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                         SECURITIES AND EXCHANGE COMMISSION
  
                               Washington, D.C. 20549
  
                                      Form 8-K
  
                                   Current Report
  
       Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  
         Date of Report (Date of earliest event reported): January 11, 2002
  
  
                                 DURECT CORPORATION
               (Exact name of registrant as specified in its charter)
  
                                      000-31615
                              (Commission File Number)
  
                 Delaware                                 94-3297098
      (State or other jurisdiction of         (I.R.S. Employer Identification No.)
      incorporation)
  
  
                                   10240 Bubb Road
                                 Cupertino, CA 95014
               (Address of principal executive offices, with zip code)
  
                                   (408) 777-1417
                (Registrant's telephone number, including area code)
  
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   Item 5. Other Events and Regulation FD Disclosure.
  
           DURECT Corporation announces Recent Developments and updates its Risk
  Factors as follows:
  
                                 RECENT DEVELOPMENTS
  
           In November 2001, ALZA and DURECT amended the terms of ALZA's option to
  distribute Chronogesic(TM) in the United States and Canada, and ALZA exercised
  its option pursuant to the amended terms. Under the revised terms, we agreed to
  negotiate exclusively for a limited period of time with ALZA and its affiliate,
  Janssen Pharmaceutica Products, L.P. for exclusive sales and marketing rights to
  Chronogesic (TM) in the United States and Canada; provided, however, if we were
  unable to reach an agreement within this limited period of time, then all
  commercialization rights would revert to DURECT. As of the date of this filing,
  our Chronogesic(TM) product is no longer subject to any option on the part of
  ALZA or its affiliates, and we are free to discuss and are currently engaged in
  discussions with multiple potential partners relating to the commercialization
  of Chronogesic(TM) in the U.S., Canada and other countries of the world. We
  believe that our ability to engage in discussions with multiple potential
  partners will allow us to maximize the value of these rights. See "Risk
  Factor--Our agreement with ALZA limits our fields of operation for our
  DUROS-based pharmaceutical systems, requires us to spend significant funds on
  product development and gives ALZA a first right to distribute selected products
  for us."
  
                                    RISK FACTORS
  
           Prospective purchasers of our common stock should carefully consider
  the following Risk Factors in addition to the other information appearing in or
  incorporated by reference into any prospectus.
  
  We have not completed development of any of our pharmaceutical systems, and we
  cannot be certain that our pharmaceutical systems will be able to be
  commercialized
  
           To be profitable, we must successfully research, develop, obtain
  regulatory approval for, manufacture, introduce, market and distribute our
  pharmaceutical systems under development. For each pharmaceutical system that we
  intend to commercialize, we must successfully meet a number of critical
  developmental milestones for each disease or medical condition that we target,
  including:
  
           .    selecting and developing drug delivery platform technology to
                deliver the proper dose of drug over the desired period of time;
  
           .    selecting and developing catheter technology, if appropriate, to
                deliver the drug to a specific location within the body;
  
           .    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; and
  
           .    demonstrating the drug formulation will be stable for commercially
                reasonable time periods.
  
           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 completed development of any pharmaceutical
  
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  systems, and DURECT has limited experience in developing such products. We have
  selected the drug dosages and have substantially completed the product design of
  our lead product, Chronogesic(TM). We have not, however, selected the drug
  dosages nor finalized the product design of our intended second product, DUROS
  hydromorphone., and we may not be able to complete the design of this product.
  We are continuing testing of these products and exploring possible design
  changes to address issues of safety, manufacturing efficiency and performance.
  We may not be able to complete development of any products that will be safe and
  effective and that will have a commercially reasonable treatment and storage
  period. If we are unable to complete development of our Chronogesic(TM) or DUROS
  hydromorphone products, or other products, we will not be able to earn revenue
  from them, which would materially harm our business.
  
  We must conduct and satisfactorily complete clinical trials for our
  pharmaceutical systems
  
           Before we can obtain government approval to sell any of our
  pharmaceutical systems, we must demonstrate through preclinical (animal) studies
  and clinical (human) trials that each system is safe and effective for human use
  for each targeted disease. As of December 31, 2001, we have completed an initial
  Phase I clinical trial using an external pump to test the safety of continuous
  chronic infusion of sufentanil, a Phase II clinical trial, a pilot Phase III
  clinical trial and a pharmacokinetic trial for our lead product,
  Chronogesic(TM). With respect to our second product, DUROS hydromorphone, we are
  currently in the pre-clinical stage. We plan to continue extensive and costly
  clinical trials to assess the safety and effectiveness of Chronogesic(TM),
  including conducting pivotal Phase III trials necessary to support regulatory
  approval of the product in the United States and other countries of the world.
  In addition, we plan to conduct extensive and costly clinical trials for DUROS
  hydromorphone and our other potential products. We may not be permitted to begin
  or continue our planned clinical trials for our potential products or, if our
  trials are permitted, our potential products may not prove to be safe or produce
  their intended effects. In addition, we may be required by regulatory agencies
  to conduct additional animal or human studies regarding the safety and efficacy
  of our products, including Chronogesic(TM), which could delay commercialization
  of such products.
  
           We anticipate that we will commence our pivotal Phase III trial of our
  intended first product, Chronogesic(TM), in mid-2002. The length of our clinical
  trials will depend upon, among other factors, the rate of trial site and patient
  enrollment and the number of patients required to be enrolled in such studies.
  We may fail to obtain adequate levels of patient enrollment in our clinical
  trials. Delays in planned patient enrollment may result in increased costs,
  delays or termination of clinical trials, which could have a material adverse
  effect on us. In addition, even if we enroll the number of patients we expect in
  the time frame we expect, our clinical trials may not provide the data necessary
  for their successful completion. Additionally, we may fail to effectively
  oversee and monitor these clinical trials, which would result in increased costs
  or delays of our clinical trials. Even if these clinical trials are completed,
  we may fail to complete and submit a new drug application as scheduled. Even if
  we are able to submit a new drug application as scheduled, the Food and Drug
  Administration may not clear our application in a timely manner or may deny the
  application entirely.
  
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           Data already obtained from preclinical studies and clinical trials of
  our pharmaceutical systems do not necessarily predict the results that will be
  obtained from later preclinical studies and clinical trials. Moreover,
  preclinical and clinical data such as ours is susceptible to varying
  interpretations, which could delay, limit or prevent regulatory approval. A
  number of companies in the pharmaceutical industry have suffered significant
  setbacks in advanced clinical trials, even after promising results in earlier
  trials. The failure to adequately demonstrate the safety and effectiveness of a
  product under development could delay or prevent regulatory clearance of the
  potential product, resulting in delays to the commercialization of our products,
  and could materially harm our business. Our clinical trials may not demonstrate
  the sufficient levels of safety and efficacy necessary to obtain the requisite
  regulatory approvals for our products, and thus our products may not be approved
  for marketing.
  
  Failure to obtain product approvals or comply with ongoing governmental
  regulations could delay or limit introduction of our new products and result in
  failure to achieve anticipated revenues
  
           The manufacture and marketing of our products and our research and
  development activities are subject to extensive regulation for safety, efficacy
  and quality by numerous government authorities in the United States and abroad.
  We must obtain clearance or approval from applicable regulatory authorities
  before we can market or sell our products in the U.S or abroad. Before receiving
  clearance to market a product in the U.S. or in any other country, we will have
  to demonstrate to the satisfaction of applicable regulatory agencies that the
  product is safe and effective on the patient population and for the diseases
  that will be treated. Clinical trials, manufacturing and marketing of products
  are subject to the rigorous testing and approval process of the FDA and
  equivalent foreign regulatory authorities. The Federal Food, Drug and Cosmetic
  Act and other federal, state and foreign statutes and regulations govern and
  influence the testing, manufacture, labeling, advertising, distribution and
  promotion of drugs and medical devices. These laws and regulations are complex
  and subject to change. Furthermore, these laws and regulations may be subject to
  varying interpretations, and we may not be able to predict how an applicable
  regulatory body or agency may choose to interpret or apply any law or
  regulation. As a result, clinical trials and regulatory approval can take a
  number of years to accomplish and require the expenditure of substantial
  resources. We may encounter delays or rejections based upon administrative
  action or interpretations of current rules and regulations. We may also
  encounter delays or rejections based upon additional government regulation from
  future legislation, administrative action or changes in FDA policy during the
  period of product development, clinical trials and FDA regulatory review. We may
  encounter similar delays in foreign countries. Sales of our products outside the
  U.S. are subject to foreign regulatory approvals that vary from country to
  country. The time required to obtain approvals from foreign countries may be
  shorter or longer than that required for FDA approval, and requirements for
  foreign licensing may differ from FDA requirements. We may be unable to obtain
  requisite approvals from the FDA and foreign regulatory authorities, and even if
  obtained, such approvals may not be on a timely basis, or they may not cover the
  clinical uses that we specify. If we fail to obtain timely clearance or approval
  for our products, we will not be able to market and sell our products, which
  will limit our ability to generate revenue.
  
           In addition, data obtained from clinical trials are susceptible to
  varying interpretations, which could delay, limit or prevent regulatory
  clearances. As of December 31, 2001, we have
  
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  completed an initial Phase I clinical trial using an external pump to test the
  safety of continuous chronic infusion of sufentanil, a Phase II clinical trial,
  a pilot Phase III trial and a pharmacokinetic trial for our Chronogesic(TM)
  product, but have not begun our pivotal Phase III trial of this product, or
  initiated clinical trials for any other products. We are currently in the
  preclinical stage with respect to our second product, DUROS hydromorphone.
  
           Marketing or promoting a drug is subject to very strict controls.
  Furthermore, clearance may entail ongoing requirements for post-marketing
  studies. The manufacture and marketing of drugs are subject to continuing FDA
  and foreign regulatory review and requirements that we update our regulatory
  filings. Later discovery of previously unknown problems with a product,
  manufacturer or facility, or our failure to update regulatory files, may result
  in restrictions, including withdrawal of the product from the market. Any of the
  following events, if they were to occur, could delay or preclude us from further
  developing, marketing or realizing full commercial use of our products, which in
  turn would materially harm our business, financial condition and results of
  operations:
  
           .  failure to obtain or maintain requisite governmental approvals;
  
           .  failure to obtain approvals for clinically intended uses of our
              products under development; or
  
           .  identification of serious and unanticipated adverse side effects in
              our products under development.
  
           Manufacturers of drugs also must comply with the applicable FDA good
  manufacturing practice regulations, which include production design controls,
  testing, quality control and quality assurance requirements as well as the
  corresponding maintenance of records and documentation. Compliance with current
  good manufacturing practices regulations is difficult and costly. Manufacturing
  facilities are subject to ongoing periodic inspection by the FDA and
  corresponding state agencies, including unannounced inspections, and must be
  licensed before they can be used for the commercial manufacture of our products.
  We or our present or future suppliers may be unable to comply with the
  applicable good manufacturing practice regulations and other FDA regulatory
  requirements. We have not been subject to a good manufacturing regulation
  inspection by the FDA relating to our pharmaceutical systems. If we do not
  achieve compliance for the products we manufacture, the FDA may withdraw
  marketing clearance or require product recall, which may cause interruptions or
  delays in the manufacture and sale of our products.
  
