ThinkEquity report on DRRX


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ThinkEquity LLC initiates coverage of Durect Corp: Buy Rating, $3 price target

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ThinkEquity report on DRRX

  1. 1. March 22, 2012 Company Report Initiation of CoverageDurect Corp. DRRX: $0.78Buy Price Target: $3.00 Specialty PharmaceuticalsDRRX: Initiate Coverage With A Buy Rating And $3Price Target James MolloyTHINK ACTION:While DRRX has had a bumpy road over the past few years in our view, we 617-778-9308, jmolloy@thinkequity.comcontinue to see a compelling combination of large-pharma collaborations with an Changes Current Previousundervalued pipeline that could provide potential upside surprise. DRRX’s lead Rating Buyproduct is Remoxy, a less-abusable Oxycontin partnered with Pfizer (PFE), which Price Target $3.00we believe could be potentially re-filed with the FDA by late 2013E. In 2H12, FY12E REV (M) $29.5E --DRRX could file an NDA for the post-surgical pain injection Posidur, partnered FY13E REV (M) $25.4E --with Hospira (HSP) and targeting 10M-20M US surgeries. Additionally, in our FY12E EPS ($0.12)E --view, DRRX has a deep pipeline of earlier pain compounds. FY13E EPS ($0.14)E --KEY POINTS: 52-Week High: $3.77Remoxy: the primary value driver at DRRX, in our opinion. DRRX has 52-Week Low: $0.71disclosed that they receive a 6%-11.5% sales royalty on sales of Remoxy, which Shares O/S-Diluted (M): 87.4we estimate could reach 7%-12% on sales of Remoxy when COGS & mark Market Cap (M): $68.2ups are included. While the path to NDA approval has been rocky in our view Average Daily Volume: 459,147(2 complete response letters so far), partner PFE has publicly stated that they Short Interest: 2.8%remain committed to getting this product FDA approved, which to us seems likely Debt/Total Cap: NAgiven PFE’s demonstrated ability to get drugs approved by the FDA. Even a small Net Cash Per Share: $0.28penetration into the ~$3B US Oxycontin market could drive substantial royalties P/E (12-month forward): NAto DRRX over the next few years, and we believe with PFE behind the drug, a Est. Long-Term EPS Growth: NAmore substantial market penetration than our estimates could be possible. P/E/G: NM Fiscal Year-End: DecPosidur: post-surgical pain injection could be NDA filed in 2H12. While the REV (M) $ 2011A 2012E 2013Emost recent phase 3 trial didn’t achieve statistical significance, DRRX plans to 8.6A 7.7E NA Marmeet with the FDA, and we believe could potentially submit an NDA for Posidur Jun 7.8A 7.2E NAas early as 2H12 using positive data from earlier hernia & shoulder trials that did Sep 8.1A 7.4E NAdemonstrate statistically significant reductions in pain & narcotic usage over days Dec 8.9A 7.2E NA1-3. Given that Pacira’s (PCRX) competing product Exparel was approved on FY 33.5A 29.5E 25.4Esimilarly small-surgery models (bunionectomy & hemorrhoidectomy), we believe FY P/S 2.0x 2.3x 2.7xthat this strategy has merit and could lead to a potential FDA approval bylate 2013 or early 2014. DRRX estimates that 10M-20M of 70M US surgeries EPS $ 2011A 2012E 2013Eare candidates for Posidur post-surgical pain treatment, which represents a Mar (0.07)A (0.04)E NAsignificant market opportunity at ~$250/injection for Posidur. Jun (0.06)A (0.04)E NA Sep (0.06)A (0.03)E NAPipeline assets offer potential upside. DRRX’s pipeline includes Relday, Dec (0.02)A (0.02)E NA FY (0.21)A (0.12)E (0.14)Epartnered with Zogenix for a long-acting Risperidone for schizophrenia whichwe expect to start phase 1 trials in 2013, and a pipeline of additional pain FY P/E NM NM NMproducts that could potentially offer upside, should the company be able to re-partner and re-start the development process. These include: Transdur, a morepowerful Duragesic for chronic severe pain; Eladur, a longer acting Lidodermfor moderate to severe pain, and 2 additional undisclosed abuse resistant painproducts included in the PFE Remoxy partnership. We currently have a modestvalue attributed to these pipeline compounds.Initiate with a Buy rating and $3 price target. We value DRRX at $3/sharebased on a sum-of-the-parts analysis. We value Remoxy at $1.50/share basedon a 5x multiple of 2017E royalties discounted back 5 years at 25% (to accountfor the development risk to this program), Posidur at $1/share based on a 5xmultiple of 2017E royalties discounted back 5 years at 40% (to account for thedevelopment risk to this program), and value the base business and cash (end2012E) & technology value at $0.50/share.Please see analyst certification (Reg. AC) and other important disclosures on pages 16-18 of this report.
