By Lisa Seachrist

Washington Editor

Durect Corp., an Alza Corp. spin-off, raised $20 million in a private placement of preferred convertible stock to develop its technology for continuous delivery of drugs.

The financing was the second round for privately held Durect, which raised $9.4 million when it formed in June 1998. The money will be used to steer the nascent pharmaceutical company through clinical trials of its lead product.

"We are a bona fide spin-off," said Tom Schreck, chief financial officer for the Cupertino, Calif.-based company. "We see ourselves as a systems integrative start-up pharmaceutical company."

Following a technology licensing agreement with Palo Alto, Calif.-based Alza Corp. for use of the Duros drug delivery technology, Durect initially is focused on bringing to market off-patent drugs delivered as a continuous dose therapy either systemically or to target areas.

Within six months of its initial funding, Durect had filed an investigational new drug application for its lead product, a systemic, continuous therapy for chronic pain. That product is being tested in Phase I clinical trials and the company hopes to market it as soon as 2002.

"By combining the off-patent molecules with the patent-protected Duros technology we will be able to leverage the millions of dollars in development of both the small-molecule drugs and the Alza technology," said Jim Brown, CEO and president of Durect. "This allows us to very rapidly take our products forward because we are working with molecules with proven therapeutic value."

In order to continue to move its lead product forward as well as bring two other undisclosed products to clinical testing, the company completed the $20 million private placement of convertible preferred stock. This financing included the initial investors - Zesiger Capital Group LLC, Premier Medical Partners Fund LP, Hambrecht and Quist LLC and Alejandro Zaffaroni - as well as new investors led by Brookside Capital, a Bain Capital Fund. Other second-round investors included J.P. Morgan Investment Management, Collinson Howe & Lennox and SOFINOV, a subsidiary of the Caisse de depot et placement du Quebec.

The Series B preferred stock is convertible to common stock at the initial public offering price for Durect. However, Schreck said Durect intends to time its public offering carefully.

"We want to always be working with a strong balance sheet," Schreck said. "By the time we go public, we will be very close to having products on the market."

The Duros delivery system is a titanium cylinder about the size of a the tine of a fork designed to deliver a continuous dose of medications over months or years. The system is implanted subcutaneously and relies on osmotic pressure to provide the flat-line dosage. Duros can target various organs or sites using a catheter system or can provide a systemic dose of the desired medicine.

Alza submitted a new drug application in May for Viadur, a palliative treatment for prostate cancer that employs the Duros system. Under the licensing agreement with Alza, Durect has exclusive rights to the Duros technology in a number of undisclosed fields. In addition to a minority equity interest in Durect, Alza maintains a royalty right to those uses. In addition to Duros, Durect has a number of patents filed and in process in order to extend the company's technology base. The company currently employs 25 people.

Durect intends to develop off-patent molecules first, but already has made strides in establishing drug stability for biological molecules such as proteins. Brown said once the biological utility of these molecules can be established, Durect likely would move into delivery of genes and proteins.

"We want to be the operating system for drug delivery in the 21st century," Schreck said.