospira wish to enter into this Agreement to specify the rights and obligations of the parties with respect to the license for such products, including the rights and obligations of the parties with respect to the development, manufacturing and commercialization of such products in the specified territory.

NOW THEREFORE, in consideration of the mutual covenants and agreements provided herein, the parties hereby agree as follows:

1. DEFINITIONS.

As used in this Agreement, the following terms shall have the meanings set forth in this Section 1 :

1.1 “ Affiliate ” shall mean with respect to either Party, a Person or entity that directly or indirectly through one or more Affiliates, controls, is controlled by, or is under common control with such Party. For the purpose of this definition, “control” means (a) ownership of more than fifty percent (50%) of the capital stock or share capital entitled to vote for the election of directors, in the case of a corporation, or more than fifty percent (50%) of equity or voting interest of the entity, in the case of any other legal entity, (b) status as a general partner in any partnership, or (c) any other arrangement whereby a Person controls or has the right to control the Board of Directors or equivalent governing body of a corporation or other entity. An entity will be an Affiliate for purposes of this Agreement only so long as it satisfies the definition set forth herein.

1.2 “ Applicable Laws ” shall mean all federal, state, local rules, regulations or national laws, statutes, rules and regulations, including any requirements of all Regulatory Authorities, major national securities exchange or major securities listing organizations that may be in effect from time to time during the Term of this Agreement and applicable to a particular activity hereunder.

1.3 “ Bupivacaine ” means 1-butyl-N-(2,6-dimethylphenyl) piperidine-2-carboxamide, including any and all pharmaceutically acceptable salts, solvates, prodrugs, esters, free base forms, enantiomers (and racemic or other mixtures of said enantiomers) thereof.

1.4 “ cGMP ” shall mean current Good Manufacturing Practice for medicinal products for human use as set forth in U.S. Code of Federal Regulations 21 CFR Part 210, 211 et seq. and Canadian equivalent thereof, as applicable, each as amended from time to time.

1.5 “ Clinical Trial ” shall mean an investigation in human subjects and/or patients intended to discover or verify the clinical, pharmacological and/or other pharmacodynamic effects of an investigational product(s), and/or to identify any adverse reactions to an

investigational product(s), and/or to study absorption, distribution, metabolism, and excretion of an investigational product(s) with the objective of ascertaining its safety and/or efficacy.

1.6 “ CMC ” shall mean chemistry, manufacturing and controls.

1.7 “ CMC Data ” shall mean the information contained in the CMC section of the NDA as defined in 21 C.F.R. § 314.56(d)(1), as amended (or the equivalent in other Regulatory Approvals in other Jurisdictions in the Territory), of a Licensed Product in the Field in the Territory generated with respect to the Licensed Product that is Controlled at any time during the Term of this Agreement by a Party, or any Affiliate, subcontractor, agent, licensee thereof, or jointly by any of the foregoing.

1.8 “ Collaboration Inventions ” means all Know-How (whether or not patentable) conceived and/or reduced to practice by or for a Party, or any Affiliate, subcontractor, agent, or licensee thereof, or jointly by any of the foregoing, arising out of or in connection with performing the activities under this Agreement.

1.9 “ Committee ” shall mean any of the “Joint Executive Committee” (JEC), the “Joint Steering Committee” (JSC) or “Commercialization Committee” (CC) and, when used in the plural, shall mean all of them or more than one of them, as the case may be.

1.10 “ Commercial Sublicense ” means the sublicense by Hospira to a Commercial Sublicensee.

1.11 “ Commercial Sublicense Fees ” means any upfront payments, milestone payments and other license payments (including the fair market value of debt or equity securities or other consideration) received by Hospira or any Affiliate thereof as consideration for a Commercial Sublicense. [* * *]

1.12 “ Commercial Sublicensee ” means a Third Party in the Territory that, in return for paying Hospira or any of its Affiliates any upfront license fees, milestone license fees and/or royalties on the sale of a Licensed Product, is granted Commercialization rights to the Licensed Product by Hospira or any of its Affiliates such that the Third Party has the right to record sales for its own account in lieu of Hospira. [* * *]

1.13 “ Commercialization ” or “ Commercialize ” shall mean any and all activities directed to the commercialization of a Licensed Product in the Field in the Territory, including pre-launch and post-launch marketing, promoting, distributing, importing and exporting, using, keeping for sale, offering to sell and selling the Licensed Product in the Field in the Territory.

1.14 “ Commercially Reasonable Efforts ” shall mean, with respect to an activity to Exploit a Licensed Product, the level of effort used by a Party to conduct such activities for its own proprietary product that is at a similar stage in its lifecycle and is of comparable market potential or profit potential, taking into account relevant considerations, including [* * *]. Commercially Reasonable Efforts shall be determined on a Jurisdiction-by-Jurisdiction basis in the Territory.

1.15 “ Competing Product ” shall mean a sustained release pharmaceutical product containing one or more Drugs for use in the Field which is intended for administration into the body other than by the [* * *] routes of delivery, other than a Licensed Product.
[* * *]

1.16 “ Confidential Information ” means any and all proprietary information or material, whether oral, visual, in writing or in any other form, that, at any time since or after the date hereof, has been or is provided, communicated or otherwise made known to the receiving Party or any of its Affiliates by or on behalf of the disclosing Party or any of its Affiliates pursuant to this Agreement or in connection with the transactions contemplated hereby or any discussions or negotiations with respect thereto.

1.17 “ Control ” or “ Controlled ” shall mean the ownership in and to or the possession of Intellectual Property Rights (including patent rights, Know-How, trade secrets, data and rights to access or cross-reference regulatory filings) by a Party or its Affiliate with the right to grant to the other Party a license, sublicense or other right to use, of the scope provided for in this Agreement, to such intangible or Intellectual Property Rights, without violating the terms of any Applicable Laws, agreement or other arrangement, or increasing the amount of any

payments between such Party and any Third Party existing at the time such Party or such Affiliate would be first required hereunder to grant the other Party such license, sublicense or other right.

1.18 “ Cost ” shall mean all reasonable internal and external costs (including cost of labor), expenses and materials associated with an activity.

1.19 “ Development Costs ” shall mean the Costs of performing the Development Plan as calculated in accordance with
Schedule 1.19 .

1.20 “ Development Data ” shall mean all Preclinical, Non-Clinical and Clinical data and CMC Data, including pharmacological, pharmacokinetic and toxicological data and all data included in any Regulatory Documentation, generated with respect to a Licensed Product that is Controlled at any time during the Term of this Agreement by a Party, or any Affiliate, subcontractor, agent, licensee thereof, or jointly by any of the foregoing.

1.21 “ Dollars ” shall mean U.S. Dollars, the lawful currency of the United States.

1.22 “ Dosage Form Development ” shall mean any pharmaceutical development activities for a Licensed Product that are necessary to design or modify a pharmaceutical formulation which includes formulation development, in vitro studies on solubility, stability, physical and chemical characteristics, denaturation, particle formation, crystallization, micronization, excipient selection, compounding, mixing, sterilization, filtration, quality assurance and control.

1.23 “ Drug ” shall mean any one of the following: [* * *]

1.24 “ Durect Technology ” shall mean all Intellectual Property Rights and Know-How related to the SABER ^TM Delivery System, the SABER ^TM Patent Rights, the Product Know-How, the Product Patent Rights, Product Collaboration Inventions, Durect Collaboration Inventions and Durect’s rights in Joint Inventions, that are in each case Controlled by Durect or any of its Affiliates during the Term of the Agreement.

1.25 “ Exploit ” means to make, have made, import, export, use, sell, or offer for sale, including to research, develop, Commercialize, register, modify, enhance, improve, Manufacture, have Manufactured, hold or keep (whether for disposal or otherwise), have used, transport, distribute, promote, market or have sold or otherwise dispose of a Licensed Product. “ Exploitation ” means the act of Exploiting a Licensed Product.

1.26 “ FDA ” shall mean the United States Food and Drug Administration and any successor thereto.

1.27 “ FDC Act ” means the United States Federal Food, Drug, and Cosmetic Act and any successor acts thereto, as amended from time to time.

1.28 “ Field ” shall mean all pain applications.

1.29 “ First Commercial Sale ” shall mean: (i) with respect to a Jurisdiction, the first sale for use, consumption or resale of any Licensed Product by Hospira or an Affiliate or a Commercial Sublicensee thereof to a Third Party in a bona fide arm’s-length transaction in such Jurisdiction as evidenced by the invoice date for such sale after Regulatory Approval has been obtained in such Jurisdiction within the Territory and (ii) with respect to the Territory, the First Commercial Sale in any Jurisdiction. A sale to an Affiliate or a Commercial Sublicensee shall not constitute a First Commercial Sale unless the Affiliate or Commercial Sublicensee is the end-user of a Licensed Product. For avoidance of doubt, the provision of free samples of any Licensed Product including for purposes of testing, marketing, sampling and promotional use, Clinical Trial purposes or compassionate or similar use shall not be construed to constitute a sale of any Licensed Product for purposes of this definition.

1.30 “ Future Licensed Products ” shall mean all Licensed Products other than the Initial Licensed Product which come into existence under the terms of this Agreement.

1.31 “ GAAP ” shall mean generally accepted accounting principles recognized in the United States.

1.32 “ Governmental Entity ” shall mean any regional, central, federal, state, provincial or local court, commission or governmental, regulatory or administrative body, board, bureau, agency, instrumentality, authority or tribunal or any subdivision thereof.

1.33 “ ICH Guidelines ” shall mean the then-current guidelines applicable to pharmaceutical products adopted by the International Conference on Harmonization.

1.34 “ IND ” shall mean an Investigational New Drug application or Clinical Trial application (together with all subsequent submissions, supplements and amendments thereto, and any materials, documents or information referred to or relied upon thereby) filed with the FDA to commence Clinical Trials, and its equivalent in other Jurisdictions in the Territory.

1.35 “ Initial Licensed Product ” shall mean the pharmaceutical product under development currently known as SABER™-Bupivacaine or POSIDUR™ consisting of a Licensed Product wherein the Drug is Bupivacaine, as described in Schedule 1.35 hereto.

1.36 “ Initial Licensed Product Trademarks ” shall mean the trademark POSIDUR™, and OPTESIA™ and all applications, registrations, extensions and renewals relating thereto.

1.37 “ Intellectual Property Rights ” shall mean Patents, copyrights, trade secrets, database rights, proprietary Know-How and similar rights of any type (excluding trademarks) under the laws of any Governmental Entity, including all applications, registrations, extensions and renewals relating to any of the foregoing.

1.38 “ Jurisdiction ” shall mean a country within the Territory.

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

1.40 “ Knowledge ” shall mean, with respect to a Party, the good faith understanding of the facts and information in the possession of an officer of such Party or any of its Affiliates.

For purposes of this definition, an “officer” shall mean any person in the position of vice president or above, including any chief executive officer, president, or chief medical officer of a Party or any of its Affiliates.

1.41 “ Line Extension ” of a Licensed Product shall mean a pharmaceutical product which is an improvement, reformulation or line extension (including any primary packaging modification) of the Licensed Product intended to be Commercialized after the first Regulatory Approval of the Licensed Product which uses the identical Drug(s) as the Licensed Product as the active pharmaceutical ingredient(s) formulated in the SABER™ Delivery System for use in the Field and in the Territory which is administered into the body other than by the [* * *] routes of delivery.

1.42 “ Licensed Product ” shall mean a pharmaceutical product consisting of one or more Drugs as the sole active pharmaceutical ingredient(s) formulated in the SABER™ Delivery System for use in the Field and in the Territory which is intended for administration into the body other than by [* * *], including all dosage strengths and Line Extensions thereof.

1.43 “ Manufacture ” and “ Manufacturing ” shall mean all activities related to the production, manufacture, processing, filling, finishing, packaging, labeling, shipping and holding of a Licensed Product or any excipients thereof, including stability testing, quality assurance and quality control.

1.44 “ Marketing Exclusivity Right ” shall mean a marketing or data exclusivity right conferred as a result of (a) designation as a drug for rare diseases or conditions under Sections 525 et seq. of the FDC Act, (b) an exclusive right to sell under an NDA pursuant to Section 505(j)(5)(F)(ii), (iii) and (iv) or 505(c)(3)(E)(ii), (iii) and (iv) of the FDC Act or any relevant subsequent legislation, rules or regulations, or (c) the exclusive right granted by the FDA upon completion of pediatric studies requested by the FDA under Section 505A(a) of the FDC Act, including any equivalent or similar rights applicable in another Jurisdiction in the Territory, successor legislations of any of the foregoing or subsequent legislation that has the effect of extending marketing or data exclusivity right to a pharmaceutical product in the Territory.

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

1.46 “ NDA ” shall mean any applicable “New Drug Application,” filed with the FDA as described in 21 CFR, as amended.

1.47 “ Net Sales ” shall mean, for any period, the total amount billed or invoiced on sales of a Licensed Product (in its final, finished form for use by the end user) in the Field in the Territory by Hospira, its Affiliates or Commercial Sublicensees to independent, unrelated Third Parties such as wholesalers, distributors or end-users in bona fide arm’s length transactions, less the following deductions, in each case related specifically to the Licensed Product and actually allowed and/or taken by a Third Party and not otherwise recovered by or reimbursed to Hospira, its Affiliates or Commercial Sublicensees:

(i) trade, cash and quantity discounts (other than price discounts granted at the time of invoicing and already included in the gross amount invoiced);

(ii) price reductions or rebates, retroactive or otherwise, imposed by, negotiated with or otherwise paid to governmental authorities;

(iii) taxes on sales (such as sales taxes, value added taxes, use taxes or similar taxes), but not including taxes assessed against the income derived from such sales;

(iv) custom duties, surcharges and other governmental charges incurred in connection with the exportation or importation of the Licensed Product;

(v) freight, insurance and other transportation charges to the extent added to the sale price and set forth separately as such in the total amount invoiced, as well as any fees for services provided by distributors, wholesalers and warehousing chains related to the distribution of the Licensed Product that are treated as sales allowances under GAAP if GAAP is applicable to such selling party, provided that such fees are consistent with those charged across the selling party’s product line;

(vi) amounts repaid or credited by reason of rejections, defects, return credits, recalls or returns or because of retroactive price reductions, including rebates or wholesaler charge backs; and

(vii) the portion of management fees paid during the relevant time period to group purchasing organizations and/or pharmaceutical benefit managers relating specifically to the finished Licensed Product that are treated as sales allowances under GAAP if GAAP is applicable to such selling party, provided that such fees are consistent with those charged across the selling party’s product line.

Where any reduction in the invoice price or deduction therefrom is based on sales of a bundle of products in which the Licensed Product for use in the Field in the Territory is included, the reduction in price or deduction therefrom would be allocated as actually credited unless such Licensed Product receives a higher than pro rata share of any reduction or deduction that the bundled set of products receives. In such case, the reduction or deduction therefrom shall be allocated to such Licensed Product on a no greater than a pro rata basis based on the sales value (i.e., the unit average selling price multiplied by the number of units) of such Licensed Product relative to the sales value contributed by the other products in the bundle with respect to such sale.

Subject to the above, Net Sales shall be calculated in accordance with the applicable selling party’s standard internal policies and procedures, which must be in accordance with GAAP if GAAP is applicable to such party. If consideration in addition to or in lieu of money is received for the sale of the Licensed Product in the Field in the Territory on an arm’s-length transaction, the fair market value of such consideration must be included in the determination of Net Sales for such a sale. Net Sales shall not include (a) sales, transfers or dispositions between or among Hospira, its Affiliates or Commercial Sublicensees, (b) sales, transfers or dispositions of Licensed Product for sampling, Preclinical, Clinical Trial or regulatory purposes conducted by or on behalf of Hospira, its Affiliates or Commercial Sublicensees in connection with the Licensed Product in the Field in the Territory, (c) destruction of the Licensed Product and (d) sales, transfers or dispositions for legitimate charitable purposes at no charge.

[* * *]

Net Sales shall not include any amount billed or invoiced on sales of a Licensed Product in a Jurisdiction after expiration of the Royalty Term with respect to such Licensed Product in such Jurisdiction.

1.48 “ Nycomed Agreement ” shall mean the agreement entered into between Durect and Nycomed Danmark APS dated November 29, 2006, as amended by the amendment dated February 18, 2010.

1.49 “ Party ” shall mean Durect or Hospira, as the case may be, and, when used in the plural, shall mean Durect and Hospira.

1.50 “ Patent ” and “ Patents ” shall mean issued patents and patent applications, including any and all provisionals, continuations, divisionals, continuation-in-part applications, foreign counterparts, substitutions, reissues, renewals, re-examinations, supplementary protection certificates, patent term extensions, adjustments or restoration rights, registrations, confirmations or subsequently issued protective rights of similar nature of any of the above.

1.51 “ Person ” shall mean an individual, sole proprietorship, partnership, limited partnership, limited liability partnership, corporation, limited liability company, business trust, joint stock company, trust, incorporated association, joint venture, or other entity or organization, in any case whether for-profit or not-for profit, and including, without limiting the generality of any of the foregoing, a government or political subdivision, department or agency of a government.

1.52 “ Preclinical ” shall mean preliminary pharmacological studies undertaken in non-human animals, but not necessarily for purposes of submission in support of Regulatory Approval.

1.53 “ Pricing ” or “ Pricing Approval ” shall mean any and all pricing approvals, licenses, registrations or authorizations of any Regulatory Authority necessary to Commercialize, promote, distribute, sell or market a Licensed Product in the Field and in the Territory.

1.54 “ Product Know-How ” shall mean Know-How related to the Licensed Products that is (a) Controlled by Durect or any of its Affiliates during the Term of this Agreement and (b) useful for a Party, or its Affiliates and/or licensees to Exploit any Licensed Product in the Territory.

1.55 “ Product Patents Rights ” shall mean (i) those Patents in the Territory Controlled by Durect or any of its Affiliates during the Term which relate to the Licensed Products, excluding the SABER ^TM Patent Rights and (ii) those Patents in the Territory Controlled by Durect or any of its Affiliates during the Term which cover Product Collaboration Inventions. Schedule 1.55 sets forth a list of the Product Patent Rights as of the Effective Date. Schedule 1.55 shall be updated by Durect on a regular basis throughout the Term.

1.56 “ Regulatory Approval ” means approvals (including NDAs), licenses, registrations or authorizations of any Regulatory Authority of the Regulatory Approval Application necessary to Manufacture and Commercialize a Licensed Product in a Jurisdiction.

1.57 “ Regulatory Approval Application ” shall mean an NDA in the U.S., a New Drug Submission in Canada, or other similar documentation required to be approved before commercial sale or use of a Licensed Product as a pharmaceutical or medicinal product in a Jurisdiction.

1.58 “ Regulatory Authority ” shall mean the FDA, Health Canada and any other Governmental Entity in the Territory or Jurisdiction regulating or otherwise exercising authority over the distribution, manufacture, use, storage, transport, Clinical Trial or sale of a Licensed Product.

1.59 “ Regulatory Documentation ” shall mean all submissions to Regulatory Authorities, including for Clinical Trials, Non-Clinical trials, Pre-Clinical trials, tests, and biostudies, relating to a Licensed Product, including all INDs and Regulatory Approval Applications, as well as all correspondence with Regulatory Authorities (registration and licenses, Pricing and Reimbursement correspondence, regulatory drug lists, advertising and promotion documents), Adverse Event files, complaint files, Manufacturing records and inspection reports.

1.60 “ Reimbursement ” or “ Reimbursement Approval ” shall mean any and all reimbursement approvals, licenses, registrations or authorizations of the Regulatory Authority in any Jurisdiction necessary to Commercialize, promote, distribute, sell or market a Licensed Product in the Field to cover the costs related to the treatment of patients with a Licensed Product.

1.61 “ Royalty Term ” shall mean, with respect to a Licensed Product, in each Jurisdiction of the Territory, the period of time commencing on the First Commercial Sale of the Licensed Product in such Jurisdiction and ending on the later of: (a) [* * *] years from the date of the First Commercial Sale of the Licensed Product in such Jurisdiction and (b) the end of the Patent Royalty Term for such Licensed Product in such Jurisdiction.

1.62 “ SABER ^TM Delivery System ” shall mean Durect’s non-polymeric, high viscosity liquid carrier system for imparting controlled release to active ingredients, including any and all Intellectual Property Rights therein and thereto.

1.63 “ SABER ^TM Patent Rights ” shall mean those Patents in the Territory Controlled by Durect or any of its Affiliates during the Term which relate to the SABER ^TM Delivery System as listed in Schedule 1.63 . Schedule 1.63 shall be updated by Durect on a regular basis throughout the Term.

1.64 “ Specifications ” shall mean the specifications for a Licensed Product as agreed upon by the JSC, considering the applicable regulatory requirements in the Territory, as may be amended from time to time.

1.65 “ Substitutable Product ” shall mean a sustained release pharmaceutical product that is bioequivalent and substitutable for the applicable Licensed Product and given an “AA” or “AB” therapeutic equivalence code to the applicable Licensed Product in the FDA Orange Book or equivalent thereof.

1.66 “ Territory ” shall mean the U.S. and Canada, excluding with respect to any Licensed Product, any Jurisdiction in which Hospira’s rights to such Licensed Product have terminated under the terms of this Agreement.

1.67 “ Third Party ” shall mean any Person who or which is neither a Party nor an Affiliate of a Party.

1.68 “ Topical ” shall mean a route of delivery which consists of application externally and topically to the epidermis other than to a wound or incision.

1.69 “ U.S. ” shall mean the United States of America, including all states, territories and possessions (including Puerto Rico) thereof.

1.70 “ Valid Claim ” means (a) any claim of issued and unexpired Patents covering Durect Technology that (i) has not been held permanently revoked, unenforceable or invalid by a decision of a court or governmental agency of competent jurisdiction, which decision is unappealable or unappealed within the time allowed for appeal, and (ii) has not been abandoned, disclaimed, denied or admitted to be invalid or unenforceable through reissue or disclaimer or otherwise; or (b) any claim of a pending Patent Right covering Durect Technology that was filed and is being prosecuted in good faith and has not been abandoned or finally disallowed without the possibility of appeal or re-filing of the application; provided that such application has not been pending for
more than [* * *] years.