  We may not be able to manufacture sufficient quantities of our products to
  support our clinical and commercial requirements at an acceptable cost, and we
  have limited manufacturing experience
  
           We must manufacture our products in clinical and commercial quantities,
  either directly or through third parties, in compliance with regulatory
  requirements and at an acceptable cost. The manufacture of our DUROS-based
  pharmaceutical systems is a complex process. Although we have substantially
  completed development of the manufacturing process for our
  
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  Chronogesic(TM) product, we continue to consider ways to optimize our
  manufacturing process and to explore possible changes to increase efficiencies
  and lower costs. We have not yet completed development of the manufacturing
  process for any products other than Chronogesic(TM). If we fail to develop
  manufacturing processes to permit us to manufacture a product at an acceptable
  cost, then we may not be able to commercialize that product.
  
           We completed construction of a manufacturing facility for our
  DUROS-based pharmaceutical systems in May 2001 in accordance with our initial
  plans, and we anticipate that this facility, once it is ready for production,
  will be capable of manufacturing supplies for our Phase III clinical trial and
  commercial launch of our Chronogesic(TM) product and for clinical trials of our
  DUROS hydromorphone product as well as other products on a pilot scale. However,
  our facility and our production processes must be validated and qualified before
  we commence production of clinical and anticipated commercial supplies of our
  products. We have substantially completed validating and qualifying our
  manufacturing facility but have not completed these processes. DURECT has
  limited experience validating and qualifying manufacturing facilities.
  
           In order to manufacture clinical and commercial supplies of our
  pharmaceutical systems, we must attain and maintain compliance with applicable
  federal, state and foreign regulatory standards relating to manufacture of
  pharmaceutical products which are rigorous, complex and subject to varying
  interpretations. Furthermore, our new facility will be subject to government
  audits to determine compliance with good manufacturing practices regulations,
  and we may be unable to pass inspection with the applicable regulatory agencies
  or may be asked to undertake corrective measures which may be costly and cause
  delay.
  
           If we are unable to ready our manufacturing facility for production and
  manufacture product in a timely manner or at an acceptable cost and attain and
  maintain compliance with applicable regulations, we could experience a delay in
  our clinical trials and the commercial sale of our DUROS-based pharmaceutical
  systems. 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 our
  clinical trials and commercial launch. We may also be required or choose to
  subcontract with third party contractors to perform the final manufacturing
  steps of our DUROS-based pharmaceutical systems in which case we will be subject
  to the schedule, expertise and performance of third parties as well as incur
  significant additional costs. See "We rely heavily on third parties to support
  development, clinical testing and manufacturing of our products." Under our
  development and commercialization agreement with ALZA, we cannot subcontract the
  manufacture of subassemblies of the DUROS system without approval from ALZA. If
  we cannot manufacture product in time to meet our clinical or commercial
  requirements or at an acceptable cost, our operating results will be harmed.
  
           In April 2000, we acquired the ALZET product and related assets from
  ALZA. We manufacture subassemblies of the ALZET product at our Vacaville
  facility. We currently rely on ALZA to perform the coating process for the
  manufacture of the ALZET product, but we will be
  
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  required to perform this process ourselves starting April 2003 or sooner. We
  have limited experience manufacturing this product, and we may not be able to
  successfully or consistently manufacture this product at an acceptable cost, if
  at all.
  
  Our agreement with ALZA limits our fields of operation for our DUROS-based
  pharmaceutical systems, requires us to spend significant funds on product
  development and gives ALZA a first right to distribute selected products for us
  
           In April 1998, we entered into a development and commercialization
  agreement with ALZA Corporation, which was amended and restated in April 1999
  and April 2000. ALZA was acquired by Johnson & Johnson in June 2001 and has
  since operated as a wholly owned subsidiary. Our agreement with ALZA gives us
  exclusive rights to develop, commercialize and manufacture products using ALZA's
  DUROS technology to deliver by catheter:
  
           .  drugs to the central nervous system to treat select nervous system
              disorders;
  
           .  drugs to the middle and inner ear;
  
           .  drugs to the pericardial sac of the heart; and
  
           .  select drugs into vascular grafts.
  
  We also have the right to use the DUROS technology to deliver systemically and
  by catheter:
  
           .  sufentanil to treat chronic pain; and
  
           .  select cancer antigens.
  
           We may not develop, manufacture or commercialize DUROS-based
  pharmaceutical systems outside of these specific fields without ALZA's prior
  approval. In addition, if we develop or commercialize any drug delivery
  technology for use in a manner similar to the DUROS technology in a field
  covered in our license agreement with ALZA, then we may lose our exclusive
  rights to use the DUROS technology in such field as well as the right to develop
  new products using DUROS technology in such field. Furthermore, to maintain our
  rights under this license agreement, we must meet annual minimum development
  spending requirements totaling $52.0 million to develop products in some or all
  of these fields through 2004 and fund development of a minimum number of
  products per year up to a total of eight products through 2004. In order to
  maintain commercialization rights for our products in the U.S. and any foreign
  countries, we must diligently develop our products, procure required regulatory
  approvals and commercialize the products in these countries. If we fail to meet
  the various diligence requirements, we may:
  
           .  lose our rights to develop, commercialize and manufacture some of
              our DUROS-based pharmaceutical systems;
  
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       .    lose rights for products in some or all countries, including the U.S.;
            or
  
       .    lose rights in some fields of use.
  
       These rights would revert to ALZA, which could then develop DUROS-based
  pharmaceutical products in such countries or fields of use itself or license
  others to do so. In addition, in the event that our rights terminate with
  respect to any product or country, or this agreement terminates or expires in
  its entirety (except for termination by us due to a breach by ALZA), ALZA will
  have the exclusive right to use all of our data, rights and information relating
  to the products developed under the agreement as necessary for ALZA to
  commercialize these products, subject to the payment of a royalty to us based on
  the net sales of the products by ALZA.
  
       Our agreement with ALZA gives us the right to perform development work and
  manufacture the DUROS pump component of our DUROS-based pharmaceutical systems.
  In the event of a change in our corporate control, including an acquisition of
  us, our right to manufacture and perform development work on the DUROS pump
  would terminate and ALZA would have the right to manufacture and develop DUROS
  systems for us so long as ALZA can meet our specification and supply
  requirements following such change in control.
  
       Under the ALZA agreement, we must pay ALZA royalties on sales of DUROS-
  based pharmaceutical systems we commercialize and a percentage of any up-front
  license fees, milestone or special fees, payments or other consideration we
  receive, excluding research and development funding. In addition, commencing
  upon the commercial sale of a product developed under the agreement, we are
  obligated to make minimum product payments to ALZA on a quarterly basis based on
  our good faith projections of our net product sales of the product. These
  minimum payments will be fully credited against the product royalty payments we
  must pay to ALZA.
  
       ALZA also has an exclusive option to distribute any DUROS-based
  pharmaceutical system we develop to deliver non-proprietary cancer antigens
  worldwide. The terms of any distribution arrangement have not been set and are
  to be negotiated in good faith between ALZA and ourselves. ALZA's option to
  acquire distribution rights limits our ability to negotiate with other
  distributors for these products and may result in lower payments to us than if
  these rights were subject to competitive negotiations. We must allow ALZA an
  opportunity to negotiate in good faith for commercialization rights to our
  products developed under the agreement prior to granting these rights to a third
  party. These rights do not apply to products that are subject to ALZA's option
  or products for which we have obtained funding or access to a proprietary drug
  from a third party to whom we have granted commercialization rights prior to the
  commencement of human clinical trials.
  
       ALZA has the right to terminate the agreement in the event that we breach a
  material obligation under the agreement and do not cure the breach in a timely
  manner. In addition, ALZA has the right to terminate the agreement if, at any
  time prior to July 2002, we solicit for employment or hire, without ALZA's
  consent, a person who is or within the previous 180 days
  
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  has been an employee of ALZA, or if at any time prior to July 2006, we solicit
  for employment or hire, without ALZA's consent, a person who is or within the
  previous 180 days has been an employee of ALZA in the DUROS technology group.
  
       Under the ALZA Agreement, ALZA had an exclusive option to distribute our
  Chronogesic(TM) product in the United States and Canada. In November 2001, ALZA
  and DURECT amended the terms of this option, and ALZA exercised its option
  pursuant to the amended terms. Under the revised terms, we agreed to negotiate
  exclusively for a limited period of time with ALZA and its affiliate, Janssen
  Pharmaceutica Products, L.P. for exclusive sales and marketing rights to
  Chronogesic (TM) in the United States and Canada; provided, however, if we were
  unable to reach an agreement within this limited period of time, then all
  commercialization rights would revert to DURECT. As of the date of this filing,
  our Chronogesic(TM) product is no longer subject to any option on the part of
  ALZA or its affiliates, and we are free to discuss and are currently engaged in
  discussions with multiple potential partners relating to the commercialization
  of Chronogesic(TM) in the U.S., Canada and other countries of the world. We
  believe that our ability to engage in discussions with multiple partners will
  allow us to maximize the value of these rights. There can be no assurance that
  we will reach an agreement with any potential partner, including ALZA, or its
  affiliates, regarding commercialization rights to Chronogesic (TM) on
  commercially reasonable terms, or at all. If we are unable to reach an agreement
  with a commercialization partner, this may be interpreted as a negative factor,
  resulting in a decline in our stock price.
  
  Technologies and businesses which we have acquired may be difficult to
  integrate, disrupt our business, dilute stockholder value or divert management
  attention. We may also acquire additional businesses or technologies in the
  future, which could have these same effects
  
       We may acquire technologies, products or businesses to broaden the scope of
  our existing and planned product lines and technologies. For example, in October
  1999, we acquired substantially all of the assets of IntraEAR, Inc., in April
  2000 we acquired the ALZET product and related assets from ALZA and in April
  2001, we completed the acquisition of SBS. These and our future acquisitions
  expose us to:
  
       .    increased costs associated with the acquisition and operation of the
            new businesses or technologies and the management of geographically
            dispersed operations;
  
       .    the risks associated with the assimilation of new technologies,
            operations, sites and personnel;
  
       .    the diversion of resources from our existing business and
            technologies;
  
       .    the inability to generate revenues to offset associated acquisition
            costs;
  
       .    the requirement to maintain uniform standards, controls, and
            procedures; and
  
       .    the impairment of relationships with employees and customers as a
            result of any integration of new management personnel.
  
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       Acquisitions may also result in the issuance of dilutive equity securities,
  the incurrence or assumption of debt or additional expenses associated with the
  amortization of acquired intangible assets or potential businesses. Past
  acquisitions, such as our acquisitions of IntraEAR, ALZET and SBS, as well
  future acquisitions, may not generate any additional revenue or provide any
  benefit to our business.
  
  Some of our products 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 products currently under development contain, and our products
  in the future may contain, controlled substances which are subject to state,
  federal and foreign laws and regulations regarding their manufacture, use, sale,
  importation and distribution. Our Chronogesic(TM) and DUROS hydromorphone
  products under development contain opioids which are classified as Schedule II
  controlled substances under the regulations of the U.S. Drug Enforcement Agency.
  For our products containing controlled substances, we and our suppliers,
  manufacturers, contractors, customers and distributors are required to obtain
  and maintain applicable registrations from state, federal and foreign law
  enforcement and regulatory agencies and comply with state, federal and foreign
  laws and regulations regarding the manufacture, use, sale, importation and
  distribution of controlled substances. These regulations are extensive and
  include regulations governing manufacturing, labeling, packaging, testing,
  dispensing, production and procurement quotas, record keeping, reporting,
  handling, shipment and disposal. Failure to obtain and maintain required
  registrations or comply with any applicable regulations could delay or preclude
  us from developing and commercializing our products containing controlled
  substances and subject us to enforcement action. In addition, because of their
  restrictive nature, these regulations could limit our commercialization of our
  products containing controlled substances.
  
