<PAGE>

                                                                 CONFIDENTIAL
                                                                 EXHIBIT 10.6


                          SECOND AMENDED AND RESTATED

                  DEVELOPMENT AND COMMERCIALIZATION AGREEMENT

                                    between

                               ALZA CORPORATION

                                      and

                              DURECT CORPORATION





*Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>

                               TABLE OF CONTENTS

                                                                            PAGE




**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                       i
<PAGE>

                          SECOND AMENDED AND RESTATED
                          ---------------------------
                  DEVELOPMENT AND COMMERCIALIZATION AGREEMENT
                  -------------------------------------------

     This Second Amended and Restated Development and Commercialization
Agreement (the "Agreement") is effective as of April 28, 1999 ("Effective Date")
between ALZA Corporation, a Delaware corporation ("ALZA"), and Durect
Corporation, a Delaware corporation ("Durect").

                                   RECITALS
                                   --------

     A.   ALZA and Durect have previously entered into that certain Development
and Commercialization Agreement with an effective date of April 21, 1998 and
subsequently entered into an Amended and Restated Development and
Commercialization Agreement with an effective date of April 28, 1999
(collectively "Previous Agreement") for the development, manufacture and
marketing of pharmaceutical products utilizing proprietary technology of ALZA
relating to the DUROS(R) System for the controlled delivery of drugs in certain
fields, as set forth herein.

     B.   The parties wish to amend such Previous Agreement and restate their
understandings herein.

     NOW THEREFORE, in consideration of the mutual covenants and agreements
provided herein, the parties hereby agree as follows:

                            SECTION 1 - DEFINITIONS
                            -----------------------

     For purposes of this Agreement, the following terms shall have the
respective meanings set forth below:

          1.1  "Affiliate" shall mean a corporation or any other entity that
                ---------
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                       1
<PAGE>

common control with, the designated party, but only for so long as the
relationship exists. "Control" shall mean ownership of shares of stock having at
least 50% of the voting power entitled to vote for the election of directors in
the case of a corporation, and at least 50% of the interests in profits in the
case of a business entity other than a corporation.

          1.2  "Catheter" shall mean a device for transporting Drug from the
                --------
System to a specific anatomical site for delivery, which device is selected,
identified or developed by Durect (and not by ALZA) for use in a Product.

          1.3  "Commercialization" shall mean the ongoing process and activities
                -----------------
generally engaged in by a company marketing life-science products to establish
and maintain a nationwide presence for a product, including, but not limited to
offering for sale, selling, marketing, promoting, distributing and importing
such product.

          1.4  "Confidential Information" shall mean all non-public Technical
                ------------------------
Information, whether in oral, written or other tangible form that one party
discloses to the other under this Agreement and designates as confidential at
the time of disclosure or within 30 days thereafter.

          1.5  "Development Costs" shall mean [* * *].
                -----------------

          1.6  "Drug" shall mean an active pharmaceutical agent, in its pure
                ----
form or in a formulation, that is incorporated in a System to create a Product
under the terms and conditions of this Agreement.

          1.7  "Durect Field" shall mean, subject to modification under the
                ------------
terms of this Agreement, one of the following fields of use, and no others:

               (a) "CNS Field" shall mean delivery of drugs for the treatment of
                    ---------
pain, [* * *] directly into a component of the central nervous system from an
implantable pump via a catheter; provided, however, solely with respect to a
Product using Sufentanil as the Drug, there shall be no requirement that the
Drug be delivered via a catheter.

               (b) "Middle/Inner Ear Field" shall mean delivery of drugs
                    ----------------------
directly into the middle and/or inner ear from an implantable or external pump
via a catheter.

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                       2
<PAGE>

               (c) "Pericardium Field" shall mean delivery of drugs directly
                    -----------------
into the pericardial sac from an implantable pump via a catheter.

               (d) "Vascular Graft Field" shall mean delivery of drugs
                    --------------------
consisting of and limited to [* * *] directly into vascular grafts from an
implantable pump via a catheter .