1.71 Other Definitions.

Each of the following terms is defined in the Section set forth opposite such term below:

“ ADR ” – Section 14.10

“ Adverse Event ” – Section 4.7

“ Agreement ” – Preamble

“ Annual Net Sales Period ” – Section 6.2(a)

“ Audited Party ” – Section 7.5

“ Auditing Party ” – Section 7.5

“ CEO/CO Resolution Period ” – Section 2.1(d)

“ CEO ” – Section 2.1(d)

“ cGCP ” – Section 11.2(b)

“ CO ” – Section 2.1(d)

“ Commercialization Committee ” or “ CC ” – Section 2.3(a)

“ Damages ” – Section 12.1

“ Deemed Royalty Obligation ” – Section 9.3(e)

“ Development Plan ” – Section 4.1

“ Development Plan Budget ” – Section 4.1

“ Defaulting Party ” – Section 4.8

“ Durect ” – Preamble

“ Durect Collaboration Invention ” – Section 9.1(b)

“ Durect Related Party ” – Section 12.2

“ Exclusivity Period ” – Section 3.4(c)(i)

“ Effective Date ” – Preamble

“ Force Majeure ” – Section 14.12

“ Hospira ” – Preamble

“ Hospira Collaboration Invention ” – Section 9.1(c)

“ Hospira Related Party ” – Section 12.1

“ Hospira Worldwide ” – Section 8.1

“ Indemnified Party ” – Section 12.4.

“ Indemnifying Party ” – Section 12.4

“ Joint Executive Committee ” or “ JEC ” – Section 2.1(a)

“ Joint Steering Committee ” or “ JSC ” – Section 2.2(a)

“ Joint Invention ” – Section 9.1(d)

“ Joint Patent Rights ” – Section 9.2(b)

“ Know-How Royalties ” – Section 6.2(b)

“ Know-How Royalty Term ” – Section 6.2(b)

“ Marketing Plan ” – Section 5.2.

“ Milestone Payment ” – Section 6.1

“ Non-Defaulting Party ” – Section 4.8

“ Patent Litigation Losses ” – Section 9.5(c)

“ Patent Royalties ” – Section 6.2(a)

“ Patent Royalty Term ” – Section 6.2(a)

“ Permitted Sublicensees ” – Section 3.2

“ Pharmacovigilance Agreement ” – Section 4.7

“ Product Collaboration Invention ” – Section 9.1(a)

“ Publication Policies – Section 10.1

“ Product Trademarks ” – Section 3.6(a)

“ SAIB Supply Agreement ” – Section 8.3

“ Sales Projection ” – Section 5.2

“ Serious Adverse Drug Experience ” – Section 13.3

“ Supply Agreement ” – Section 8.1

“ Term ” – Section 13.1

1.74 Interpretation

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

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

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

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

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

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

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

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

(i) All references to days, months, quarters or years are references to calendar days, calendar months, calendar quarters or calendar years unless otherwise expressly provided; references to a “business day” herein shall mean a day when both Hospira and Durect corporate headquarters are open during regular business hours for the conduct of normal business operations;

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

(k) Any requirements of notice or notification by one Party to another shall be construed to mean written notice in accordance with Section 14.3 ; and

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

2. GOVERNANCE.

2.1 Joint Executive Committee .

(a) (a) Members; Officers . Within [* * *] days of the Effective Date, the Parties will establish a joint executive committee (the “ Joint Executive Committee ” or “ JEC ”), which shall consist of up to [* * *] members with an equal number of members from each of Durect and Hospira. The members of the JEC shall be set forth on Schedule 2.1 , as may be amended by the designating Party from time to time. Representatives of the JEC shall be executives of the respective Party. Each of Durect and Hospira may replace any or all of its representatives on the JEC at any time upon written notice to the other Party. Any member of the JEC may designate a substitute with due authority to temporarily attend and perform the functions of that member at any meeting of the JEC. The JEC shall be co-chaired by a representative of each of Durect and Hospira, as such representative may be changed by the

designating Party at any time. The co-chairpersons shall appoint a secretary of the JEC, and such secretary shall serve for such term as designated by the co-chairpersons.

(b) Responsibilities . The JEC shall perform the following functions:

(i) manage and oversee the interactions and performance of the Parties pursuant to the terms of this Agreement;

(ii) review and make strategic decisions as referred to the JEC by the JSC, and in accordance with the procedures established in Section 2.1(d) , resolve disputes, disagreements and deadlocks unresolved by the JSC;

(iii) review and evaluate the progress of the JSC;

(iv) consider any Line Extension, including any Dosage Form Development related to a Line Extension, of a Licensed Product in the Field and in the Territory, and if deemed suitable by the JEC, discuss a development plan (including timelines) and budget for such development, including Dosage Form Development; [* * *];

(v) have such other responsibilities as may be assigned to the JEC pursuant to this Agreement or as may be mutually agreed upon by the Parties from time to time.

(c) Meetings . The JEC shall meet in person, by video teleconference or by telephone annually and more frequently as required to resolve disputes, disagreements or deadlocks in the JSC, on such dates, and at such places and times, as the Parties shall agree. From time to time, each Party may request a JEC meeting upon notice to the other Party specifying the subject matters to be discussed, and the Parties shall convene such JEC meeting within [* * *] business days of the date of the notice. Meetings of the JEC that are held in person shall alternate between the offices of Durect and Hospira, or such other place as the Parties may agree. The members of the JEC also may convene or be polled or consulted from time to time by means of telecommunications, video conferences, electronic mail or correspondence, as deemed necessary or appropriate.

(d) Decision-making . The JEC may make decisions with respect to any subject matter that is subject to the JEC’s decision-making authority and functions as set forth in Section 2.1(b) . All decisions of the JEC shall be made by unanimous vote or written consent, with Durect and Hospira each having, collectively, one vote in all decisions. The JEC shall use reasonable efforts to resolve the matters within its roles and functions or otherwise referred to it. With respect to all matters that are subject to the JEC’s decision-making authority, if the JEC cannot reach consensus within [* * *] business days after it has met and attempted to reach such consensus, the matter shall be referred on the [* * *] business day to the chief executive officer (“ CEO ”) of Durect and a corporate officer (“ CO ”) of Hospira who shall meet as soon as practicable, but no later than [* * *] business days after such referral, to attempt in good faith to resolve the dispute. If the dispute is not resolved by the CEO of Durect and a CO of Hospira by mutual agreement within [* * *] business days after a meeting to discuss the dispute (such [* * *]-business day period after the meeting of the CEO and CO shall be referred to as the “ CEO/CO Resolution Period ”), the dispute shall be resolved by the Alternative Dispute Resolution procedures under Section 14.10 . [* * *]

2.2 Joint Steering Committee .

(a) Members; Officers . Within [* * *] days of the Effective Date, the Parties will establish a joint steering committee (the “ Joint Steering Committee ” or “ JSC ”), which shall consist of an equal number of representatives from each of Durect and Hospira, up to [* * *] members from each Party on such Committee unless otherwise agreed to by the Parties in writing. The representatives on the JSC shall be set forth on Schedule 2.2 , as may be amended by the designating Party from time to time. Each of Durect and Hospira may replace any or all of its representatives on the JSC at any time upon notice to the other Party. Such representatives shall be employees of each such Party, and those representatives of each such Party shall, individually or collectively, have expertise in pharmaceutical drug development,

regulatory matters, Clinical Trials, and/or other expertise to the extent relevant. Any member of the JSC may designate a substitute with due authority to temporarily attend and perform the functions of that member at any meeting of the JSC. Durect and Hospira each may, in its discretion, invite non-member representatives that are employees of or external consultants retained by either Hospira or Durect (and non-employee agents and consultants if agreed to in writing by the Parties) to attend meetings of the JSC, provided that such non-employee agents and consultants have signed customary confidentiality agreements. The JSC shall be chaired by a representative of each of Durect and Hospira, as such representative may be changed by the designating Party at any time. The secretary of the JSC shall alternate between a representative of Durect and a representative of Hospira. The first secretary of the JSC shall be a Durect representative.

(b) Responsibilities . The JSC shall perform the following functions:

(i) oversee the implementation of the Development Plan;

(ii) at each meeting, as applicable, review the applicable Licensed Product development status with the timelines set forth in the Development Plan as well as explanations to any deviations to timeline;

(iii) approve any modifications or amendments to the Development Plan (including Development Plan Budget);

(iv) approve regulatory strategy for the applicable Licensed Product in the Regulatory Approval Application for each Jurisdiction in the Territory;

(v) at each meeting of the JSC, review a comparison of actual Development Costs to the budgeted Development Costs for the year-to-date, as current as practicable to a date immediately prior to the date of the meeting and discuss any deviations;

(vi) review and evaluate progress of the Development Plan;

(vii) define criteria for assessing the outcome of Pre-Clinical, Non-Clinical, Clinical Trials, and the Development Plan;

(viii) in connection with Pre-Clinical and Non-Clinical studies and Clinical Trials and Manufacturing studies in the Development Plan, review, discuss and approve protocols, trial budgets, Clinical Trial supplies and trial designs;

(ix) subject to Section 4.3 , allocate the responsibilities for carrying out the Development Plan between the Parties;

(x) review and approve the Specifications for the applicable Licensed Product in the Territory, (provided, however, Hospira will, subject to Section 3.6(c) , solely decide the packaging lay-out/design and content and related materials for use in the Territory, prior to commercial use);

(xi) review and oversee the Regulatory Approval process, including approve final label indications for the applicable Licensed Product in the Regulatory Approval Application, and interactions with Regulatory Authorities as set forth in Section 4.6 ;

(xii) develop Publication Policies in accordance with Section 10.1 ;

(xiii) establish trademark usage and quality standards with respect to the use of the Initial Licensed Product Trademarks; and

(xiv) have such other responsibilities as may be assigned to the JSC pursuant to this Agreement or as may be mutually agreed upon by the Parties from time to time.

(c) Meetings . The JSC shall meet in person, by video teleconference or by telephone initially at least quarterly, and more or less frequently as Durect and Hospira deem appropriate or as reasonably requested by either such Party, on such dates, and at such places and times, as such Parties shall agree. From time to time, each Party may request a JSC meeting upon written notice to the other Party specifying the subject matters to be discussed, and the Parties shall convene such JSC meeting within [* * *] business days of the date of the notice. Meetings of the JSC that are held in person shall alternate between the offices of Durect and Hospira, or such other place as such Parties may agree. The members of the JSC

also may convene or be polled or consulted from time to time by means of telecommunications, video conferences, electronic mail or correspondence, as deemed necessary or appropriate.

(d) Decision-making . The JSC may make decisions with respect to any subject matter that is subject to the JSC’s decision-making authority and functions as set forth in Section 2.2(b) . All decisions of the JSC shall be made by unanimous vote or written consent, with Durect and Hospira each having, collectively, one vote in all decisions. If, with respect to any matter that is subject to the JSC’s decision-making authority, after all reasonable efforts to reach consensus have been exhausted, the JSC cannot reach consensus within [* * *] business days after it has first met and attempted to reach such consensus, the matter shall be referred on the [* * *] business day to the JEC for resolution.

2.3 Commercialization Committee

(a) Members; Officers . At such time as Hospira deems appropriate, however not later than upon the submission of the NDA in the U.S. for the Initial Licensed Product, Hospira shall establish a commercialization committee (the “ Commercialization Committee ” or “ CC ”), which shall consist of representatives from each of Durect and Hospira. Each of Durect and Hospira may replace any or all of its representatives on the CC at any time upon written notice to the other Party. Such representatives shall be employees of each such Party, and those representatives of each such Party shall, individually or collectively, have expertise in marketing and sales of pharmaceutical products. Any member of the CC may designate a substitute with due authority to temporarily attend and perform the functions of that member at any meeting of the CC. Durect and Hospira each may, in its discretion, invite non-member representatives that are employees of or external consultants retained by either Hospira or Durect to attend meetings of the CC, provided that such external consultants have signed a confidentiality agreement with Hospira and Durect prior to such meeting. The CC shall be chaired by a representative of Hospira. [* * *]

(b) Responsibilities . The CC shall perform the following functions:

(i) review the annual Marketing Plan developed by Hospira in accordance with Section 5.2 ;

(ii) review modifications to the Marketing Plan throughout the year;

(iii) inform and discuss the state of the markets for each Licensed Product in the applicable Jurisdiction(s) in the Territory, competitors and the competitive landscape, and opportunities and issues concerning the Commercialization of each Licensed Product, including consideration of marketing and promotional strategy, marketing research plans, labels for each Licensed Product, positioning of each Licensed Product and profile issues regarding each Licensed Product;

(iv) review the phase IV protocols proposed by Hospira under Section 5.4 , taking into consideration the appropriateness of any proposed development activities including line extensions, Clinical Trials for purposes of obtaining new label indications and phase IV Clinical Trials in the context of the overall marketing and promotional strategy for each Licensed Product in the Territory;

(v) review data and reports arising from and generated in connection with the Commercialization of each Licensed Product in the Territory including the Marketing Plan, marketing budgets, market research studies, and Licensed Product sales and formulary access and sales forecasts;

(vi) at each meeting of the CC, review a comparison of actual sales and Costs to the year-to-date forecast, as current as reasonable to a date immediately prior to the date of the meeting; and

(vii) have such other responsibilities as may be assigned to the CC pursuant to this Agreement or as may be mutually agreed upon by the Parties from time to time.

(c) Meetings . The CC shall meet in person, by video teleconference or by telephone twice annually, on such dates, and at such places and times, as such Parties shall agree. From time to time, each Party may request a CC meeting upon written notice to the other Party specifying the subject matters to be discussed, and the Parties shall convene such CC meeting within [* * *] business days of the date of the notice. Meetings of the CC that are held in person shall alternate between the offices of Durect and Hospira, or such other place as the Parties may agree. The members of the CC may also convene or be polled or consulted from time to time by means of telecommunications, video conferences, electronic mail or correspondence, as deemed necessary or appropriate.

2.4 Minutes of the JEC and JSC Meetings .

(a) Subject to Section 2.4(b) , definitive minutes of all JEC and JSC meetings shall be finalized no later than [* * *] business days after the meeting to which the minutes pertain, as follows:

(i) Within [* * *] business days after a JEC or a JSC meeting, the secretary of such JEC or JSC shall prepare and distribute to all such members of the JEC or JSC draft minutes of the meeting. Such minutes shall provide a list of any actions, decisions or determinations approved by such JEC or JSC and a list of any issues yet to be resolved, either within the JEC or JSC, or through the relevant escalation process.

(ii) The secretary of such JEC or JSC shall have [* * *] business days after distribution of the draft minutes to discuss each JEC or JSC member’s comments and finalize the minutes. The secretary and chairperson(s) of such JEC or JSC shall each sign and date the final minutes. The signature of each chairperson and secretary upon the final minutes shall indicate each Party’s assent to the minutes.

(b) If at any time during the preparation and finalization of JEC or JSC meeting minutes, the JEC or JSC members do not agree on any issue with respect to the minutes, such issue shall be resolved as provided in Section 2.1(d) or 2.2(d) , as the case may be. The decision resulting from the foregoing process shall be recorded by the secretary in

amended finalized minutes for said meeting. All other issues in the minutes that are not subject to the foregoing process shall be finalized within the [* * *]-business day period as provided in Section 2.4(a) .

2.5 Duration of Committees . The JEC and CC shall exist until the termination of this Agreement. The Parties may mutually agree to terminate the JEC or CC earlier, in which case the JEC or CC shall terminate within [* * *] days of such mutual agreement, and the Parties shall thereafter discuss and agree upon alternative ways to cover the responsibilities and duties of the JEC or CC, as applicable. The JSC shall terminate at such time when no Licensed Products are being developed under the Agreement. In the event that after termination of the JSC, the Parties begin development activities for any Licensed Product, the JSC shall be reinstated. Notwithstanding the foregoing, however, commencing upon receipt of Regulatory Approval of the Initial Licensed Product in the U.S., Durect may, upon written notice to Hospira, elect to have the JEC, JSC and CC terminated, in which case the JEC, JSC and CC shall terminate within [* * *] days of such notice from Durect, and the Parties shall thereafter discuss and agree upon alternative ways to cover the responsibilities and duties of the JEC, JSC and CC.

2.6 Expenses . Each Party shall be responsible for all travel and related Costs for its members and other representatives to attend meetings of, and otherwise participate on, a Committee.

2.7 Scope of Committees . Hospira and Durect have chartered the Committees with a belief that vigorous interaction and cooperation between the Parties are essential for the success of a Licensed Product; provided each Party shall retain the rights, powers and discretion granted to it under this Agreement. Except as expressly provided in the Agreement, no rights, powers or discretion shall be delegated to or vested in the Committees. Nothing in this Article 2 , and no decision made by a committee shall be deemed to modify or supersede any term or condition set forth in this Agreement, any of the rights, powers and/or discretions granted to a Party under this Agreement, nor any decision or decision-making authority

provided to a Party in this Agreement. Furthermore, the Committees shall not have the authority to make any determination that a Party is in breach of this Agreement, or that a Party has engaged or not engaged in acts related to breach. The Committees shall not have the power to amend, modify or waive compliance with this Agreement, which may only be amended or modified, or compliance with which may only be waived, as provided in Section 14.8.

3. GRANT OF RIGHTS.

3.1 Rights Granted to Hospira. On the terms and subject to the conditions of this Agreement, Durect hereby grants to Hospira:

(a) the exclusive right and license, even as to Durect and its Affiliates, to Exploit the Licensed Products in the Field and in the Territory, including the right to record sales for its own account; and

(b) an exclusive license, even as to Durect and its Affiliates, under the Durect Technology for use in the Field and Territory to Exploit the Licensed Products.

Although Hospira is being granted an exclusive license in the Field and Territory to Exploit the Licensed Products, during the Term, Hospira hereby grants to Durect the right to perform the development and Manufacturing activities with respect to the Licensed Products in the Field and in the Territory as expressly set forth in this Agreement.

3.2 Sublicense . Hospira shall have the right to grant sublicenses under the exclusive license granted pursuant to Section 3.1 to any Affiliate of Hospira and any Third Party wholesalers, subdistributors, co-promoters or similar Third Parties as well as contract research organizations and contract manufacturing organizations (“ Permitted Sublicensees ”). In addition, Hospira may delegate or sublicense any of the rights granted hereunder to a sublicensee, other than the Permitted Sublicensees, with the prior written consent of Durect, which consent shall not be unreasonably withheld, provided that [* * *]. In the event Hospira desires to grant a sublicense of the rights granted hereunder in accordance with this Section 3.2 , it shall provide Durect, within [* * *] days prior to execution of each Commercial Sublicense agreement, the name of the Commercial Sublicensee, the territories for which the

sublicense would be granted and the proposed sublicense expiration date. Any Commercial Sublicense by Hospira hereunder shall be subject to the terms and conditions of this Agreement, and the Commercial Sublicensees will not be permitted to grant further sublicenses. In addition, any Commercial Sublicensee shall be subject to the terms and conditions of this Agreement to the same extent as applicable to Hospira with respect to the field sublicensed. Any sublicense or delegation by Hospira shall not relieve Hospira of its obligations under the Agreement, Hospira may not grant any sublicensee greater rights than the rights granted to Hospira under this Agreement, and the rights of Durect under this Agreement shall not be prejudiced, reduced or limited in any way as a result of such sublicense or delegation.

3.3 Section 365(n) of the Bankruptcy Code . All rights and licenses granted under or pursuant to this Agreement, including amendments hereto, by each Party to the other Party are, for all purposes of 11 U.S.C. Section 365(n), licenses of rights to intellectual property as defined in Title 11. Each Party may elect to retain and may fully exercise all of its rights and elections under 11 U.S.C. Section 365(n).

3.4 Exclusivity .

(a) Licensed Product Exclusivity . Pursuant to the rights granted to Hospira under Section 3.1 , Durect and its Affiliates shall not develop (except in performance of its obligations under this Agreement), Manufacture nor Commercialize, and shall not grant any rights or licenses to any Third Party to develop, Manufacture or Commercialize any Licensed Product in the Territory; provided, however, notwithstanding the foregoing and Section 3.1(a) , Durect shall have the right to Manufacture or have Manufactured any Licensed Product in the Territory solely for development or Commercialization outside the Territory.

[* * *]

3.5 Product Diversion . To the extent permitted by Applicable Laws, (i) Durect shall not, and shall cause its Affiliates and licensees (other than Hospira) and their distributors not to, knowingly or intentionally sell any Licensed Product in the Field in the Territory

including through any media (e.g., the internet) and, (ii) should Durect become aware of any such Licensed Product diversion, it shall, and shall cause its Affiliates and licensees (other than Hospira) to stop the diversion. To the extent permitted by Applicable Laws, (x) Hospira or its Affiliates shall not, and shall include in agreements with its sublicensees and distributors that sell any Licensed Product in the Field in the Territory covenants from such parties not to, knowingly or intentionally sell any Licensed Product outside the Territory or outside the Field including through any media (e.g., the internet), and (y) should Hospira become aware of such Licensed Product diversion, it shall, and cause its Affiliates, sublicensees and distributors to stop the diversion.

3.6 Trademarks; Logos.

(a) Product Trademarks . Hospira shall have the right to select the Licensed Product name and all trademarks used in connection with the marketing, promotion and Commercialization of the applicable Licensed Product including special promotional or advertising taglines used in connection with the marketing of the applicable Licensed Product, in each case in the Territory (all such trademarks except for the Initial Licensed Product Trademarks, including all goodwill associated therewith, and all applications, registrations, extensions and renewals relating thereto shall be referred to as “ Product Trademarks ”). Hospira shall be the exclusive owner of the Product Trademarks and all goodwill associated therewith, and shall, at its sole discretion and Cost, register and maintain such Product Trademarks. Durect agrees that it will not challenge the title or ownership of Hospira in the Product Trademarks or any Hospira trademark, or attack or contest the validity of such trademarks.