  Our limited operating history makes evaluating our stock difficult
  
       Investors can only evaluate our business based on a limited operating
  history. We were incorporated in February 1998 and have engaged primarily in
  research and development, licensing technology, raising capital and recruiting
  scientific and management personnel. This short history may not be adequate to
  enable investors to fully assess our ability to successfully develop our
  products, achieve market acceptance of our products and respond to competition.
  
  Acceptance of our products 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
  Chronogesic(TM). Even if approved for marketing, our products 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;
  
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       .    the establishment and demonstration in the medical community of the
            safety and clinical efficacy of our products and their potential
            advantages over existing therapeutic products, including oral
            medication, transdermal drug delivery products such as drug patches,
            or external or implantable drug delivery products; and
  
       .    pricing and reimbursement policies of government and third-party
            payors such as insurance companies, health maintenance organizations
            and other health plan administrators.
  
       Physicians, patients, payors or the medical community in general may be
  unwilling to accept, utilize or recommend any of our products. If we are unable
  to obtain regulatory approval, commercialize and market our future products when
  planned and achieve market acceptance, we will not achieve anticipated revenues.
  
  If users of our products are unable to obtain adequate reimbursement from
  third-party payors, or if new restrictive legislation is adopted, market
  acceptance of our products may be limited and we may not achieve anticipated
  revenues
  
       The continuing efforts of government and insurance companies, health
  maintenance organizations and other payors of healthcare costs to contain or
  reduce costs of health care may affect our future revenues and profitability,
  and the future revenues and profitability of our potential customers, suppliers
  and collaborative partners and the availability of capital. For example, in
  certain foreign markets, pricing or profitability of prescription
  pharmaceuticals is subject to government control. In the United States, recent
  federal and state government initiatives have been directed at lowering the
  total cost of health care, and the U.S. Congress and state legislatures will
  likely continue to focus on health care reform, the cost of prescription
  pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we
  cannot predict whether any such legislative or regulatory proposals will be
  adopted, the announcement or adoption of such proposals could materially harm
  our business, financial condition and results of operations.
  
       Our ability to commercialize our products successfully will depend in part
  on the extent to which appropriate reimbursement levels for the cost of our
  products 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.
  
  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 September 30, 2001, had an accumulated deficit of approximately $66.3
  million. We expect to
  
                                        -11-
  
  <PAGE>
  
  continue to incur significant operating losses over the next several years as we
  continue to incur increasing costs for research and development, clinical trials
  and manufacturing. Our ability to achieve profitability depends upon our
  ability, alone or with others, to successfully complete the development of our
  proposed products, obtain the required regulatory clearances and manufacture and
  market our proposed products. Development of pharmaceutical systems is costly
  and requires significant investment. In addition, we may choose to license
  either additional drug delivery platform technology or rights to particular
  drugs 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 products and do not expect to receive significant revenue in the near
  future. All revenues to date are from the sale of products we acquired in
  October 1999 in connection with the acquisition of substantially all of the
  assets of IntraEAR, Inc., the ALZET product we acquired in April 2000 from ALZA
  and the sale of biodegradable polymers and contract research and development
  revenues from our SBS subsidiary. We do not expect these revenues to increase
  significantly in future periods. We do not anticipate commercialization and
  marketing of our products 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 do not control ALZA's ability to develop and commercialize DUROS technology
  outside of fields licensed to us, and problems encountered by ALZA could result
  in negative publicity, loss of sales and delays in market acceptance of our
  DUROS-based pharmaceutical systems
  
       ALZA retains complete rights to the DUROS technology for fields outside the
  specific fields licensed to us. Accordingly, ALZA may develop and commercialize
  DUROS-based products or license others to do so, so long as there is no conflict
  with the rights granted to us. ALZA recently received FDA approval to market its
  first DUROS-based product, Viadur (leuprolide acetate implants) for the
  palliative treatment of advanced prostate cancer. If ALZA fails to commercialize
  this product successfully, or encounters problems associated with this product,
  negative publicity could be created about all DUROS-based products, which could
  result in harm to our reputation and cause reduced sales of our products. In
  addition, if any third-party that may be licensed by ALZA fails to develop and
  commercialize DUROS-based products successfully, the success of all DUROS-based
  systems could be impeded, including ours, resulting in delay or loss of revenue
  or damage to our reputation, any one of which could harm our business.
  
       We do not own the trademark "DUROS" and any competitive advantage we derive
  from the name may be impaired by third-party use ALZA owns the trademark
  "DUROS." Because ALZA is also developing and marketing DUROS-based systems, and
  may license third parties to do so, there may be confusion in the market between
  ALZA, its potential licensees and us, and this confusion could impair the
  competitive advantage, if any, we derive from use of the DUROS name. In
  addition, any actions taken by ALZA or its potential licensees that negatively
  impact the trademark "DUROS" could negatively impact our reputation and result
  in reduced sales of our DUROS-based pharmaceutical systems.
  
                                        -12-
  
  <PAGE>
  
  We may be sued by third parties which claim that our products infringe on their
  intellectual property rights, particularly because there is substantial
  uncertainty about the validity and breadth of medical patents
  
       We may be exposed to future litigation by third parties based on claims
  that our products or activities infringe the intellectual property rights of
  others or that we have misappropriated the trade secrets of others. This risk is
  exacerbated by the fact that the validity and breadth of claims covered in
  medical technology patents and the breadth and scope of trade secret protection
  involve complex legal and factual questions for which important legal principles
  are unresolved. Any litigation or claims against us, whether or not valid, could
  result in substantial costs, could place a significant strain on our financial
  resources and could harm our reputation. In addition, intellectual property
  litigation or claims could force us to do one or more of the following:
  
       .    cease selling, incorporating or using any of our products 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 products, which would be costly and time-consuming.
  
  If we are unable to adequately protect or enforce our intellectual property
  rights or secure rights to third-party patents, we may lose valuable assets,
  experience reduced market share or incur costly litigation to protect our rights
  
       Our success will depend in part on our ability to obtain patents, maintain
  trade secret protection and operate without infringing the proprietary rights of
  others. As of December 31, 2001, we held four issued U.S. patents and two issued
  foreign patent. In addition, we have 24 pending U.S. patent applications and
  have filed 16 patent applications under the Patent Cooperation Treaty, from
  which 15 national phase applications are currently pending in Europe, Australia
  and Canada. As of December 31, 2001, our subsidiary SBS held 4 issued U.S.
  patents, 1 issued foreign patent and 5 pending U.S. patent applications and has
  filed 5 patent applications under the Patent Cooperation Treaty. To maintain the
  license rights to ALZA intellectual property granted to us under our development
  and commercialization agreement with ALZA, we must meet annual minimum
  development spending requirements and fund development of a minimum number of
  products. If we do not meet these diligence requirements, we may lose rights to
  one or more of our licensed fields. Also, under our agreement with ALZA, we must
  assign to ALZA any intellectual property rights relating to the DUROS system and
  its manufacture and any combination of the DUROS system with other components,
  active agents, features or processes. In addition, ALZA retains the right to
  enforce and defend against infringement actions relating to the DUROS system,
  and if ALZA exercises these rights, it will be entitled to the proceeds of these
  infringement actions.
  
       The patent positions of pharmaceutical companies, including ours, are
  uncertain and involve complex legal and factual questions. In addition, the
  coverage claimed in a patent application can be significantly reduced before the
  patent is issued. Consequently, our patent
  
                                        -13-
  
  <PAGE>
  
  applications or those of ALZA that are licensed to us may not issue into
  patents, and any issued patents may not provide protection against competitive
  technologies or may be held invalid if challenged or circumvented. Our
  competitors may also independently develop products similar to ours or design
  around or otherwise circumvent patents issued to us or licensed by us. In
  addition, the laws of some foreign countries may not protect our proprietary
  rights to the same extent as U.S. law.
  
       We also rely upon trade secrets, technical know-how and continuing
  technological innovation to develop and maintain our competitive position. We
  require our employees, consultants, advisors and collaborators to execute
  appropriate confidentiality and assignment-of-inventions agreements with us.
  These agreements typically provide that all materials and confidential
  information developed or made known to the individual during the course of the
  individual's relationship with us is to be kept confidential and not disclosed
  to third parties except in specific circumstances, and that all inventions
  arising out of the individual's relationship with us shall be our exclusive
  property. These agreements may be breached, and in some instances, we may not
  have an appropriate remedy available for breach of the agreements. Furthermore,
  our competitors may independently develop substantially equivalent proprietary
  information and techniques, reverse engineer our information and techniques, or
  otherwise gain access to our proprietary technology.
  
       We may be unable to meaningfully protect our rights in trade secrets,
  technical know-how and other non-patented technology. We may have to resort to
  litigation to protect our intellectual property rights, or to determine their
  scope, validity or enforceability. Enforcing or defending our proprietary rights
  is expensive, could cause diversion of our resources and may not prove
  successful. Any failure to enforce or protect our rights could cause us to lose
  the ability to exclude others from using our technology to develop or sell
  competing products.
  
  We rely heavily on third parties to support development, clinical testing and
  manufacturing of our products
  
       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 MDS Pharma, Inc. to perform blood plasma assays in
  connection with our clinical trials for Chronogesic(TM), Nelson Laboratories,
  Inc. to perform quality control services related to components of our
  DUROS-based pharmaceutical systems, and Da / Pro Rubber Inc. to supply us with
  molded rubber components of our DUROS-based pharmaceutical systems. In the past,
  we relied on Chesapeake Biological Labs, Inc. to perform the final manufacturing
  steps of our Chronogesic(TM) product, and we may need to rely on a third party
  manufacturer again if we encounter delays in readying our manufacturing facility
  for production. See "We may not be able to manufacture sufficient quantities of
  our products to support our clinical and commercial requirements at an
  acceptable cost, and we have limited manufacturing experience." We anticipate
  that we will continue to rely on these and other third party contractors to
  support development, clinical testing, and manufacturing of our pharmaceutical
  systems. Failure of these contractors to provide the required services in a
  timely manner or on reasonable commercial terms could materially delay the
  
                                        -14-
  
  <PAGE>
  
  development and approval of our products, increase our expenses and
  materially harm our business, financial condition and results of operations.
  
  Key components of our DUROS-based 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 DUROS-based
  pharmaceutical systems are currently purchased from a single or a limited number
  of outside sources. The reliance on a sole or limited number of suppliers could
  result in:
  
           .  delays associated with redesigning a product due to a failure to
              obtain a single source component;
  
           .  an inability to obtain an adequate supply of required components;
              and
  
           .  reduced control over pricing, quality and time delivery.
  