  2. 2. March 22, 2012 Company ReportSUMMARY & INVESTMENT THESISWe are initiating coverage on Durect Corp. (DRRX) with a Buy rating and a $3 price target. DRRX is a specialtypharmaceutical company focused on improving the delivery of opioids and reducing the use and abuse of strong opioids.DRRX is partnered with PFE on the development & sale of Remoxy, an abuse-resistant Oxycontin that PFE has statedcould be re-filed with the FDA in late 2012/early 2013. DRRX is partnered with Hospira (HSP) in the US for thedevelopment & sale of Posidur, a long acting post-surgical delivery of bupivacaine for pain control. DRRX is alsodeveloping Transdur, a strong-opioid patch similar to Duragesic for severe pain; Eladur, a transdermal bupivacaine patchsimilar to Lidoderm for mild-to-moderate pain; and Relday, a needle free long-acting dose of risperidone for schizophrenia.DRRX also has a legacy manufacturing business that is based on the Alzet osmotic pump for animal trials drug delivery,and Lactel biodegradable polymer raw materials for drug & medical device development.OUR TOP 4 REASONS TO OWN DRRX1. Remoxy: the primary value driver at DRRX, in our opinion. DRRX has disclosed that they receive a 6%-11.5%sales royalty on sales of Remoxy, which we estimate could reach 7%-12% on sales of Remoxy when COGS & mark upsare included. While the path to NDA approval has been rocky in our view (2 complete response letters so far), partnerPFE has publicly stated that they remain committed to getting this product FDA approved, which to us seems likely givenPFE’s demonstrated ability to get drugs approved by the FDA. Even a small penetration into the ~$3B US Oxycontinmarket could drive substantial royalties to DRRX over the next few years, and we believe with PFE behind the drug, amore substantial market penetration than our estimates could be realistic.2. Posidur: post-surgical pain injection could be NDA filed in 2H12. While the most recent phase 3 trial didn’t achievestatistical significance, DRRX plans to meet with the FDA and we believe could submit the NDA for Posidur as early as2H12 using positive data from earlier hernia & shoulder trials that did demonstrate statistically significant reductions inpain & narcotic usage over days 1-3. Given that Pacira’s (PCRX) competing product Exparel was approved on similarlysmall-surgery models (bunionectomy & hemorrhoidectomy), we believe that this strategy has merit and could lead to apotential FDA approval by late 2013E/early 2014E. DRRX estimates that 10M-20M of 70M US surgeries are candidatesfor Posidur post-surgical pain treatment, which represents a significant market opportunity at ~$250/injection for Posidur.3. Pipeline assets offer potential upside. DRRX’s pipeline includes Relday, partnered with Zogenix for a long-actingRisperidone for schizophrenia, which we expect to start phase 1 trials in 2013, and a pipeline of additional pain productsthat could potentially offer upside, should the company be able to re-partner and re-start the development process. Theseinclude: Transdur, a more powerful Duragesic for chronic severe pain; Eladur, a longer acting Lidoderm for moderate tosevere pain, and 2 additional undisclosed abuse resistant pain products included in the PFE Remoxy partnership. Wecurrently have a modest value attributed to these pipeline compounds.4. DRRX has been a long, strange trip but we see value at current levels. DRRX’s has had a storied history of drugdevelopment in our view, with key management members having split off from Alza long ago to form DRRX. Since then,DRRX’s key asset and primary value driver - Remoxy - has been out-licensed to 1) Pain Therapeutics (PTIE) by DRRX; 2)King Pharmaceuticals by PTIE; and 3) Pfizer (PFE) when PFE bought King in 2011. Over the past 2 years, we believe themain driver of DRRX’s stock underperformance has been driven by the inability of these partners to get Remoxy throughthe NDA process at the FDA, with the drug receiving back-to-back Complete Response Letters (CRL) from the FDA. Mostrecently, DRRX’s second value driver, Posidur, failed in the large phase 3 BESST trial (Bupivacaine Effectiveness andSafety in Saber Trial) which negatively impacted the stock price. While in our view these issues are a real impediment todriving value to the stock unless they can be resolved, we believe that at current levels the risks to both programs aremore than adequately priced in. Should DRRX succeed in addressing either issue, or demonstrate a realistic path to FDAapproval, we believe the stock could react positively. Page 2
  3. 3. March 22, 2012 Company ReportUPCOMING POTENTIAL CATALYSTSEXHIBIT 1:Event Expected TimingFDA meeting on Posidur NDA filing 2Q12EPFE meets FDA on Remoxy re-filing 3Q12ERemoxy NDA re-filing by PFE 4Q12E/1Q13EPosidur NDA filing 1H13ESource: Company reports and ThinkEquity LLC estimatesVALUATIONWe value DRRX at $3/share based on a sum-of-the-parts analysis. We value Remoxy at $1.50/share based on a 5xmultiple of 2017E royalties discounted back 5 years at 25% (to account for the development risk to this program), Posidurat $1/share based on a 5x multiple of 2017E royalties discounted back 5 years at 40% (to account for the developmentrisk to this program), the base business and cash (end 2012E) & technology value of $0.50/share.EXHIBIT 2:Sum-of-the-parts valuation: DRRX Segment Valuation Per share (000s) value Remoxy $150,344 $1.50 Posidur $116,027 $1.00 Base polymer business $24,430 $0.25 Cash (end-12E) & tech $31,761 $0.25 SUM $322,562 $3.00 Shares out 12E (000) 109,205Source: ThinkEquity LLC estimatesCOMPANY DESCRIPTIONDurect is an emerging specialty pharmaceutical company located in Cupertino, California. The company focuses on thedevelopment of pharmaceutical systems based on its proprietary drug delivery platform technologies that treat chronicdebilitating diseases and enable biotechnology products. These platform technologies include the Saber Delivery System(a patented depot injectable that can be used for proteins, peptides and small molecule delivery), and the Oradursustained release oral gel-cap technology (an oral sustained release technology with several potential abuse deterrentproperties). DRRX also partners with pharmaceutical and biotechnology companies to develop and commercializeproprietary and enhanced pharmaceutical products based on its technologies.KEY PRODUCTSTo value a drug delivery company, we evaluate the potential of near-term, disclosed proprietary compounds and then addin a subjective valuation for smaller products and a technology value. We combine these inputs for a sum-of-the-partsanalysis to value the company’s stock. Exhibit 3: Remoxy gel-capRemoxy – Abuse-resistant Oxycontin- $1.50/shareKey issues: We see this as the main value driver for DRRX. Partnered withPFE, the drug has faced hurdles at the FDA but since we believe that PFEacquired KG primarily to get this drug we expect they should potentially get itover the finish line at the FDA in the 2013-2014 time-frame.ProductIn collaboration with King Pharmaceuticals (acquired by PFE) & PainTherapeutics (PTIE), DRRX developed Remoxy, a controlled releaseformulation of the opioid oxycodone (Oxycontin – a ~$3 billion US branded Source: Page 3