(b) License to Initial Licensed Product Trademarks . Subject to the terms hereof, Durect hereby grants to Hospira an exclusive license, even as to Durect and its Affiliates, with the right to sublicense to Permitted Sublicensees and Durect-approved Commercial Sublicensees under Section 3.2 to use the Initial Licensed Product Trademarks in the Territory solely in connection with the Manufacture and Commercialization of the

Initial Licensed Product in the Territory; provided, however, with respect to the OPTESIA™ mark, the foregoing license to Hospira and subsequent sublicense by Hospira shall be subject to the prior approval of Nycomed, and in addition, notwithstanding anything to the contrary in this Agreement, the rights of Hospira granted hereunder with respect to the OPTESIA™ mark shall at all times be subject to the terms and conditions applicable to such license as set forth in the Nycomed Agreement. Hospira agrees that it will not challenge the title or ownership of Durect in the Initial Licensed Product Trademarks, or attack or contest the validity of such trademark.

(c) Durect Trademark . Hospira agrees to use Commercially Reasonable Efforts to utilize a Durect trademark on labels and/or packaging for all Licensed Product marketed, distributed or sold in the Territory, provided that [* * *] Licensed Product labels and/or packaging shall include all appropriate patent markings and notices reasonably agreed to by the Parties.

[* * *]

4. DEVELOPMENT AND REGULATORY

4.1 Plans . The “ Development Plan ” sets forth, on a calendar year-by-calendar year basis, the Development Plan activities, for development of a Licensed Product through Regulatory Approval (including any mandated post-conditional Regulatory Approval obligations) in the Territory, including: (i) the development, scientific, medical, regulatory and other activities including Clinical Trials, Non-Clinical and Pre-Clinical studies and Dosage Form Development, Manufacturing process development, scale-up, validation, ICH registration batches, quality control, stability and manufacturing qualification and supply of the Licensed Product for Clinical Trials for the development of the Licensed Product through Regulatory Approval (including post-Regulatory Approval if mandated by a Regulatory Authority in order to obtain or maintain Regulatory Approval for the Licensed Product) in the Field in the Territory; (ii) the estimated budget for each development activity, and estimated over-all budget for performance of all development activities under the Development Plan

(“ Development Plan Budget ”); (iii) target Licensed Product profiles; and (iv) timelines. The Development Plan for the Initial Licensed Product shall be agreed to by the Parties prior to the Effective Date, and thereafter shall be updated by and reviewed by the JSC at least once each calendar year by a date no later than [* * *] of each year or more frequently as the JSC deems, so as to cover any other amendments, and each amendment shall be approved by the JSC. The terms of the Development Plan are expressly incorporated herein.

4.2 [* * *]

4.3 Development of Licensed Product in the Territory. Under the supervision and auspices of the JSC, the Parties shall have the following responsibilities relating to development of a Licensed Product (including Line Extension(s), if any) in the Territory:

(a) Durect or its designees shall perform any Dosage Form Development for the Initial Licensed Product as set forth in the Development Plan for the Initial Licensed Product.

(b) Durect or its designees shall perform any additional Dosage Form Development not set forth in the Development Plan for the Initial Licensed Product and perform any Dosage Form Development for any Future Licensed Product, the Cost of which shall be calculated in accordance with [* * *], unless the Parties otherwise agree. [* * *];

(c) Notwithstanding any other language herein, Hospira shall have the right, in its sole discretion, to develop any Line Extensions to a Licensed Product in the Field and in the Territory subject to Section 4.3 (b) above;

(d) Unless otherwise determined by the JSC, Durect will be responsible for conducting the activities set forth in the Development Plan;

(e) The Parties shall perform their obligations under the Development Plan, and all other development activities required for registration for Licensed Product(s) for use in the Field in the Territory using Commercially Reasonable Efforts, in good scientific manner and in material compliance with Applicable Laws and:

(i) cooperate with the other Party to implement the Development Plan;

(ii) perform the work set out for such Party to achieve the objectives of such plan efficiently and expeditiously; and

(iii) completely and accurately record in writing all work done and results achieved in connection with the development of Licensed Product(s) under their respective Development Plans.

4.4 Ownership and Exchange of Data and Know-How . Durect shall own all Development Data. Durect hereby grants to Hospira an exclusive right and license in the Field and in the Territory to use all such Development Data for all purposes necessary to allow Hospira to exercise its rights and perform its obligations under this Agreement. During the Term of this Agreement, (i) Durect shall promptly provide to Hospira copies of all Know-How related to the Licensed Products and Development Data that is in existence as of the Effective Date, and each Party shall promptly provide the other Party with all Know-How related to the Licensed Products and Development Data that is developed, acquired by such Party during the Term, in each case as required or useful to perform the Development Plan or exercise its rights and obligations under the Agreement, and (ii) each Party shall promptly provide the other Party with all material safety information concerning any Licensed Product of which it becomes aware.

4.5 Funding of Development.

(a) From and after the Effective Date, each of Durect and Hospira shall be responsible for the Costs incurred on or after the Effective Date listed below its name in the following table:


		Durect		Hospira
		Fifty percent (50%) of the Development Costs under the Development Plan for the Initial Licensed Product (excluding Line Extensions thereof)		Fifty percent (50%) of the Development Costs under the Development Plan for the Initial Licensed Product (excluding Line Extensions thereof)
		[* * *]		[* * *]
		[* * *]		[* * *]
		[* * *]		[* * *]

(b) With respect to those Development Costs to be paid by one Party to the other hereunder, within [* * *] calendar days after the end of each month, Durect and/or Hospira, as the case may be, shall provide to the other Party an invoice in an amount equal to Costs incurred by such Party in such month for which the other Party is obligated to reimburse under the terms of this Agreement. Payment terms shall be net [* * *] days from the date of each Party’s receipt of any correct invoice. Payments shall be sent to the “Remit to” address set forth on the invoice. Should a Party dispute any portion of an invoice, it shall not be required to pay any portion of such invoice until such time as the dispute is resolved and such disputing Party receives a fully corrected invoice; provided that, in such an event, the other Party shall have the option of issuing a new, correct invoice for the portion of the original invoice not in dispute, and the disputing Party shall pay such new invoice within the time limits set forth in this Section 4.5(b) .

4.6 Regulatory

(a) Initial Licensed Product .

(i) U.S. prior to FDA Regulatory Approval . Except as otherwise provided under this Agreement or mutually agreed by Durect and Hospira, prior to FDA Regulatory Approval in the U.S. for the Initial Licensed Product, Durect shall own all Regulatory Documentation, including INDs, in the U.S. and shall use Commercially Reasonable Efforts to prepare, file and prosecute all regulatory actions connected with seeking Regulatory Approval of the Initial Licensed Product in the U.S. in accordance with the Development Plan.

(ii) U.S. after FDA Regulatory Approval . Upon the receipt by Durect of the FDA Regulatory Approval for the Initial Licensed Product in the U.S., Durect shall transfer ownership of any Regulatory Approvals in the U.S. to Hospira,

and Hospira shall thereafter own the Regulatory Approval for the Initial Licensed Product in the U.S. and shall use Commercially Reasonable Efforts to maintain in good standing the Regulatory Approval of the Initial Licensed Product in the U.S., including payment of all user fees and other maintenance Costs, so long as Hospira retains the right to Commercialize the Initial Licensed Product in the U.S.

(iii) Canada . Upon the receipt by Durect of the FDA Regulatory Approval for the Initial Licensed Product for the U.S., Hospira shall use Commercially Reasonable Efforts to prepare, file and prosecute all regulatory actions connected with seeking Regulatory Approval of the Initial Licensed Products in Canada, and upon receipt of Regulatory Approval, maintain such Regulatory Approval in good standing, including payment of all user fees and other maintenance Costs, and shall own all such Regulatory Approvals obtained in Canada so long as Hospira retains the right to Commercialize the Initial Licensed Product in Canada. In the event that any additional development and/or regulatory activities are required to obtain Regulatory Approval in Canada, then, subject to Section 4.3(a) and (b) , Hospira shall be responsible for performing such activities, but the Parties shall each be responsible for fifty percent (50%) of the Costs therefore as set forth in Section 4.5 .

(b) [* * *]

(c) Cooperation . With respect to each Licensed Product, each Party shall in a timely manner provide the other Party with copies of all Regulatory Documentation in such Party’s Control as reasonably requested by the other Party necessary for applying for and maintaining such Regulatory Approval(s) and INDs. Each Party shall submit proposed filings and correspondence to a Regulatory Authority regarding major or material issues (e.g., submissions, telephone conference meeting records, correspondence that include commitments or agreements) to the JSC for its approval prior to submission to a Regulatory Authority, shall keep the JSC informed as to the status of such efforts, permit the JSC to review any revisions to any filings or communications with a Regulatory Authority during their preparation and

shall confer with the JSC regarding the preparation of such filings and communications and the Regulatory Approval process. Each Party, [* * *], shall have the right to participate in any major conference or meeting with Regulatory Authorities with respect to a Licensed Product in the Territory.

4.7 Reporting Adverse Events . As soon as practicable, and in no event later than ninety (90) calendar days of the Effective Date, Hospira and Durect will develop and agree upon safety data exchange procedures for the Territory which will be set forth in a separate and detailed safety agreement (the “ Pharmacovigilance Agreement ”). The Pharmacovigilance Agreement will describe the coordination of collection, investigation, reporting, and exchange of information concerning adverse drug reactions (and to the extent applicable, adverse events) with respect to a Licensed Product (as defined in the then current edition of ICH Guidelines and any other relevant regulations or regulatory guidelines) or any other safety problem of significance (each such adverse event or problem, an “ Adverse Event ”), and product quality and product complaints involving Adverse Events, sufficient to permit each Party, its Affiliates, sublicensees or licensees to comply with its legal obligations, including to the extent applicable, those obligations contained in ICH Guidelines. The safety data exchange procedures will be promptly updated if required by changes in legal requirements or by agreement between the Parties.

[* * *]

5. DISTRIBUTION AND PROMOTION.

5.1 Generally . As between the Parties, Hospira will be exclusively responsible for Commercializing of a Licensed Product in the Territory and all Costs associated therewith.

5.2 Marketing Plan . No later than [* * *] prior to the anticipated date of the First Commercial Sale of the applicable Licensed Product in the Territory, Hospira will develop a “ Marketing Plan ” outlining Hospira’s plans for Commercialization of the Licensed Product in the Territory, which plan shall be presented at the CC. The Marketing Plan shall be consistent with Hospira’s requirement under Section 5.5 to use Commercially Reasonable Efforts to

Commercialize the applicable Licensed Product in the Field and in the Territory and include, at such time as appropriate, (i) preliminary plans related to the prelaunch, launch, Reimbursement, promotion and sales of the applicable Licensed Product in the Territory, Pricing and Reimbursement strategy (provided, however, that Hospira shall be free, at its discretion, to determine the pricing of a Licensed Product in all the Territory), competitive landscape, public relations and promotional communications, forecasts for the number of sales representatives, sales detailing plans, and a summary of proposed phase IV Clinical Trials and a reasonably descriptive overview of the marketing and advertising campaigns proposed to be conducted; (ii) a good faith projection of the anticipated Net Sales for the Licensed Product in the Territory for the following [* * *] years (“ Sales Projection ”). The Marketing Plan shall be updated by Hospira and reviewed by the CC at least once each calendar year by a date no later than [* * *] of each year so as to cover the next [* * *] full calendar years.

5.3 Promotional Materials and Activities . All promotional materials and promotional activities with respect to a Licensed Product in the Territory shall be consistent with the then current Marketing Plan. To the extent permitted by Applicable Laws, Hospira will use Commercially Reasonable Efforts to include an acknowledgment of Durect as the developer and licensor of the Licensed Product in promotional materials for the Licensed Products.

5.4 Post-Registration Development . Hospira shall be responsible for the preparation of all phase IV protocols (which shall be reviewed by the CC in accordance with Section 2.3(b)(iv) ) and the conduct of phase IV Clinical Trials for the Territory; [* * *]

5.5 Commercial Diligence . Within [* * *] of obtaining Regulatory Approval of a Licensed Product in a Jurisdiction, Hospira (or its Affiliates or Commercial Sublicensees, as applicable) shall use Commercially Reasonable Efforts to make its First Commercial Sale of such Licensed Product in such Jurisdiction, and shall continue to use Commercially Reasonable Efforts to Commercialize such Licensed Product in such Jurisdiction so long as Hospira retains Commercialization rights in such Jurisdiction. During the [* * *] following the First Commercial Sale of a Licensed Product in a Jurisdiction, Hospira shall provide to its sales

representatives who are promoting such Licensed Product sales incentive compensation programs for the Licensed Product that are no less favorable to those that Hospira provides to those specific sales representatives with respect to their sale of any pharmaceutical products.

5.6 Global Marketing Team. To the extent reasonably feasible, Durect shall permit Hospira to participate in any global marketing strategy team formed by Durect that includes Durect and/or Third Parties licensed by Durect to market a Licensed Product outside the Territory to discuss marketing tactics and synergies for a Licensed Product.

6. PAYMENTS.

6.1 Milestone Payments to Durect . In consideration for the grant of the exclusive license under Section 3.1 , Hospira shall pay to Durect the following one-time, non-refundable and non-creditable payments with regards to the Initial Licensed Product (each a “ Milestone Payment ”) within [* * *] days after the occurrence of the corresponding specific event set forth in the table below, provided, however, [* * *]. In the case of Milestone Payment No. 1, such payment shall be made within ten (10) days of the Effective Date.


Milestone No.	Event	One-Time Payments to Durect (U.S. Dollars)
1	Effective Date	Twenty-Seven Million Five Hundred Thousand Dollars ($27,500,000)
2	[* * *]	[* * *]
3	[* * *]	[* * *]
4	[* * *]	[* * *]
5	[* * *]	[* * *]
6	[* * *]	[* * *]
7	[* * *]	[* * *]

Each Party shall notify the other Party within [* * *] business days of the occurrence of any event triggering a Milestone Payment listed above.

6.2 Royalties . In further consideration of the grant of license to Hospira by Durect hereunder, and subject to the other provisions of this Section 6 , Hospira shall pay the royalties

to Durect on a Jurisdiction-by-Jurisdiction basis for the applicable Royalty Term as set forth in Section 6.2(a)-(d) below. Upon the expiration of the Royalty Term in a Jurisdiction with respect to a Licensed Product, all licenses with respect to such Licensed Product in such Jurisdiction, including the license rights granted under Section 3.1 and Section 4.4 herein, shall be fully paid-up, exclusive, royalty free, irrevocable and perpetual.

(a) Patent Royalties . Subject to Section 6.2 (d) below, from the date of the First Commercial Sale in a Jurisdiction of a Licensed Product until the later of: (i) expiration of the last Valid Claim that would be infringed by the manufacture, sale, offer for sale, use or importation of such Licensed Product in such Jurisdiction; and (ii) expiration of Marketing Exclusivity Rights in such Jurisdiction (the “ Patent Royalty Term ”), Hospira shall pay Durect a royalty equal to the following percentages of the aggregate annual Net Sales of such Licensed Product in the applicable Jurisdiction (“ Patent Royalties ”):


Aggregate Annual Net Sales in the Territory ($)		Royalty to Durect (percent of Net Sales)
[* * *]		[* * *]
[* * *]		[* * *]
[* * *]		[* * *]
[* * *]		[* * *]
[* * *]		[* * *]

The royalty rates set forth above shall apply only to that portion of Net Sales of such Licensed Product within the applicable tier of Net Sales. For purposes of illustration, Patent Royalties owed on $[* * *] million in annual Net Sales of a Licensed Product would be calculated as the sum of (a) [* * *] and (b) [* * *]. The periods by which annual net sales are measured for purposes of this Section 6.2(a) shall be a calendar year (each, an “ Annual Net Sales Period ”) except that the first Annual Net Sales Period shall begin on the first day of the calendar quarter preceding the First Commercial Sale of such Licensed Product and continue to the end of the calendar quarter ending on December 31 ^st of that calendar year.

(b) Know-How Royalties . [* * *] If the Know-How Royalty Term is in effect in a particular Jurisdiction, Hospira shall pay Durect royalties equal to the following percentage of the aggregate annual Net Sales of the applicable Licensed Product in such Jurisdiction in the Territory (“ Know-How Royalties ”):


Aggregate Annual Net Sales in the Territory ($)		Royalty to Durect (percent of Net Sales)
[* * *]		[* * *]
[* * *]		[* * *]
[* * *]		[* * *]
[* * *]		[* * *]
[* * *]		[* * *]

(c) The first Annual Net Sales Period in which Know-How Royalties are payable shall begin on the first day of the Know-How Royalty Term and continue to the end of the calendar quarter ending on December 31 ^st of that calendar year.

[* * *]

6.3 Commercial Sublicense Income . In addition to the royalties payable to Durect under Section 6.2 and the Milestone Payments payable to Durect under Section 6.1 , if Hospira grants a Commercial Sublicense under Section 3.2 , Hospira shall thereafter pay Durect, within [* * *] days after the receipt thereof by Hospira, [* * *] of any Commercial Sublicense Fees received by Hospira; provided, however, in the case where Hospira receives a milestone payment from a Commercial Sublicensee for the same event that triggers one of the Milestone Payments set forth in Section 6.1 , then Hospira shall only be required to pay [* * *] of the portion of such payment it receives from its Commercial Sublicensee for such milestone that exceeds the amount of the Milestone Payment that Hospira is obligated to pay Durect with respect to such milestone in Section 6.1 above.

7. PAYMENTS AND REPORTS.

7.1 Payments of Royalties . Beginning [* * *] calendar days after the end of the calendar quarter in which the First Commercial Sale of a Licensed Product is made and for each calendar quarter thereafter, Hospira shall submit a statement to Durect (no later than [* * *] calendar days after the end of such calendar quarter), which shall set forth the amount of Net Sales of such Licensed Product in the Territory by Jurisdiction during such quarter, and the calculation of the royalties due on such Net Sales in the aggregate for the Territory for such quarter pursuant to Section 6.2 herein. Each such statement shall be accompanied by the royalty payment, if any, due to Durect.

7.2 Currency Conversion . To the extent that Hospira must convert any Canadian dollars to U.S. Dollars for purposes of its payment obligations to Durect hereunder, Hospira shall take each quarter’s Canadian Dollar denominated Net Sales and convert to U.S. Dollars by using the average exchange rate for the quarter by taking the average monthly exchange rate for each of the three months’ in the quarter for the Canadian dollar as published by Reuters. These rates will be consistent with the rates used internally by Hospira for its accounting and record-keeping purposes, which rates shall be consistent with GAAP.

7.3 Mode of Payment . Hospira shall make all payments required under this Agreement in U.S. Dollars by wire transfer to any U.S. bank account as specified by Durect in writing within [* * *] days of any applicable due date.

7.4 Records Retention . Hospira, Durect and each such Party’s respective Affiliates and Commercial Sublicensees, as applicable, shall keep complete and accurate records in accordance with GAAP (if GAAP is applicable to such party) and pertaining to such Party’s Development Costs, the sale of applicable Licensed Product and the calculation of Net Sales in the Territory, as applicable, to permit the determination of Development Costs which are reimbursable by the other Party hereunder and royalties for a minimum period of [* * *] calendar years after the calendar year in which such sales or costs occurred, and in sufficient detail to permit the Parties to confirm the accuracy of each of the foregoing.

7.5 Audit Request . During the Term of this Agreement and for a period of [* * *] [* * *] thereafter, at the request and Cost of a Party (the “ Auditing Party ”), Durect and its Affiliates (in the case of a request by Hospira) or Hospira and its Affiliates and Commercial Sublicensees (in the case of a request by Durect) (the “ Audited Party ”) shall permit an independent, certified public accountant appointed by the Auditing Party and reasonably acceptable to the Audited Party, at reasonable times and upon reasonable advance notice of not less than [* * *] calendar days, but not more often than once in each calendar year, to examine such records for the [* * *] years prior to the notice as may be necessary to determine the correctness of any report or payment made under this Agreement or obtain information as to the determination of Development Costs which are reimbursable by the other Party hereunder, Net Sales for purposes of calculating royalties payable hereunder for any calendar quarter in such audited period. Results of any such examination shall be made available concurrently to all Parties except that said independent, certified public accountant shall verify to the Auditing Party such amounts and shall disclose no other information revealed in such audit. The examination shall also include disclosure of the methodology and calculations used to determine the results. The said independent, certified public accountant shall execute a written confidentiality agreement with the Audited Party.

7.6 Cost of Audit . The Auditing Party shall bear the full Cost of the performance of any audit requested by the Auditing Party except as hereinafter set forth. If, as a result of any inspection of the books and records of the Audited Party, it is shown that payments made by one Party to the other under this Agreement were less than the amount which should have been paid (in the case of royalties) or the amount of costs charged by one Party to the other Party were more than the amount that should have been charged (in the case of Development Costs), then the under-paying or over-charging Party, as applicable, shall make all payments required to be made to eliminate any discrepancy revealed by said inspection within [* * *] calendar days from receipt of the results of said examination, including in each case interest at the rate of one percent ([* * *]) per month (or the maximum interest allowable by Applicable Laws, whichever is less) for the amount of the discrepancy. Furthermore, if the payments made were

less than [* * *] of the amount that should have been paid during any calendar year, or if there was an overcharge of more than
[* * *] of the amount of that was owed, in either case due to the error of the Audited Party, the Audited Party shall also reimburse the Auditing Party for reasonable Costs incurred by the Auditing Party in respect of such audit.

8. COMMERCIAL SUPPLY OF PRODUCT

8.1 Amendment of Supply Agreement. Durect shall use Commercially Reasonable Efforts to amend, within [* * *] days of the Effective Date, on terms reasonably acceptable to each Party, the Manufacturing Development, Manufacturing and Packaging Agreement between Durect and Hospira Worldwide, Inc. (“ Hospira Worldwide ”) for POSIDUR dated December 18, 2006 (“ Supply Agreement ”) to: (i) exclude the Territory from the scope of the commercial supply obligations for the Initial Licensed Product in the Supply Agreement, and (ii) [* * *].

8.2 Commercial Supply . Effective upon the amendment of the Supply Agreement in accordance with Section 8.1 , Hospira shall be responsible for the Manufacture and supply of the Initial Licensed Product for Commercialization within the Territory. For clarity, Durect shall retain the right to Manufacture clinical supplies of the Initial Licensed Product excluding Line Extensions, if any. Hospira shall be responsible for the clinical and commercial supply of any Future Licensed Products.