           We have a supply agreement with Mallinckrodt, Inc. for our sufentanil
  requirements for our Chronogesic(TM) product, which expires in September 2004.
  Additionally, we have a supply agreement with RMS Company under which RMS has
  agreed to supply us with titanium components of our DUROS-based pharmaceutical
  systems until April 2004. Other that these agreements, we do not have long-term
  agreements with any of our suppliers, and therefore the supply of a particular
  component could be terminated at any time without penalty to the supplier. Any
  interruption in the supply of single source components could cause us to seek
  alternative sources of supply or manufacture these components internally. If the
  supply of any components for our pharmaceutical systems is interrupted,
  components from alternative suppliers may not be available in sufficient volumes
  within required timeframes, if at all, to meet our needs. This could delay our
  ability to complete clinical trials and obtain approval for commercialization
  and marketing of our products, causing us to lose sales, incur additional costs
  and delay new product introductions and could harm our reputation.
  
  We lack marketing, sales and distribution experience for pharmaceutical systems
  and we may not be able to sell our products if we do not enter into
  relationships with third parties or develop a direct sales organization
  
           We have yet to establish marketing, sales or distribution capabilities
  for our pharmaceutical systems. We intend to enter into agreements with third
  parties to sell our products or to develop our own sales and marketing force. We
  may be unable to establish or maintain third-party relationships on a
  commercially reasonable basis, if at all. In addition, these third parties may
  have similar or more established relationships with our competitors.
  
           If we do not enter into relationships with third parties for the sales
  and marketing of our products, we will need to develop our own sales and
  marketing capabilities. DURECT has only limited experience in developing,
  training or managing a sales force. If we choose to establish a direct sales
  force, we will incur substantial additional expenses in developing, training and
  
                                        -15-
  
  <PAGE>
  
  managing such an organization. We may be unable to build a sales force, the cost
  of establishing such a sales force may exceed our product revenues, or our
  direct marketing and sales efforts may be unsuccessful. In addition, we compete
  with many other companies that currently have extensive and well- funded
  marketing and sales operations. Our marketing and sales efforts may be unable to
  compete successfully against these other companies. We may be unable to
  establish a sufficient sales and marketing organization on a timely basis, if at
  all. We may be unable to engage qualified distributors. Even if engaged, these
  distributors may:
  
           .  fail to satisfy financial or contractual obligations to us;
  
           .  fail to adequately market our products;
  
           .  cease operations with little or no notice to us; or
  
           .  offer, design, manufacture or promote competing product lines.
  
           If we fail to develop sales, marketing and distribution channels, we
  would experience delays in product sales and incur increased costs, which would
  harm our financial results.
  
  If we 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. 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 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 systems. In
  addition, we may expend significant funds towards such training before any
  orders are placed for our products.
  
  Investors may experience substantial dilution of their investment
  
           In the past, we have issued options to acquire common stock at prices
  below the initial public offering price. To the extent these outstanding options
  are ultimately exercised, there will be dilution to investors.
  
  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 products. 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 products. 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
  
                                        -16-
  
  <PAGE>
  
  research or development programs which would materially harm our business,
  financial condition and results of operations.
  
           We believe that our cash, cash equivalents and investments, will be
  adequate to satisfy our capital needs for at least the next 18 months. However,
  our actual capital requirements will depend on many factors, including:
  
           .  continued progress and cost of our research and development
              programs;
  
           .  progress with preclinical studies and clinical trials;
  
           .  the time and costs involved in obtaining regulatory clearance;
  
           .  costs involved in preparing, filing, prosecuting, maintaining and
              enforcing patent claims;
  
           .  costs of developing sales, marketing and distribution channels and
              our ability to sell our products;
  
           .  costs involved in establishing manufacturing capabilities for
              commercial quantities of our products;
  
           .  competing technological and market developments;
  
           .  market acceptance of our products; and
  
           .  costs for recruiting and retaining employees and consultants.
  
           We may consume available resources more rapidly than currently
  anticipated, resulting in the need for additional funding. We may seek to raise
  any necessary additional funds through equity or debt financings, convertible
  debt financings, collaborative arrangements with corporate partners or other
  sources, which may be dilutive to existing stockholders. In addition, in the
  event that additional funds are obtained through arrangements with collaborative
  partners or other sources, we may have to relinquish rights to some of our
  technologies, product candidates or products under development 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, or relinquish to ALZA rights to develop DUROS products in
  certain fields, resulting in loss of sales, increased costs, and reduced
  revenues.
  
  Future deferred compensation expenses and non-cash charges may adversely impact
  or delay our profitability
  
           To date, we have recorded deferred compensation expenses related to
  stock options grants, including stock options assumed in our acquisition of SBS,
  which will be amortized as follows: $661,000 for the three months ending
  December 31, 2001, $1.7 million for the year
  
                                        -17-
  
  <PAGE>
  
  ending December 31, 2002, $724,000 for the year ending December 31, 2003,
  $108,000 for the year ending December 31, 2004, $18,000 for the year ending
  December 31, 2005, and $2,000 for the year ending December 31, 2006. In
  addition, deferred compensation expense related to option awards to
  non-employees will be calculated during the vesting period of the option based
  on the then-current price of our common stock, which could result in significant
  charges that adversely impact or delay our profitability. Furthermore, we have
  issued a warrant to ALZA with a value of approximately $6.5 million, which will
  be amortized over time based on sales of our products and which will also
  adversely impact or delay our profitability.
  
  We depend upon key personnel who may terminate their employment with us at any
  time, and we need to hire additional qualified personnel
  
           Our success will depend to a significant degree upon the continued
  services of key management, technical, and scientific personnel, including Felix
  Theeuwes, our Chairman and Chief Scientific Officer, James E. Brown, our
  President and Chief Executive Officer and Thomas A. Schreck, our Chief Financial
  Officer. Although we have obtained key man life insurance policies for each of
  Messrs. Theeuwes, Brown and Schreck in the amount of $1 million, this insurance
  may not adequately compensate us for the loss of their services. In addition,
  our success will depend on our ability to attract and retain other highly
  skilled personnel. Competition for qualified personnel is intense, and the
  process of hiring and integrating such qualified personnel is often lengthy. We
  may be unable to recruit such personnel on a timely basis, if at all. Our
  management and other employees may voluntarily terminate their employment with
  us at any time. The loss of the services of key personnel, or the inability to
  attract and retain additional qualified personnel, could result in delays to
  product development or approval, loss of sales and diversion of management
  resources.
  
  We may not successfully manage our growth
  
           Our success will depend on the expansion of our operations and the
  effective management of growth, which will place a significant strain on our
  management and on our administrative, operational and financial resources. To
  manage such growth, we must expand our facilities, augment our operational,
  financial and management systems and hire and train additional qualified
  personnel. If we are unable to manage growth effectively our business would be
  harmed.
  
  The market for our products is new, rapidly changing and competitive, and new
  products or technologies developed by others could impair our ability to grow
  our business and remain competitive
  
           The pharmaceutical industry is subject to rapid and substantial
  technological change. Developments by others may render our products under
  development or technologies noncompetitive or obsolete, or we may be unable to
  keep pace with technological developments or other market factors. Technological
  competition in the industry from pharmaceutical and biotechnology companies,
  universities, governmental entities and others diversifying into the field is
  intense and is expected to increase. Many of these entities have significantly
  greater research and development capabilities than we do, as well as
  substantially more marketing,
  
                                        -18-
  
  <PAGE>
  
  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 a new enterprise and are engaged in the development of novel
  therapeutic technologies. As a result, 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 products. Our competitors may develop products that
  are safer, more effective or less costly than our products 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 products even if commercialized. Chronic pain
  can also be treated by oral medication, transdermal drug delivery systems, such
  as drug patches, or with other implantable drug delivery devices. 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 products 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 products involve an
  inherent risk that product liability claims will be asserted against us.
  Although we are insured against such risks up to a $5 million annual aggregate
  limit in connection with clinical trials and commercial sales of our products,
  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 products,
  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 products.
  
  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 products, 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
  
                                        -19-
  
  <PAGE>
  
  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 our acquisition of SBS, which,
  through its subsidiary Birmingham Polymers, Inc., is engaged in the business of
  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 stock price may fluctuate, and your investment in our stock could decline in
  value
  
           The average daily trading volume of our common stock for the twelve
  months ending December 31, 2001, was 111,628 shares. The limited trading volume
  of our stock may contribute to its volatility, and an active trading market in
  our stock might not develop or continue. The market price of our common stock
  may fluctuate significantly in response to factors which are beyond our control.
  The stock market in general has recently experienced extreme price and volume
  fluctuations. In addition, the market prices of securities of technology and
  pharmaceutical companies have also been extremely volatile, and have experienced
  fluctuations that often have been unrelated or disproportionate to the operating
  performance of these companies. These broad market fluctuations could result in
  extreme fluctuations in the price of our common stock, which could cause a
  decline in the value of our investors' stock.
  
  Future sales of our common stock may depress our stock price
  
           Commencing on March 27, 2001, which was 180 days after the date of our
  initial public offering, as many as 34,173,026 shares of our common stock became
  available for sale in the public market, subject to applicable securities laws.
  Additionally, in connection with our acquisition of SBS, we are filing with the
  SEC a registration statement on Form S-3 under the Securities Act with respect
  to the 2,145,652 shares of common stock issued to the former SBS shareholders or
  issuable upon the exercise of warrants and certain options we assumed. The
  common stock issued in connection with this acquisition shall become freely
  tradable in the public market after this registration statement has been
  declared effective by the Securities and Exchange Commission. Further
  information regarding the SBS acquisition is included in the company's current
  report on Form 8-K filed with the SEC on May 15, 2001. We may also seek to raise
  capital through equity
  
                                        -20-
  
  <PAGE>
  
  or convertible debt financings or through the sale of equity or convertible
  securities to collaboration or commercialization partners. Such financing
  activities may increase the number of shares of our common stock being sold in
  the public markets. If substantial amounts of our common stock were to be sold
  in the public market, the market price of our common stock could fall. In
  addition, these sales could create the perception to the public of difficulties
  or problems in our business. As a result, these sales also might make it more
  difficult for us to sell equity or equity-related securities in the future at a
  time and price that we deem appropriate.
  
  We have broad discretion over the use of our cash and investments, and their
  investment may not yield a favorable return
  
           Our management has broad discretion over how our cash and investments
  are used and may invest in ways with which our stockholders may not agree and
  that do not yield favorable returns.
  
  Executive officers, directors and entities affiliated with them have substantial
  control over us, which could delay or prevent a change in our corporate control
  favored by our other stockholders
  
           Our directors, executive officers and principal stockholders, together
  with their affiliates have substantial control over us. The interests of these
  stockholders may differ from the interests of other stockholders. As a result,
  these stockholders, if acting together, would have the ability to exercise
  control over all corporate actions requiring stockholder approval irrespective
  of how our other stockholders may vote, including:
  
           .  the election of directors;
  
           .  the amendment of charter documents;
  
           .  the approval of certain mergers and other significant corporate
              transactions, including a sale of substantially all of our assets;
              or
  
           .  the defeat of any non-negotiated takeover attempt that might
              otherwise benefit the public stockholders.
  
  Our certificate of incorporation, our bylaws, Delaware law and our stockholder
  rights plan contain provisions that could discourage another company from
  acquiring us
  
           Provisions of Delaware law, our certificate of incorporation, bylaws
  and stockholder rights plan may discourage, delay or prevent a merger or
  acquisition that stockholders may consider favorable, including transactions in
  which you might otherwise receive a premium for your shares. These provisions
  include:
  
           .  authorizing the issuance of "blank check" preferred stock without
              any need for action by stockholders;
  
                                        -21-
  
  <PAGE>
           .  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 by-laws;
  
           .  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.
  
                                        -22-
  
  <PAGE>
  
                                     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 hereunto duly authorized.
  