  4. 4. March 22, 2012 Company Reportmarket according to IMS) using the proprietary Oradur gel-cap technology. Remoxy is a twice-daily controlled releaseformulation that is intended to match the pharmacokinetics (PK) of Oxycontin, but with enhanced abuse deterrenceproperties due to the nature of DRRX’s Oradur technology.The main concept hinges on putting oxycodone into a gel formulation such that it cannot be crushed and abused. Thetechnology involves entrapping the majority of its oxycodone inside DRRX’s Oradur sustained release oral gel-captechnology. Oradur uses a sucrose acetate isobutyrate, a high viscosity, biodegradable liquid matrix that is formed into anoral gel-cap to provide 12-24 hours of controlled release of oxycodone.Clinical DataPTIE conducted two anti-abuse studies in England. In the first study, five healthy volunteers received a 10mg oral dose ofRemoxy and five healthy volunteers consumed 10mg of Oxycontin. Each preparation was stirred for 10 minutes in vodkaand chased by a glass of water. Oxycontin released over 200% more drug than Remoxy (p=0.03). In the second study,five healthy volunteers were instructed to chew a 10mg oral dose of Remoxy for five minutes and to swallow the resultantslurry with a glass of water and five other volunteers chewed a 10mg oral dose of Oxycontin for five minutes and thenswallowed the resultant slurry with a glass of water. In the second study, Oxycontin released over 170% more drug thanRemoxy (p=0.03). These early studies demonstrate that similar manipulation of Remoxy leads to much lower substanceblood levels. The Remoxy formulation’s high viscosity capsule is also designed to make it difficult to inject intravenously orto snort the drug, if crushed, which should also help with abuse deterrence. See details below.EXHIBIT 4:P h a s e 3 tria l: R e m o x y fo r o s te o a rth ritisA im effica cy & sa fety o f 2 x/d a y o xyco d o n e fo r O A p a inD esig n p h a se 3 , 1 2 w eek, ra n d o m , 2 x b lin d , p la ceb o co n tro lled , m u lti-cen ter stu d y. W a sh o u t fo llo w ed b y 2 w eek titra tio n , th en ra n d o m ized to stu d y. 1 st 4 w eeks titra tio n to a n a lg esic effect, th en fixed d o se fo r 8 w eeks to tria l en dD o sin g 5 m g -2 0 m g B ID (1 0 m g -4 0 m g T D D ) fo r 1 2 w eeksE n d p o in ts 1 : d ecrea se in L ikert p a in sco res, 2 : Q u a lity o f A n elg esia , g lo b a l a ssessm en t, W O M A C O A in d ex d ecrea se & S F -1 2 H ea lth S u rveyP a tien ts 4 1 2 m a le & fem a le p a tien ts w ith O A ; A ctive: 1 3 2 co m p leted , 7 5 ea rly term in a tio n ; P la ceb o : 1 3 1 co m p leted , 7 0 ea rly term in a tedS a fety N o sa fety issu es, co m m o n o p io id sid e effects o b servedR esu lts 1 : d ecrea sed p a in in ten sity o n L ikert sca le (p = 0 .0 0 7 ); Q o fA (p = 0 .0 0 4 ), G lo b a l a ssm n t (p = 0 .0 0 7 ), W O M A C (p = 0 .0 2 3 ), S F -1 2 (p = 0 .0 0 3 )S o u rce: C a ris & C o m p a n y estim a tes, C o m p a n y rep o rtsFDA Complete Response Letter and re-filing…and Complete Response Letter and re-filing…King/PTIE initially filed Remoxy with the FDA on June 10, 2008 and it was accepted for priority (6 month) review on thAugust 12, 2008. On November 13 2008, an FDA panel unofficially voted 11 to 8 in favor of approving Remoxy. Theprimary concern of the panel was apparently the distinction between “abuse-resistance”, a strong claim of non-abusability, thand “tamper-resistance”, a weaker claim. This concern was echoed by the FDA on December 11 2008 when it issued aComplete Response Letter (CRL) to KG’s NDA filing saying that Remoxy’s NDA could not be approved in its present form.The FDA has asked for additional non-clinical data to supportthe approval of Remoxy. Exhibit 5: Projected DRRX Remoxy royaltyKing/PTIE re-filed Remoxy on 12/27/10 with a 6-month reviewcycle, and subsequently King was acquired by PFE on 2/28/11.We believe one of the key assets that induced PFE to purchase thKing was the Remoxy abuse-resistant Oxycontin. On June 242011, the FDA issued yet another CRL for Remoxy and PFEexpects to conduct a bioavailability study in 2Q12 and then meetwith the FDA in 3Q12 to discuss the regulatory path forward forRemoxy. We expect that the clinical trial and regulatory Source: ThinkEquity LLC estimates Page 4
  5. 5. March 22, 2012 Company Reportexpertise of PFE behind the Remoxy re-submission will get this product across the finish line this time. We project a 1H13re-submission, 6-month review, and a 2H13 potential NDA approval, with a potential 1Q14 launch. See our table “BrandedDrugs Trial Timelines” at the end of this report for more detail.Competitive positioningPurdue Pharmaceuticals (private) won approval for and launched an abuse-resistant version of Oxycontin in August 2010called Oxycontin-CII. Other products include PFE’s Embeda (abuse-resistant once-daily morphine) that utilizes apharmacological approach to abuse deterrence by embedding spheres of naltrexone in the pill to block the release ofopioid if the pill is crushed for abuse.EconomicsRemoxy was originally licensed by DRRX to PTIE, who subsequently out-licensed the technology to King, who wasacquired by PFE 1Q11. PFE has exclusive US rights to develop and to commercialize Remoxy and certain other opioiddrugs formulated with DRRXs Saber technology. PFE controls any pre-clinical, clinical, commercial manufacturing andsales/marketing activities for additional abuse-resistant opioids developed under this agreement. DRRX is reimbursed forits expenses for formulation and other work performed under the contract and will receive payments based on theachievement of certain technical, clinical or regulatory milestones, in addition to receiving royalties on product sales thatstart at 6% and scale up to ~11.5%. We model in the following royalty rates: 8.7% in 2014, 9.5% in 2015, and 10% in2016. We assume a COGS mark-up for delivering raw materials to KG for production.EXHIBIT 6:Remoxy timelineEvent Timing ValuationPTIE licenses Remoxy from DRRX December 2002 Our DCF analysis indicates a Remoxy value ofKG licenses Remoxy from PTIE Novemer 2005 $1.50/share. Our key assumptions include estimates ofKG submits 1st Remoxy NDA June 2008 the company’s share of the Oxycontin market and price,Complete Response Letter #1 received December 2008 and a 55% chance of ultimate approval, which wePFE announces KG acquisition October 2010 believe is in line with the late-stage nature of the filingKG re-submits Remoxy NDA December 2010 and the 2 prior CRLs. We model in pricing of $325,PFE closes KG acquisition March 2011 which we believe will be in-line with branded OxycontinComplete Response Letter #2 received June 2011 prices by the time Remoxy potentially makes it toPFE to conduct 2 bioavailability studies 2Q12E market. We view