8.3 Supply of [* * *] . Attached hereto as Schedule 8.3 is a [* * *] Supply Agreement that the Parties have entered into as of the Effective Date hereof.

9. INTELLECTUAL PROPERTY.

9.1 Ownership of Collaboration Inventions . Subject to the terms herein, all Collaboration Inventions shall be owned as follows:

(a) [* * *]

(b) With respect to Collaboration Inventions that do not constitute Product Collaboration Inventions, Durect shall own the entire right, title and interest in and to all such

Collaboration Inventions (including all Patents and other Intellectual Property Rights relating thereto) to the extent such Collaboration Inventions are made solely by its employees and/or Third Parties acting on behalf of Durect in the performance of the Agreement (each such Collaboration Invention a “ Durect Collaboration Invention ”).

(c) With respect to Collaboration Inventions that do not constitute Product Collaboration Inventions, Hospira shall own the entire right, title and interest in and to all such Collaboration Inventions (including all Patents and other Intellectual Property Rights relating thereto) to the extent such Collaboration Inventions are made solely by its employees and/or Third Parties acting on behalf of Hospira in the performance of the Agreement (each such Collaboration Invention, an “ Hospira Collaboration Invention ”).

(d) With respect to Collaboration Inventions that do not constitute Product Collaboration Inventions, the Parties shall jointly own all Joint Inventions (as defined below) and, subject to the rights granted each Party under this Agreement and except as otherwise specifically provided under this Agreement, each Party shall be free to use and exploit its interest in Joint Inventions and otherwise undertake all activities a sole owner might undertake with respect to such Joint Inventions, without the consent of and without accounting to the other Party. “ Joint Invention ” means a Collaboration Invention which is not a Product Collaboration Invention which: (i) one or more employees, consultants or agents of Durect or any other persons obligated to assign such Collaboration Invention to Durect; and (ii) one or more employees, consultants or agents of Hospira or any other persons obligated to assign such Collaboration Invention to Hospira, are joint inventors of such Collaboration Invention. The term “joint inventors,” as it applies generally to Collaboration Inventions, shall be construed in accordance with how that term is used pursuant to United States patent law.

(e) Subject to appropriate confidentiality undertakings, each Party shall notify the other Party promptly after the completion of invention disclosure statements (or similar type of internal process employed by such Party for recording or recognizing inventions) for each Collaboration Invention (or, if any provisional or other patent application

is filed claiming such invention, promptly upon such filing), and shall provide a copy of written documentation of the Collaboration Invention suitable to describe the invention and identify any inventors participating in the invention (or, if any patent application is filed, a full and complete copy of the documents submitted to the relevant patent office) to the other Party.

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

(g) Each Party shall, at the request of the other Party, execute all assignment documents necessary to perfect the ownership interests in Collaboration Inventions as determined pursuant to this Section 9.1 .

(h) Each Party has and will continue to have written contracts with all Third Parties (including employees, sublicensees and subcontractors) performing services on its behalf under this Agreement and, where such services may give rise to the creation of inventions that may be Collaboration Inventions, such Party shall ensure that such contracts provide for the assignment to such Party of all Collaboration Inventions and rights therein.

(i) Notwithstanding any language to the contrary herein, with respect to any services provided by Hospira Worldwide, Inc. pursuant to the Supply Agreement (as defined in Section 8.1 herein), nothing herein shall supersede the terms and conditions set forth in the Supply Agreement with respect to the ownership or license rights of Intellectual Property Rights.

(j) Notwithstanding any language to the contrary herein, the provisions of Section 9.1 shall survive any expiration or termination of this Agreement for any reason.

9.2 Prosecution of Patents .

(a) Durect Controlled Patents .

(i) As between Durect and Hospira, Durect shall prepare, prosecute and maintain the SABER ^TM Patent Rights, Product Patent Rights and Patents relating to Durect Collaboration Inventions (including their issuance, reissuance, reexamination and the defense of any interference, revocation or opposition proceedings) at Durect’s sole Cost and discretion, subject to the provisions of this Section 9.2(a) .

(ii) With respect to the Product Patent Rights, Durect shall promptly furnish Hospira with copies of all substantive prosecution correspondence to and from patent offices in the Territory and provide Hospira a reasonable time to offer its comments thereon before Durect makes a submission to the relevant patent office, provided that in the event that delay would jeopardize any potential Product Patent Right, Durect shall have the right to proceed without awaiting Hospira’s comments on any patent application or correspondence relating thereto. Hospira shall offer its comments promptly, and Durect shall consider in good faith such comments of Hospira and shall incorporate such comments if reasonable. Durect shall not abandon any patent application or patent in the Product Patent Rights without the prior written consent of Hospira, such consent not to be unreasonably withheld or delayed. If, subject to Hospira’s foregoing consent right, Durect determines to abandon, or not to file, prosecute, defend or maintain, any Product Patent Right (including not to defend any interference, revocation or opposition proceedings) in any Jurisdiction, then [* * *] With respect to the SABER™ Patent Rights, Durect shall promptly furnish Hospira with copies of all substantive prosecution correspondence to and from patent offices in the Territory to the extent relevant to the Licensed Products, and provide Hospira a reasonable time to offer its comments thereon before Durect makes a submission to the relevant patent office, provided that in the event that delay would jeopardize any potential SABER™ Patent Right, Durect shall have the right to proceed without awaiting Hospira’s comments on any patent application or correspondence relating thereto. Hospira shall offer its comments promptly, and Durect shall

consider in good faith such comments of Hospira. If Durect determines to abandon, or not to file, prosecute, defend or maintain, any SABER™ Patent Right (including not to defend any interference, revocation or opposition proceedings) in any Jurisdiction, then subject to Durect’s consent, not to be unreasonably withheld, [* * *].

(b) Joint Patent Rights . With respect to the decision to initiate the drafting and filing of a new patent application claiming a Joint Invention, the Parties shall first exchange sufficient information identifying such Joint Invention and discuss in good faith the relative merits of seeking patent rights thereto and, upon the prior mutual agreement of the Parties to proceed, not unreasonably withheld, the Parties shall engage and co-direct outside patent counsel to undertake such actions as are necessary or appropriate to procure, prosecute and maintain patents and/or patent applications to such Joint Inventions (“ Joint Patent Rights ”) (including any issuance, reissuance or reexamination thereof and the defense of any interference, revocation or opposition proceedings related thereto), subject to the provisions of this Section 9.2(b) ; provided , that all associated Costs shall be shared equally between the Parties. The patent counsel shall be instructed to furnish both Parties with copies of drafts of such Joint Patent Rights and any substantive prosecution correspondence relating to such Joint Patent Rights to and from patent offices and permit each party to offer its comments thereon before any submission or response to a patent office. Each Party shall offer its comments promptly, including any request regarding which countries the Joint Patents should be filed and maintained. If a Party determines in its sole discretion not to file, prosecute, defend or maintain any Joint Patent Right (including failing to defend any interference, revocation or opposition proceedings) in any country, then such Party shall provide the other Party with [* * *] days’ prior written notice (or such shorter time period that would permit the other Party a reasonable opportunity to respond in a timely manner) of such determination, and the other Party shall have the right and opportunity to file, prosecute, defend and/or maintain such Joint Patent Rights at its sole Cost, and shall thereafter own such Joint Patent Right.

(c) Hospira Patents . As between Durect and Hospira, Hospira may prepare, file, prosecute and maintain all Patents claiming a Hospira Collaboration Invention (including their issuance, reissuance, reexamination and the defense of any interference, revocation or opposition proceedings) in Hospira’s sole name and at Hospira’s sole Cost and discretion.

(d) Assistance . Each Party shall, at the reasonable request of the other Party, execute all lawful papers, all divisional, continuing, reissue and foreign applications, make all rightful oaths and take such other actions as may be reasonably requested by the other Party in conjunction with submission, filing, prosecution and defense of Patents and to aid in obtaining the proper protection of inventions pursuant to this Section 9.2 .

9.3 Enforcement of Patent Rights .

(a) In the event that either Hospira or Durect becomes aware of any Competing Product that is or is intended to be made, used, or sold in the Territory by a Third Party that it believes to infringe Product Patent Rights and/or SABER ^TM Patent Rights, such Party will promptly notify the other Party of all the relevant facts and circumstances known by it in connection with the infringement. Hospira and Durect shall thereafter consult and cooperate fully to determine a course of action, including the commencement of legal action as provided in this Section 9.3 by either or both Parties, to terminate any such infringement.

(b) As between Durect and Hospira, Durect shall have the first right, but not the duty, upon written notice to Hospira to initiate, prosecute and control the enforcement of any of the Product Patent Rights against actual, alleged or threatened infringement by a Third Party in the Territory through the marketing or sale of a Competing Product. Upon receipt of written notice from Durect, the Parties shall discuss in good faith the filing of a motion for preliminary injunction in either Durect’s name or the names of both Parties. If Durect does not file such injunction or proceed further against such Third Party alleged infringement of a Product Patent Right within [* * *] days of a Party’s first notice to the other Party of such Third Party infringement, then Hospira shall have the right, but not the duty, to institute or proceed with such an action against such Third Party for infringement of such Product Patent Right.

(c) As between Durect and Hospira, Durect shall have the first right, but not the duty, upon written notice to Hospira to initiate, prosecute and control the enforcement of any of the SABER™ Patent Rights against actual, alleged or threatened infringement by a Third Party in the Territory through the marketing or sale of a Competing Product. If Durect does not institute a proceeding against such Third Party alleging infringement of the SABER ^TM Patent Rights within [* * *] of a Party’s first notice to the other Party of such Third Party infringement, then Hospira shall have the right, but not the duty, to institute such an action against such Third Party for infringement of any of the SABER ^TM Patent Rights; provided, however, that Hospira’s right to undertake any such action alleging infringement of the SABER ^TM Patent Rights shall be subject to the prior written consent of Durect, not to be unreasonably withheld.

(d) Except as provided below, the Costs of any such action under this Section 9.3 (including fees of attorneys and other professionals) shall be borne [* * *]. For any such action to terminate any such infringement, in the event that Hospira is unable to initiate or prosecute such action solely in its own name or it is otherwise advisable to obtain an effective remedy, Durect will join such action voluntarily and will execute and cause its Affiliates to execute all documents necessary for Hospira to initiate and maintain such action. Each Party shall at its own expense promptly give to the Party bringing such infringement proceedings such reasonable assistance as the Party bringing the action may reasonably request. The Party instituting any such action may not enter into any settlement, consent judgment or other voluntary final disposition of such action that admits the invalidity or unenforceability of any Patent licensed hereunder, subjects the other Party to an injunction or any other liability or obligations, including a monetary payment in connection therewith without the prior written consent of the other Party, not to be unreasonably withheld. The Party undertaking any proceedings shall keep the other reasonably informed of the progress of the action and shall consider the comments and observations of the other in prosecuting the proceedings.

(e) Any recovery obtained as a result of an infringement action brought under this Section 9.3 , whether by judgment, award, decree or settlement, will first be applied to reimbursement of each Party’s Costs in bringing such suit or proceeding, and any remaining balance will be distributed to [* * *]

9.4 Defense of Patents .

(a) In the event that either Hospira or Durect becomes aware of any action initiated by a Third Party (or any counterclaim or defense asserted in any other action) in the Territory alleging non-infringement, invalidity or unenforceability of any Product Patent Rights and/or SABER ^TM Patent Rights, such Party will promptly notify the other Party of all the relevant facts and circumstances known by it in connection with such action. Hospira and Durect shall thereafter consult and cooperate fully to determine a course of action.

(b) Durect shall have the first right, but not the duty, to defend and control any action initiated by a Third Party (or any counterclaim or defense asserted in any other action) in the Territory alleging invalidity or unenforceability of any Product Patent Rights. If Durect fails to defend any such action initiated by a Third Party (or any counterclaim or defense asserted in any other action) within [* * *] days of notice from such Third Party (or such shorter time period that would permit Hospira a reasonable opportunity to respond in a timely manner), Hospira shall thereafter have the right, but not the duty, to defend and control any such invalidity action, counterclaim or defense in the Territory.

(c) Durect shall have the first right, but not the duty, to defend and control any action initiated by a Third Party (or any counterclaim or defense asserted in any other action) in the Territory alleging invalidity or unenforceability of the SABER ^TM Patent Rights. If Durect fails to defend any such action initiated by a Third Party (or any counterclaim or defense asserted in any other action) within [* * *] days of notice from such Third Party (or such shorter time period that would permit Hospira a reasonable opportunity to respond in a timely manner), then Hospira shall have the right, but not the duty, to defend and control any such invalidity action, counterclaim or defense in the Territory; provided, however, that Hospira’s right to undertake the defense of such action relating to the SABER ^TM Patent Rights shall be subject to the prior written consent of Durect, not to be unreasonably withheld.

(d) Except as provided below, the Costs of any such action under this Section 9.4 (including fees of attorneys and other professionals) shall be borne [* * *] For any such action, in the event that Hospira is unable to defend such action solely in its own name or it is otherwise advisable to obtain an effective remedy, then Durect will join such action voluntarily and will execute and cause its Affiliates to execute all documents necessary for Hospira to defend such action. Each Party shall at its own expense promptly give to the defending Party such reasonable assistance as the Party defending the action may reasonably request. The defending Party may not enter into any settlement, consent judgment or other voluntary final disposition of such action that admits the invalidity or unenforceability of any Patent licensed hereunder, subjects the other Party to an injunction or any other liability or obligations including any monetary payment in connection therewith without the prior written consent of the other Party, not to be unreasonably withheld. The Party undertaking any such defense shall keep the other reasonably informed of the progress of the action and shall consider the comments and observations of the other in the proceedings.

(e) [* * *]

9.5 Patent Infringement Claims .

(a) Each Party shall notify the other Party promptly in writing of any claim of, or action for, infringement of any Patents or misappropriation of trade secret rights of any Third Party that is threatened, made or brought against either Party by reason of the development, manufacture, use, sale, offer for sale, importation or exportation of a Licensed Product in the Territory.

(b) In the event of the institution of any suit by a Third Party against Hospira or any of its Affiliates or Commercial Sublicensees alleging Patent infringement or misappropriation of trade secret rights of any Third Party in connection with the manufacture, use, sale, offer for sale, importation or exportation by or on behalf of Hospira, its Affiliates or Commercial Sublicensees of a Licensed Product in the Territory, as between Durect and Hospira, Hospira shall be responsible for the defense of any such suit and, subject

to the terms of this Section 9.5 , Hospira shall control such defense. Hospira shall select counsel and, provided that Hospira can do so without compromising attorney-client privilege, regularly consult with Durect and its counsel to keep Durect reasonably informed on the progress and status of the suit. Durect shall, at its own Cost, reasonably assist and cooperate with Hospira in any such litigation at Hospira’s request. Hospira may not enter into any settlement, consent judgment or other voluntary final disposition of such action that admits infringement by a Licensed Product or subjects the Licensed Product to an injunction or Durect to an injunction or any other liability or obligations, including a monetary payment in connection therewith without the prior written consent of Durect, not to be unreasonably withheld.

(c) Hospira shall be responsible for all Costs to defend any suit that it is responsible for under this Section 9.5 , including all fees and costs of attorneys, expert witnesses and other out-of-pocket litigation costs and all damages, penalties, court costs, attorney fees and other payments payable to any such Third Party, whether as a result of any judgment, award, settlement or otherwise (such liability, “ Patent Litigation Losses ”); provided, however, Hospira may, without limiting Durect’s liability for any breach of its representations and warranties hereunder, offset [* * *] of all such Patent Litigation Losses against any future royalties for such Licensed Product due to Durect for Net Sales in such applicable Jurisdiction(s). Notwithstanding the foregoing, however: [* * *]. Except in the event of a breach by Durect of any of its representations or warranties hereunder, Durect’s sole liability and Hospira’s exclusive remedy against Durect for any Patent Litigation Losses shall be Hospira’s right of offset in accordance with this Section 9.5 (c) .

(d) In the event a Third Party threatens suit against either Party for Patent infringement involving the development, manufacture, use, sale, offer for sale, importation, exportation, license or marketing of a Licensed Product in the Territory, the Parties shall confer with respect to the appropriate course of action, and if they determine that a declaratory action is warranted, then with respect to such action, the provisions of this Section 9.3 , 9.4 , or 9.5 as applicable shall apply thereto with respect to the prosecution of such action and/or the defense of any claims asserted in response thereto.

(e) In the event that either Party becomes aware of a Third Party Patent, under which, in the good faith reasonable judgment of such Party, it would be advisable to obtain a license to avoid infringement or potential infringement by the development, manufacture or Commercialization of a Licensed Product in any Jurisdiction, such Party shall promptly notify the other Party. The Parties shall then confer in good faith with respect to the appropriate course of action. Hospira shall have the right to negotiate and obtain such a license and, subject to the terms of this Section 9.5(e) below and without limiting Durect’s liability for any breach of its representations and warranties hereunder, Hospira shall be solely responsible for all costs and obligations under such license (the “ Third Party License Fees ”), provided, however, that: [* * *], Hospira may offset [* * *] of such Third Party License Fees against any future royalties due to Durect for Net Sales of such Licensed Product in such applicable Jurisdiction(s) provided that [* * *].

9.6 Prosecution of Initial Licensed Product Trademarks . If requested by Hospira, Durect shall use Commercially Reasonable Efforts to register and maintain, or cause to be registered and maintained, any of the Initial Licensed Product Trademarks in the Territory at Hospira’s Cost. Durect shall furnish Hospira with copies of all substantive prosecution correspondence to and from trademark offices in the Territory and provide Hospira a reasonable time to offer its comments thereon before Durect makes a submission to the relevant trademark office, provided that in the event that delay would jeopardize any potential rights, Durect shall have the right to proceed without awaiting Hospira’s comments on any application or correspondence relating to the Initial Licensed Product Trademarks. Hospira shall offer its comments promptly, and Durect shall consider in good faith such comments of Hospira and shall incorporate such comments if reasonable. If Hospira utilizes an Initial Licensed Product Trademark, then all Products bearing the Initial Licensed Product Trademark shall be manufactured, in accordance with the trademark usage and quality standards established by the JSC and approved by Durect, such approval not to be unreasonably withheld nor delayed;

provided that , on a Jurisdiction-by-Jurisdiction basis, the JSC shall, if commercially reasonable, adopt any trademark usage and quality standards timely proposed by Durect to the JSC prior to the First Commercial Sale in such Jurisdiction.

9.7 Enforcement of Initial Licensed Product Trademarks or Product Trademarks . If either Party learns of any infringement or threatened infringement by a Third Party of any of the Initial Licensed Product Trademarks or a Product Trademark in the Territory, such Party shall as soon as reasonably practicable notify the other Party and will provide such other Party with all available evidence of such infringement or threatened infringement. As between Durect and Hospira, Durect (or Nycomed with respect to OPTESIA™) shall have the first right, but not the duty, upon written notice to Hospira to initiate, prosecute and control the enforcement of any of the Initial Licensed Product Trademarks or a Product Trademark against actual, alleged or threatened infringement by a Third Party in the Territory through the marketing or sale of a Competing Product. Upon receipt of written notice from Durect, the Parties shall discuss in good faith the filing of a motion for preliminary injunction in either Durect’s name or the names of both Parties. If Durect does not file such injunction or proceed further against such Third Party alleged infringement of a Product Patent Right within [* * *] days of a Party’s first notice to the other Party of such Third Party infringement, Hospira shall have the right, but not the duty, to institute, prosecute and control, at its own Cost, any action or proceeding with respect to any infringement or threatened infringement by a Third Party of an Initial Licensed Product Trademark or any Product Trademark in the Territory, by counsel of its own choice, and provided that Hospira can do so without compromising attorney-client privilege, shall regularly consult with Durect and its counsel with regards to a claim of enforcement of the Initial Licensed Product Trademark to keep them reasonably informed on the progress and status of such suit. The Costs of any such action under this Section 9.7 (including fees of attorneys and other professionals) shall be borne [* * *]. For any such action to terminate any such infringement, in the event that Hospira is unable to initiate or prosecute such action solely in its own name or it is otherwise advisable to obtain an effective remedy, Durect will join such action voluntarily and will execute and cause its Affiliates to execute all

documents necessary for Hospira to initiate litigation and maintain such action. Hospira will control the action, including settlement thereof; provided , that no settlement or consent judgment or other voluntary final disposition of any such action brought by Hospira to enforce the Initial Licensed Product Trademark in the Territory pursuant to this Section 9.7 may be entered into without the prior written consent of Durect, such consent not to be unreasonably withheld, if such settlement would adversely affect the Initial Licensed Product Trademark (e.g., restrict the rights or admit invalidity). Any damage award or other consideration resulting from any such action or proceeding shall be retained by [* * *].

10. PUBLICATION; CONFIDENTIALITY

10.1 Publications . The Parties, through the JSC, shall develop policies and procedures (the “ Publication Policies ”) for any publication with respect to the results of Clinical Trials and phase IV Clinical Trials for a Licensed Product in the Territory, including disclosure applicable to Clinical Trial registries, which policies and procedures shall be consistent with the Parties’ respective policies and procedures for publication and disclosure of the results of human Clinical Trials, with disputes to be resolved in favor of the policy that provides for the broadest disclosure of such results. All abstracts, manuscripts and presentations (including information to be presented verbally) that disclose results of Clinical Trials or phase IV Clinical Trials for a Licensed Product shall be reviewed and approved by the JSC in accordance with the Publication Policies. Notwithstanding the foregoing, each Party shall provide to the other Party (through the JSC) the opportunity to review each of the submitting Party’s proposed abstracts, manuscripts or presentations (including information to be presented verbally) that relate to any development activities or otherwise with respect to a Licensed Product, at least [* * *] days prior to its intended presentation or submission for publication, and such submitting Party agrees, upon written request from the other Party given within such [* * *] day period, not to submit such abstract or manuscript for publication or to make such presentation until the other Party is given up to [* * *] days from the date of such written request to seek appropriate Patent protection for any material in such publication or presentation that it reasonably believes may be patentable. Once an abstract, manuscript or

presentation has been reviewed and approved by the JSC, the same abstract, manuscript or presentation does not have to be provided again to the other Party for review for a later submission for publication. Each Party also shall have the right to require that any of its Confidential Information (but not the results of the Clinical Trials or phase IV Clinical Trials for a Licensed Product that have been approved for disclosure pursuant to the Publication Policies) that is disclosed in any such proposed publication or presentation be deleted prior to such publication or presentation. In any permitted publication or presentation by a party, the other Party’s contribution shall be duly recognized, and co-authorship shall be determined in accordance with customary standards.