                                         DURECT Corporation
  
  Date:  January 11, 2002                By: /s/ James E. Brown
                                             ------------------
                                             James E. Brown
                                             President and Chief Executive Officer
  
                                        -23-
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text: SECURITIES AND EXCHANGE COMMISSION
  
                               Washington, D.C. 20549
  
                                      Form 8-K
  
                                   Current Report
  
       Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  
         Date of Report (Date of earliest event reported): January 11, 2002
  
                                 DURECT CORPORATION
               (Exact name of registrant as specified in its charter)
  
                                      000-31615
                              (Commission File Number)
  
                 Delaware                                 94-3297098
      (State or other jurisdiction of         (I.R.S. Employer Identification No.)
      incorporation)
  
                                   10240 Bubb Road
                                 Cupertino, CA 95014
               (Address of principal executive offices, with zip code)
  
                                   (408) 777-1417
                (Registrant's telephone number, including area code)
  Item 5. Other Events and Regulation FD Disclosure.
  
           DURECT Corporation announces Recent Developments and updates its Risk
  Factors as follows:
  
                                 RECENT DEVELOPMENTS
  
           In November 2001, ALZA and DURECT amended the terms of ALZA's option to
  distribute Chronogesic(TM) in the United States and Canada, and ALZA exercised
  its option pursuant to the amended terms. Under the revised terms, we agreed to
  negotiate exclusively for a limited period of time with ALZA and its affiliate,
  Janssen Pharmaceutica Products, L.P. for exclusive sales and marketing rights to
  Chronogesic (TM) in the United States and Canada; provided, however, if we were
  unable to reach an agreement within this limited period of time, then all
  commercialization rights would revert to DURECT. As of the date of this filing,
  our Chronogesic(TM) product is no longer subject to any option on the part of
  ALZA or its affiliates, and we are free to discuss and are currently engaged in
  discussions with multiple potential partners relating to the commercialization
  of Chronogesic(TM) in the U.S., Canada and other countries of the world. We
  believe that our ability to engage in discussions with multiple potential
  partners will allow us to maximize the value of these rights. See "Risk
  Factor--Our agreement with ALZA limits our fields of operation for our
  DUROS-based pharmaceutical systems, requires us to spend significant funds on
  product development and gives ALZA a first right to distribute selected products
  for us."
  
                                    RISK FACTORS
  
           Prospective purchasers of our common stock should carefully consider
  the following Risk Factors in addition to the other information appearing in or
  incorporated by reference into any prospectus.
  
  We have not completed development of any of our pharmaceutical systems, and we
  cannot be certain that our pharmaceutical systems will be able to be
  commercialized
  
           To be profitable, we must successfully research, develop, obtain
  regulatory approval for, manufacture, introduce, market and distribute our
  pharmaceutical systems under development. For each pharmaceutical system that we
  intend to commercialize, we must successfully meet a number of critical
  developmental milestones for each disease or medical condition that we target,
  including:
  
           .    selecting and developing drug delivery platform technology to
                deliver the proper dose of drug over the desired period of time;
  
           .    selecting and developing catheter technology, if appropriate, to
                deliver the drug to a specific location within the body;
  
           .    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; and
  
           .    demonstrating the drug formulation will be stable for commercially
                reasonable time periods.
  
           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 completed development of any pharmaceutical
  
                                         -2-
  systems, and DURECT has limited experience in developing such products. We have
  selected the drug dosages and have substantially completed the product design of
  our lead product, Chronogesic(TM). We have not, however, selected the drug
  dosages nor finalized the product design of our intended second product, DUROS
  hydromorphone., and we may not be able to complete the design of this product.
  We are continuing testing of these products and exploring possible design
  changes to address issues of safety, manufacturing efficiency and performance.
  We may not be able to complete development of any products that will be safe and
  effective and that will have a commercially reasonable treatment and storage
  period. If we are unable to complete development of our Chronogesic(TM) or DUROS
  hydromorphone products, or other products, we will not be able to earn revenue
  from them, which would materially harm our business.
  
  We must conduct and satisfactorily complete clinical trials for our
  pharmaceutical systems
  
           Before we can obtain government approval to sell any of our
  pharmaceutical systems, we must demonstrate through preclinical (animal) studies
  and clinical (human) trials that each system is safe and effective for human use
  for each targeted disease. As of December 31, 2001, we have completed an initial
  Phase I clinical trial using an external pump to test the safety of continuous
  chronic infusion of sufentanil, a Phase II clinical trial, a pilot Phase III
  clinical trial and a pharmacokinetic trial for our lead product,
  Chronogesic(TM). With respect to our second product, DUROS hydromorphone, we are
  currently in the pre-clinical stage. We plan to continue extensive and costly
  clinical trials to assess the safety and effectiveness of Chronogesic(TM),
  including conducting pivotal Phase III trials necessary to support regulatory
  approval of the product in the United States and other countries of the world.
  In addition, we plan to conduct extensive and costly clinical trials for DUROS
  hydromorphone and our other potential products. We may not be permitted to begin
  or continue our planned clinical trials for our potential products or, if our
  trials are permitted, our potential products may not prove to be safe or produce
  their intended effects. In addition, we may be required by regulatory agencies
  to conduct additional animal or human studies regarding the safety and efficacy
  of our products, including Chronogesic(TM), which could delay commercialization
  of such products.
  
           We anticipate that we will commence our pivotal Phase III trial of our
  intended first product, Chronogesic(TM), in mid-2002. The length of our clinical
  trials will depend upon, among other factors, the rate of trial site and patient
  enrollment and the number of patients required to be enrolled in such studies.
  We may fail to obtain adequate levels of patient enrollment in our clinical
  trials. Delays in planned patient enrollment may result in increased costs,
  delays or termination of clinical trials, which could have a material adverse
  effect on us. In addition, even if we enroll the number of patients we expect in
  the time frame we expect, our clinical trials may not provide the data necessary
  for their successful completion. Additionally, we may fail to effectively
  oversee and monitor these clinical trials, which would result in increased costs
  or delays of our clinical trials. Even if these clinical trials are completed,
  we may fail to complete and submit a new drug application as scheduled. Even if
  we are able to submit a new drug application as scheduled, the Food and Drug
  Administration may not clear our application in a timely manner or may deny the
  application entirely.
  
                                         -3-
  Data already obtained from preclinical studies and clinical trials of
  our pharmaceutical systems do not necessarily predict the results that will be
  obtained from later preclinical studies and clinical trials. Moreover,
  preclinical and clinical data such as ours is susceptible to varying
  interpretations, which could delay, limit or prevent regulatory approval. A
  number of companies in the pharmaceutical industry have suffered significant
  setbacks in advanced clinical trials, even after promising results in earlier
  trials. The failure to adequately demonstrate the safety and effectiveness of a
  product under development could delay or prevent regulatory clearance of the
  potential product, resulting in delays to the commercialization of our products,
  and could materially harm our business. Our clinical trials may not demonstrate
  the sufficient levels of safety and efficacy necessary to obtain the requisite
  regulatory approvals for our products, and thus our products may not be approved
  for marketing.
  
  Failure to obtain product approvals or comply with ongoing governmental
  regulations could delay or limit introduction of our new products and result in
  failure to achieve anticipated revenues
  
           The manufacture and marketing of our products and our research and
  development activities are subject to extensive regulation for safety, efficacy
  and quality by numerous government authorities in the United States and abroad.
  We must obtain clearance or approval from applicable regulatory authorities
  before we can market or sell our products in the U.S or abroad. Before receiving
  clearance to market a product in the U.S. or in any other country, we will have
  to demonstrate to the satisfaction of applicable regulatory agencies that the
  product is safe and effective on the patient population and for the diseases
  that will be treated. Clinical trials, manufacturing and marketing of products
  are subject to the rigorous testing and approval process of the FDA and
  equivalent foreign regulatory authorities. The Federal Food, Drug and Cosmetic
  Act and other federal, state and foreign statutes and regulations govern and
  influence the testing, manufacture, labeling, advertising, distribution and
  promotion of drugs and medical devices. These laws and regulations are complex
  and subject to change. Furthermore, these laws and regulations may be subject to
  varying interpretations, and we may not be able to predict how an applicable
  regulatory body or agency may choose to interpret or apply any law or
  regulation. As a result, clinical trials and regulatory approval can take a
  number of years to accomplish and require the expenditure of substantial
  resources. We may encounter delays or rejections based upon administrative
  action or interpretations of current rules and regulations. We may also
  encounter delays or rejections based upon additional government regulation from
  future legislation, administrative action or changes in FDA policy during the
  period of product development, clinical trials and FDA regulatory review. We may
  encounter similar delays in foreign countries. Sales of our products outside the
  U.S. are subject to foreign regulatory approvals that vary from country to
  country. The time required to obtain approvals from foreign countries may be
  shorter or longer than that required for FDA approval, and requirements for
  foreign licensing may differ from FDA requirements. We may be unable to obtain
  requisite approvals from the FDA and foreign regulatory authorities, and even if
  obtained, such approvals may not be on a timely basis, or they may not cover the
  clinical uses that we specify. If we fail to obtain timely clearance or approval
  for our products, we will not be able to market and sell our products, which
  will limit our ability to generate revenue.
  
           In addition, data obtained from clinical trials are susceptible to
  varying interpretations, which could delay, limit or prevent regulatory
  clearances. As of December 31, 2001, we have
  
                                         -4-
  completed an initial Phase I clinical trial using an external pump to test the
  safety of continuous chronic infusion of sufentanil, a Phase II clinical trial,
  a pilot Phase III trial and a pharmacokinetic trial for our Chronogesic(TM)
  product, but have not begun our pivotal Phase III trial of this product, or
  initiated clinical trials for any other products. We are currently in the
  preclinical stage with respect to our second product, DUROS hydromorphone.
  
           Marketing or promoting a drug is subject to very strict controls.
  Furthermore, clearance may entail ongoing requirements for post-marketing
  studies. The manufacture and marketing of drugs are subject to continuing FDA
  and foreign regulatory review and requirements that we update our regulatory
  filings. Later discovery of previously unknown problems with a product,
  manufacturer or facility, or our failure to update regulatory files, may result
  in restrictions, including withdrawal of the product from the market. Any of the
  following events, if they were to occur, could delay or preclude us from further
  developing, marketing or realizing full commercial use of our products, which in
  turn would materially harm our business, financial condition and results of
  operations:
  
           .  failure to obtain or maintain requisite governmental approvals;
  
           .  failure to obtain approvals for clinically intended uses of our
              products under development; or
  
           .  identification of serious and unanticipated adverse side effects in
              our products under development.
  
           Manufacturers of drugs also must comply with the applicable FDA good
  manufacturing practice regulations, which include production design controls,
  testing, quality control and quality assurance requirements as well as the
  corresponding maintenance of records and documentation. Compliance with current
  good manufacturing practices regulations is difficult and costly. Manufacturing
  facilities are subject to ongoing periodic inspection by the FDA and
  corresponding state agencies, including unannounced inspections, and must be
  licensed before they can be used for the commercial manufacture of our products.
  We or our present or future suppliers may be unable to comply with the
  applicable good manufacturing practice regulations and other FDA regulatory
  requirements. We have not been subject to a good manufacturing regulation
  inspection by the FDA relating to our pharmaceutical systems. If we do not
  achieve compliance for the products we manufacture, the FDA may withdraw
  marketing clearance or require product recall, which may cause interruptions or
  delays in the manufacture and sale of our products.
  