this as a niche product amongPFE to meet FDA on next steps 3Q12E practicing physicians at the outset, but believe that itPFE expected to re-submit Remoxy 2H12E could gain wider acceptance if it ends up showing clinically relevant decreases in abuse.Source: Company Reports and ThinkEquity LLC estimatesPatentWe expect that the patent should last post-2015, but drug delivery patents can come under multiple legal challenges, andthere can be no guarantee that generics do not appear prior to this date. In particular, it is unclear to us how the drugrelease profile of this product compares vs. Purdue Pharma’s regular Oxycontin. At the end of the day, in our view it iseffectively just a 2x/day Oxycontin product, abuse resistant or not. If the drug pharmacokinetic profile (PK curve ) is withina 20% correlation of Oxycontin’s then it could be a violation of Purdue’s patents. Both King and PTIE have insisted in thepast that Remoxy’s PK profile is not similar to Oxycontin and does not violate Purdue’s patents, but this data has not beenmade publicly available. Page 5
  6. 6. March 22, 2012 Company ReportPosidur - saber bupivacaine for post-surgical pain - $1/shareKey issues: DRRX plans to meet with the FDA to discuss filing Posidur based on earlier phase 2b hernia & shoulder thatshowed statistically significant reductions in pain & opioid use, in spite of the recent failed phase 3 BESST trial. If the F DAagrees with DRRX’s strategy this product could have a potential 2013 PDUFA date.Posidur is a long-acting local anesthetic being developed for the treatment of post-surgical pain. It is injected followingsurgery adjacent to the incision, where it continuously releases bupivacaine in a controlled fashion, which can be adjustedto provide up to 72 hours of local analgesia. We believe the advantage to Posidur is its longer duration, which can providefull dosing over the post-surgical period without the need for re-dosing every 4-6 hours (the current indication forbupivacaine). The market for this product is substantial, as there are over 70 million combined inpatient and outpatientsurgical procedures performed each year in the U.S. We believe that Posidur could be utilized in 33% of these procedures(surgeries include: abdominal, orthopedic, hernia, among others).Phase 3 BESST clinical trial dataDRRX announced on 1/5/12 that the phase 3 BESST (Bupivacaine Effectiveness and Safety in Saber Trial) trials thatPosidur had failed to reach statistical significance on either co-primary endpoint: pain intensity on movement 0-3 dayspost-surgery or supplemental opioid use 0-3 days post-surgery.Cohorts 1 and 2Posidur vs commercially available Bupivacaine HCl solution after Exhibit 7: Posidur gellaparotomy and after laparoscopic cholecystectomy, respectively. Cohorts1 and 2 were prespecified to be pooled due to their small sample size.With respect to Cohorts 1 and 2 (pooled), the mean reduction in pain onmovement was approximately 20% (p=0.0111) for the POSIDUR groupcompared to the patient group treated with bupivacaine HCl. In relation tomedian total morphine-equivalent opioid dose for supplemental analgesiaduring the period 0-72 hours post-dose for Cohorts 1 and 2 (pooled), thepatient group treated with POSIDUR reported approximately 18% lessopioids consumed compared to the bupivacaine HCl group (p=0.5455).Cohort 3Posidur versus Saber-Placebo, laparoscopically-assisted colectomy. Withrespect to the co-primary efficacy endpoint of pain reduction as measuredby mean pain intensity on movement (normalized) Area Under the Curve(AUC) during the period 0-72 hours post-dose, the patient group treated Source: Posidur 5.0 mL (660 mg) reported a mean pain reduction in painscores of approximately 7% (p=0.1466). The statistical analysis plan included pain on movement as recorded atscheduled times through an electronic diary plus pain scores reported whenever supplemental opioids were administeredwith such scores attributed as if they were pain on movement. In the prespecified sensitivity analysis (which includes onlyscheduled pain assessment on movement scores as collected on the electronic diary), the patient group treated withPosidur 5.0 mL reported approximately 10% less pain versus placebo (p=0.0410). In relation to the co-primary efficacyendpoint of median total morphine-equivalent opioid dose for supplemental analgesia during the period 0-72 hours post-dose, the patient group treated with Posidur reported approximately 16% less opioids consumed versus the placebo group(p=0.5897).Overall, the Posidur groups showed a similar systemic safety profile as the patient groups treated with Saber-Placebo andactive comparator. There were no signs of systemic safety issues. Local site reactions were observed more frequently inthe Posidur and Saber-Placebo groups than in the active comparator groups; most of these observations werediscolorations, the majority of which resolved without treatment during the trial. No negative safety signal was seen in theinitial cardiac and neurologic safety assessment in BESST; however further analysis is underway. See table below for asummary of the BESST trial data details. Page 6
  7. 7. March 22, 2012 Company ReportEXHIBIT 8:Phase 3 BESST trial: Posidur abdominal surgery - results 1/5/12Aim Safety & efficacy of Posidur in reducing pain and opioid-related side effects following various abdominal surgeriesDesign multicenter, random, 2x-blind, parallel assignment. 3 cohorts: (1): 48 pts Posidur 5mL vs. placebo after laparotomy, (2): 50 pts Posidur 5mL vs placebo after laproscopic cholecystectomy, (3): 207 pts Posidur 5mL vs placebo after laproscopically-assisted colectomyDosing 5mL Posidur directly onto wound post surgicallyEndpoints co-1: pain intensity on movement AUC 0-3 days post, supplemental opioid use 0-3 days post; 2: mean pain on movement, time to 1st rescue meds, opioid side effects, pain at restPatients cohort 1 n=48; cohort 2 n=50; cohort 3=207Safety no signs of systemic safety issues, local site reactions were observed more frequentlyResults - 1/5/12 results trended positive for pain reduction & reduction of supplemental opioids days 0-3 post surgery, but they did not reach statistical significance.Source: Company reportsPhase 2b clinical trial dataDRRX presented Posidur phase 2b data in 3Q07 from an Australia & New Zealand trial that was designed to evaluate thetolerability, activity, dose response and pharmacokinetics of Posidur in patients undergoing open inguinal hernia repair.The study was a multi-center, randomized, double blind, placebo-controlled study in 122 patients. Study patients wererandomized into three treatment groups: patients that were treated with Posidur 2.5 mL (n=43), Posidur 5 mL (n=47) andplacebo (n=32). The co-primary efficacy endpoints for the study were Mean Pain Intensity on Movement area under thecurve (AUC), a measure of pain over a period of time, 1-72 hours post-surgery, and the proportion of patients requiringsupplemental opioid analgesic medication during the study. Secondary