UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2017March 31, 2021

OR

For the transition period from to

Commission file number 000-31615

DURECT CORPORATION

(Exact name of registrant as specified in its charter)

10260 Bubb Road

Cupertino, California 95014

(Address of principal executive offices, including zip code)

(408) 777-1417

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of October 27, 2017,May 3, 2021, there were 148,546,131227,406,182 shares of the registrant’s Common Stock outstanding.

INDEX

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PART I. FINANCIALFINANCIAL INFORMATION

DURECT CORPORATION

CONDENSED BALANCE SHEETS

(in thousands)

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

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DURECT CORPORATION

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS

(in thousands, except per share amounts)

(unaudited)

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

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DURECT CORPORATION

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share amounts)

(unaudited)

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

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DURECT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

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

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DURECT CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Nature of Operations

DURECT Corporation (the Company) was incorporated in the state of Delaware on February 6, 1998.  The Company is a biopharmaceutical company with research and development programs broadly falling into two categories: (i) new chemical entities derived from our Epigenetics Regulator Program, in which we attemptthe Company attempts to discover and develop molecules which have not previously been approved and marketed as therapeutics, and (ii) Drug DeliveryProprietary Pharmaceutical Programs, in which we apply ourthe Company applies its formulation expertise and technologies largely to active pharmaceutical ingredients whose safety and efficacy have previously been established but which we aimthe Company aims to improve in some manner through a new formulation. The Company has several products under development by itself and with third party collaborators. The Company also manufactures and sells osmotic pumps used in laboratory research, and designs, develops and manufactures a wide range of standard and custom biodegradable polymers andcertain excipients for pharmaceutical and medical devicecertain clients for use as raw materials in their products. In addition, the Company conducts research and development of pharmaceutical products in collaboration with third party pharmaceutical and biotechnology companies.

Basis of Presentation

The accompanying unaudited financial statements include the accounts of the Company. These financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC), and therefore do not include all the information and footnotes necessary for a complete presentation of the Company’s results of operations, financial position and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP). The unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position at September 30, 2017,March 31, 2021, the operating results and comprehensive income (loss)loss, and stockholders’ equity for the three and nine months ended September 30, 2017 and 2016,March 31, 2021, and cash flows for the ninethree months ended September 30, 2017March 31, 2021 and 2016.2020. The balance sheet as of December 31, 20162020 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto, included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 20162020 filed with the SEC.

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

Discontinued Operations

In December 2020, the Company announced its decision to sell its LACTEL Absorbable Polymer (LACTEL) product line to Evonik, which was completed on December 31, 2020 and therefore the accompanying statement of operations for the three months ended March 31, 2020 has been recast to reflect the revenue and expenses related to the Company’s LACTEL product line as discontinued operations (see Note 8). The Company believes this format provides comparability with its previously filed financial statements.

Risks and Uncertainties

The pandemic caused by an outbreak of a new strain of coronavirus, COVID-19, has resulted, and is likely to continue to result, in significant national and global economic disruption and may adversely affect our business. COVID-19 initially also had a negative impact on orders for our ALZET product line as many ALZET customers reduced their activities during the pandemic. ALZET orders have recovered significantly in 2021, a trend that may or may not continue as the impact of the pandemic has proven to be difficult to predict.  For DUR-928, the Company may experience delays in patient enrollment of the Phase 2b clinical trial in patients with alcohol-associated hepatitis (AH) or disruptions in supplies of DUR-928 or other items required for clinical trials.  These delays and potential disruptions will increase the overall costs of development of DUR-928. The Company is actively monitoring the impact of COVID-19 and the possible effects on its financial condition, liquidity, operations, clinical trials, suppliers, industry and workforce. However, the full extent, consequences, and duration of the COVID-19 pandemic and the resulting impact on the Company cannot currently be predicted. The Company will continue to evaluate the impact that these events could have on the Company’s operations, financial position, and the results of operations and cash flows.