10.2 Publicity . Each Party shall maintain the confidentiality of all provisions of the Agreement and this Agreement itself, and neither Party shall make any press release nor public announcement concerning the existence of or the terms of this Agreement or containing material new information regarding the development or Commercialization of a Licensed Product, without the prior written approval of the other Party with regard to the content of such press release or public announcement, except as may be required to be made by either Party in order to comply with Applicable Laws in which case the disclosing Party shall provide the nondisclosing Party with at least [* * *] business days prior written notice of such disclosure (to the extent permitted by Applicable Laws) so that the nondisclosing Party shall have the opportunity if it so desires to seek a protective order or other appropriate remedy and, in connection with any such required disclosure, the disclosing Party shall use reasonable efforts to obtain confidential treatment for such disclosure or to prevent or modify such disclosure as may be requested by the nondisclosing Party (to the extent permitted by Applicable Laws). Such consent will not be unreasonably withheld or delayed by such other Party. Except as otherwise provided herein, prior to any such press release or public announcement requiring the other Party’s prior written approval, the Party wishing to make the announcement will submit a draft of the proposed press release or public announcement to the other Party not less than [* * *] business days in advance to enable the other Party to consider and comment thereon. Failure to respond with comments in writing prior to [* * *] before scheduled release

shall be deemed approval of such press release or public announcement. [* * *] Any written public announcements regarding a Licensed Product for which Hospira or Durect would be required to obtain the other Party’s written consent shall include a standard statement in a form agreed to by the Parties stating that the relevant Licensed Product has been licensed from and is being co-developed with Durect. Notwithstanding anything to the contrary in this Agreement, nothing in this Section 10.2 is intended to prohibit either Party from republishing or restating information that has already been approved by the other Party for use in a prior press release or public announcement.

10.3 Confidentiality .

(a) Except to the extent expressly authorized by this Agreement or otherwise agreed in writing, the Parties agree that, during the Term of this Agreement and for [* * *] years following the expiration or termination of the Agreement, the receiving Party, its Affiliates and its designees shall, and shall ensure that their respective employees, officers, directors and other representatives shall, keep confidential and not publish or otherwise disclose and not use for any purpose, other than the purpose of this Agreement, any Confidential Information of the disclosing Party. The receiving Party shall treat Confidential Information as it would its own proprietary information which in no event shall be with less than a reasonable standard of care, and take reasonable precautions to prevent the disclosure of Confidential Information to a Third Party, except as explicitly set forth herein, without written consent of the disclosing Party.

(b) The receiving Party’s obligations set forth in this Agreement shall not extend to any Confidential Information of the disclosing Party that:

(i) the receiving Party can demonstrate by competent evidence was already in its possession without any limitation on use or disclosure prior to its receipt from the disclosing Party;

(ii) is or hereafter becomes part of the public domain by public use, publication, general knowledge or the like or is made generally available by a Third Party, in each case, other than through a wrongful act, fault or negligence on the part of the receiving Party, or a breach of this Agreement;

(iii) is received from a Third Party without restriction and with the right to disclose such Confidential Information; or

(iv) the receiving Party can demonstrate by competent evidence was independently developed by or for the receiving Party without reference to, use of or disclosure of the disclosing Party’s Confidential Information.

Notwithstanding the foregoing, specific aspects or details of Confidential Information shall not be deemed to be within the public domain or in the possession of the receiving Party merely because the Confidential Information is embraced by more general information in the public domain or in the possession of the receiving Party. Further, any combination of Confidential Information shall not be considered in the public domain or in the possession of the receiving Party merely because individual elements of such Confidential Information are in the public domain or in the possession of the receiving Party unless the combination and its principles are in the public domain or in the possession of the receiving Party. Any and all information, data and materials, including any and all Intellectual Property Rights therein and thereto, owned by a Party pursuant to this Agreement shall constitute Confidential Information of such Party which shall be deemed the disclosing Party with respect to such Confidential Information for the purposes of this Article 10 and for the avoidance of doubt, subject to the exclusions to the confidentiality obligations in this Article 10 as described in Section 10.3(b)(ii) and (iii) . Notwithstanding the foregoing, the obligations of confidentiality under this Section 10.3 regarding any Confidential Information relating to or containing a Party’s trade secret that has been suitably identified to the other Party as such shall continue beyond the period set forth in this Section 10.3 (i.e., the Term plus [* * *]) so long as the subject matter remains a trade secret.

10.4 Authorized Disclosures . The restrictions contained in Section 10.3 shall not apply to Confidential Information that are:

(a) made to an applicable Regulatory Authority as useful or required in connection with any filing, application or request for Regulatory Approval for a Licensed Product; provided that reasonable measures shall be taken to assure confidential treatment of such information;

(b) to the extent necessary, (i) in connection with a proposed financing transaction, merger, acquisition or other change of control of a Party or sale of all or substantially all of the assets of a Party or (ii) subject to subcontracting provisions set forth in this Agreement, to its Affiliates, directors, officers, employees, consultants, sublicensees of Hospira or Durect (or bona fide potential sublicensees of Hospira or Durect), vendors and clinicians who have a need to know such information in connection with a Party performing its obligations or exercising its rights under this Agreement, in each case under written agreements of confidentiality substantially similar or at least as restrictive as those set forth in this Agreement; provided, that either Party may enter into such written agreements that provide for shorter timeframes for maintaining confidentiality than those set forth in this Agreement with the written consent of the other Party;

(c) otherwise required by Applicable Laws or the requirements of a major U.S. securities exchange, in the reasonable opinion of legal counsel to the receiving Party, provided that the Party disclosing such Confidential Information shall exercise its Commercially Reasonable Efforts to obtain a protective order or other reliable assurance that confidential treatment shall be accorded and if possible give the other Party a reasonable opportunity to review and comment on any such disclosure in advance thereof (but not less than [* * *] Business Days, if possible, prior to the date of such disclosure);

(d) made in response to an order of a court of competent jurisdiction or other Regulatory Authority or any political subdivision or regulatory body thereof of competent jurisdiction; provided that the receiving Party shall first have, if reasonably possible, given notice to the disclosing Party and given the disclosing Party, at such disclosing Party’s own expense, a reasonable opportunity to quash such order or to obtain a protective order

requiring that the Confidential Information or documents that are the subject of such order be held in confidence by such court or Regulatory Authority or, if disclosed, be used only for the purposes for which the order was issued; and provided, further, that if a disclosure order is not quashed or a protective order is not obtained, the Confidential Information disclosed in response to such order shall be limited to that information which is legally required, in the reasonable opinion of legal counsel to the receiving Party, to be disclosed in such response to such court or governmental order; or

(e) is reasonably necessary in filing or prosecuting of Product Patent Rights or (ii) reasonably necessary in defending litigation related to Product Patent Rights if such litigation relates to this Agreement.

10.5 Remedies . Each Party shall be entitled, in addition to any other right or remedy it may have, at law or in equity, to seek an injunction, without the posting of any bond or other security, enjoining or restraining the other Party, its Affiliates and/or its licensees from any violation or threatened violation of this Article 10.

10.6 Patient Information . The Parties shall abide (and cause their respective Affiliates and sublicensees to abide), and take (and cause their respective Affiliates and sublicensees to take) all reasonable and appropriate actions to ensure that all Third Parties conducting or assisting with any Clinical development activities hereunder in accordance with, and subject to the terms of this Agreement, to abide, to the extent applicable, by all Applicable Laws concerning the confidentiality or protection of patient identifiable information and other patient protected health information.

11. REPRESENTATIONS AND WARRANTIES

11.1 Representations and Warranties of the Parties .

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

(a) Corporate Power . Such Party is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation, and has full corporate power and authority to enter into this Agreement and to perform its obligations hereunder;

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

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

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

(e) Conflicts . The execution and delivery of this Agreement, and the performance by such Party of its obligations under this Agreement, including the grant of rights to the other Party pursuant to this Agreement, does not and will not: (i) conflict with or violate any provision of incorporation, bylaws or any similar instrument of such Party, as applicable, in any material way, (ii) conflict with, nor result in any violation of or default under any instrument, judgment, order, writ, decree, contract or provision to which such Party is otherwise bound, and (iii) conflict with any rights granted by such Party to any Third Party or breach any obligation that such Party has to any Third Party;

(f) Every employee of such Party has an obligation to assign his or her inventions to such Party to the extent such inventions are within the scope of his or her activities for such Party with respect to this Agreement, and all such employees and every consultant retained by such Party to provide services to such Party has an obligation to maintain the confidentiality of such Party’s confidential information;

(g) As of the Effective Date, each Party is in compliance with Section 3.4 .

(h) Debarment . Neither Party, nor any of its Affiliates, employees or agents working on its behalf, has ever been, is currently, or is the subject of a proceeding that could lead to that Party becoming, as applicable, a Debarred Entity or Individual. Such Party further covenants, represents and warrants that if, during the Term of this Agreement, it, or any of its Affiliates, employees or agents working on the other Party’s behalf, becomes or is the subject of any FDA investigation or debarment proceeding that could lead to that Party becoming, as applicable, a Debarred Entity or Individual, the Party shall immediately remove such Affiliate, employee or agent from performing services related to this Agreement and notify the other Party. In the event that the Party does not immediately remove such Affiliate, employee or agent from performing under this Agreement, the other Party shall have the right to immediately terminate this Agreement. For purposes of this provision, the following definitions shall apply:

(i) A “Debarred Individual” is an individual who has been debarred by the FDA pursuant to 21 U.S.C. §335a (a) or (b) from providing services in any capacity to a person that has an approved or pending drug product application.

(ii) A “Debarred Entity” is a corporation, partnership or association that has been debarred by the FDA pursuant to 21 U.S.C. §335a (a) or (b) from submitting or assisting in the submission of any abbreviated drug application, or a subsidiary or affiliate of a Debarred Entity.

11.2 Additional Representations and Warranties of Durect . Durect hereby further represents, warrants and covenants to Hospira that as of the Effective Date:

(a) Grant of License .

(i) Durect is the sole and exclusive owner of the entire right, title and interest in the Durect Technology in existence on the Effective Date, and has the right to grant to Hospira the rights specified herein. The Product Patent Rights and the SABER™ Patent Rights constitute all of the Patents Controlled by Durect and its Affiliates or licensed to Durect or its Affiliates as of the Effective Date that would be infringed by the Exploitation of a Licensed Product in the Field in the Territory. The Product Know-How constitutes all the Know-How Controlled by Durect and its Affiliates or licensed to Durect or its Affiliates that would be infringed by the Exploitation of a Licensed Product in the Field in the Territory. All fees required to maintain issued and pending Patent Rights have been paid to date;

(ii) prior to the Effective Date, Durect has delivered to Hospira a true, correct and complete copy of the Nycomed Agreement, with all redactions expressly noted; other than the Nycomed Agreement, Durect has not entered into any license or similar grant of rights between Durect, on the one hand, and a Third Party, on the other hand, pursuant to which Durect grants to any such Third Party a license or other rights with respect to the Product Patent Rights or Product Know-How in each case for Exploitation of a Licensed Product; furthermore, Durect has not entered into any agreement with any Third Party pursuant to which it grants a license or other rights with respect to the Durect Technology for Exploitation of a Licensed Product in the Field in the Territory;

(iii) except for Nycomed’s consent to the sublicense by Durect to Hospira of the right to use the OPTESIA™ mark under Section 3.6(b) , no provision of the Nycomed Agreement or any other agreement between Durect and any other Third Party (i) requires the consent of any Third Party (including Nycomed) in order for Durect to grant to Hospira, or Hospira, in turn to grant to its Affiliates, (ii) precludes Durect from granting to Hospira, or Hospira in turn from granting to its Affiliates or sublicensees, in each case ((i) and (ii)), a license or a sublicense under the rights granted to Hospira with respect to the Exploitation of a Licensed Product in accordance with the terms and conditions of this

Agreement, in each case in the Field in the Territory; or (iii) grants to a Third Party (including Nycomed) the right to prevent Hospira from engaging in any Clinical Trials for a Licensed Product in the Field in the Territory or to require Durect to exercise its right set forth in the first sentence of Section 5.4 ;

(b) Regulatory Filings . With respect to the Initial Licensed Product (i) to its Knowledge, each regulatory filing made by Durect was, at the time of filing, true, complete and accurate in all material respects, (ii) no serious adverse event information has come to the attention of Durect that is materially different in terms of the incidence, severity or nature of such serious adverse events than that which was filed as safety updates to the IND or disclosed or made available to Hospira, (iii) to its Knowledge, Durect has not failed to disclose or make available any material safety or toxicity information to Hospira, (iv) to its Knowledge, all written data summaries prepared by Durect that were included in the Regulatory Filings and that are based on Clinical Trials conducted or sponsored by Durect accurately summarize in all material respects the corresponding raw data underlying such summaries, and (v) to the Knowledge of Durect, all of the studies, tests and Preclinical and Clinical Trials conducted prior to, or being conducted as of, the Effective Date were conducted, or are being conducted, in accordance with Applicable Laws, and in the case of Clinical Trials, the then valid cGCP. “ cGCP ” shall mean the current standards for Clinical Trials for drugs, as set forth in the FDC Act and applicable FDA regulations (including without limitation 21 C.F.R. Parts 50, 54 and 56) and guidances promulgated thereunder, as amended from time to time;

(c) No Existing Claims . The Product Patent Rights, the SABER Patent Rights, the Product Know-How and POSIDUR trademark and, to Durect’s Knowledge, the OPTESIA trademark, are valid and in good standing, all assignments for such Patents have been appropriately obtained and recorded, all inventors have been correctly and appropriately listed, and no inventorship disputes exist. To Durect’s Knowledge, in the Territory, there is no claim or demand of any Person pertaining to or any proceeding which is pending or threatened that challenges Durect’s interest in the Product Patent Rights, the SABER Patent Rights, the Product Know-How or any of the Initial Licensed Product Trademarks or makes any adverse

claim of ownership thereof. To Durect’s Knowledge, none of the relevant Patents, or Know-How in the Product Patent Rights, the SABER Patent Rights, the Product Know-How and any Initial Licensed Product Trademarks are the subject of any pending or threatened, adverse claim, judgment, injunction, order, decree or agreement restricting its use in connection with a Licensed Product in the Field in the Territory.

(d) Future Authorizations . Durect shall obtain and maintain during the Term all authorizations, consents and approvals, governmental or otherwise, necessary for Durect to grant the rights and licenses granted by Durect under this Agreement.

(e) Non-Infringement . As of the Effective Date, (i) Durect has no Knowledge of any Third Party Patent that would be infringed or Third Party trade secret that would be misappropriated by the development, Manufacture and/or Commercialization of the Initial Licensed Product in the Field in the Territory, (ii) Durect has no Knowledge of any infringement or misappropriation by a Third Party of the Durect Technology, the Product Patent Rights and/or Product Know-How, and (iii) Durect has received no written claims relating to any such (including corresponding use of any Initial Licensed Product Trademark) infringement or misappropriation. None of the Durect trademarks Durect requests Hospira to utilize pursuant to Section 3.6(c) shall, at any time during the Term, infringe a Third Party trademark or copyright.

(f) No Litigation . As of the Effective Date, there is no pending, settled or, to its Knowledge, threatened litigation with respect to the SABER Delivery System or the Licensed Products or that may materially affect Durect’s ability to grant the rights and licenses granted by Durect under this Agreement.

(g) No Additional Material Information . The documentation disclosed or made available by Durect as requested by Hospira in connection with Hospira’s due diligence in entering into this Agreement, to Durect’s Knowledge is, in all material respects, true, complete and unredacted (except as expressly noted in such documentation).

11.3 Disclaimer of Other Warranties . EXCEPT AS SET FORTH IN THIS AGREEMENT, THE PARTIES MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES WITH RESPECT TO THE MANUFACTURE OF PRODUCT, ANY TECHNOLOGY, GOODS, SERVICES, RIGHTS OR OTHER SUBJECT MATTER OF THIS AGREEMENT OR OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF QUALITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT.

11.4 Survival of Representations . The representations and warranties set forth in this Agreement shall survive indefinitely.

12. INDEMNIFICATION; INSURANCE

12.1 Indemnification by Durect . Durect shall indemnify, defend and hold harmless Hospira and its Affiliates, and their respective directors, officers, employees and agents and permitted assigns including, its Commercial Sublicensees and Permitted Sublicensees (each a “ Hospira Related Party ”) from and against any and all liabilities, damages, losses, judgments, penalties, fines, settlements, and costs and expenses (including reasonable fees of attorneys and other professionals) (collectively, “ Damages ”) resulting from Third Party claims that arise out of or result from: (i) Durect’s breach of this Agreement, including a breach of any of Durect’s representations, warranties, covenants or agreements hereunder; (ii) negligence or willful misconduct by or on behalf of Durect or any of its Affiliates, designees, licensees, representatives or agents in the performance of its activities under this Agreement; (iii) the development, manufacture, promotion or sale of any Licensed Product outside the Territory by or on behalf of Durect, its Affiliates, any licensee and/or any sublicense; or (iv) the development, manufacture, promotion or sale of a Licensed Product by or on behalf of Durect, its Affiliates, any licensee and/or sublicensee after the termination of the license granted to Hospira under this Agreement.

12.2 Indemnification by Hospira . Hospira shall indemnify, defend and hold harmless Durect and its Affiliates and their respective directors, officers, employees and agents (each a

“ Durect Related Party ”) from and against any and all Damages resulting from Third Party claims that arise out of or result from (i) any breach by Hospira of this Agreement, including breach by Hospira of its representations, warranties, covenants or agreements hereunder; (ii) negligence or willful misconduct by or on behalf of Hospira or any of its Affiliates, designees, licensees, representatives or agents in the performance of its activities under this Agreement; or (iii) negligence or willful misconduct by or on behalf of Hospira or any of its Affiliates, designees, licensees, representatives or agents (other than Durect and any of Durect’s Affiliates, designees, licensees, representatives or agents) in the Manufacture or Commercialization of a Licensed Product by Hospira, or any of its Commercial Sublicensees, Affiliates under this Agreement.

12.3 Shared Liability . If Damages arise out of Third Party claims that are subject to indemnification by Hospira under Section 12.2 and also subject to indemnification by Durect under Section 12.1 , then the Parties shall indemnify each other to the extent of their respective liability for the Damages. In the event that the Parties cannot agree to their respective indemnity obligations hereunder, a Party shall be free at any time to seek resolution of the respective indemnity obligations of the Parties under this Section 12 pursuant to the provisions set forth in Section 14.10 .

12.4 Indemnification Procedure . Upon receipt by the Party seeking indemnification hereunder (an “ Indemnified Party ”) of notice of any action, suit, proceeding, claim, demand or assessment against such Indemnified Party which might give rise to Damages, the Indemnified Party shall give prompt written notice thereof to the Party from which indemnification is sought (the “ Indemnifying Party ”) indicating the nature of the claim and the basis therefore, provided that the failure to give such prompt notice shall not relieve the Indemnifying Party of its obligations hereunder except to the extent the Indemnifying Party or the defense of any such claim is materially prejudiced thereby. The Indemnifying Party shall have the right, at its option, to assume the defense of, at its own Cost and by its own counsel, any such claim involving the asserted liability of the Indemnified Party. If any Indemnifying Party shall undertake to compromise or defend any such asserted liability, it shall promptly notify the

Indemnified Party of its intention to do so, and the Indemnified Party shall agree to cooperate fully with the Indemnifying Party and its counsel in the compromise of, or defense against, any such asserted liability; provided, however, that the Indemnifying Party shall not, as part of any settlement or other compromise, (i) admit to liability for which the Indemnifying Party is not fully indemnifying the Indemnified Party, or agree to an injunction or other relief with respect to activities of the Indemnified Party without the written consent of the Indemnified Party or otherwise adversely affect the business of the Indemnified Party in any manner, admit to any violation of any Applicable Laws or any violation of the rights of any Person, or adversely affect the Indemnified Party’s rights under this Agreement. Notwithstanding an election by the Indemnifying Party to assume the defense of any claim as set forth above, such Indemnified Party shall have the right (at its own Cost if the Indemnifying Party has elected to assume such defense) to employ separate counsel and to participate in the defense of any claim.

12.5 LIMITATION ON DAMAGES . NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, EXCEPT IN CIRCUMSTANCES OF INTENTIONAL MISCONDUCT BY A PARTY OR ITS AFFILIATES, OR WITH RESPECT TO INDEMNIFICATION OBLIGATIONS FOR THIRD PARTY CLAIMS SET FORTH IN ARTICLE 12 AND BREACHES OF A PARTY’S CONFIDENTIALITY OBLIGATIONS HEREUNDER, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY OF ITS AFFILIATES FOR ANY SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING LOST PROFITS OR LOST REVENUES, WHETHER UNDER ANY CONTRACT, WARRANTY, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY.

12.6 Insurance . Each Party shall carry and maintain in full force and effect while this Agreement is in effect and for [* * *] years thereafter if written on a claims made or occurrence reported form, the types of insurance specified below with carriers maintaining an AM Best rating of no lower than A-VII:

(a) Commercial general liability insurance including premises operations, contractual liability, personal injury and advertising injury including fire legal liability for bodily injury and property damage with combined limits of not less than $[* * *] per occurrence and $[* * *] in the aggregate for bodily injury, including death, and property damage;

(b) Workers’ compensation insurance in the amounts required by the law of the Jurisdictions, countries or states in which such Party’s workers are located;

(d) Commercial Automobile Liability for owned, hired and non-owned motor vehicles with a combined single limit in an amount not less than $[* * *] each occurrence;

(e) Umbrella liability insurance with a policy limit of at least $[* * *] per occurrence and in the aggregate;

(f) Products liability insurance with a policy limit of at least $[* * *] per occurrence and in the aggregate; provided that Hospira shall have a policy with a limit of no less than $[* * *] upon First Commercial Sale of the Initial Licensed Product in the Territory; and

(g) Cargo/Transit insurance covering all risks of physical loss or damage to cargo handled by Supplier at a full replacement cost.