efficacy endpoints included Mean Pain Intensity onMovement AUC over the period 1-48 hours post-surgery, mean total consumption of supplemental opioid analgesicmedication, and time to first use of supplemental opioid analgesic medication. The study hit on some Mean Pain Intensityon Movement primary endpoints in the 5mL dose, but missed on the % of patients taking supplemental opioids. Seedetails below.EXHIBIT 9:Phase 2b trial: Posidur for Inguinal Hernia - results 7/17/07Aim tolerability, activity, dose response & PK profile in patients undergoing inguinal hernia repairDesign Australia & NZ multi-center, random, 2x blind, placebo controlled; randomized toDosing 2.5ml or 5ml Posidur post-surgicalEndpoints 1: mean pain intensity on movement 1-72hrs, % of pts requiring supplemental opioids 2: mpiom 1-48hrs, total supplemental opioids, time to 1st supplemental opioid usePatients 122 patients: 3 groups: Posidur 2.5ml (n=43), Posidur 5ml (n=47), placebo (n=32)Safety comparable safety in 2.5ml/5ml groups to placeboResults - 7/17/07 1: 5ml -31% mpiom 1-72hrs (p=0.0033), 2: 5ml -35% mpiom 1-48hr (p=0.0007) 1: 53% 5ml group took supp. opioids (vs. 72% placebo) (p=0.09, not sig.) 2.5ml dose showed trends but not stat sig. 5ml dose will be used in phase 3Source: Company reportsNext steps for PosidurDRRX anticipates meeting with the FDA in mid-2012 to discuss the potential path forward for Posidur. While the recentphase 3 BESST trial was a failure, DRRX believes that there may be a legitimate path forward for Posidur utilizing the2007 phase 2b Hernia study (data in exhibit above) and the phase 2 shoulder surgery study (data in exhibit below) thatapparently shows a reduction in pain scores and opioid use over 3 days. While DRRX has yet to publicly disclose thedetails of the shoulder study due to prior requirements of former partner Nycomed, we expect that DRRX could disclose Page 7
  8. 8. March 22, 2012 Company Reportthe full shoulder study data set by the end of 1Q12. This data set would closely resemble the small-surgery model path toapproval that Pacira Pharmaceuticals (PCRX) followed in their 2011 approval for Exparel (DepoBupivacaine) where theysubmitted data in hemorrhoid & bunion removal models (see Exparel data in below exhibits).Assuming the FDA agrees with DRRX’s Posidur submission plan, we believe that Posidur could have an NDA filed by1H13 with a potential 1H14 FDA approval & potential mid-2014 launch (see Branded drugs trial timelines chart at end ofreport for more details).EXHIBIT 10:Phase 2b trial: Posidur for shoulder surgery - results 2/9/11Aim Safety & efficacy of Posidur in reducing pain and opioid-related side effects vs placebo & active comparator in arthroscopic shoulder surgeryDesign 3 treatment groups: 1) 5mL Posidur; 2) bupivacaine HCI solution; 3) Saber-placeboDosing 5mL Posidur/comparator/placebo directly onto wound post surgicallyEndpoints co-1: non-inferiority of Posidur to Saber-Placebo for pain intensity measured as an Area Under the Curve (AUC) 1-72 hrs post-surgery; 2) Superiority of Posidur to placebo in use of rescue meds 0- 72 hrs post surgeryPatients N = 107Safety comparable safety profile between the three groups and Posidur appeared well toleratedResults - 2/9/11 1: stat sig pain intensity reduction and in opioid sparing vs Saber-placebo; No stat sig differenceTopline only compared to active comparatorSource: Company reportsEXHIBIT 11:Phase 3 trial: Exparel (DepoBupivacaine) for bunionectomy - results 10/20/09Aim Safety & efficacy of Exparel for prolonged postoperative analgesia in patients undergoing metatarsal osteotomy (bunionectomy)Design multicenter, random, 2x-blind, parallel-group, placebo controlled study; Pain intensity rated by patients on 0-10 numeric rating scale (NRS) out to 72 hours. Rescue meds (5mg oxycodone/325mg acetaminophen orally every 4-6 hrs as needed or ketorolac 15-30mg IV).Dosing 106mg Exparel directly into wound at conclusion of surgeryEndpoints 1: cumulative area under the curve (AUC) of NRS pain intensity over 1st 24 hrs post surgical; 2: % pts pain free 8-48 hrs; % pts requesting & total amount rescue meds through 24hrs;Patients N = 193Safety Well tolerated, AEs similar to placebo; No SAEsResults - 10/20/09 1: reduced NRS scores (p=0.0005) 24 hrs post-surgery; 2: % pts requesting rescue meds (1% vs 7% placebo; p<0.05), fewer opiods over 24 hrs post (p=0.0077); pain free at 2,4,8,48 hrs post-surgery than placebo (p<0.05)Source: Company reports Page 8
  9. 9. March 22, 2012 Company ReportEXHIBIT 12:Phase 3 trial: Exparel (DepoBupivacaine) for hemorrhoidectomy - results 12/1/09Aim Safety & efficacy of Exparel for prolonged postoperative analgesia in patients undergoing hemorrhoidectomyDesign multicenter, random, 2x-blind, parallel-group, placebo controlled study; Pain intensity rated by patients on 0-10 numeric rating scale (NRS) out to 72 hours. Rescue meds (morphine sulfate 10mg IM every 4hrs as needed).Dosing 266mg Exparel directly into wound at conclusion of surgeryEndpoints 1: cumulative area under the curve (AUC) of NRS pain intensity over 1st 72 hrs post surgical; 2: % pts opioid free; time to 1st opioid rescue; total opioid consumption through 72 hrs;Patients N = 189Safety Well tolerated, AEs similar to placebo; No SAEsResults - 12/1/09 1: reduced NRS scores (p<0.0001); 2: % opioid free (p<0.0008); median time to rescue med (p<0.0001); total opioid consumption through 72 hrs (p=0.0006)Source: Company reportsCompetitive positioningThe primary competing therapy for Posidur (besides traditional Lidoderm post-surgical infusion) is PCRX’s Exparel, a longacting bupivacaine that was approved in October 2011 for postsurgical analgesia and is expected to be launched in April2012. PCRX has stated they expect to command a little over $250 per injection for Exparel.EconomicsIn 2Q10, HSP paid DRRX $27.5M up-front with $185M in development & sales milestones with an undisclosed salesroyalty (we assume a tiered 14%-20% sales royalty). In 4Q06, Nycomed paid DRRX a $14M upfront for the Europeanrights to Posidur with a potential for up to $180M in development andsales milestones. Following the 1H11 acquisition of Nycomed byJapanese pharmaceutical company Takeda and the recent Exhibit 13: Alzet & Lactelannouncement of the failed phase 3 BESST trials, Nycomed returnedthe EU rights to DRRX. US partner Hospira remains committed to thecontinued US development of Posidur (at this point anyway) and whilewe believe the Nycomed return likely slows EU development it alsoopens the door to re-out licensing Posidur for the EU in the future.ValuationOur DCF analysis indicates a Posidur value of $1.00 per DRRX share.Our key assumptions include estimates about the share of the surgical market and price. We assume pricing of ~$300per usage starting in 1H14E, which we believe will be in-line withcurrent treatment costs for acute post-operative pain. We expect thecompeting product Exparel by PCRX to be priced around $250 pertreatment starting in 1H12E, which could reasonably be in the Source:$300/dose range by 2014E. We have applied a 35% discount rate toour valuation to account for the risks to approval for Posidur.Alzet & Lactel – valuing the base business at DRRX - $0.25/shareKey issues: In our view this is the “backstop” program for DRRX and represents the basic valuation parameter for thecompany. While not a high growth, high margin business, it does generate a consistent $12M-$13M annually for DRRX.The Alzet implantable pump line consists of miniature, implantable osmotic pumps and accessories used for experimentalresearch in mice, rats and other lab animals. The pumps are not approved for, nor intended for human use. ALZET pumpscontinuously deliver drugs, hormones and other test agents at controlled rates from one day to four weeks without theneed for external connections, frequent handling or repeated dosing. In laboratory research, these infusion pumps can beused for systemic administration when implanted under the skin or in the body. They can be attached to a catheter for Page 9