Liquidity and Need to Raise Additional Capital

As of September 30, 2017,March 31, 2021, the Company had an accumulated deficit of $452.0 million. Although the Company had positive cash flow in the three months ended September 30, 2017, primarily $499.9 million as a result of an upfront payment from Indivior for the assignment of certain patent rights, the Company historically has hadwell as negative cash flows from operating activities for the three months ended March 31, 2021, and expects itsto continue to incur negative cash flows to continue.from operating activities in the foreseeable future.  The Company will continue to require substantial funds to continue research and development, including clinical trials of its product candidates. The Company believes its existing cash, cash equivalents and investments are sufficient to fund its operating cashflow requirements for a period greater than 12 months from the date of issuance of these condensed financial statements. Management’s plans in order to meet its operating cash flow requirements beyond the next 12 months from the date these

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condensed financial statements are filed, may include seeking additional collaborative agreements for certain of itsthe Company’s programs and achieving milestone and other payments underrevenue from its collaboration and licensing agreements, as well as financing activities such as public offerings and private placements of its common stock, preferred stock offerings, issuances of debt and convertible debt instruments.

There are no assurances that such additional funding will be obtained andor that the Company will succeed in its future operations. If the Company cannot successfully raise additional capital when needed and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected.

Inventories

Inventories are stated at the lower of cost or market,net realizable value, with cost determined on a first-in, first-out basis. Inventories, in part, include certain excipients that are sold to a customer for a currently marketed animal health product and included in several products in development or awaiting regulatory approval. These inventories are capitalized based on management’s judgment of probable sale prior to their expiration dates. The valuation of inventory requires management to estimate the quantities of inventory that may become expired prior to use. The Company may be required to record a reserve for certain amounts of itsexpense previously capitalized inventory costs upon a change in management’s judgment due to among other potential factors, a denial or delay of approval of a customer’s product by the necessary regulatory bodies, or new information that suggests that the inventory will not be saleable.  In addition, these circumstances may causeIf the Company is able to record a liability related to minimum purchase agreementssubsequently sell products made with raw materials that were previously written down, the Company has in place for raw materials. In

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October 2017, the Company announced that PERSIST, the Phase 3 clinical trial for POSIMIR^® (SABER^®-Bupivacaine), did not meet its primary efficacy endpoint of reduction in pain on movement over the first 48 hours after surgerywill report an unusually high gross profit as compared to standard bupivacaine HCl. As a result, the Company wrote down certain lots of inventory which arethere will be no longer considered to be probable for use prior to expiration and prepaid inventory related to a minimum purchase agreement for an excipient. In addition, the Company recorded a liability related to a minimum purchase agreement for the same excipient. In the three and nine months ended September 30, 2017, the Company recorded charges toassociated cost of goods sold of approximately $2.0 million, of which approximately $503,000 related to the write-down of the cost basis of inventory on hand, $500,000 related to the prepaid inventory for the minimum purchase commitment for this excipient, and $1.0 million related to the accrual of a liability for the remaining minimum purchase commitment for the same excipient. As of September 30, 2017, the remaining carrying value of the excipient in the Company’s inventory was $81,000. In the event that management determines that the Company will not utilize all of these materials, there could be a potential write-off related to this inventory in future periods.materials.

The Company’s inventories consist of the following (in thousands):

Revenue Recognition

Revenue from the sale of products is recognized when there is persuasive evidence that an arrangement exists, the product is shipped and title transfers to customers, provided no continuing obligation on the Company’s part exists, the price is fixed or determinable and the collectability of the amounts owed is reasonably assured. The Company enters into license and collaboration agreements under which itthe Company may receive upfront license fees, research funding and contingent milestone payments and royalties.  

Product Revenue, Net

The Company’s deliverables under these arrangements typically consist of granting licenses to intellectual property rights and providingCompany sells osmotic pumps used in laboratory research, and development services. For multiple-element arrangements, each deliverable within a multiple deliverable revenue arrangement is accountedmanufactures certain excipients for pharmaceutical clients for use as a separate unit of accounting if bothraw materials in their products.

Revenues from product sales are recognized when the customer obtains control of the following criteria are met: (1) the delivered item or items have valueCompany’s product, which occurs at a point in time, typically upon shipment to the customer oncustomer. The Company expenses incremental costs of obtaining a standalone basiscontract as and (2) for an arrangement that includes a general right of return relative towhen incurred if the delivered item(s), delivery or performanceexpected amortization period of the undelivered item(s)asset that the Company would have recognized is considered probableone year or less.