Each Party shall include the other party and their subsidiaries, affiliates, directors, officers, employees and agents as additional insureds with respect to Commercial General Liability and Products Liability but only as their interest may appear by written contract. Prior to commencement of services, and annually thereafter, each Party shall furnish to the other Party certificates of insurance evidencing the insurance coverages stated above and shall endeavor to provide at least [* * *] days written notice to the other Party prior to any cancellation, non-renewal

or material change in said coverage. In the case of cancellation, non-renewal or material change in said coverage, each Party shall promptly provide to the other Party with a new certificate of insurance evidencing that the coverage meets the requirements in Section 12.6 . Each Party agrees that its insurance shall act as primary and noncontributory from any other valid and collectible insurance maintained by the other Party. Each party may, at its option, satisfy, in whole or in part, its obligation under this Section 12.6 through its self- insurance program. If either Party chooses to self-insure, then that Party must indemnify the other Party to the same as an additional insured would be in a traditional insurance policy.

13. TERM AND TERMINATION

13.1 Term of Agreement . This Agreement shall become effective as of the Effective Date and, unless earlier terminated as provided in this Agreement, shall remain in effect until the latest to expire of the Royalty Term for the Initial Licensed Product or any Future Licensed Product in the Territory (the “ Term ”).

13.2 Termination for Material Breach . In the event of an alleged material breach of this Agreement by a Party, the other Party must give the Party that is allegedly in default notice thereof if such non-breaching party intends to terminate the Agreement pursuant to this Section 13.2 . Any dispute regarding an alleged material breach of this Agreement shall be resolved in accordance with this Section 13.2 . [* * *] If, however, a Party receives a notice of material breach that relates solely to the payment of amounts due hereunder, and (a) there is no dispute as to the amounts owed and (b) such material breach for non-payment is not cured within [* * *] days after receipt of such notice, the notifying Party shall be entitled to terminate this Agreement by giving written notice to the defaulting Party. In the event that the Neutral (as defined in Schedule 14.10 ), in accordance with the procedures set forth in Section 14.10 , has rendered a ruling that a Party has materially breached this Agreement, which ruling specified the remedies imposed on such breaching Party for such breach, and the breaching Party has failed to comply with the terms of such adverse ruling within the time period specified therein for compliance, or if such compliance cannot be fully achieved by such date, the breaching

Party has failed to commence compliance and/or has failed to use diligent efforts to achieve full compliance as soon thereafter as is reasonably possible, or in the event the material breach cannot be remedied, [* * *], then in each case the non-breaching Party shall have the following rights:

(a) if Hospira is the breaching Party that failed to cure such breach or, if applicable comply with an adverse ruling and if the basis for such breach is Hospira’s failure to abide by a material obligation under this Agreement, Durect may terminate this Agreement by delivering written notice to Hospira after the expiration of the period during which Hospira was to comply as set forth in the adverse ruling (if applicable);

(b) where Hospira is the breaching party that failed to comply with an adverse ruling and if the basis for such breach is Hospira’s failure to use Commercially Reasonable Efforts to Commercialize a Licensed Product in a particular Jurisdiction, Durect may upon written notice given after the expiration of the period to comply, terminate Hospira’s license rights solely with respect to the Licensed Product in the particular Jurisdiction; and

(c) if Durect is the breaching Party that failed to cure such breach or, if applicable, comply with an adverse ruling and if the basis for such breach is Durect’s failure to abide by a material obligation under this Agreement, Hospira may terminate this Agreement by delivering written notice to Durect after the expiration of the period during which Durect was to comply as set forth in the adverse ruling (if applicable) but, at its sole discretion, may, notwithstanding any language to the contrary, retain its license rights and other rights under this Agreement subject to the royalty payments in Section 6.2 and the milestone payments in Section 6.1 and Commercial Sublicense Fees in Section 6.3 ; provided, however, that Hospira shall be entitled to deduct from the royalty and milestone payments otherwise due to Durect [* * *]; and provided, further, that Hospira’s license rights shall also be subject to all the provisions of this Agreement directly applicable to such license rights.

13.3 Termination for Product Withdrawal or Material Adverse Event . If during the development, Manufacture, or Commercialization of a Licensed Product, such Licensed Product becomes subject to one or more Serious Adverse Drug Experiences (as defined below) or either Party receives notice from a Regulatory Authority, independent review committee, data safety monitoring board or another similar Clinical Trial or post-marketing monitoring body alleging significant concern regarding a patient safety issue or notice of withdrawal of the Licensed Product from the market in the Territory or Hospira, in good faith, has a reasonable safety concern with respect to the viability of the Licensed Product, Hospira shall have the right, upon [* * *] prior written notice to Durect setting forth the reasons therefor, to terminate this Agreement. For purposes of this Agreement, a “ Serious Adverse Drug Experience ” means any adverse drug experience occurring at any dose that results in any of the following outcomes: death, a life-threatening adverse drug experience, inpatient hospitalization or prolongation of existing hospitalization due to a Licensed Product, a persistent or significant disability/incapacity, or a congenital anomaly/birth defect. Important medical events that may not result in death, be life-threatening, or require hospitalization may be considered a Serious Adverse Drug Experience when, based upon appropriate medical judgment, they may jeopardize the patient or subject and may require medical or surgical intervention to prevent one of the outcomes listed in this definition.

13.4 Termination for Insolvency . Either Party may terminate this Agreement effective immediately upon written notice to the other Party in the event a Party files for protection under the bankruptcy laws, makes an assignment for the benefit of creditors, appoints or suffers appointment of a receiver or trustee over its property, files a petition under any bankruptcy or insolvency act or has any such petition filed against it which is not discharged within [* * *] days of the filing thereof.

13.5 Other Termination Rights . Prior to [* * *], Hospira may terminate this Agreement upon [* * *] prior written notice to Durect after [* * *]. After [* * *], Hospira may terminate the Agreement in its entirety or with respect to any or all Jurisdictions without cause upon [* * *] prior written notice to Durect, in which case the Territory shall be modified to exclude any such terminated Jurisdiction therefrom. [* * *].

13.6 Effect of Termination or Expiration .

(a) Early Termination . In the event of the early termination of the Agreement in its entirety or with respect to a Licensed Product and/or Jurisdiction, except as otherwise expressly provided in this Agreement, including in Section 13.2(c) , as applicable:

(i) the rights and obligations of the Parties hereunder with respect to the applicable Licensed Product in the applicable Territory or Jurisdiction, including any Manufacture, Commercialization and/or payment obligations not due and owing as of the termination shall immediately cease;

(ii) all licenses granted by Durect to Hospira in Section 3 and 4.4 shall terminate with respect to the applicable Licensed Product in the applicable Territory or Jurisdiction, as applicable;

(iii) Hospira shall or shall cause its Affiliates and Commercial Sublicensees, if any, to assign or transfer to Durect (to the extent not already owned by Durect) at no Cost, all Regulatory Documentation, Regulatory Approvals, Product Trademarks (and goodwill associated therewith) Controlled by Hospira or its Affiliates, as applicable, that relate to the Exploitation of the applicable Licensed Product in the Territory or Jurisdiction as applicable (collectively, the “ Product Material );

(iv) Hospira will cooperate in any reasonable manner requested by Durect to achieve a smooth transition of the Manufacture and Commercialization of the applicable Licensed Product to Durect or its licensees in the particular terminated Jurisdiction or the Territory, as applicable; without limiting the foregoing, if Durect so elects, Hospira shall, at no Cost to Durect, facilitate and cause Hospira Worldwide to amend the Supply Agreement such that the Supply Agreement is restored to its status quo ante before any amendments due to this Agreement;

(v) if Hospira has inventory of the applicable Licensed Product for Commercialization in the Territory or a particular terminated Jurisdiction, as applicable, at Durect’s sole discretion: [* * *];

(vi) in the event of the termination of the Agreement by Hospira pursuant to Sections 13.2(c) , and Hospira elects to retain the license to Exploit a Licensed Product, Durect will cooperate in any reasonable manner requested by Hospira to achieve a smooth transition of the development of the applicable Licensed Product to Hospira or its Affiliates or sublicensees; and

(vii) each Party, at the request of the other Party, shall return or destroy, and thereafter provide to the other Party written certification evidencing such destruction, all data, files, records and other materials in its possession or control containing or comprising the other Party’s Confidential Information.

(b) Expiration .

(i) Upon the expiration of the Royalty Term in a Jurisdiction with respect to a Licensed Product, all licenses with respect to such Licensed Product in such Jurisdiction, including the license rights granted under Section 3.1 and Section 4.4 herein, shall be fully paid-up, exclusive, royalty free, irrevocable and perpetual.

(ii) Upon the expiration of the Term of this Agreement, all licenses with respect to all Licensed Products in all Jurisdictions in the Territory, including the license rights granted under Section 3.1 and Section 4.4 herein, shall be fully paid-up, exclusive, royalty free, irrevocable and perpetual.

(c) Upon Early Termination or Expiration . In addition, upon expiration or termination of this Agreement, in whole or in part, for any reason, (i) except as provided in Section 13.6 or 13.7 , all rights and obligations of the Parties hereunder shall terminate, and (ii) nothing herein shall be construed to release either Party from any accrued rights or obligations that matured prior to the effective date of such expiration or termination, nor preclude either Party from pursuing any right or remedy it may have hereunder or at law or in equity with respect to any breach of this Agreement.

13.7 Surviving Provisions . Expiration or any termination of this Agreement shall not release a party from the obligations to make any payments that were due or had accrued prior to the effective date of such termination (including non-cancelable obligations or commitments made in good faith prior to notice of termination), and the following Sections of this Agreement shall survive any expiration or termination of this Agreement for any reason: Sections 1 , 3.3 , 4.4 (first sentence only), 6.2 (last sentence only), 7.4 , 7.5 , 7.6 , 9.1 , 9.2(b) , (c) and (d) , 9.6 (unless the Agreement has been terminated by Durect pursuant to Section 13.2 ), 9.7 (unless the Agreement has been terminated by Durect pursuant to Section 13.2 ), 10 , 11 , 12 , 13.6 , 13.7 and 14 .

14. MISCELLANEOUS PROVISIONS

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

14.2 Assignment. Except as otherwise expressly provided in this Agreement, neither Party shall assign this Agreement or its rights or obligations hereunder without the express written consent of the other Party hereto, except that either Party may assign or transfer this Agreement and its rights or obligations hereunder without the consent of the other Party to (i) an Affiliate, (ii) any assignee of all or substantially all of its business or assets relating to the subject matter of this Agreement, or (iii) its successor pursuant to an operation of law. An assignment or transfer by a Party pursuant to this Section 14.2 shall be binding on its successors or assigns. Except as otherwise expressly provided in this Agreement, no such assignment or transfer shall be valid or effective unless done in accordance with this Section 14.2 .

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

In the case of Durect, to:

Durect Corporation

2 Results Way

Cupertino, CA 95014

Attention: General Counsel

Facsimile No:(408) 777-3577

Telephone No:(408) 777-1417

In the case of Hospira, to:

Hospira Inc.

275 North Field Drive

Lake Forest, Illinois 60045

Attn: General Counsel

Fax: 224-212-2086

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

14.4 Use of Name . Except as otherwise provided herein, Durect, on the one hand, and Hospira on the other hand, shall not have any right, express or implied, to use in any manner the name or other designation of the other or any other trade name, trademark or logos of the other for any purpose, unless consented to in writing by the other Party.

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

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

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

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

14.9 Governing Law . This Agreement shall be governed by and interpreted in accordance with the laws of the State of [* * *] without regard to conflicts of law principles.

14.10 Alternative Dispute Resolution . Unless expressly provided herein, any dispute, difference or question arising between the Parties in connection with this Agreement, the construction thereof, or the rights, duties or liabilities of either Party shall be resolved in accordance with the alternative dispute resolution (“ ADR ”) procedure set forth in Schedule 14.10 .

14.11 Compliance with Laws . Each Party shall review in good faith and cooperate in taking actions to ensure compliance of this Agreement and the Parties’ activities hereunder with all Applicable Laws. Each Party shall provide the other Party such reasonable assistance as may be required for the Party requesting such assistance to comply with all Applicable Laws necessary to permit the Parties to perform hereunder and to exercise their respective rights hereunder.

14.12 Force Majeure . Neither Party shall be held liable or responsible to the other Party nor be deemed to be in default under, or in breach of any provision of, this Agreement for failure or delay in fulfilling or performing any obligation of this Agreement to the extent that such failure or delay is due to Force Majeure, and without the willful wrongdoing, recklessness or gross negligence of the Party so failing or delaying. For purposes of this Agreement, “ Force Majeure ” is defined as causes beyond the reasonable control of the Party, including acts of God; war; terrorism; civil commotion; fire, flood, earthquake or explosion; strike, riot or epidemic. In the event that the ability of Durect or Hospira to perform its obligations under this Agreement, as the case may be, shall be so affected, the affected Party shall immediately notify the other Party of such inability and of the period for which such inability is expected to continue. The Party giving such notice shall thereupon be excused from such of its obligations under this Agreement for the duration of such Force Majeure and for so long as it is unable to perform its obligations hereunder. To the extent possible, each Party shall use Commercially Reasonable Efforts to minimize the duration of any Force Majeure.

14.13 Entire Agreement . This Agreement including schedules and exhibits thereto, including the Development Plan together with all other future written agreements entered into by the Parties and specifically made a part of this Agreement, constitute the entire agreement between the Parties with respect to the subject matter of this Agreement and supersede all prior agreements and understandings, both oral and written, between the Parties with respect to the subject matter of this Agreement.

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

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

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

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

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

14.19 Information for Financial Reporting . In addition to any reports provided by the Parties hereunder, including the reports provided by Hospira pursuant to Section 7.1 , each

Party agrees to use reasonable efforts to provide the other party such financial information, including Development Costs and/or royalties in each calendar month within [* * *] weeks of the end of each calendar month to allow the other Party to accrue the proper expenses and revenues as required by GAAP and required for financial reporting under Applicable Laws; provided however, for clarity, this Section 14.19 shall not be construed to require a Party to disclose any information that is not otherwise required to be disclosed to the other Party under the terms of this Agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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


Durect Corporation

By:		/s/ James E. Brown
Name:		James E. Brown
Title:		President and Chief Executive Officer

Hospira, Inc.

By:		/s/ Brian J. Smith
Name:		Brian J. Smith
Title:		Sr. Vice President

Schedule 1.19- Development Costs

Development Costs are equal to the sum of the following, in each case reasonably incurred by a Party in the performance of the Development Plan: (i) labor cost of such Party’s research and development personnel charged as set forth below, (ii) direct outside expenditures, and (iii) capital asset expenditures.


[* * *]

[* * *]		[* * *]

[* * *]		[* * *]

[* * *]		[* * *]

[* * *]		[* * *]

[* * *]		[* * *]

[* * *]

Schedule 1.35- Initial Licensed Product Description

[* * *]

Schedule 1.55 - Product Patents Rights

[* * *]


*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*

[* * *]	[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]	[* * *]

Schedule 1.63—SABER™ Patents Rights

[* * *]


*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*

[* * *]	[* * *]	[* * *]	[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]	[* * *]	[* * *]	[* * *]

[* * *]


*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*

[* * *]	[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]	[* * *]	[* * *]	[* * *]

[* * *]


*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*

[* * *]	[* * *]	[* * *]	[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]	[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]	[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]	[* * *]

Schedule 2.1- Initial Members of JEC

[* * *]

Schedule 2.2- Initial Members of JSC

[* * *]

Schedule 8.1

[* * *]


*[ * ]*	*[ * ]*		*[ * ]*	*[ * ]*
*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*	*[ * ]*
[* * *]	[* * *]	[* * *]	[* * *]	[* * *]
[* * *]	[* * *]	[* * *]	[* * *]	[* * *]

[* * *]

Schedule 8.3

[* * *] Supply Agreement

Schedule 14.10 – Alternative Dispute Resolution

[* * *]

Exhibit 10.60

Confidential treatment has been sought for portions of this Agreement. The copy filed herewith omits the sinformation subject to the confidential treatment request. Omissions are designated as * * *. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

[* * *] SUPPLY AGREEMENT

This [* * *] Supply Agreement (“ Agreement ”) is effective as of June 1, 2010 (the “ Effective Date ”) by and between Durect Corporation, a corporation established under the laws of Delaware, and having its principal business offices at 2 Results Way, Cupertino, California 95014, United States of America (“ Durect ”) and Hospira, Inc, a corporation having its principal business offices at 275 N Field Drive, Lake Forest, IL 60045 (“ Hospira ”).

WITNESSETH

A. Whereas, Durect and Hospira are parties to the Development and License Agreement dated June 1, 2010 (the “ License Agreement ”), wherein Durect has granted to Hospira under the terms set forth in the License Agreement rights to Exploit Licensed Products in the Territory;

B. Whereas, the License Agreement contemplates that Durect will supply to Hospira the excipient [* * *] (“ [* * *] ”) for Hospira’s use in the Manufacture of: (i) Clinical supplies of Future Licensed Products and Line Extensions of the Initial Licensed Product and (ii) Licensed Products for Commercialization, in each case in the Territory (the “ Specified Uses ”).

C. Whereas, the Parties now desire to specify the terms and conditions applicable to such supply.

NOW, THEREFORE, in consideration of the mutual premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, Durect and Hospira agree as follows.

This Agreement sets forth the rights and obligations of Durect and Hospira in relation to the supply by Durect to Hospira and the purchase by Hospira from Durect of [* * *] for the Specified Uses by Hospira, any of its Affiliates or sublicensees involved in the Exploitation of Licensed Products in the Territory, and the Parties shall refer only to this [* * *] Supply Agreement with respect to such. This Agreement does not amend, modify or supersede the Supply Agreement under which Durect supplies [* * *] to Hospira Worldwide in order for Hospira Worldwide to manufacture the Initial Licensed Product for Durect.

ARTICLE I. DEFINITIONS

Except as otherwise expressly defined in this Article I and elsewhere in this Agreement, all capitalized terms shall have the meanings ascribed to such terms in the License Agreement. As used herein, the following capitalized terms have the meanings as defined below:

Act - shall mean the U.S. Food, Drug & Cosmetic Act and the regulations promulgated thereunder.

Batch - a specific quantity of Finished [* * *] that is intended to have uniform character and quality within specified limits and is produced according to a single manufacturing run during the same cycle of production.

Calendar Quarter - the period of three consecutive calendar months ending on March 31, June 30, September 30, or December 31, as the case may be.

Certificate Of Analysis - a document which is signed and dated by a duly authorized representative of Durect certifying that the Finished [* * *] conforms with the Specifications.

Contract Year - the 12-month period beginning on the Effective Date and thereafter on each anniversary of the Effective Date.

DMF - the Type IV drug master file relating to manufacture of Finished [* * *] from [* * *] Starter Material.

[* * *] .

Failure to Supply - Durect supplies less than [* * *] of the quantity specified in the applicable purchase order within [* * *].

Finished [* * *] - Parenteral grade [* * *] which meets the Specifications.

IPEC - International Pharmaceutical Excipients Council.

IPEC Guidelines - the Joint IPEC-PQG Good Manufacturing Practices Guide For Pharmaceutical Excipients, current edition.

Manufacturing Cost - [* * *].

Quality Agreement - the Quality Agreement to be executed by the Parties in accordance with Section 3.3 and to be attached hereto as Exhibit A to this Agreement.

[* * *] Starter Material - pharmaceutical grade [* * *] qualified for oral use as supplied by [* * *] or other supplier and which is further processed to produce Finished [* * *].

Specifications - specifications for the Finished [* * *] attached hereto as Exhibit B .

Shipment - each individual shipment of Finished [* * *] received by Hospira from Durect.

Section 1.1 Interpretation

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

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

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

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

(k) Any requirements of notice or notification by one Party to another shall be construed to mean written notice in accordance with Section 10.3 ; and

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

ARTICLE II. SUPPLY

Section 2.1 Supply and Purchase . During the Term, subject to the terms and conditions hereof, Durect shall manufacture and supply to Hospira (and, its Affiliates and sublicensees involved in the Exploitation of Products in the Territory, if any) at least [* * *] of the binding portion of any then current Forecast, and Hospira (and its Affiliates and sublicensees involved in the Exploitation of Licensed Products in the Territory, if any) shall exclusively purchase from Durect, Hospira’s requirements (and the requirements, if any, of its Affiliates and sublicensees involved in the Exploitation of Licensed Products in the Territory), of [* * *] for the Specified Uses. [* * *] shall be supplied hereunder in the form of Finished [* * *].

Section 2.2 Price. The purchase price for Finished [* * *] to be purchased hereunder is Durect’s Manufacturing Cost therefor ($[* * *] as of the Effective Date). [* * *]

Section 2.3 Records Retention . Durect and its Affiliates shall keep complete and accurate records in accordance with GAAP and pertaining to the Manufacturing Cost to permit the determination of the Manufacturing Cost for a minimum period of [* * *] calendar years in sufficient detail to permit Hospira to confirm the accuracy thereof.

Section 2.4 Audit Request . During the Term of this Agreement and for a period of [* * *] year thereafter, at the request of Hospira (the “ Auditing Party ”), Durect and its Affiliates (the “ Audited Party ”) shall permit an independent, certified public accountant appointed by the Auditing Party and reasonably acceptable to the Audited Party, at reasonable times and upon reasonable advance notice of not less than [* * *] calendar days, but not more often than [* * *] in each calendar year, to examine such records for the [* * *] years prior to the notice as may be necessary to determine the correctness of Durect’s determination of the Manufacturing Cost. Results of any such examination shall be made available concurrently to all Parties except that said independent, certified public accountant shall verify to the Auditing Party such amounts and shall disclose no other information revealed in such audit. The examination shall also include disclosure of the methodology and calculations used to determine the results. The said independent, certified public accountant shall execute a written confidentiality agreement with the Audited Party.