  10. 10. March 22, 2012 Company Reportintravenous, intracerebral, or intra-arterial infusion or for targeted delivery, where the effects of a drug or test agent arelocalized in a particular tissue or organ. The Alzet product line is referenced in more than 12,000 scientific texts currently.Lactel Absorbable Polymers are a range of standard or custom designed biodegradable polymers based on lactide,glycolide and caprolactone for pharmaceutical and medical device manufacturers for use as raw materials in theirproducts. The polymers are manufactured and sold from DRRX’s Alabama facility and are used for a variety of controlled-release and medical-device applications, including several (undisclosed) FDA-approved commercial products.Both the Alzet and the Lactel products are sold through a direct sales force in the US and through a network of distributorsOUS.Other assets – Eladur, Relday, TransdurKey issues: Few of the following products are close to the market, or have experienced clinical trial failure or are otherwiseinexplicably halted. While there is little near-term benefit from this group it highlights the diverse applicability of DRRX’sSaber drug delivery technology.EladurDRRX is developing the transdermal bupivacaine patch Eladur utilizing the DRRX transdermal technology from Transdurthat is designed to provide continuous delivery of bupivacaine for up to three days from a single application. Thiscompares with a 12 hr. wear with ENDP’s Lidoderm. We expect Eladur to have many differentiating attributes fromLidoderm including an extended duration of action and better wearability. In April 2011, DRRX reported top-line resultsfrom a 263 patient phase 2 clinical trial in chronic low back pain for Eladur where Eladur failed to differentiate fromplacebo for the endpoint of mean change in pain intensity scores from baseline to the mean of week 11 and week 12. PFErecently returned Eladur back to DRRX, and the company is continuing to evaluate the recent study failure to determinethe next steps with this program and potential new partners for this program.ReldayDRRX is partnered with Zogenix (ZGNX) for the clinical development and commercialization of Relday, a proprietary,long-acting injectable formulation of risperidone using DRRX’s Saber controlled-release formulation technology incombination with ZGNX’s DosePro needle-free, subcutaneous drug delivery system. The companies will also share non-clinical development responsibilities. ZGNX expects to initiate clinical studies for Relday in patients with schizophrenia in1H13 following filing of an Investigational New Drug (IND) application. ZGNX has made a $2.25M upfront payment toDRRX, with an additional $103M in potential future clinical, regulatory and commercial milestone payments based uponsuccessful achievement of certain events. ZGNX will have exclusive global rights to commercialize Relday and will payDRRX an undisclosed royalty on Relday sales.TransdurOne of the major class of drugs utilized to treat chronic pain is comprised of oral opioids, such as Oxycontin, a brandedextended-release oral oxycodone-based painkiller which accounted for over $3B in worldwide sales in 2010 according toIMS. Another major class of drugs utilized to treat chronic pain is transdermally delivered opioids such as Duragesic, aleading transdermal fentanyl product which accounted for approximately $750M in worldwide sales in 2010 according toIMS. DRRX is developing a transdermal sufentanil patch (Transdur-sufentanil) for continuous delivery of sufentanil for upto seven days from a single application, as compared to the two to three days of relief provided by currently availableDuragesic & generic Duragesic. DRRX has developed a smaller sufentanil patch (~1/5th the size of currently marketedtransdermal fentanyl patches for a therapeutically equivalent dose) with a longer duration of delivery that could offerimproved convenience and compliance for patients.In 2008, ENDP successfully completed a phase 2 clinical trial for Transdur in which ENDP evaluated the conversion ofpatients on oral and transdermal opioids to Transdur. The phase 2 trial met its primary and secondary objectives ofestablishing a successful dose-titration regimen and dose potency relationships, demonstrating safety and tolerability atthe therapeutic dose, and achieving effective analgesic pain control. The phase 2 data, extensive non-clinical data thathad been generated by ENDP and a potential regulatory pathway for the phase 3 program were reviewed with the FDA atan end-of-phase 2 meeting on February 19, 2009 and the program was returned by ENDP to DRRX. The current pathforward for Transdur remains muddled in our view given the lack of movement since the drug was returned in 2008. Page 10
  11. 11. March 22, 2012 Company ReportEXHIBIT 14:Drug PatentRemoxy 2025Posidur 2015; 1 pending patent to 2025Source: Company reportsMANAGEMENTJames E. Brown, D.V.M. co-founder, President, CEO and Director. Prior to 1998, Dr. Brown worked at ALZACorporation as Vice President of Biopharmaceutical and Implant Research and Development from June 1995 to June1998. Prior to that, Dr. Brown held various positions at Syntex Corporation, a pharmaceutical company, including Directorof Business Development from May 1994 to May 1995, Director of Joint Ventures for Discovery Research from April 1992to May 1995, and held a number of positions including Program Director for Syntex Research and Development fromOctober 1985 to March 1992.Matthew J. Hogan, CFO. Mr. Hogan joined Durect from Ciphergen Biosystems, Inc., where he was the Chief FinancialOfficer from 2000 to 2006 and a consultant from March 2006. Prior to joining Ciphergen, Mr. Hogan was the ChiefFinancial Officer at Avocet Medical, Inc. from 1999 to 2000. From 1996 to 1999, Mr. Hogan was the Chief Financial Officerat Microcide Pharmaceuticals, Inc. From 1986 to 1996, he held various positions in the investment banking group atMerrill Lynch & Co., most