Trade Discounts and substantiallyAllowances: The Company provides certain customers with discounts that are explicitly stated in the Company’s control. The accounting standards contain a presumption that separate contracts entered into at or near the same time with the same entity or related parties were negotiatedand are recorded as a package and should be evaluated as a single agreement. Deferred revenue associated with a non-refundable payment received under a license and collaboration agreement for which the performance obligations are terminated will result in an immediate recognitionreduction of any remaining deferred revenue in the period the related product revenue is recognized.

Product Returns: Consistent with industry practice, the Company generally offers customers a limited right of return for products that termination occurred provided that all performance obligations have been satisfied.

From time-to-time,purchased from the Company. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using its historical sales information. Consistent with historical experience, the Company alsocontinues to expect product returns to be minimal.

Collaborative Research and Development and Other Revenue

The Company enters into sales of intellectual property rightslicense agreements, under which it may receive upfront payments, contingent milestone payments and earn-outs fromlicenses certain rights to its product candidates to third party collaborators.parties. The Company’s deliverable underterms of these arrangements typically consistsinclude payment to the Company of saleone or more of the following: non-refundable, up-front license fees; reimbursement of development costs incurred by the Company under approved work plans; development, regulatory and commercial milestone payments; payments for manufacturing supply services the Company provides through its contract manufacturers; and royalties on net sales of licensed products. Each of these payments results in collaborative research and development revenues, except for revenues from royalties on net sales of licensed products, which are classified as other revenues.

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. The Company uses key assumptions to determine the standalone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. The Company expects to recognize revenue for the variable consideration currently being constrained when it is probable that a significant revenue reversal will not occur.

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Licenses of intellectual property: If the license to the Company’s intellectual property rights,is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaborative research and development revenues and net income (loss) in the period of adjustment.

Milestone Payments: At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaborative research and development revenues and net income (loss) in the period of adjustment.

Manufacturing Supply Services: Arrangements that include a promise for future supply of drug product for either clinical development or commercial supply at the customer’s discretion are generally considered as options. The Company assesses if these options provide a material right to the customer and if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments when the customer exercises these options, any additional payments are recorded in collaborative research and development revenue when the customer obtains control of the goods, which is upon delivery.

Royalties and Earn-outs: For arrangements that include sales-based royalties or earn-outs, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized material royalty revenue resulting from the Company’s collaborative arrangements or material earn-out revenue from the Company’s patent purchase agreement with Indivior.

The Company receives payments from its customers based on development cost schedules established in each contract. Up-front payments are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements.  Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not contain any substantive continuing obligations subsequent toassess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the related rights, title, and interestpromised goods or services to the buyer. customer will be one year or less.

Total revenue by geographic region (based on the location of the customer) for the three months ended March 31, 2021 and 2020 are as follows (in thousands):

Prepaid and Accrued Contract Research Expenses

The Company recognizesincurs significant costs associated with third party consultants and organizations for pre-clinical studies, clinical trials, contract research and manufacturing, validation, testing, regulatory advice and other research and development-related services. The Company is required to estimate periodically the upfront payment as revenue because such arrangement constitutes the Company's revenue-earning activities and is in line with its ordinary coursecost of ongoing business operations.services rendered but unbilled based on management’s estimates of project status. If these good faith estimates are inaccurate, actual expenses incurred could materially differ from these estimates.

Research and development revenueexpenses are primarily comprised of salaries and benefits associated with research and development personnel, overhead and facility costs, preclinical and non-clinical development costs, clinical trial and related clinical manufacturing costs, contract services, and other outside costs. Research and development costs are expensed as incurred. Research and development

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costs paid to services performedthird parties under the collaborative arrangements with the Company’s third-party collaborators issponsored research agreements are recognized as the related services are performed. In addition, reimbursements of research and development servicesexpenses incurred by the Company’s partners are performed. These research payments received under each respective agreement are not refundable and are generally based on reimbursement of qualified expenses,recorded as defined in the agreements. Research and development expenses under the collaborative research and development agreements generally approximate or exceed the revenue recognized under such agreements over the term of the respective agreements. Deferred revenue may result when the Company does not expend the required level of effort during a specific period in comparison to funds received under the respective agreement.

