We are delighted to report that 2004 was the year where we saw the transformation of DURECT from a company that was focused on a single product candidate, CHRONOGESIC®, to a company with a diversified pipeline of five product candidates in advanced development, namely, the SABER™- Bupivacaine injectable depot, TRANSDUR™-Sufentanil Patch, ORADUR™ Oxycodone (Remoxy™), CHRONOGESIC® Implant and DURIN™-Leuprolide.

The success that we have achieved is based on the foundation we laid since the founding of DURECT in 1998, and on which we have continued to build such that, to date we have established a broad base of proprietary injectable, oral, transdermal and implantable technologies suitable for the treatment of chronic debilitating diseases and the enabling of biotech technology products. This broad technology base has allowed us to diversify our product portfolio and minimize our development and financial risk by establishing partnerships. In addition, the strength of our technology and product portfolio allowed us to execute on late-stage development agreements and maintain commercial rights on select products to further our goal of developing into a specialty pharmaceutical company with sales and marketing capabilities to drive greater shareholder value.

The highlights of the year include:

• On the strength of positive Phase I data, our SABER-Bupivacaine product candidate entered Phase II clinical testing at the end of 2004. This product candidate is intended to be administered around a surgical site after surgery to provide up to 72 hours or more of regional pain relief and is based on our patented SABER delivery system. We believe this product could potentially reduce hospital stays and the amount of traditional post-surgical pain medications needed by patients, as well as the side effects that result from the use of concomitant opioid medications. Although there has been significant interest from potential commercialization partners for this product candidate, we are evaluating retaining commercialization rights for this product candidate to further our goal of developing into a specialty pharmaceutical company.
  
  
• Based on the infrastructure and the clinical and delivery experience that we have developed on sufentanil through our CHRONOGESIC program, we established a transdermal program to develop a product that also enhances our return on our sufentanil investment. Our TRANSDUR Sufentanil patch for the treatment of chronic pain is designed for a dosing period of one week and is about one fifth the size of currently marketed opioid patches. This program has moved very rapidly, from initial concept about eighteen months ago to the initiation of Phase II studies this year. As a result of our progress, we established a strong commercialization partnership with Endo Pharmaceuticals on this product candidate in March 2005 for the U.S. and Canadian markets under which we retain co-promotion rights, as well as all commercial rights for non-North American territories, to support our transition into a specialty pharmaceutical company.
  
  
• Remoxy (ORADUR-Oxycodone), a product candidate utilizing ORADUR, our proprietary oral sustained release gel cap technology under development in collaboration with Pain Therapeutics advanced into Phase III clinical testing at the end of 2004.
  
  
• DURIN Leuprolide for the treatment of Alzheimer’s disease, under development in collaboration with the private company Voyager Pharmaceuticals advanced into clinical testing. In 2004, Voyager filed an IND and initiated Phase I testing on this product candidate while simultaneously conducting Phase II proof-of-concept studies.
  
  
• In 2004, we reported that our CHRONOGESIC program for the development of a product candidate to deliver sufentanil from the DUROS implant for the treatment of chronic pain, has been delayed after we continued to see a small fraction of systems experience a pre-mature shut down prior to end of the intended drug delivery period in animal testing. We continue to work on redesigning the system to address this issue.
  
  

In summary, DURECT met all of its corporate goals in 2004 for four of its five programs in development. In addition to advancing our product pipeline, we achieved regulatory milestones with the acceptance of two INDs for product candidates utilizing our technologies and continued to build on our strong patent position covering our technologies. We have a strong position in intangible assets such as “know-how” and other intellectual property to protect our products. Each of our products, both licensed and proprietary, possess key attributes critical to becoming a successful product in the large and growing markets they address. There is tremendous enthusiasm and optimism at DURECT because of the quality of the products we are developing and their increasing stage of maturity.

On behalf of everyone at DURECT, we thank you for your continued support and look forward to the achievement of major milestones in 2005.

Sincerely,

James E. Brown, D.V.M. President and Chief Executive Officer
Felix Theeuwes, D.Sc Chairman and Chief Scientific Officer
Thomas A. Schreck Chief Financial Officer