  We may not be able to manufacture sufficient quantities of our products to
  support our clinical and commercial requirements at an acceptable cost, and we
  have limited manufacturing experience
  
           We must manufacture our products in clinical and commercial quantities,
  either directly or through third parties, in compliance with regulatory
  requirements and at an acceptable cost. The manufacture of our DUROS-based
  pharmaceutical systems is a complex process. Although we have substantially
  completed development of the manufacturing process for our
  
                                         -5-
  Chronogesic(TM) product, we continue to consider ways to optimize our
  manufacturing process and to explore possible changes to increase efficiencies
  and lower costs. We have not yet completed development of the manufacturing
  process for any products other than Chronogesic(TM). If we fail to develop
  manufacturing processes to permit us to manufacture a product at an acceptable
  cost, then we may not be able to commercialize that product.
  
           We completed construction of a manufacturing facility for our
  DUROS-based pharmaceutical systems in May 2001 in accordance with our initial
  plans, and we anticipate that this facility, once it is ready for production,
  will be capable of manufacturing supplies for our Phase III clinical trial and
  commercial launch of our Chronogesic(TM) product and for clinical trials of our
  DUROS hydromorphone product as well as other products on a pilot scale. However,
  our facility and our production processes must be validated and qualified before
  we commence production of clinical and anticipated commercial supplies of our
  products. We have substantially completed validating and qualifying our
  manufacturing facility but have not completed these processes. DURECT has
  limited experience validating and qualifying manufacturing facilities.
  
           In order to manufacture clinical and commercial supplies of our
  pharmaceutical systems, we must attain and maintain compliance with applicable
  federal, state and foreign regulatory standards relating to manufacture of
  pharmaceutical products which are rigorous, complex and subject to varying
  interpretations. Furthermore, our new facility will be subject to government
  audits to determine compliance with good manufacturing practices regulations,
  and we may be unable to pass inspection with the applicable regulatory agencies
  or may be asked to undertake corrective measures which may be costly and cause
  delay.
  
           If we are unable to ready our manufacturing facility for production and
  manufacture product in a timely manner or at an acceptable cost and attain and
  maintain compliance with applicable regulations, we could experience a delay in
  our clinical trials and the commercial sale of our DUROS-based pharmaceutical
  systems. 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 our
  clinical trials and commercial launch. We may also be required or choose to
  subcontract with third party contractors to perform the final manufacturing
  steps of our DUROS-based pharmaceutical systems in which case we will be subject
  to the schedule, expertise and performance of third parties as well as incur
  significant additional costs. See "We rely heavily on third parties to support
  development, clinical testing and manufacturing of our products." Under our
  development and commercialization agreement with ALZA, we cannot subcontract the
  manufacture of subassemblies of the DUROS system without approval from ALZA. If
  we cannot manufacture product in time to meet our clinical or commercial
  requirements or at an acceptable cost, our operating results will be harmed.
  
           In April 2000, we acquired the ALZET product and related assets from
  ALZA. We manufacture subassemblies of the ALZET product at our Vacaville
  facility. We currently rely on ALZA to perform the coating process for the
  manufacture of the ALZET product, but we will be
  
                                         -6-
  required to perform this process ourselves starting April 2003 or sooner. We
  have limited experience manufacturing this product, and we may not be able to
  successfully or consistently manufacture this product at an acceptable cost, if
  at all.
  
  Our agreement with ALZA limits our fields of operation for our DUROS-based
  pharmaceutical systems, requires us to spend significant funds on product
  development and gives ALZA a first right to distribute selected products for us
  
           In April 1998, we entered into a development and commercialization
  agreement with ALZA Corporation, which was amended and restated in April 1999
  and April 2000. ALZA was acquired by Johnson & Johnson in June 2001 and has
  since operated as a wholly owned subsidiary. Our agreement with ALZA gives us
  exclusive rights to develop, commercialize and manufacture products using ALZA's
  DUROS technology to deliver by catheter:
  
           .  drugs to the central nervous system to treat select nervous system
              disorders;
  
           .  drugs to the middle and inner ear;
  
           .  drugs to the pericardial sac of the heart; and
  
           .  select drugs into vascular grafts.
  
  We also have the right to use the DUROS technology to deliver systemically and
  by catheter:
  
           .  sufentanil to treat chronic pain; and
  
           .  select cancer antigens.
  
           We may not develop, manufacture or commercialize DUROS-based
  pharmaceutical systems outside of these specific fields without ALZA's prior
  approval. In addition, if we develop or commercialize any drug delivery
  technology for use in a manner similar to the DUROS technology in a field
  covered in our license agreement with ALZA, then we may lose our exclusive
  rights to use the DUROS technology in such field as well as the right to develop
  new products using DUROS technology in such field. Furthermore, to maintain our
  rights under this license agreement, we must meet annual minimum development
  spending requirements totaling $52.0 million to develop products in some or all
  of these fields through 2004 and fund development of a minimum number of
  products per year up to a total of eight products through 2004. In order to
  maintain commercialization rights for our products in the U.S. and any foreign
  countries, we must diligently develop our products, procure required regulatory
  approvals and commercialize the products in these countries. If we fail to meet
  the various diligence requirements, we may:
  
           .  lose our rights to develop, commercialize and manufacture some of
              our DUROS-based pharmaceutical systems;
  
                                         -7-
  .    lose rights for products in some or all countries, including the U.S.;
            or
  
       .    lose rights in some fields of use.
  
       These rights would revert to ALZA, which could then develop DUROS-based
  pharmaceutical products in such countries or fields of use itself or license
  others to do so. In addition, in the event that our rights terminate with
  respect to any product or country, or this agreement terminates or expires in
  its entirety (except for termination by us due to a breach by ALZA), ALZA will
  have the exclusive right to use all of our data, rights and information relating
  to the products developed under the agreement as necessary for ALZA to
  commercialize these products, subject to the payment of a royalty to us based on
  the net sales of the products by ALZA.
  
       Our agreement with ALZA gives us the right to perform development work and
  manufacture the DUROS pump component of our DUROS-based pharmaceutical systems.
  In the event of a change in our corporate control, including an acquisition of
  us, our right to manufacture and perform development work on the DUROS pump
  would terminate and ALZA would have the right to manufacture and develop DUROS
  systems for us so long as ALZA can meet our specification and supply
  requirements following such change in control.
  
       Under the ALZA agreement, we must pay ALZA royalties on sales of DUROS-
  based pharmaceutical systems we commercialize and a percentage of any up-front
  license fees, milestone or special fees, payments or other consideration we
  receive, excluding research and development funding. In addition, commencing
  upon the commercial sale of a product developed under the agreement, we are
  obligated to make minimum product payments to ALZA on a quarterly basis based on
  our good faith projections of our net product sales of the product. These
  minimum payments will be fully credited against the product royalty payments we
  must pay to ALZA.
  
       ALZA also has an exclusive option to distribute any DUROS-based
  pharmaceutical system we develop to deliver non-proprietary cancer antigens
  worldwide. The terms of any distribution arrangement have not been set and are
  to be negotiated in good faith between ALZA and ourselves. ALZA's option to
  acquire distribution rights limits our ability to negotiate with other
  distributors for these products and may result in lower payments to us than if
  these rights were subject to competitive negotiations. We must allow ALZA an
  opportunity to negotiate in good faith for commercialization rights to our
  products developed under the agreement prior to granting these rights to a third
  party. These rights do not apply to products that are subject to ALZA's option
  or products for which we have obtained funding or access to a proprietary drug
  from a third party to whom we have granted commercialization rights prior to the
  commencement of human clinical trials.
  
       ALZA has the right to terminate the agreement in the event that we breach a
  material obligation under the agreement and do not cure the breach in a timely
  manner. In addition, ALZA has the right to terminate the agreement if, at any
  time prior to July 2002, we solicit for employment or hire, without ALZA's
  consent, a person who is or within the previous 180 days
  
                                         -8-
  has been an employee of ALZA, or if at any time prior to July 2006, we solicit
  for employment or hire, without ALZA's consent, a person who is or within the
  previous 180 days has been an employee of ALZA in the DUROS technology group.
  
       Under the ALZA Agreement, ALZA had an exclusive option to distribute our
  Chronogesic(TM) product in the United States and Canada. In November 2001, ALZA
  and DURECT amended the terms of this option, and ALZA exercised its option
  pursuant to the amended terms. Under the revised terms, we agreed to negotiate
  exclusively for a limited period of time with ALZA and its affiliate, Janssen
  Pharmaceutica Products, L.P. for exclusive sales and marketing rights to
  Chronogesic (TM) in the United States and Canada; provided, however, if we were
  unable to reach an agreement within this limited period of time, then all
  commercialization rights would revert to DURECT. As of the date of this filing,
  our Chronogesic(TM) product is no longer subject to any option on the part of
  ALZA or its affiliates, and we are free to discuss and are currently engaged in
  discussions with multiple potential partners relating to the commercialization
  of Chronogesic(TM) in the U.S., Canada and other countries of the world. We
  believe that our ability to engage in discussions with multiple partners will
  allow us to maximize the value of these rights. There can be no assurance that
  we will reach an agreement with any potential partner, including ALZA, or its
  affiliates, regarding commercialization rights to Chronogesic (TM) on
  commercially reasonable terms, or at all. If we are unable to reach an agreement
  with a commercialization partner, this may be interpreted as a negative factor,
  resulting in a decline in our stock price.
  
  Technologies and businesses which we have acquired may be difficult to
  integrate, disrupt our business, dilute stockholder value or divert management
  attention. We may also acquire additional businesses or technologies in the
  future, which could have these same effects
  
       We may acquire technologies, products or businesses to broaden the scope of
  our existing and planned product lines and technologies. For example, in October
  1999, we acquired substantially all of the assets of IntraEAR, Inc., in April
  2000 we acquired the ALZET product and related assets from ALZA and in April
  2001, we completed the acquisition of SBS. These and our future acquisitions
  expose us to:
  
       .    increased costs associated with the acquisition and operation of the
            new businesses or technologies and the management of geographically
            dispersed operations;
  
       .    the risks associated with the assimilation of new technologies,
            operations, sites and personnel;
  
       .    the diversion of resources from our existing business and
            technologies;
  
       .    the inability to generate revenues to offset associated acquisition
            costs;
  
       .    the requirement to maintain uniform standards, controls, and
            procedures; and
  
       .    the impairment of relationships with employees and customers as a
            result of any integration of new management personnel.
  
                                         -9-
  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 and SBS, as well
  future acquisitions, may not generate any additional revenue or provide any
  benefit to our business.
  
  Some of our products 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 products currently under development contain, and our products
  in the future may contain, controlled substances which are subject to state,
  federal and foreign laws and regulations regarding their manufacture, use, sale,
  importation and distribution. Our Chronogesic(TM) and DUROS hydromorphone
  products under development contain opioids which are classified as Schedule II
  controlled substances under the regulations of the U.S. Drug Enforcement Agency.
  For our products containing controlled substances, we and our suppliers,
  manufacturers, contractors, customers and distributors are required to obtain
  and maintain applicable registrations from state, federal and foreign law
  enforcement and regulatory agencies and comply with state, federal and foreign
  laws and regulations regarding the manufacture, use, sale, importation and
  distribution of controlled substances. These regulations are extensive and
  include regulations governing manufacturing, labeling, packaging, testing,
  dispensing, production and procurement quotas, record keeping, reporting,
  handling, shipment and disposal. Failure to obtain and maintain required
  registrations or comply with any applicable regulations could delay or preclude
  us from developing and commercializing our products containing controlled
  substances and subject us to enforcement action. In addition, because of their
  restrictive nature, these regulations could limit our commercialization of our
  products containing controlled substances.
  