Milestone payments under collaborative arrangements are triggered either by the results of the Company’s research and development efforts or by specified sales results by a third-party collaborator. Milestones related to the Company’s development-based activities may include initiation of various phases of clinical trials, successful completion of a phase of development or results from a clinical trial, acceptance of a New Drug Application by the FDA or an equivalent filing with an equivalent regulatory agency in another territory, or regulatory approval by the FDA or by an equivalent regulatory agency in another territory. Due to the uncertainty involved in meeting these development-based milestones, the development-based milestones are considered to be substantive (i.e., not

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just achieved through passage of time) at the inception of the collaboration agreement. In addition, the amounts of the payments assigned thereto are considered to be commensurate with the enhancement of the value of the delivered intellectual property as a result of the Company’s performance. The Company’s involvement is generally necessary to the achievement of development-based milestones. The Company would account for development-based milestones as revenue upon achievement of the substantive milestone events. Milestones related to sales-based activities may be triggered upon events such as the first commercial sale of a product or when sales first achieve a defined level. Under the Company’s collaborative agreements, the Company’s third-party collaborators will take the lead in commercialization activities and the Company is typically not involved in the achievement of sales-based milestones. These sales-based milestones would be achieved after the completion of the Company’s development activities. The Company would account for the sales-based milestones in the same manner as royalties, with revenue recognized upon achievement of the milestone. In addition, upon the achievement of either development-based or sales-based milestone events, the Company has no future performance obligations related to any milestone payments.revenue.

Comprehensive Income (Loss)Loss

Components of other comprehensive income (loss)loss are comprised entirely of unrealized gains and losses on the Company’s available-for-sale securities for all periods presented. Total comprehensive loss has been disclosed in the Company’s Condensed Statements of Comprehensive Loss.

Net Income (Loss)Loss Per Share

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

The numerators and denominators in the calculation of basic and diluted net income (loss)loss per share were as follows:follows (in thousands except per share amounts):

Options to purchase approximately 20.0 million shares of common stock were excluded from the denominator in the calculation of diluted net loss per share for the nine months ended September 30, 2017, as the effect would be anti-dilutive. Options to purchase approximately 16.94.8 million and 18.87.3 million shares of common stock were excluded from the denominator in the calculation of diluted net loss per share for the three and nine months ended September 30, 2016,March 31, 2021 and March 31, 2020, respectively, as the effect would be anti-dilutive.

Recent Accounting Pronouncements

In May 2014,June 2016, the Financial Accounting Standards Board (FASB)FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with CustomersNo. 2016-13 (ASU 2014-09), which amends the guidance in former ASC 605, Revenue Recognition. The core principle2016-13) “Financial Instruments - Credit Losses: Measurement of the guidanceCredit Losses on Financial Instruments.” ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. This standard is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The guidance provides companies with two implementation methods. Companies can choose to apply the standard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application (modified retrospective application). The standard will be effective for the Company in the first quarter of 2018.  The Company is in the process of identifying revenue streamsfiscal years beginning after December 15, 2022 for analysissmall reporting companies, including interim reporting periods within those years and has begun its analysis of a major collaboration under the new standard. However, the Company has not yet completed its final analysis of the impact of this guidance. To date, the Company’s revenues have been derived from product sales, from license and collaboration agreements and from sale of intellectual property rights. Based on the

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Company’s preliminary analysis, it does not currently anticipate a material quantitative impact on product revenue as the timing of revenue recognition for product sales is not expected to significantly change. For the Company’s license and collaboration agreements, the consideration the Company is eligible to receive under these agreements typically consists of upfront payments, research and development funding, milestone payments, and royalties. For the Company’s agreements related to sale of intellectual property rights, the consideration the Company is eligible to receive under these agreements typically consists of upfront payments, milestone payments, and earn-outs. Each of the license and collaboration agreements and the agreements related to sale of intellectual property rights is unique and will need tomust be assessed separately under the five-step process under the new standard. The Company continues to review the impact that this new standard will have on its collaboration and license arrangements and intellectual property purchase agreements as well as on its financial statement disclosures.  The Company will select the modified retrospective method to adopt the standard.