recently as a Director focusing on the biotechnology and pharmaceutical sectors. Mr. Hoganholds a B.A. in economics from Dartmouth College and an M.B.A. from the Amos Tuck School of Business Administration.Felix Theeuwes, D.Sc., Chairman, co-founder, and Chief Scientific Officer. Dr. Theeuwes was with ALZA Corporationfrom 1970 until June 1999 holding positions directing research, technology development, and product development for avariety of controlled drug delivery systems. His work led to the product introduction of the ALZET® mini osmotic pumpseries for animal research, and the OROS® systems series of products. He directed research in transdermal research anddevelopment, initiated the electrotransport/iontophoresis program, and initiated the DUROS® osmotic implant program.He holds more than 210 U.S. patents covering these systems and published more than 80 articles and book chapters.RISKS TO PRICE TARGETExogenous events could impact our outlook. We believe that pharmaceutical companies have the least control overcompetitive, political, and regulatory risks. Although we have incorporated competitive assumptions into our forecasts,there may be other risks beyond the scope of our analysis. Changes in the drug reimbursement system, as well as anypolitical or regulatory amendments, may significantly influence the earnings power of these companies.Actual clinical results and the FDA’s conclusions may deviate from our expectations. Many of our assumptions arebased on a review of incomplete clinical trial data available in the public domain. Often our conclusions are drawn fromearly-stage data, which may not be reflected by pivotal studies. Furthermore, the FDA’s conclusions may not coincide withour own, materially changing our revenue and earnings assumptions.Compliance issues, product recalls, and other mandates by regulatory authorities could materially change ourexpectations. Regulatory compliance issues, ranging from accounting irregularities to defective manufacturing practices,could materially change our assumptions and earnings outlook. Unanticipated product recalls and labeling changes couldalso have adverse consequences on our earnings assumptions.Legal risks could lead to additional liabilities and revenue loss. In addition to the expenses incurred by patentchallenges, product liability and other legal suits could occur and lead to additional liabilities and revenue loss, whichcould substantially change our financial assumptions. Page 11
  12. 12. March 22, 2012 Company ReportEXHIBIT 15:Durect CorporationBranded drugs trial timelines 2011A 2012E 2013E 2014E 2015E 1QA 2QA 3QA 4QA 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QERemoxy - less abusable OxyContin KG re-files with the FDA 4Q10 - NDA accepted 1/27/11 FDA PDUFA #2 - June 23rd PDUFA - CR Letter #2 FDA 2 PFE to run 2 bioavailability studies BAs Meet FDA meet Refile NDA (3rd time) NDA 3 FDA PDUFA #3 - assume 6-mo review again FDA 3 PFE launch LAUNCHPosidur (SABER-Bupivacaine injection for post-op. pain, partnered with Nycomed in EUR) Phase 3 - FAILED PRIMARY ENDPOINT 1/5/12 phase 3 - US data BESST Trial, 1H11 complete enroll 6/7/10 Partner with Hospira for US Meet FDA to discuss filing plans meet NDA filing & FDA approval (file shoulder & hernia trials) NDA FDA Launch - US by Hospira LAUNCH Nycomed 2 phase 2bs "Optesia" trade name in EU hysterectomy - FAILED 6/16/10 Phase 2 shoulder - mixed data 2/9/11 data Takeda (Nycomed) returns Posidur back to DRRX prtnrRelday LA risperidone (for schizophrenia) with Zogenix CMC pre-clinical development CMC activities Phase 1 phase 1 Phase 2 & 3 timing uncertain additional trials Specialty PharmaceuticalsSource: Company reports and ThinkEquity LLC estimates Jim Molloy (617) 778-9308 | Page 12
  13. 13. March 22, 2012 Company ReportDurect CorporationQuarterly income statement 2011A 2011A 2012E 2012E 2013E($000 except per share) 1QA 2QA 3QA 4QA Year 1QE 2QE 3QE 4QE YearRevenuesProduct revenue, net $3,092 $2,645 $2,909 $2,481 $11,127 $3,371 $2,880 $3,039 $2,925 $12,215Collab. R&D & other 5,512 5,188 5,206 6,454 22,360 4,322 4,322 4,322 4,322 17,287Total revenues $8,604 $7,833 $8,115 $8,935 $33,487 $7,693 $7,201 $7,361 $7,247 $29,502 ExpensesCOGS 1,401 1,085 1,300 927 4,713 1,154 1,080 1,104 1,087 4,425Gross profits 7,203 6,748 6,815 8,008 28,774 6,539 6,121 6,257 6,160 25,077Research & development 9,880 8,708 8,452 7,013 34,053 7,000 6,500 6,500 6,250 26,250Selling, general & admin 3,716 3,327 3,377 3,154 13,574 3,000 2,750 2,750 2,750 11,250Total operating expenses 14,997 13,120 13,129 11,094 52,340 11,154 10,330 10,354 10,087 41,925Income (loss) from ops (6,393) (5,287) (5,014) (2,159) (18,853) (3,461) (3,129) (2,993) (2,840) (12,423)Interest & other, net 36 42 (11) 21 88 20 20 20 20 80Debt conversion expenseEarnings before taxes (6,357) (5,245) (5,025) (2,138) (18,765) (3,441) (3,109) (2,973) (2,820) (12,343)Income tax provision 0 0 0 0 0 0 0 0 0 0Net income (loss) (6,357) (5,245) (5,025) (2,138) (18,765) (3,441) (3,109) (2,973) (2,820) (12,343)1x items, after taxNet income ex-1x itemsEPS ($0.07) ($0.06) ($0.06) ($0.02) ($0.21) ($0.04) ($0.04) ($0.03) ($0.02) ($0.12)EPS ex-1x milestonesWeighted avg. shares (000) 87,270 87,404 87,450 87,514 87,410 87,614 87,714 117,814 117,914 102,764Fully diluted shares (000) 96,270 108,557 108,855 108,919 108,710 109,019 109,119 139,219 139,319 124,169Margin & expense analysisGross Profit 84% 86% 84% 90% 86% 85% 85% 85% 85% 85%Operating margin -74% -67% -62% -24% -56% -45% -43% -41% -39% -42%Net margin cont. ops. -74% -67% -62% -24% -56% -45% -43% -40% -39% -42%Tax rate 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Year-over-year changeTotal revenue 12% 7% 0% 5% 6% -11% -8% -9% -19% -12%COGS 2% 26% 51% -21% 10% -18% 0% -15% 17% -6%R&D 5% -5% 4% -26% -6% -29% -25% -23% -11% -23%SG&A 6% -7% -11% -22% -9% -19% -17% -19% -13% -17% Specialty PharmaceuticalsSource: Company reports and ThinkEquity LLC estimates Jim Molloy (617) 778-9308 Page 13
  14. 14. March 22, 2012 Company ReportDurect CorporationAnnual income statement($000 except per share) 2011A 2012E 2013E 2014E 2015E CommentsRevenuesRemoxy royalties $19,691 $44,750 Assume 2H13 approvalPosidur royalties 18,588 44,865 Hospira US partner, post op painProduct revenue, net $11,127 $12,215 $12,766 13,344 13,951 Alzet & Lactel polymersCollab. R&D & other revenue 22,360 17,287 12,603 5,600 5,600 amortized milestones hereTotal revenues $33,487 $29,502 $25,369 $57,224 $109,166ExpensesCOGS 4,713 4,425 3,552 8,011 15,283Gross profits 28,774 25,077 21,818 49,213 93,883Research & development 34,053 26,250 27,000 29,750 33,500Selling, general & admin 13,574 11,250 11,000 12,000 13,500 Headcount reduced in 1Q12Total operating expenses 52,340 41,925 41,552 49,761 62,283Inc (loss) from ops (18,853) (12,423) (16,182) 7,463 46,883 Guide: ~$12M burn in 2012Interest & other net 88 80 50 46 180Earnings before taxes (18,765) (12,343) (16,132) 7,509 47,063Income tax provision 0 0 0 0 12,448 $400M NOLs & R&D creditsNet income (loss) (18,765) (12,343) (16,132) 7,509 34,615EPS, fully diluted ($0.21) ($0.12) ($0.14) $0.05 $0.25Weighted avg. shares (000) 87,410 102,764 118,164 118,564 118,964Fully diluted shares (000) 108,710 124,169 139,664 140,064 140,464Cash & equivalents $28,431 $24,730 $17,161 $32,549 $77,382 FY12 Guide: $12M burn rateMargin & expense analysisGross Profit 86% 85% 86% 86% 86%Operating margin -56% -42% -64% 13% 43%Net margin cont. ops. -56% -42% -64% 13% 32%Tax rate 0% 0% 0% 0% 26%Year-over-year changeTotal revenue 6% -12% -14% 126% 91%COGS 10% -6% -20% 126% 91%R&D -6% -23% 3% 10% 13%SG&A -9% -17% -2% 9% 13% Specialty PharmaceuticalsSource: Company reports and ThinkEquity LLC estimates Jim Molloy (617) 778-9308 Page 14