  Our limited operating history makes evaluating our stock difficult
  
       Investors can only evaluate our business based on a limited operating
  history. We were incorporated in February 1998 and have engaged primarily in
  research and development, licensing technology, raising capital and recruiting
  scientific and management personnel. This short history may not be adequate to
  enable investors to fully assess our ability to successfully develop our
  products, achieve market acceptance of our products and respond to competition.
  
  Acceptance of our products 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
  Chronogesic(TM). Even if approved for marketing, our products 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;
  
                                        -10-
  .    the establishment and demonstration in the medical community of the
            safety and clinical efficacy of our products and their potential
            advantages over existing therapeutic products, including oral
            medication, transdermal drug delivery products such as drug patches,
            or external or implantable drug delivery products; and
  
       .    pricing and reimbursement policies of government and third-party
            payors such as insurance companies, health maintenance organizations
            and other health plan administrators.
  
       Physicians, patients, payors or the medical community in general may be
  unwilling to accept, utilize or recommend any of our products. If we are unable
  to obtain regulatory approval, commercialize and market our future products when
  planned and achieve market acceptance, we will not achieve anticipated revenues.
  
  If users of our products are unable to obtain adequate reimbursement from
  third-party payors, or if new restrictive legislation is adopted, market
  acceptance of our products may be limited and we may not achieve anticipated
  revenues
  
       The continuing efforts of government and insurance companies, health
  maintenance organizations and other payors of healthcare costs to contain or
  reduce costs of health care may affect our future revenues and profitability,
  and the future revenues and profitability of our potential customers, suppliers
  and collaborative partners and the availability of capital. For example, in
  certain foreign markets, pricing or profitability of prescription
  pharmaceuticals is subject to government control. In the United States, recent
  federal and state government initiatives have been directed at lowering the
  total cost of health care, and the U.S. Congress and state legislatures will
  likely continue to focus on health care reform, the cost of prescription
  pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we
  cannot predict whether any such legislative or regulatory proposals will be
  adopted, the announcement or adoption of such proposals could materially harm
  our business, financial condition and results of operations.
  
       Our ability to commercialize our products successfully will depend in part
  on the extent to which appropriate reimbursement levels for the cost of our
  products 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.
  
  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 September 30, 2001, had an accumulated deficit of approximately $66.3
  million. We expect to
  
                                        -11-
  continue to incur significant operating losses over the next several years as we
  continue to incur increasing costs for research and development, clinical trials
  and manufacturing. Our ability to achieve profitability depends upon our
  ability, alone or with others, to successfully complete the development of our
  proposed products, obtain the required regulatory clearances and manufacture and
  market our proposed products. Development of pharmaceutical systems is costly
  and requires significant investment. In addition, we may choose to license
  either additional drug delivery platform technology or rights to particular
  drugs 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 products and do not expect to receive significant revenue in the near
  future. All revenues to date are from the sale of products we acquired in
  October 1999 in connection with the acquisition of substantially all of the
  assets of IntraEAR, Inc., the ALZET product we acquired in April 2000 from ALZA
  and the sale of biodegradable polymers and contract research and development
  revenues from our SBS subsidiary. We do not expect these revenues to increase
  significantly in future periods. We do not anticipate commercialization and
  marketing of our products 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 do not control ALZA's ability to develop and commercialize DUROS technology
  outside of fields licensed to us, and problems encountered by ALZA could result
  in negative publicity, loss of sales and delays in market acceptance of our
  DUROS-based pharmaceutical systems
  
       ALZA retains complete rights to the DUROS technology for fields outside the
  specific fields licensed to us. Accordingly, ALZA may develop and commercialize
  DUROS-based products or license others to do so, so long as there is no conflict
  with the rights granted to us. ALZA recently received FDA approval to market its
  first DUROS-based product, Viadur (leuprolide acetate implants) for the
  palliative treatment of advanced prostate cancer. If ALZA fails to commercialize
  this product successfully, or encounters problems associated with this product,
  negative publicity could be created about all DUROS-based products, which could
  result in harm to our reputation and cause reduced sales of our products. In
  addition, if any third-party that may be licensed by ALZA fails to develop and
  commercialize DUROS-based products successfully, the success of all DUROS-based
  systems could be impeded, including ours, resulting in delay or loss of revenue
  or damage to our reputation, any one of which could harm our business.
  
       We do not own the trademark "DUROS" and any competitive advantage we derive
  from the name may be impaired by third-party use ALZA owns the trademark
  "DUROS." Because ALZA is also developing and marketing DUROS-based systems, and
  may license third parties to do so, there may be confusion in the market between
  ALZA, its potential licensees and us, and this confusion could impair the
  competitive advantage, if any, we derive from use of the DUROS name. In
  addition, any actions taken by ALZA or its potential licensees that negatively
  impact the trademark "DUROS" could negatively impact our reputation and result
  in reduced sales of our DUROS-based pharmaceutical systems.
  
                                        -12-
  We may be sued by third parties which claim that our products infringe on their
  intellectual property rights, particularly because there is substantial
  uncertainty about the validity and breadth of medical patents
  
       We may be exposed to future litigation by third parties based on claims
  that our products or activities infringe the intellectual property rights of
  others or that we have misappropriated the trade secrets of others. This risk is
  exacerbated by the fact that the validity and breadth of claims covered in
  medical technology patents and the breadth and scope of trade secret protection
  involve complex legal and factual questions for which important legal principles
  are unresolved. Any litigation or claims against us, whether or not valid, could
  result in substantial costs, could place a significant strain on our financial
  resources and could harm our reputation. In addition, intellectual property
  litigation or claims could force us to do one or more of the following:
  
       .    cease selling, incorporating or using any of our products 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 products, which would be costly and time-consuming.
  
  If we are unable to adequately protect or enforce our intellectual property
  rights or secure rights to third-party patents, we may lose valuable assets,
  experience reduced market share or incur costly litigation to protect our rights
  
       Our success will depend in part on our ability to obtain patents, maintain
  trade secret protection and operate without infringing the proprietary rights of
  others. As of December 31, 2001, we held four issued U.S. patents and two issued
  foreign patent. In addition, we have 24 pending U.S. patent applications and
  have filed 16 patent applications under the Patent Cooperation Treaty, from
  which 15 national phase applications are currently pending in Europe, Australia
  and Canada. As of December 31, 2001, our subsidiary SBS held 4 issued U.S.
  patents, 1 issued foreign patent and 5 pending U.S. patent applications and has
  filed 5 patent applications under the Patent Cooperation Treaty. To maintain the
  license rights to ALZA intellectual property granted to us under our development
  and commercialization agreement with ALZA, we must meet annual minimum
  development spending requirements and fund development of a minimum number of
  products. If we do not meet these diligence requirements, we may lose rights to
  one or more of our licensed fields. Also, under our agreement with ALZA, we must
  assign to ALZA any intellectual property rights relating to the DUROS system and
  its manufacture and any combination of the DUROS system with other components,
  active agents, features or processes. In addition, ALZA retains the right to
  enforce and defend against infringement actions relating to the DUROS system,
  and if ALZA exercises these rights, it will be entitled to the proceeds of these
  infringement actions.
  
       The patent positions of pharmaceutical companies, including ours, are
  uncertain and involve complex legal and factual questions. In addition, the
  coverage claimed in a patent application can be significantly reduced before the
  patent is issued. Consequently, our patent
  
                                        -13-
  applications or those of ALZA that are licensed to us may not issue into
  patents, and any issued patents may not provide protection against competitive
  technologies or may be held invalid if challenged or circumvented. Our
  competitors may also independently develop products similar to ours or design
  around or otherwise circumvent patents issued to us or licensed by us. In
  addition, the laws of some foreign countries may not protect our proprietary
  rights to the same extent as U.S. law.
  
       We also rely upon trade secrets, technical know-how and continuing
  technological innovation to develop and maintain our competitive position. We
  require our employees, consultants, advisors and collaborators to execute
  appropriate confidentiality and assignment-of-inventions agreements with us.
  These agreements typically provide that all materials and confidential
  information developed or made known to the individual during the course of the
  individual's relationship with us is to be kept confidential and not disclosed
  to third parties except in specific circumstances, and that all inventions
  arising out of the individual's relationship with us shall be our exclusive
  property. These agreements may be breached, and in some instances, we may not
  have an appropriate remedy available for breach of the agreements. Furthermore,
  our competitors may independently develop substantially equivalent proprietary
  information and techniques, reverse engineer our information and techniques, or
  otherwise gain access to our proprietary technology.
  
       We may be unable to meaningfully protect our rights in trade secrets,
  technical know-how and other non-patented technology. We may have to resort to
  litigation to protect our intellectual property rights, or to determine their
  scope, validity or enforceability. Enforcing or defending our proprietary rights
  is expensive, could cause diversion of our resources and may not prove
  successful. Any failure to enforce or protect our rights could cause us to lose
  the ability to exclude others from using our technology to develop or sell
  competing products.
  
  We rely heavily on third parties to support development, clinical testing and
  manufacturing of our products
  
       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 MDS Pharma, Inc. to perform blood plasma assays in
  connection with our clinical trials for Chronogesic(TM), Nelson Laboratories,
  Inc. to perform quality control services related to components of our
  DUROS-based pharmaceutical systems, and Da / Pro Rubber Inc. to supply us with
  molded rubber components of our DUROS-based pharmaceutical systems. In the past,
  we relied on Chesapeake Biological Labs, Inc. to perform the final manufacturing
  steps of our Chronogesic(TM) product, and we may need to rely on a third party
  manufacturer again if we encounter delays in readying our manufacturing facility
  for production. See "We may not be able to manufacture sufficient quantities of
  our products to support our clinical and commercial requirements at an
  acceptable cost, and we have limited manufacturing experience." We anticipate
  that we will continue to rely on these and other third party contractors to
  support development, clinical testing, and manufacturing of our pharmaceutical
  systems. Failure of these contractors to provide the required services in a
  timely manner or on reasonable commercial terms could materially delay the
  
                                        -14-
  development and approval of our products, increase our expenses and
  materially harm our business, financial condition and results of operations.
  
  Key components of our DUROS-based 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 DUROS-based
  pharmaceutical systems are currently purchased from a single or a limited number
  of outside sources. The reliance on a sole or limited number of suppliers could
  result in:
  
           .  delays associated with redesigning a product due to a failure to
              obtain a single source component;
  
           .  an inability to obtain an adequate supply of required components;
              and
  
           .  reduced control over pricing, quality and time delivery.
  