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842), which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement. This ASU becomes effective for the Company in the first quarter of fiscal year 2019 and early adoption is permitted. This ASU is required to be applied withadopted using a modified retrospective approach, and requires application of the new standard at the beginning of the earliest comparative period presented.with certain exceptions. Early adoption is permitted.  The Company is currently evaluatingdoes not expect the impact that ASU 2016-02 willadoption of this standard to have a material effect on its financial statements.

Note 2. Strategic Agreements

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

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Agreement with Sandoz AG

In May 2017, the Company and Sandoz AG (“Sandoz”) entered into a license agreement to develop and market POSIMIR in the United States. Following expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR), the agreement became effective in June 2017. POSIMIR is the Company’s investigational post-operative pain relief depot currently in Phase 3 clinical development in the United States that utilizes the Company’s patented SABER^® technology to deliver bupivacaine to provide up to three days of pain relief after surgery. The Company retains commercialization rights in the rest of the world. Under terms of the agreement, Sandoz made an upfront payment of $20 million, with the potential for up to an additional $43 million in milestone payments based on successful development and regulatory milestones, and up to an additional $230 million in sales-based milestones.  DURECT is responsible for the completion of the ongoing PERSIST Phase 3 clinical trial for POSIMIR as well as FDA interactions through potential approval. If approved, DURECT also has certain manufacturing obligations under this agreement. Sandoz will have exclusive commercialization rights in the United States upon regulatory approval with sole funding responsibility for commercialization activities.  Sandoz will pay the Company a tiered double-digit royalty on product sales for a

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defined period, after which the license granted to Sandoz shall convert to a non-exclusive, fully paid, royalty-free, irrevocable and perpetual license. The term of the agreement shall be for the duration of Sandoz’s obligation to pay royalties for product sales under the Agreement. The agreement provides each party with specified termination rights, including the right of Sandoz to terminate at will after a specified period and each party to terminate the agreement upon material breach of the agreement by the other party. In October 2017, the Company announced that PERSIST, the Phase 3 clinical trial for POSIMIR, did not meet its primary efficacy endpoint of reduction in pain on movement over the first 48 hours after surgery as compared to standard bupivacaine HCl. The failure of the PERSIST trial for POSIMIR to achieve its primary endpoint gives Sandoz a right to terminate the Company’s agreement with them on thirty days’ notice, in addition to the rights they have to terminate for convenience on six months’ notice. 

The Company evaluated the agreement under the accounting guidance for multiple element arrangements and identified three deliverables: the license to develop and market POSIMIR, the research and development services and the manufacturing services.  Given that the delivery of the manufacturing services by the Company is dependent upon approval of POSIMIR by the FDA, and that the fee to be received by the Company for these services, should they be delivered, is consistent with their estimated selling price, the Company considers the manufacturing services to be a contingent deliverable and has excluded them from the initial measurement and allocation of the arrangement consideration.  The Company evaluated the license deliverable and concluded that it did not have stand alone value separate from the research and development services and accordingly combined these deliverables into a single unit of accounting.  The Company allocated the arrangement consideration, which consists of the $20.0 million upfront payment, to this single unit of accounting and will recognize this revenue ratably over the term of its estimated performance period under the agreement, which is the term over which the research and development services are provided.  The effect of a change made to the estimated performance period, and the related ratably recognized revenue, would occur on a prospective basis in the period that the change was made. The Company considers the development and regulatory milestones to be substantive, and will recognize the associated milestone payments as revenue when the underlying milestone events are achieved.

Total collaborative research and development revenue recognized by the Company for Sandoz was $3.8 million and $4.6 million for the three and nine months ended September 30, 2017 respectively, compared with zero for the corresponding periods in 2016. The cumulative aggregate payments received by the Company from Sandoz as of September 30, 2017 were $20.0 million under this agreement.