  15. 15. March 22, 2012 Company ReportDurect CorporationBalance sheet model(values in 000s) 2010A 1Q11A 2Q11A 3Q11A 2011A 2012E 2013E 2014E 2015EAssets Cash & equiv. $10,437 $4,830 $5,486 $7,031 $8,896 $24,730 $14,731 $30,119 $74,952 ST investments 35,005 33,541 29,247 25,428 19,535Total current assets 54,845 47,793 42,539 40,409 37,301 37,624 32,209 40,544 86,278 Net PP&E 1,776 1,752 2,204 3,412 3,124 22,750 30,000 30,000 32,500 Goodwill 6,399 6,399 6,399 6,399 6,399 6,399 6,399 6,399 6,399Total assets 67,560 59,945 54,344 53,249 49,196 71,635 69,911 84,071 141,581LiabilitiesTotal current liabilities 17,909 16,132 15,769 16,402 14,891 14,751 15,222 14,306 22,925Total liabilities 53,073 49,285 46,935 48,334 45,719 44,751 47,722 48,306 59,675 Additional paid-in capital 351,679 353,766 355,757 357,504 359,006 394,736 406,173 412,240 458,379 Accumulated deficit (337,205) (343,135) (348,380) (353,405) (355,543) (367,886) (384,019) (376,510) (376,510)Shareholders equity 14,487 10,660 7,409 4,119 3,477 26,884 22,190 35,765 81,906Total liab & net worth 67,560 59,945 54,344 52,453 49,196 71,635 69,911 84,071 141,581Source: Company reports and ThinkEquity LLC estimatesDurect CorporationStatement of cash flows model(values in 000s) 2010A 1Q11A 2Q11A 3Q11A 2011A 2012E 2013E 2014E 2015EOperating cash flowNet loss ($22,898) ($6,357) ($11,602) ($16,627) ($18,765) ($12,343) ($16,132) $7,509 $34,615Depreciation & amort. 2,214 284 519 735 1,176 1,033 888 1,717 3,275Change in assets &liabilities 1,302 (1,840) (533) 1,145 (1,222) (255) (554) 313 (1,558)Cash from operations 7,763 (8,143) (12,139) (13,104) (17,386) (4,566) (8,799) 16,538 46,333Investing cash flowPurchase of PP&E (256) (256) (937) (2,328) (2,467) (2,000) (2,500) (2,500) (3,000)Cash from investing (6,130) 1,811 6,177 8,718 14,734 (2,000) (2,500) (2,500) (3,000)Financing cash flowCommon stock issuance 565 737 994 994 1,126 22,350 1,250 1,300 1,450Cash from financing 517 725 1,011 980 1,111 22,400 1,300 1,350 1,500Net change in cash 2,150 (5,607) (4,951) (3,406) (1,541) 15,834 (9,999) 15,388 44,833Cash at beginning of period 8,287 10,437 10,437 10,437 10,437 8,896 24,730 14,731 30,119Cash at end of period 10,437 4,830 5,486 7,031 8,896 24,730 14,731 30,119 74,952Source: Company reports and ThinkEquity LLC estimates Page 15
  16. 16. March 22, 2012 Company Report Initiation of CoverageCOMPANIES MENTIONED IN THIS REPORT:Company Exchange Symbol Price RatingEndo Pharmaceuticals Holdings Inc. NASDAQ ENDP $35.98 BuyImportant DisclosuresAnalyst CertificationI, James Molloy, hereby certify that all of the views expressed in this research report accurately reflect my personal views about thesubject securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specificrecommendations or views expressed in this research report.The analyst(s) responsible for preparing this report has/have received compensation based on various factors, including the firms totalrevenues, a portion of which is generated by investment banking activities. The analyst(s) also receive compensation in the form of apercentage of commissions from trades made through the firm in the securities of the subject company of this report, although not for anyinvestment banking transactions with or involving the subject company.ThinkEquity LLC makes a market in Durect Corp. and Endo Pharmaceuticals Holdings Inc. securities; and/or associated persons may sellto or buy from customers on a principal basis. Page 16
  17. 17. March 22, 2012 Company Report Initiation of CoverageRating DefinitionsEffective October 7, 2009, ThinkEquity LLC moved from a four-tier Buy/Accumulate/Source of Funds/Sell rating system to a three-tier Buy/Hold/Sell system. The new ratings appear in our Distribution of Ratings, Firmwide chart. To request historical information, including previouslypublished reports or statistical information, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600 MontgomeryStreet, San Francisco, California, 94111.Buy: ThinkEquity expects the stock to generate positive risk-adjusted returns of more than 10% over the next 12 months. ThinkEquityrecommends initiating or increasing exposure to the stock.Hold: ThinkEquity expects the stock to generate risk-adjusted returns of +/-10% over the next 12 months. ThinkEquity believes the stockis fairly valued.Sell: ThinkEquity expects the stock to generate negative risk-adjusted returns of more than 10% during the next 12 months. ThinkEquityrecommends decreasing exposure to the stock. Distribution of Ratings, Firmwide ThinkEquity LLC IB Serv./Past 12 Mos.Rating Count Percent Count PercentBUY [B] 127 66.84 13 10.24HOLD [H] 52 27.37 1 1.92SELL [S] 11 5.79 0 0.00This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned.The information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable.The opinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Pastperformance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied,is made regarding future performance. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there beany sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration or qualification underthe securities laws of any such state. This research report was originally prepared and distributed to institutional clients of ThinkEquity LLC. Page 17
  18. 18. March 22, 2012 Company Report Initiation of CoverageRecipients who are not market professionals or institutional clients of ThinkEquity LLC should seek the advice of their personal financialadvisors before making any investment decisions based on this report. Stocks mentioned in this report are not covered by ThinkEquity LLCunless otherwise mentioned.Additional information on the securities mentioned is available on request. In the event that this is a compendium report (covers more thansix ThinkEquity LLC-covered subject companies), ThinkEquity LLC may choose to provide specific disclosures for the subject companies byreference. To request more information regarding these disclosures, please call: 866-288-8206, or write to: Director of Research, ThinkEquityLLC, 600 Montgomery Street, San Francisco, California, 94111. Stocks mentioned in this report are not covered by ThinkEquity LLC unlessotherwise mentioned.Member of FINRA and SIPC.Copyright 2012 ThinkEquity LLC, A Panmure Gordon Company Page 18