Section 2.5 Cost of Audit . The Auditing Party shall bear the full cost of the performance of any audit requested by the Auditing Party except as hereinafter set forth. If, as a result of any inspection of the books and records of the Audited Party, it is shown that the Manufacturing Costs charged by Durect to Hospira was more than the amount that should have been charged, then Durect shall make all payments required to be made to eliminate any discrepancy revealed by said inspection within [* * *] calendar days from receipt of the results of said examination, including interest at the rate of [* * *] percent ([* * *]%) per month (or the maximum interest allowable by applicable laws, whichever is less) for the amount of the discrepancy. Furthermore, if there was an overcharge of more than [* * *] percent ([* * *]%) of the amount of that was owed, the Audited Party shall also reimburse the Auditing Party for reasonable costs incurred by the Auditing Party in respect of such audit.

Section 2.6 Purchase Orders .

(a) On a [* * *] basis, Hospira will provide a rolling [* * *] year forecast, of which the [* * *] months will be firm (“ Forecast ”). Durect will notify Hospira within [* * *] business days of Forecast receipt if it in good faith has reason to believe it cannot meet the Forecast. Durect’s providing of such notification shall not be interpreted in any manner as relieving Durect of its obligations under this Agreement, nor shall it prevent Hospira from pursuing any and all rights and remedies Hospira may have based on Durect’s failure to be able to deliver Finished [* * *] in accordance with the terms of this Agreement. Hospira shall place purchase orders with Durect at least [* * *] days in advance of the delivery date specified on the purchase order. Durect will confirm each purchase order and its delivery date within [* * *] business days from the date of receipt of such purchase order. Hospira shall be obligated to purchase all quantities of Finished [* * *] so ordered and Durect shall accept all such purchase orders it receives in accordance with this Section. In ordering and delivering, the Parties shall use their standard forms, but nothing in those forms shall be construed to modify or amend the terms of this Agreement. Each purchase order will be deemed satisfied upon delivery of a quantity which is [* * *] more or less of the quantity ordered, provided that Hospira shall only be required to pay for the amount of Finished [* * *] actually delivered. If Durect is unable to deliver the Finished [* * *] on the date specified by Hospira, Durect shall notify Hospira as soon as possible, but in any event within [* * *] days of receipt of the purchase order. Durect’s providing of such notification shall not be interpreted in any manner as relieving Durect of its obligations under this Agreement, nor shall it prevent Hospira from pursuing any and all rights and remedies Hospira may have based on Durect’s failure to deliver the Finished [* * *] in accordance with the terms of this Agreement.

(b) In the event that Hospira requests Durect to supply Finished [* * *] in less than [* * *] days, Durect shall use reasonable efforts to do so, provided that if Durect provides notice to Hospira of additional charges in meeting Hospira’s request beyond those normally incurred in supplying Finished [* * *], including but not limited to, expedited analytical charges or shipping charges, then Hospira shall either (i) agree to pay Durect for any such additional charges, or (ii) withdraw its request for the expedited delivery. In the event that a purchase order for any month exceeds the latest Forecast for such month, Durect will use its reasonable efforts, but shall be under no obligation, to supply Finished [* * *] in excess of [* * *] of the Forecast.

(c) With respect to purchase orders for Finished [* * *], Durect agrees that such purchase orders, and the content thereof, shall be deemed confidential and shall not be disclosed to any third party.

Section 2.7 Payment and Delivery .

(a) Terms of Payment . Payment terms shall be net [* * *] days from the receipt of the invoice for the Shipment. Invoices shall be issued no earlier than the date on which Finished [* * *] is shipped. Payment must indicate the invoice number(s) being paid. Unless otherwise agreed, all payments will be in U.S. dollars. Hospira shall be responsible for payment of any and all sales, use, excise, or similar taxes and custom duties or tariffs, except for taxes based on Durect’s income.

(b) Delivery . Durect shall manufacture the Finished [* * *] at Durect’s factory in Vacaville, CA or other Durect site permitted hereunder . Delivery shall be [* * *]. Title to the Shipment shall transfer upon placing the Shipment onto the carrier’s vehicle at Durect’s location. Durect will provide to the carrier instructions regarding the transport conditions required in order to not adversely affect the Finished [* * *] (including ensuring that the Shipment is temperature monitored and the Finished [* * *] is kept at an appropriate temperature throughout shipment). Durect will provide a Certificate of Analysis for each Batch of Finished [* * *] shipped to Hospira. The direct cost of transportation from Durect’s facility shall be paid by [* * *]. Any change in the shipping address must be made in writing to Durect. Such notice must be received by Durect in a timely manner. Hospira shall be responsible for any additional reasonable charges incurred for split shipments or special packaging requirements other than those set forth in the Specifications.

Section 2.8 Increasing Capacity . With respect to [* * *] required for the Initial Licensed Product, Durect shall, at [* * *], implement a second manufacturing site or increase capacity at its existing manufacturing site, if required in order to meet increased demand. The allocation of the cost for any secondary manufacturing sites needed or increased capacity needed, in each case resulting from demand due to the Manufacture of Future Licensed Products for Commercialization[* * *].

Section 2.9 Safety Stock. Within [* * *] days of Durect’s receipt of the first purchase order from Hospira, Durect shall establish and maintain a safety stock of Finished [* * *] available to Hospira. Durect shall maintain a safety stock of Finished [* * *] at all times in an amount not less than [* * *] of the amount of Finished [* * *] purchased by Hospira during the previous [* * *]. Durect shall keep Hospira reasonably informed of the level of inventory identified as the safety stock and shall notify Hospira in the event any deliveries to Hospira deplete the current safety stock levels.

Section 2.10 Secondary Supply of [* * *] Starter Material . After FDA Regulatory Approval of the Initial Licensed Product, at such time deemed commercially reasonable by Durect, Durect shall use commercially reasonable efforts to establish and maintain a secondary supplier of the [* * *] Starter Material and a secondary approved manufacturing site for the Finished [* * *]. Durect shall provide Hospira with detailed updates and information regarding the sourcing and identification of potential [* * *] Starter Material suppliers and Finished [* * *] manufacturing sites. In the event that Hospira desires to have established a secondary supplier of [* * *] Starter Material and/or secondary manufacturing site for Finished [* * *] prior to such time as deemed commercially reasonable by Durect, then Hospira shall have the option to either [* * *].

Section 2.11 Failure to Supply .

(a) In the event of a Failure to Supply Finished [* * *] for any reason (including Force Majeure), Hospira shall be entitled, in its sole discretion, to manufacture, have manufactured, or purchase from a Third Party the Finished [* * *] to Exploit Licensed Products so long as Hospira retains the right to Exploit Licensed Products under the License Agreement.

(b) In such event, if Hospira so elects, for the sole purpose of Exploiting Licensed Products so long as Hospira retains the right to Exploit Licensed Products under the License Agreement:

[* * *]

ARTICLE III. REGULATORY, ACCESS AND OTHER MATTERS

Section 3.1 Specifications . The Specifications are set forth in Exhibit B .

(a) Hospira shall provide Durect with written notice as soon as reasonably practicable of any instructions or requirements of a Regulatory Authority that may require a change in the Specifications or manufacturing process or of any changes in Specifications desired by Hospira. Durect shall promptly implement any changes relating to the Finished [* * *] Specifications or manufacturing processes hereunder that are required by Applicable Law in the Territory, or by medical concerns related to the toxicity, safety and/or efficacy of the Finished [* * *]s. Durect shall not unreasonably withhold or delay consent to any changes in the Specifications or manufacturing processes requested by Hospira that are not required by laws or other regulatory requirements, or by medical concerns related to the toxicity, safety and/or efficacy of the Finished [* * *], provided that Hospira will reimburse Durect for any costs incurred by Durect in connection with such changes. No such change will be valid unless agreed to by the Parties in a written amendment to the Quality Agreement. The Parties will mutually agree on a manufacturing schedule for the Finished [* * *] to be manufactured and supplied in accordance with the revised Specifications.

(b) Unless the changes are requested by Hospira, Durect shall notify Hospira not less than [* * *] days in advance of any intended changes in the Specifications or manufacturing processes. If such advance notice is not possible due to the instructions or requirements of a Regulatory Authority, Durect shall provide Hospira such notice as soon as is reasonably practicable. No changes to the Finished [* * *] Specifications or manufacturing processes that may impact the Licensed Products may be submitted to Regulatory Authorities in the Territory without the approval of both Parties. The Parties will mutually agree on a manufacturing schedule for [* * *] to be manufactured and supplied in accordance with the revised Specifications as amended in the Quality Agreement. In addition, and not by way of limitation, Durect shall notify Hospira and, if necessary, Regulatory Authorities, of significant changes (based on The IPEC-Americas Significant Change Guide for Bulk Pharmaceutical Excipients) from established production and process control procedures that may affect Finished [* * *] quality.

Section 3.2 Durect Standards . Durect shall manufacture the Finished [* * *] in compliance with the Specifications, the applicable IPEC Guidelines, and Applicable Laws in the Territory. Durect shall provide Hospira with a Certificate of Analysis with each Shipment of Finished [* * *] delivered to Hospira.

Section 3.3 Quality Assurance. Durect shall perform quality testing in order to assure that the Finished [* * *] complies with the Specifications, and shall retain samples of the Finished [* * *] produced and records of the tests made on each Batch of Finished [* * *]. In addition, unless agreed in writing, no Finished [* * *] shall be shipped until such Finished [* * *] has been released by Durect’s Quality Assurance in accordance with the Specifications. Upon successful qualification of Durect as a Hospira supplier, the Parties shall negotiate a Quality Agreement, which document shall outline the Durect and Hospira operational responsibilities in regards to the Finished [* * *] which agreement may be modified between the Quality Assurance groups of the Parties without modifying this Agreement. [* * *]

Section 3.4 Stability Testing . Durect shall, from time to time, in accordance with Durect’s standard operating procedures (“SOPs”), perform stability testing using validated procedures for quality attributes as associated with the Specifications. Durect shall perform the work detailed in all SOPs or protocols under the IPEC Guidelines, including laboratory testing, Quality Assurance review of data, and preparation of a final report. In the event that stability test results fail to meet the Specifications or acceptance criteria as defined in the SOPs, protocols, or release requirements, Durect will undertake any resulting investigations and other action required as per the IPEC Guidelines and Durect’s internal SOPs or protocols.

Section 3.5 Validation Requirements . Durect shall maintain the current and all future validations for all equipment and procedures which are used in the manufacture and testing of the Finished [* * *] in accordance with the IPEC Guidelines and Applicable Law in the Territory.

Section 3.6 Regulatory Inspections . Durect shall allow any and all inspections deemed necessary by Regulatory Authorities, and shall promptly correct all deficiencies such that Durect is able to timely manufacture and supply Finished [* * *] for Hospira.

Section 3.7 Deviations & Investigations . Durect shall notify Hospira in writing of all process deviations, manufacturing failures, errors/accidents that result in confirmed Out-of-Specification results pertaining to Finished [* * *] produced for Hospira, in each case within [* * *] working days of Durect’s knowledge of such. Such notification shall be sent to Hospira as per the Quality Agreement.

Section 3.8 Release Testing . Durect shall perform or have performed Batch release testing using validated procedures for the Finished [* * *]. In the event that the results fail to meet the Specifications or acceptance criteria as defined in the SOPs, Durect will undertake any resulting investigations and other actions required as per the IPEC Guidelines and Durect’s internal SOPs.

Section 3.9 Master Files . Durect will maintain a current DMF with the FDA and other Regulatory Authorities in the Territory as requested for the Finished [* * *] purchased by Hospira hereunder. Durect will notify Hospira of any pertinent change in the DMF. Durect shall grant permission for Hospira to reference its DMF for the Finished [* * *] currently on file or which may in the future be filed with the FDA or applicable Regulatory Authorities responsible for drug regulations in the Territory, as amended or supplemented from time to time, for Hospira’s use for obtaining and maintaining Regulatory Approval for the Licensed

Products in the Territory. In addition, Durect will cause [* * *] and any other Third Party supplier of [* * *] Starter Material to grant permission for Hospira to reference any DMF with respect to [* * *] Starter Material for Hospira’s use for obtaining and maintaining Regulatory Approval for the Licensed Products in the Territory. In the event Hospira is seeking to obtain regulatory approval in countries where the DMF is not accepted, Hospira shall so notify Durect and the Parties shall negotiate in good faith with respect to the preparation and submission of site master files for such countries, the cost of which shall be borne equally by Hospira and Durect in accordance with Sections 4.5 and 4.6 of the License Agreement.

Section 3.10 Regulatory Standards . Durect will be responsible for ensuring that its facilities, equipment and systems meet the IPEC Guidelines and Applicable Law in the Territory.

ARTICLE IV. WARRANTY AND REJECTION

Section 4.1 Warranties.

(a) Durect warrants that, at the time of delivery of the Finished [* * *]:

(i)

Finished [* * *] delivered pursuant to this Agreement shall comply with the Specifications and is produced in accordance with IPEC Guidelines and Applicable Laws in the Territory.

(ii)

not be adulterated or misbranded within the meaning of the any Applicable Law in the Territory or be an article which may not, under provisions of any Applicable Law, be sold in the Territory.

(iii)

at the time of delivery have at least [* * *] of shelf life.

(iv)

at the time of delivery, title to the Finished [* * *] will pass to Hospira free and clear of all liens, claims, charges and encumbrances and that.

(b) Reference Standard Warranty . Durect further warrants that any reference standard material delivered to Hospira pursuant to this Agreement shall meet the specifications outlined in the applicable Certificate of Analysis provided pursuant to Sections 2.7 and 3.2 .

(c) Non-Infringement Warranty . In addition to, and not in lieu of, any other warranties under the License Agreement, Durect warrants that, to its Knowledge, the Finished [* * *] and Durect’s processes to manufacture the Finished [* * *] do not infringe any patent, copyright, trademark or other Intellectual Property right of any Third Parties.

[* * *]

(d) Power and Authority . Each Party represents and warrants that:

(i)

It is duly incorporated, validly existing and in good standing under the laws of jurisdiction in which it is incorporated.

(ii)

It has the corporate power and authority to enter into this Agreement and perform its obligations hereunder and that the execution, delivery and performance of this Agreement and the performance of its obligations hereunder have been duly authorized and approved by all necessary action and no other action is necessary to authorize the execution, delivery and performance of this Agreement.

(iii)

There are no suits, claims, or proceedings pending, or to its best knowledge and belief, after due inquiry, threatened against it or any of its Affiliates in any court or by or before any governmental body or agency which would affect its ability to perform its obligations under this Agreement.

(e) No Debarred Service Providers . Durect represents and warrants that neither Durect, nor any of its Affiliates, employees or agents working on Hospira’s behalf, has ever been, is currently, or is the subject of a proceeding that could lead to that party becoming, as applicable, a Debarred Entity or Individual. Durect further covenants, represents and warrants that if, during the Term of this Agreement, it, or any of its Affiliates, employees or agents working on Hospira’s behalf, becomes or is the subject of any FDA investigation or debarment proceeding that could lead to that party becoming, as applicable, a Debarred Entity or Individual, Durect shall immediately remove such Affiliate, employee or agent from performing services related to this Agreement and notify Hospira. In the event that Durect does not immediately remove such Affiliate, employee or agent from performing under this Agreement, Hospira shall have the right to immediately terminate this Agreement. This provision shall survive termination or expiration of this Agreement. For purposes of this provision, the following definitions shall apply:

(1) A “Debarred Individual” is an individual who has been debarred by the FDA pursuant to 21 U.S.C. §335a (a) or (b) from providing services in any capacity to a person that has an approved or pending drug product application.

(2) A “Debarred Entity” is a corporation, partnership or association that has been debarred by the FDA pursuant to 21 U.S.C. §335a (a) or (b) from submitting or assisting in the submission of any abbreviated drug application, or a subsidiary or Affiliate of a Debarred Entity.

(f) DURECT MAKES NO OTHER WARRANTIES OF ANY OTHER KIND, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF THE QUALITY, MERCHANTABILITY, FITNESS FOR ANY PURPOSE OR NON-INFRINGEMENT, AND DURECT EXPRESSLY DISCLAIMS ANY SUCH OTHER WARRANTIES WITH RESPECT TO THE PRODUCTS, EITHER EXPRESSED OR IMPLIED.

Section 4.2 Testing . Hospira shall have [* * *] days after the receipt (at Hospira’s facility) of any Shipment of Finished [* * *] to subject the Finished [* * *] to quality control testing to determine conformity to the Specifications. Durect shall supply Hospira with the necessary test methods to perform such tests at its own facility. If testing of such samples shows a failure to meet Specifications, Hospira may, at Durect’s expense return the entire Shipment, or any part thereof, to Durect. If Hospira does not notify Durect of the non-conformity of Finished [* * *] within such [* * *] day period, Finished [* * *] shall be deemed to meet the Specifications, except as to latent defects that could not reasonably have been detected by routine visual inspection on delivery, in which case Hospira may also return any Finished Product to Durect within [* * *] business days after discovery of such latent defect. Durect shall at its option, within [* * *] days of Hospira’s return, either replace any such returned Finished [* * *] with Finished [* * *] meeting Specifications or provide Hospira with full credit. Should there be a discrepancy between Hospira’s test results and the results of testing performed by Durect, such discrepancy shall be finally resolved by testing performed by a third party mutually agreed to by Hospira and Durect. The costs of such testing shall be borne by the Party against whom the discrepancy is resolved. Nothing contained in this S ection 4.2 shall relieve Durect of its obligations to deliver Finished [* * *] in accordance with Section 4.1 above.

Section 4.3 Retention of Records . Durect shall retain Batch production records and release testing data for Finished [* * *] for a period of [* * *] years beyond the retest/expiration date of the Finished [* * *] provided. At the end of such [* * *]year period, Durect will notify Hospira in writing and Hospira will have a period of [* * *] days in which to notify Durect that it is desirous of having the records delivered to Hospira’s facility and in that event, Durect shall cause all such records to be delivered to the location designated by Hospira at Hospira’s expense.

Section 4.4 Retention of Samples . Durect shall retain sufficient samples of each Batch of Finished [* * *] to repeat quality control testing [* * *] times.

ARTICLE V. AUDITS

Section 5.1 Audits .

(a) Upon reasonable request by Hospira, Durect will arrange for Hospira to perform, at Hospira’s expense, periodic audits conducted during normal working hours of the processing facilities and procedures utilized in the manufacture of Finished [* * *] to ensure continued compliance with this Agreement and Applicable Law in the Territory. Such audits will include, without limitation, (i) inspections relating to the manufacture, testing, handling, storage, packaging and labeling of Finished [* * *]; and (ii) inspections of all documentation related to the Finished [* * *] including, but not limited to: Batch records, validation documentation, analytical results on raw materials, components, intermediates and final products, deviation reports, in-process testing and reports, trend analysis reports, inspection reports generated by Regulatory Authorities and responses to reports and inspections by Regulatory Authorities. Such periodic audits will be limited to [* * *], and shall be conducted according to IPEC Guidelines. The results of any such audit will be issued in writing to Durect, discussed with Durect, and corrective action agreed upon by the Parties.

(b) In addition to the foregoing, with at least [* * *] business days advance notice, Hospira shall be permitted to investigate/audit, during normal working hours, Durect facilities and records with respect to Finished [* * *] in the event of any failure of any Hospira Batch to meet Specifications, any major deviation from Specifications, Batch failure(s) or any regulatory actions, violations or complaints relevant to this Agreement.

ARTICLE VI. RESPONSIBILITIES OF HOSPIRA

Section 6.1 Hospira shall be responsible for compliance with Applicable Laws relating to the Manufacture and Commercialization of the Licensed Products which incorporate or include the Finished [* * *] in any manner. Except as otherwise provided in the License Agreement, Hospira shall, if legally required, file appropriate regulatory documents for all Licensed Products which include the Finished [* * *] with the FDA and other applicable Regulatory Authorities and shall provide copies of those portions of such documents referencing the Finished [* * *] to Durect, but Hospira shall have the right to redact any portion containing Confidential Information of Hospira.

Section 6.2 Sole Use. Hospira will use Finished [* * *] supplied by Durect solely to Exploit Licensed Products.

ARTICLE VII. INDEMNIFICATION

Section 7.1 Indemnification by Durect . Durect shall indemnify, defend and hold harmless the Hospira Related Parties from and against any and all Damages resulting from Third Party claims that arise out of or result from: (i) Durect’s breach of this Agreement, including a breach of any of Durect’s representations, warranties, covenants or agreements hereunder; and (ii) the negligence or willful misconduct by or on behalf of Durect or any of its Affiliates, designees, licensees, representatives or agents in the performance of its activities under this Agreement.

Section 7.2 Indemnification by Hospira . Hospira shall indemnify, defend and hold harmless the Durect Related Parties from and against any and all Damages resulting from Third Party claims that arise out of or result from (i) any breach by Hospira of this Agreement, including breach by Hospira of its representations, warranties, covenants or agreements hereunder; (ii) negligence or willful misconduct by or on behalf of Hospira or any of its Affiliates, designees, licensees, representatives or agents in the performance of its activities under this Agreement; or (iii) negligence or willful misconduct by or on behalf of Hospira or any of its Affiliates, designees, licensees, representatives or agents in the holding, storage, testing and use of the Finished [* * *] by Hospira, or any of its Affiliates and sublicensees (if applicable) under this Agreement.