Patent Purchase Agreement with Indivior

On September 26, 2017, the Company entered into a Patent Purchase Agreement (the “Agreement”“Indivior Agreement”) with Indivior UK Limited (“Indivior”).Indivior. Pursuant to the Indivior Agreement, the Company has assigned to Indivior certain patents that may provide further intellectual property protection for RBP-7000, Indivior’s investigational once-monthly injectable risperidone product for the treatment of schizophrenia.  In consideration for such assignment, Indivior has made an upfront non-refundable payment to DURECT of $12.5 million, and has also agreed to make an additional $5 million payment to DURECT contingent upon the achievement of a regulatory milestone, as well as quarterly earn-out payments that are based on a single digit percentage of U.S. net sales for certain products covered by the assigned patent rights including RBP-7000. The assigned patent rights include granted patents extending through at least 2026. DURECT also receives a non-exclusive right under the assigned patents to develop and commercialize certain risperidone-containing products and products that do not contain risperidone or buprenorphine.  The agreementIndivior Agreement contains customary representations, warranties and indemnities of the parties. The Company received the payment of $12.5 million from Indivior in September 2017 andAmounts recognized the $12.5 million as revenue from sale of intellectual property rights in the three months ended September 30, 2017 as the Company does notMarch 31, 2021 and 2020 related to earn-out revenues from PERSERIS have any continuing obligations under the purchase agreement.

Agreement with Pain Therapeutics, Inc.

In December 2002, the Company entered into an exclusive agreement with Pain Therapeutics, Inc. (Pain Therapeutics) to developbeen immaterial and commercialize on a worldwide basis REMOXY ER and other oral sustained release, abuse deterrent opioid products incorporating four specified opioid drugs, using the ORADUR technology. This agreement currently covers only REMOXY ER.

Under the terms of this agreement, Pain Therapeutics paid the Company an upfront license fee of $1.0 million, with the potential for an additional $3.0 millionare included in performance milestone payments based on the successful development and approval of REMOXY ER. Of these potential milestones, all $3.0 million are development-based milestones. There are no sales-based milestones under the agreement. As of September 30, 2017, the Company had received $1.5 million in cumulative milestone payments.

 In March 2016, Pain Therapeutics resubmitted a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA), and in September 2016, Pain Therapeutics received a Complete Response Letter from the FDA for REMOXY ER. Based on its review, the FDA has determined that the NDA cannot be approved in its present form and specifies additional actions and data that are needed for drug approval.

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Total collaborative research and development revenue recognized for REMOXY-related work performed by the Company for Pain Therapeutics was $4,000 and $109,000 for the three and nine months ended September 30, 2017, compared with $153,000 and $163,000 for the corresponding periods in 2016. The cumulative aggregate payments received by the Company from Pain Therapeutics as of September 30, 2017 were $40.4 million under this agreement.other revenue.

The Company recognized no product revenue related to key excipients for REMOXY ER for each of the three and nine months ended September 30, 2017 compared to $374,000 and $653,000 for the corresponding periods in 2016. The associated cost of goods sold were zero for each of the three and nine months ended September 30, 2017, compared to $92,000 and $216,000 for the corresponding periods in 2016. Pursuant to the Company’s 2002 agreement with Pain Therapeutics, the Company is to be the exclusive supplier of certain defined excipients for products in the collaboration.

Agreement with Zogenix, Inc.

     On July 11, 2011, the Company and Zogenix, Inc. (Zogenix) entered into a Development and License Agreement (the Zogenix Agreement). The Company and Zogenix had previously been working together under a feasibility agreement pursuant to which the Company’s research and development costs were reimbursed by Zogenix. Under the Zogenix Agreement, Zogenix was responsible for the clinical development and commercialization of a proprietary, long-acting injectable formulation of risperidone using the Company’s SABER controlled-release formulation technology potentially in combination with Zogenix’s DosePro® needle-free, subcutaneous drug delivery system. DURECT was responsible for non-clinical, formulation and CMC development activities. The Company was to be reimbursed by Zogenix for its research and development efforts on the product. Zogenix paid a non-refundable upfront fee to the Company of $2.25 million in July 2011. The Company’s research and development services are considered integral to utilizing the licensed intellectual property and, accordingly, the deliverables are accounted for as a single unit of accounting. The $2.25 million upfront fee had been recognized as collaborative research and development revenue ratably over the term of the Company’s research and development involvement with Zogenix with respect to this product candidate.    