           We have a supply agreement with Mallinckrodt, Inc. for our sufentanil
  requirements for our Chronogesic(TM) product, which expires in September 2004.
  Additionally, we have a supply agreement with RMS Company under which RMS has
  agreed to supply us with titanium components of our DUROS-based pharmaceutical
  systems until April 2004. Other that these agreements, we do not have long-term
  agreements with any of our suppliers, and therefore the supply of a particular
  component could be terminated at any time without penalty to the supplier. Any
  interruption in the supply of single source components could cause us to seek
  alternative sources of supply or manufacture these components internally. If the
  supply of any components for our pharmaceutical systems is interrupted,
  components from alternative suppliers may not be available in sufficient volumes
  within required timeframes, if at all, to meet our needs. This could delay our
  ability to complete clinical trials and obtain approval for commercialization
  and marketing of our products, causing us to lose sales, incur additional costs
  and delay new product introductions and could harm our reputation.
  
  We lack marketing, sales and distribution experience for pharmaceutical systems
  and we may not be able to sell our products if we do not enter into
  relationships with third parties or develop a direct sales organization
  
           We have yet to establish marketing, sales or distribution capabilities
  for our pharmaceutical systems. We intend to enter into agreements with third
  parties to sell our products or to develop our own sales and marketing force. We
  may be unable to establish or maintain third-party relationships on a
  commercially reasonable basis, if at all. In addition, these third parties may
  have similar or more established relationships with our competitors.
  
           If we do not enter into relationships with third parties for the sales
  and marketing of our products, we will need to develop our own sales and
  marketing capabilities. DURECT has only limited experience in developing,
  training or managing a sales force. If we choose to establish a direct sales
  force, we will incur substantial additional expenses in developing, training and
  
                                        -15-
  managing such an organization. We may be unable to build a sales force, the cost
  of establishing such a sales force may exceed our product revenues, or our
  direct marketing and sales efforts may be unsuccessful. In addition, we compete
  with many other companies that currently have extensive and well- funded
  marketing and sales operations. Our marketing and sales efforts may be unable to
  compete successfully against these other companies. We may be unable to
  establish a sufficient sales and marketing organization on a timely basis, if at
  all. We may be unable to engage qualified distributors. Even if engaged, these
  distributors may:
  
           .  fail to satisfy financial or contractual obligations to us;
  
           .  fail to adequately market our products;
  
           .  cease operations with little or no notice to us; or
  
           .  offer, design, manufacture or promote competing product lines.
  
           If we fail to develop sales, marketing and distribution channels, we
  would experience delays in product sales and incur increased costs, which would
  harm our financial results.
  
  If we 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. 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 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 systems. In
  addition, we may expend significant funds towards such training before any
  orders are placed for our products.
  
  Investors may experience substantial dilution of their investment
  
           In the past, we have issued options to acquire common stock at prices
  below the initial public offering price. To the extent these outstanding options
  are ultimately exercised, there will be dilution to investors.
  
  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 products. 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 products. 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
  
                                        -16-
  research or development programs which would materially harm our business,
  financial condition and results of operations.
  
           We believe that our cash, cash equivalents and investments, will be
  adequate to satisfy our capital needs for at least the next 18 months. However,
  our actual capital requirements will depend on many factors, including:
  
           .  continued progress and cost of our research and development
              programs;
  
           .  progress with preclinical studies and clinical trials;
  
           .  the time and costs involved in obtaining regulatory clearance;
  
           .  costs involved in preparing, filing, prosecuting, maintaining and
              enforcing patent claims;
  
           .  costs of developing sales, marketing and distribution channels and
              our ability to sell our products;
  
           .  costs involved in establishing manufacturing capabilities for
              commercial quantities of our products;
  
           .  competing technological and market developments;
  
           .  market acceptance of our products; and
  
           .  costs for recruiting and retaining employees and consultants.
  
           We may consume available resources more rapidly than currently
  anticipated, resulting in the need for additional funding. We may seek to raise
  any necessary additional funds through equity or debt financings, convertible
  debt financings, collaborative arrangements with corporate partners or other
  sources, which may be dilutive to existing stockholders. In addition, in the
  event that additional funds are obtained through arrangements with collaborative
  partners or other sources, we may have to relinquish rights to some of our
  technologies, product candidates or products under development 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, or relinquish to ALZA rights to develop DUROS products in
  certain fields, resulting in loss of sales, increased costs, and reduced
  revenues.
  
  Future deferred compensation expenses and non-cash charges may adversely impact
  or delay our profitability
  
           To date, we have recorded deferred compensation expenses related to
  stock options grants, including stock options assumed in our acquisition of SBS,
  which will be amortized as follows: $661,000 for the three months ending
  December 31, 2001, $1.7 million for the year
  
                                        -17-
  ending December 31, 2002, $724,000 for the year ending December 31, 2003,
  $108,000 for the year ending December 31, 2004, $18,000 for the year ending
  December 31, 2005, and $2,000 for the year ending December 31, 2006. In
  addition, deferred compensation expense related to option awards to
  non-employees will be calculated during the vesting period of the option based
  on the then-current price of our common stock, which could result in significant
  charges that adversely impact or delay our profitability. Furthermore, we have
  issued a warrant to ALZA with a value of approximately $6.5 million, which will
  be amortized over time based on sales of our products and which will also
  adversely impact or delay our profitability.
  
  We depend upon key personnel who may terminate their employment with us at any
  time, and we need to hire additional qualified personnel
  
           Our success will depend to a significant degree upon the continued
  services of key management, technical, and scientific personnel, including Felix
  Theeuwes, our Chairman and Chief Scientific Officer, James E. Brown, our
  President and Chief Executive Officer and Thomas A. Schreck, our Chief Financial
  Officer. Although we have obtained key man life insurance policies for each of
  Messrs. Theeuwes, Brown and Schreck in the amount of $1 million, this insurance
  may not adequately compensate us for the loss of their services. In addition,
  our success will depend on our ability to attract and retain other highly
  skilled personnel. Competition for qualified personnel is intense, and the
  process of hiring and integrating such qualified personnel is often lengthy. We
  may be unable to recruit such personnel on a timely basis, if at all. Our
  management and other employees may voluntarily terminate their employment with
  us at any time. The loss of the services of key personnel, or the inability to
  attract and retain additional qualified personnel, could result in delays to
  product development or approval, loss of sales and diversion of management
  resources.
  
  We may not successfully manage our growth
  
           Our success will depend on the expansion of our operations and the
  effective management of growth, which will place a significant strain on our
  management and on our administrative, operational and financial resources. To
  manage such growth, we must expand our facilities, augment our operational,
  financial and management systems and hire and train additional qualified
  personnel. If we are unable to manage growth effectively our business would be
  harmed.
  
  The market for our products is new, rapidly changing and competitive, and new
  products or technologies developed by others could impair our ability to grow
  our business and remain competitive
  
           The pharmaceutical industry is subject to rapid and substantial
  technological change. Developments by others may render our products under
  development or technologies noncompetitive or obsolete, or we may be unable to
  keep pace with technological developments or other market factors. Technological
  competition in the industry from pharmaceutical and biotechnology companies,
  universities, governmental entities and others diversifying into the field is
  intense and is expected to increase. Many of these entities have significantly
  greater research and development capabilities than we do, as well as
  substantially more marketing,
  
                                        -18-
  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 a new enterprise and are engaged in the development of novel
  therapeutic technologies. As a result, 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 products. Our competitors may develop products that
  are safer, more effective or less costly than our products 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 products even if commercialized. Chronic pain
  can also be treated by oral medication, transdermal drug delivery systems, such
  as drug patches, or with other implantable drug delivery devices. 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 products 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 products involve an
  inherent risk that product liability claims will be asserted against us.
  Although we are insured against such risks up to a $5 million annual aggregate
  limit in connection with clinical trials and commercial sales of our products,
  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 products,
  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 products.
  
  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 products, 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
  
                                        -19-
  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 our acquisition of SBS, which,
  through its subsidiary Birmingham Polymers, Inc., is engaged in the business of
  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 stock price may fluctuate, and your investment in our stock could decline in
  value
  
           The average daily trading volume of our common stock for the twelve
  months ending December 31, 2001, was 111,628 shares. The limited trading volume
  of our stock may contribute to its volatility, and an active trading market in
  our stock might not develop or continue. The market price of our common stock
  may fluctuate significantly in response to factors which are beyond our control.
  The stock market in general has recently experienced extreme price and volume
  fluctuations. In addition, the market prices of securities of technology and
  pharmaceutical companies have also been extremely volatile, and have experienced
  fluctuations that often have been unrelated or disproportionate to the operating
  performance of these companies. These broad market fluctuations could result in
  extreme fluctuations in the price of our common stock, which could cause a
  decline in the value of our investors' stock.
  
  Future sales of our common stock may depress our stock price
  
           Commencing on March 27, 2001, which was 180 days after the date of our
  initial public offering, as many as 34,173,026 shares of our common stock became
  available for sale in the public market, subject to applicable securities laws.
  Additionally, in connection with our acquisition of SBS, we are filing with the
  SEC a registration statement on Form S-3 under the Securities Act with respect
  to the 2,145,652 shares of common stock issued to the former SBS shareholders or
  issuable upon the exercise of warrants and certain options we assumed. The
  common stock issued in connection with this acquisition shall become freely
  tradable in the public market after this registration statement has been
  declared effective by the Securities and Exchange Commission. Further
  information regarding the SBS acquisition is included in the company's current
  report on Form 8-K filed with the SEC on May 15, 2001. We may also seek to raise
  capital through equity
  
                                        -20-
  or convertible debt financings or through the sale of equity or convertible
  securities to collaboration or commercialization partners. Such financing
  activities may increase the number of shares of our common stock being sold in
  the public markets. If substantial amounts of our common stock were to be sold
  in the public market, the market price of our common stock could fall. In
  addition, these sales could create the perception to the public of difficulties
  or problems in our business. As a result, these sales also might make it more
  difficult for us to sell equity or equity-related securities in the future at a
  time and price that we deem appropriate.
  
  We have broad discretion over the use of our cash and investments, and their
  investment may not yield a favorable return
  
           Our management has broad discretion over how our cash and investments
  are used and may invest in ways with which our stockholders may not agree and
  that do not yield favorable returns.
  
  Executive officers, directors and entities affiliated with them have substantial
  control over us, which could delay or prevent a change in our corporate control
  favored by our other stockholders
  
           Our directors, executive officers and principal stockholders, together
  with their affiliates have substantial control over us. The interests of these
  stockholders may differ from the interests of other stockholders. As a result,
  these stockholders, if acting together, would have the ability to exercise
  control over all corporate actions requiring stockholder approval irrespective
  of how our other stockholders may vote, including:
  
           .  the election of directors;
  
           .  the amendment of charter documents;
  
           .  the approval of certain mergers and other significant corporate
              transactions, including a sale of substantially all of our assets;
              or
  
           .  the defeat of any non-negotiated takeover attempt that might
              otherwise benefit the public stockholders.
  
  Our certificate of incorporation, our bylaws, Delaware law and our stockholder
  rights plan contain provisions that could discourage another company from
  acquiring us
  
           Provisions of Delaware law, our certificate of incorporation, bylaws
  and stockholder rights plan may discourage, delay or prevent a merger or
  acquisition that stockholders may consider favorable, including transactions in
  which you might otherwise receive a premium for your shares. These provisions
  include:
  
           .  authorizing the issuance of "blank check" preferred stock without
              any need for action by stockholders;
  
                                        -21-
  .  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 by-laws;
  
           .  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.
  
                                        -22-
  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 hereunto duly authorized.
  
                                         DURECT Corporation
  
  Date:  January 11, 2002                By: /s/ James E. Brown
                                             ------------------
                                             James E. Brown
                                             President and Chief Executive Officer
  
                                        -23-