Section 7.3 Indemnification Procedure . Upon receipt by the Party seeking indemnification hereunder (an “ Indemnified Party ”) of notice of any action, suit, proceeding, claim, demand or assessment against such Indemnified Party which might give rise to Damages, the Indemnified Party shall give prompt written notice thereof to the Party from which indemnification is sought (the “ Indemnifying Party ”) indicating the nature of the claim and the basis therefore, provided that the failure to give such prompt notice shall not relieve the Indemnifying Party of its obligations hereunder except to the extent the Indemnifying Party or the defense of any such claim is materially prejudiced thereby. The Indemnifying Party shall have the right, at its option, to assume the defense of, at its own Cost and by its own counsel, any such claim involving the asserted liability of the Indemnified Party. If any Indemnifying Party shall undertake to compromise or defend any such asserted liability, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party shall agree to cooperate fully with the Indemnifying Party and its counsel in the compromise of, or defense against, any such asserted liability; provided, however, that the Indemnifying Party shall not, as part of any settlement or other compromise, (i) admit to liability for which the Indemnifying Party is not fully indemnifying the Indemnified Party, or agree to an injunction or other relief with respect to activities of the Indemnified Party without the written consent of the Indemnified Party or otherwise adversely affect the business of the Indemnified Party in any manner, admit to any violation of any Applicable Laws or any violation of the rights of any Person, or adversely affect the Indemnified Party’s rights under this Agreement. Notwithstanding an election by the Indemnifying Party to assume the defense of any claim as set forth above, such Indemnified Party shall have the right (at its own Cost if the Indemnifying Party has elected to assume such defense) to employ separate counsel and to participate in the defense of any claim.

Section 7.4 LIMITATION ON DAMAGES .

(a) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, EXCEPT (1) IN CIRCUMSTANCES OF INTENTIONAL MISCONDUCT BY A PARTY OR ITS AFFILIATES, (2) WITH RESPECT TO INDEMNIFICATION OBLIGATIONS FOR THIRD PARTY CLAIMS SET FORTH IN ARTICLE VII, (3) [* * *] AND (4) BREACHES OF A PARTY’S CONFIDENTIALITY OBLIGATIONS HEREUNDER, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY OF ITS AFFILIATES FOR ANY SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING LOST PROFITS OR

LOST REVENUES,WHETHER UNDER ANY CONTRACT, WARRANTY, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY.

(b) EXCEPT IN THE CASE OF DURECT’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, DURECT’S LIABILITY FOR ANY CLAIMS MADE BY HOSPIRA FOR ANY CAUSE OF ACTION OR INDEMNIFICATION RELATED TO THIS AGREEMENT SHALL NOT EXCEED [* * *].

Section 7.5 Insurance .

(a) Each Party shall carry and maintain in full force and effect while this Agreement is in effect and for [* * *] years thereafter if written on a claims made or occurrence reported form, the types of insurance specified below with carriers maintaining an AM Best rating of no lower than A-VII:

(i) Commercial general liability insurance including premises operations, contractual liability, personal injury and advertising injury including fire, legal liability for bodily injury and property damage with combined limits of not less than $[* * *] per occurrence and $[* * *] in the aggregate for bodily injury, including death, and property damage;

(ii) Workers’ compensation insurance in the amounts required by the law of the Jurisdictions, countries or states in which such Party’s workers are located;

(iii) Employer’s Liability with a limit of liability in an amount of not less than $[* * *];

(iv) Commercial Automobile Liability for owned, hired and non-owned motor vehicles with a combined single limit in an amount not less than $[* * *] each occurrence;

(v) Umbrella liability insurance with a policy limit of at least $[* * *] per occurrence and in the aggregate;

(vi) Products liability insurance with a policy limit of at least $[* * *] per occurrence and in the aggregate; provided that Hospira shall have a policy with a limit of no less than $[* * *] upon First Commercial Sale of the Initial Licensed Product in the Territory; and

(viii) Cargo/Transit insurance covering all risks of physical loss or damage to cargo handled by Supplier at a full replacement cost.

(b) Each Party shall include the other party and their subsidiaries, affiliates, directors, officers, employees and agents as additional insureds with respect to Commercial General Liability and Products Liability but only as their interest may appear by written contract. Prior to commencement of services, and annually thereafter, each Party shall furnish

to the other Party certificates of insurance evidencing the insurance coverages stated above and shall endeavor to provide at least [* * *] days written notice to the other Party prior to any cancellation, non-renewal or material change in said coverage. In the case of cancellation, non-renewal or material change in said coverage, each Party shall promptly provide to the other Party with a new certificate of insurance evidencing that the coverage meets the requirements in Section 7.5 . Each Party agrees that its insurance shall act as primary and noncontributory from any other valid and collectible insurance maintained by the other Party. Each party may, at its option, satisfy, in whole or in part, its obligation under this Section 7.5 through its self- insurance program. If either Party chooses to self-insure, then that Party must indemnify the other Party to the same as an additional insured would be in a traditional insurance policy.

ARTICLE VIII. CONFIDENTIALITY

Section 8.1 Publicity . Each Party shall maintain the confidentiality of all provisions of the Agreement and this Agreement itself, and neither Party shall make any press release nor public announcement concerning the existence of or the terms of this Agreement or containing material new information regarding the development or Commercialization of a Licensed Product, without the prior written approval of the other Party with regard to the content of such press release or public announcement, except as may be required to be made by either Party in order to comply with Applicable Laws in which case the disclosing Party shall provide the nondisclosing Party with at least [* * *] business days prior written notice of such disclosure (to the extent permitted by Applicable Laws) so that the nondisclosing Party shall have the opportunity if it so desires to seek a protective order or other appropriate remedy and, in connection with any such required disclosure, the disclosing Party shall use reasonable efforts to obtain confidential treatment for such disclosure or to prevent or modify such disclosure as may be requested by the nondisclosing Party (to the extent permitted by Applicable Laws). Such consent will not be unreasonably withheld or delayed by such other Party. Except as otherwise provided herein, prior to any such press release or public announcement requiring the other Party’s prior written approval, the Party wishing to make the announcement will submit a draft of the proposed press release or public announcement to the other Party not less than [* * *] business days in advance to enable the other Party to consider and comment thereon. Failure to respond with comments in writing prior to [* * *] before scheduled release shall be deemed approval of such press release or public announcement. [* * *] Notwithstanding anything to the contrary in this Agreement, nothing in this Section 8.1 is intended to prohibit either Party from republishing or restating information that has already been approved by the other Party for use in a prior press release or public announcement.

Section 8.2 Confidentiality . Except to the extent expressly authorized by this Agreement or otherwise agreed in writing, the Parties agree that, during the Term of this Agreement and for [* * *] years following the expiration or termination of the Agreement, the receiving Party, its Affiliates and its designees shall, and shall ensure that their respective employees, officers, directors and other representatives shall, keep confidential and not publish or otherwise disclose and not use for any purpose, other than the purpose of this Agreement, any Confidential Information of the disclosing Party. The receiving Party shall treat Confidential Information as it would its own proprietary information which in no event shall be with less than a reasonable standard of care, and take reasonable precautions to prevent the disclosure of Confidential Information to a Third Party, except as explicitly set forth herein, without written consent of the disclosing Party.

Section 8.3 The receiving Party’s obligations set forth in this Agreement shall not extend to any Confidential Information of the disclosing Party that:

(i) the receiving Party can demonstrate by competent evidence was already in its possession without any limitation on use or disclosure prior to its receipt from the disclosing Party;

(iii) is received from a Third Party without restriction and with the right to disclose such Confidential Information; or

Notwithstanding the foregoing, specific aspects or details of Confidential Information shall not be deemed to be within the public domain or in the possession of the receiving Party merely because the Confidential Information is embraced by more general information in the public domain or in the possession of the receiving Party. Further, any combination of Confidential Information shall not be considered in the public domain or in the possession of the receiving Party merely because individual elements of such Confidential Information are in the public domain or in the possession of the receiving Party unless the combination and its principles are in the public domain or in the possession of the receiving Party. Any and all information, data and materials, including any and all Intellectual Property Rights therein and thereto, owned by a Party pursuant to this Agreement shall constitute Confidential Information of such Party which shall be deemed the disclosing Party with respect to such Confidential Information for the purposes of this Article VIII and for the avoidance of doubt, subject to the exclusions to the confidentiality obligations in this Article VIII as described in Section 8.3(b)(ii) and (iii) . Notwithstanding the foregoing, the obligations of confidentiality under this Section 8.3 regarding any Confidential Information relating to or containing a Party’s trade secret that has been suitably identified to the other Party as such shall continue beyond the period set forth in this Section 8.3 (i.e., the Term plus [* * *] years) so long as the subject matter remains a trade secret.

Section 8.4 Authorized Disclosures . The restrictions contained in Section 8.2 shall not apply to Confidential Information that are:

(i) made to an applicable Regulatory Authority as useful or required in connection with any filing, application or request for Regulatory Approval; provided that reasonable measures shall be taken to assure confidential treatment of such information;

(ii) to the extent necessary, (i) in connection with a proposed financing transaction, merger, acquisition or other change of control of a Party or sale of all or substantially all of the assets of a Party or (ii) subject to subcontracting provisions set forth in this Agreement or the License Agreement, to its Affiliates, directors, officers, employees, consultants, sublicensees of Hospira or Durect (or bona fide potential sublicensees of Hospira or Durect), vendors and clinicians, in each case under written agreements of confidentiality substantially similar or at least as restrictive as those set forth in this Agreement, who have a need to know such information in connection with a Party performing its obligations or exercising its rights under this Agreement; provided, that either Party may enter into such written agreements that provide for shorter timeframes for maintaining confidentiality than those set forth in this Agreement with the written consent of the other Party;

(iii) otherwise required by Applicable Laws or the requirements of a major U.S. securities exchange, in the reasonable opinion of legal counsel to the receiving Party, provided that the Party disclosing such Confidential Information shall exercise its Commercially Reasonable Efforts to obtain a protective order or other reliable assurance that confidential treatment shall be accorded and if possible give the other Party a reasonable opportunity to review and comment on any such disclosure in advance thereof (but not less than five (5) business days, if possible, prior to the date of such disclosure);

(iv) made in response to an order of a court of competent jurisdiction or other Regulatory Authority or any political subdivision or regulatory body thereof of competent jurisdiction; provided that the receiving Party shall first have, if reasonably possible, given notice to the disclosing Party and given the disclosing Party, at such disclosing Party’s own expense, a reasonable opportunity to quash such order or to obtain a protective order requiring that the Confidential Information or documents that are the subject of such order be held in confidence by such court or Regulatory Authority or, if disclosed, be used only for the purposes for which the order was issued; and provided, further, that if a disclosure order is not quashed or a protective order is not obtained, the Confidential Information disclosed in response to such order shall be limited to that information which is legally required, in the reasonable opinion of legal counsel to the receiving Party, to be disclosed in such response to such court or governmental order; or

[* * *]

Section 8.5 Remedies . Each Party shall be entitled, in addition to any other right or remedy it may have, at law or in equity, to seek an injunction, without the posting of any bond or other security, enjoining or restraining the other Party, its Affiliates and/or its licensees from any violation or threatened violation of this Article VIII.

ARTICLE IX. TERM AND TERMINATION

Section 9.1 Term of Agreement . This Agreement shall commence as of the Effective Date and, unless earlier terminated in accordance with the terms of this Article IX, or unless otherwise mutually agreed to by the Parties, shall expire on the termination or expiration of the License Agreement (the “ Term ”).

Section 9.2 Termination for Material Breach . In the event of an alleged material breach of this Agreement by a Party, the other Party must give the Party that is allegedly in default notice thereof if such non-breaching party intends to terminate the Agreement pursuant to this Section 9.2 . Any dispute regarding an alleged material breach of this Agreement shall be resolved in accordance with this Section 9.2 . [* * *] If, however, a Party receives a notice of material breach that relates solely to the payment of amounts due hereunder, and (a) there is no dispute as to the amounts owed and (b) such material breach for non-payment is not cured within [* * *] days after receipt of such notice, the notifying Party shall be entitled to terminate this Agreement by giving written notice to the defaulting Party. In the event that the Neutral (as defined in Schedule 10.10 ), in accordance with the procedures set forth in Section 10.10 , has rendered a ruling that a Party has materially breached this Agreement, which ruling specified the remedies imposed on such breaching Party for such breach, and the breaching Party has failed to comply with the terms of such adverse ruling within the time period specified therein for compliance, or if such compliance cannot be fully achieved by such date, the breaching Party has failed to commence compliance and/or has failed to use diligent efforts to achieve full compliance as soon thereafter as is reasonably possible, or in the event the material breach cannot be remedied, [* * *], then in each case the non-breaching Party shall have the right to terminate this Agreement by delivering written notice to the breaching Party after the expiration of the period during which the breaching Party was to comply as set forth in the adverse ruling (if applicable);

Section 9.3 Termination for Insolvency . Either Party may terminate this Agreement effective immediately upon written notice to the other Party in the event a Party files for protection under the bankruptcy laws, makes an assignment for the benefit of creditors, appoints or suffers appointment of a receiver or trustee over its property, files a petition under any bankruptcy or insolvency act or has any such petition filed against it which is not discharged within [* * *] days of the filing thereof.

Section 9.4 Termination by Hospira . Hospira may, at any time, terminate this Agreement upon [* * *] prior written notice to Durect, in which case [* * *].

Section 9.5 Termination by Durect . Durect may terminate this Agreement upon [* * *] months prior written notice to Hospira, in which case [* * *]. However, Durect may not terminate this Agreement pursuant to this Section prior to [* * *] years after the First Commercial Sale of the Initial Licensed Product.

Section 9.6 Effect of Termination . Upon expiration or termination of this Agreement, in whole or in part, for any reason, nothing herein shall be construed to release either Party from any accrued rights or obligations that matured prior to the effective date of such expiration or termination, nor preclude either Party from pursuing any right or remedy it may have hereunder or at law or in equity with respect to any breach of this Agreement. Each Party, at the request of the other Party, shall return or destroy, and thereafter provide to the other Party written certification evidencing such destruction, all data, files, records and other materials in its possession or control containing or comprising the other Party’s Confidential Information.

Section 9.7 Nonexclusive Rights and Remedies . Termination is not an election of remedies. Except as otherwise specifically provided herein, all rights and remedies of the Parties provided under this Agreement are not exclusive and are in addition to any other rights and remedies provided by law or under this Agreement.

Section 9.8 Surviving Provisions . Expiration or any termination of this Agreement shall not release a party from the obligations to make any payments that were due or had accrued immediately prior to the effective date of such termination (including non-cancelable obligations or commitments made in good faith prior to notice of termination), and the following Sections of this Agreement shall survive any expiration or termination of this Agreement for any reason: Articles I, IV, V, VII, VIII and X Sections 2.3, 2.4, 2.5, 2.11(b) (but not if this Agreement expires in ordinary course or is terminated early by Durect due to Hospira’s breach), 3.9, 4.3, 9.6, 9.7 and 9.8.

ARTICLE X. MISCELLANEOUS

Section 10.1 Relationship of Parties . Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, employer-employee or joint venture relationship between the Parties. No Party shall incur any debts or make any commitments for the other, except to the extent, if at all, specifically provided herein.

Section 10.2 Assignment . Except as otherwise expressly provided in this Agreement, neither Party shall assign this Agreement or its rights or obligations hereunder without the express written consent of the other Party hereto, except that either Party may assign or transfer this Agreement and its rights or obligations hereunder without the consent of the other Party to (i) an Affiliate, (ii) any assignee of all or substantially all of its business or assets relating to the subject matter of this Agreement, or (iii) its successor pursuant to an operation of law. An assignment or transfer by a Party pursuant to this Section 10.2 shall be binding on its successors or assigns. Except as otherwise expressly provided in this Agreement, no such assignment or transfer shall be valid or effective unless done in accordance with this Section 10.2.

Section 10.3 Notice . Any notice, request or other communication required or permitted to be given under or in connection with this Agreement shall be deemed to have been sufficiently given if in writing and personally delivered, facsimile transmission (receipt

verified), electronic mail or overnight express courier service (signature required), prepaid, to the Party for which such notice is intended, at the address set forth for such Party below:

In the case of Durect, to:

Durect Corporation

2 Results Way

Cupertino, CA 95014

Attention: General Counsel

Facsimile No: (408) 777-3577

Telephone No: (408) 777-1417

In the case of Hospira, to:

Hospira Inc.

275 North Field Drive

Lake Forest, Illinois 60045

Attn: General Counsel

Fax: 224-212-2086

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

Section 10.4 Use of Name . Except as otherwise provided herein, Durect, on the one hand, and Hospira on the other hand, shall not have any right, express or implied, to use in any manner the name or other designation of the other or any other trade name, trademark or logos of the other for any purpose, unless consented to in writing by the other Party.

Section 10.5 Waiver . A waiver by any Party of any of the terms and conditions of this Agreement in any instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach hereof. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and except as specifically provided herein none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either Party.

Section 10.6 Counterparts . This Agreement may be executed simultaneously in any number of counterparts, any one of which need not contain the signature of more than one Party but all such counterparts taken together shall constitute one and the same agreement. This Agreement, to the extent signed and delivered by means of a facsimile machine (or pdf-file attachment to Email), shall be treated in all manner and respects and for all purposes as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person.

Section 10.7 Severability . When possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.

Section 10.8 Amendment . No amendment, modification or supplement of any provisions of this Agreement shall be valid or effective unless made in writing and signed by a duly authorized officer of each Party.

Section 10.9 Governing Law . This Agreement shall be governed by and interpreted in accordance with the laws of the State of [* * *] without regard to conflicts of law principles.

Section 10.10 Alternative Dispute Resolution . Unless expressly provided herein, any dispute, difference or question arising between the Parties in connection with this Agreement, the construction thereof, or the rights, duties or liabilities of either Party shall be resolved in accordance with the alternative dispute resolution procedure set forth in Schedule 10.10 .

Section 10.11 Compliance with Laws . Each Party shall review in good faith and cooperate in taking actions to ensure compliance of this Agreement and the Parties’ activities hereunder with all Applicable Laws. Each Party shall provide the other Party such reasonable assistance as may be required for the Party requesting such assistance to comply with all Applicable Laws necessary to permit the Parties to perform hereunder and to exercise their respective rights hereunder.

Section 10.12 Force Majeure . Neither Party shall be held liable or responsible to the other Party nor be deemed to be in default under, or in breach of any provision of, this Agreement for failure or delay in fulfilling or performing any obligation of this Agreement to the extent that such failure or delay is due to Force Majeure, and without the willful wrongdoing, recklessness or gross negligence of the Party so failing or delaying. For purposes of this Agreement, “ Force Majeure ” is defined as causes beyond the reasonable control of the Party, including acts of God; war; terrorism; civil commotion; fire, flood, earthquake or explosion; strike, riot or epidemic. In the event that the ability of Durect or Hospira to perform its obligations under this Agreement, as the case may be, shall be so affected, the affected Party shall immediately notify the other Party of such inability and of the period for which such inability is expected to continue. The Party giving such notice shall thereupon be excused from such of its obligations under this Agreement for the duration of such Force Majeure and for so long as it is unable to perform its obligations hereunder. To the extent possible, each Party shall use Commercially Reasonable Efforts to minimize the duration of any Force Majeure.

Section 10.13 Entire Agreement . This Agreement including schedules and exhibits thereto together with all other future written agreements entered into by the Parties and specifically made a part of this Agreement, constitute the entire agreement between the Parties with respect to the subject matter of this Agreement and supersede all prior agreements and understandings, both oral and written, between the Parties with respect to the subject matter of this Agreement. This Agreement does not amend, modify, or alter the License Agreement, or any of the rights or obligations of the Parties under the License Agreement.

Section 10.14 Parties in Interest . All of the terms and provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Parties hereto and their respective permitted successors and assigns.

Section 10.15 No Third Party Beneficiaries . Except for rights and obligations specifically referred to herein that apply to Affiliates, sublicensees or licensees of the Parties, nothing in this Agreement is intended to confer on any Person other than Durect or Hospira any rights or obligations under this Agreement, and there are no intended Third Party beneficiaries to this Agreement.

Section 10.16 Descriptive Headings; Certain Terms . The descriptive headings of this Agreement are for convenience only, and shall be of no force or effect in construing or interpreting any of the provisions of this Agreement.

Section 10.17 Fees and Payments . All fees and payments properly paid by one Party to the other under this Agreement shall be deemed non-refundable unless expressly provided to the contrary herein.

Section 10.18 No Implied Licenses . Except as specifically and expressly granted in this Agreement, no rights or licenses to any intellectual property rights are granted by either Party to the other, by implication, estoppel or otherwise, and each Party specifically reserves all its rights with respect to any intellectual property rights not specifically granted hereunder. Furthermore, unless expressly provided otherwise herein, each Party may use and practice its own Intellectual Property Rights, technology and data in any manner not inconsistent with the terms of this Agreement without the consent of the other Party and without obligation to notify the other Party of its intended use.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed, on the Effective Date written above.


Durect Corporation		Hospira, Inc.

By:	/s/ James E. Brown	By:	/s/ Brian J. Smith

Name:	James E. Brown	Name:	Brian J. Smith

Title:	CEO	Title:	Sr. Vice President

Date: June 1, 2010		Date: June 1, 2010

EXHIBIT A

QUALITY AGREEMENT

[TO BE ATTACHED IN ACCORDANCE WITH SECTION 3.3]

EXHIBIT B

SPECIFICATIONS

[* * *]


[ * * * ]	[ * * * ]	[ * * * ]

[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]

[* * *]	[* * *]	[* * *]

EXHIBIT C

ESCROW AGREEMENT

[TO BE ATTACHED IN ACCORDANCE WITH SECTION 2.11(b)(i)]

SCHEDULE 10.10

Alternative Dispute Resolution

[* * *]

Exhibit 31.1

Rule 13a-14(a) Section 302 Certification

CERTIFICATIONS

I, James E. Brown, certify that:

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

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

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

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

(a)

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

(b)

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

(c)

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

(d)

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

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

(a)

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

(b)

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

August 5, 2010

/s/ JAMES E. BROWN

James E. Brown

Chief Executive Officer

Exhibit 31.2

Rule 13a-14(a) Section 302 Certification

CERTIFICATIONS

I, Matthew J. Hogan, certify that:

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

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

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

(a)

(b)

(c)

(d)

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

(a)

(b)

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

August 5, 2010

/s/ MATTHEW J. HOGAN

Matthew J. Hogan

Chief Financial Officer and Principal Accounting Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DURECT Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Brown, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

August 5, 2010

/s/ J AMES E. B ROWN

James E. Brown

Chief Executive Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DURECT Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Matthew J. Hogan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

August 5, 2010

/s/ MATTHEW J. HOGAN

Matthew J. Hogan

Chief Financial Officer and

Principal Accounting Officer