The Company granted to Zogenix an exclusive worldwide license, with sub-license rights, to the Company’s intellectual property rights related to the Company’s proprietary polymeric and non-polymeric controlled-release formulation technology to make and have made, use, offer for sale, sell and import risperidone products, where risperidone is the sole active agent, for administration by injection in the treatment of schizophrenia, bipolar disorder or other psychiatric related disorders in humans. The Company retained the right to supply Zogenix’s Phase 3 clinical trial and commercial product requirements on the terms set forth in the Zogenix Agreement. Zogenix was permitted to terminate the Zogenix Agreement without cause at any time upon prior written notice, and either party was permitted to terminate the Zogenix Agreement upon certain circumstances including written notice of a material uncured breach.

In August 2017, the Company and Zogenix terminated the Zogenix Agreement.  Under the mutual termination agreement, Zogenix’s development and commercialization rights are returned to the Company, and Zogenix will transfer to the Company all regulatory filings and development information related to Relday.   As a result of the termination of the Zogenix agreement, the Company recognized revenue during the third quarter of 2017 for the remaining $750,000 of deferred revenue related to the upfront fee as the Company had no remaining performance obligations under the agreement; this recognition of revenue did not result in additional cash proceeds to the Company.

The following table provides a summary of collaborative research and development revenue recognized under the agreements with Zogenix (in thousands). The cumulative aggregate payments received by the Company as of September 30, 2017 were $20.1 million under these agreements.

Agreement with Santen Pharmaceutical Co., Ltd.

On December 11, 2014, the Company and Santen Pharmaceutical Co., Ltd. (Santen) entered into a definitive agreement (the Santen Agreement). Pursuant to the Santen Agreement, the Company granted Santen an exclusive worldwide license to the Company’s proprietary SABER formulation platform and other intellectual property to develop and commercialize a sustained release product utilizing the Company’s SABER technology to deliver an ophthalmology drug. Santen controls and funds the development and commercialization program, and the parties established a joint management committee to oversee, review and coordinate the development activities of the parties under the Santen Agreement.

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In connection with the Santen agreement, Santen agreed to pay the Company an upfront fee of $2.0 million in cash and to make contingent cash payments to the Company of up to $76.0 million upon the achievement of certain milestones, of which $13.0 million are development-based milestones and $63.0 million are commercialization-based milestones including milestones requiring the achievement of certain product sales targets (none(NaN of which has been achieved as of September 30, 2017)March 31, 2021). Santen will also pay for certain Company costs incurred in the development of the licensed product. If the product is commercialized, the Company would also receive a tiered royalty on annual net product sales ranging from single-digit to the low double digits, determined on a country-by-country basis. The Company’sIn January 2018, the Company was notified by Santen that due to a shift in near term priorities, Santen elected to reallocate research and development servicesresources and put the Company’s program on pause until further notice. While the main program is on pause, the parties are considered integral to utilizing the licensed intellectual property and, accordingly, the deliverables are accounted for asworking together on a single unitlimited set of accounting. The $2.0 million upfront fee had been recognized as collaborative research and development revenue ratably over the term of the Company’s research and development involvement with Santen with respect to this product candidate.activities funded by Santen. As of September 30, 2017,March 31, 2021, the cumulative aggregate payments received by the Company under this agreement were $3.3 million.

The following table provides a summary of collaborative research and development revenue recognized under the Santen Agreement (in thousands).

Note 3. Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company’s valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company follows a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. These levels of inputs are the following:

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The Company’s financial instruments are valued using quoted prices in active markets or based upon other observable inputs. Money market funds are classified as Level 1 financial assets. Certificates of deposit, commercial paper, municipal bonds, corporate debt securities, and U.S. Government agency securities are classified as Level 2 financial assets. The fair value of the Level 2 assets is estimated using pricing models using current observable market information for similar securities. The Company’s Level 2 investments include U.S. government-backed securities and corporate securities that are valued based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The fair value of commercial paper is based upon the time to maturity and discounted using the three-month treasury bill rate. The average remaining maturity of the Company’s Level 2 investments as of September 30, 2017March 31, 2021 is less than twelve months and these investments are rated by S&P and Moody’s at AAA or AA- for securities and A1, A2, P1 or P1P2 for commercial paper.

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The following is a summary of available-for-sale securities as of September 30, 2017March 31, 2021 and December 31, 20162020 (in thousands):