               (e) "Cancer Antigen Field" shall mean delivery from an
                    --------------------
implantable pump of an anti-cancer antigen from the list of anti-cancer antigens
attached hereto as Exhibit A or a combination of such anti-cancer antigens,
solely for treatment by immunization therapy. Such list of anti-cancer antigens
may be reviewed for additions or deletions from time to time by representatives
of ALZA and Durect, such determination to be made by mutual written agreement at
the discretion of each party.

     To provide further clarification, the Durect Fields shall not include
applications of any ALZA drug delivery technology other than applications of
DUROS(R) Technology as set forth in this Agreement.

          1.8  "DUROS(R) Technology" shall mean all Technical Information
                -------------------
relating to the System.

          1.9  "FDA" shall mean the United States Food and Drug Administration
                ---
or any successor United States governmental agency performing similar functions
with respect to pharmaceutical products.

          1.10 "IND" shall mean the application for Investigation of a New Drug
                ---
submitted to the FDA.

          1.11 "Intellectual Property Rights" shall mean trade secrets, patents,
                ----------------------------
copyrights, know-how and similar rights of any type under the laws of any
governmental authority, domestic or foreign, including all applications and
registrations relating to any of the foregoing.

          1.12 "Major Market Country" shall mean any one of [* * *]
                --------------------

          1.13 "Minimum Payments" shall have the meaning set forth in Section
                ----------------
6.2 hereof.

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                       3
<PAGE>

          1.14 "Minimum Payment Year" shall mean a period of four consecutive
                --------------------
Payment Computation Periods beginning with the first day of the Payment
Computation Period following the Payment Computation Period during which all
necessary regulatory approvals to market the Product in a Major Market Country
have been received, and each successive four Payment Computation Periods
thereafter.  The first four Payment Computation Periods shall be the First
Minimum Payment Year; the next four Payment Computation Periods shall be the
Second Minimum Payment Year; etc.

          1.15 "NDA" shall mean a "New Drug Application," "Product License
                ---
Application," or other application for approval to market a product submitted to
the FDA, as amended or supplemented from time to time.

          1.16 "Net Sales" shall mean the amounts invoiced on sales of a Product
                ---------
by Durect and its Affiliates and Subcontractors to independent, unrelated third
parties in bona fide arms-length transactions, less the following deductions
actually allowed by Durect, its Affiliates and Subcontractors and taken by such
third parties and not otherwise recovered by or reimbursed to Durect, or its
Affiliates or Subcontractors:  (i) trade, cash and quantity discounts; (ii)
taxes or government charges levied on the sale of Product to the extent added to
the sales price and set forth separately as such in the amount invoiced; (iii)
amounts repaid or credited by reason of rejections, defects or returns or
because of rebates or retroactive price reductions; and (iv) delivery charges
(including transportation and insurance costs) actually included in the Net
Sales invoiced.  Net sales shall not include the prices charged (at fair market
value) for separate products such as catheter access devices, syringes, gloves,
and gauze pads, that may be either sold separately from the Product or bundled
with the Product in the form of a kit;  provided, however, that any Net Sales
shall be deemed to include the amount or fair market value of any consideration
(other than consideration described in Section 6.1(b)) received by Durect or its
Affiliates or Subcontractors that can be attributable to a Product, whether such
consideration is in cash or payments in kind.  Net Sales shall not include sales
of a Product between or among Durect and its Affiliates and Subcontractors.

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                       4
<PAGE>

          1.17 "Payment Computation Period" shall mean each three month period,
                --------------------------
or any portion thereof, ending March 31, June 30, September 30, or December 31
of each year during the term of this Agreement.

          1.18 "Primary Field" shall mean the [***].
                -------------

          1.19 "Product" shall mean at any time: (i) any human pharmaceutical
                -------
product consisting of a Drug incorporated in or combined with a System and
(except in cases where the Durect Field definition does not require a catheter)
Catheter, which product is: (A) designed for use in a Durect Field; and (B)
selected as a Product under Section 2.2; or (ii) another product that is
substantially similar to the Product of clause (i), for example, a different
strength (i.e., a different amount of active ingredient delivered in the same
          ----
pattern and by the same route of administration), or having only cosmetic
changes such as size, color, shape, etc., or similar nontherapeutic changes.
                                    ----

          1.20 "Product Candidate" shall mean any human pharmaceutical product
                -----------------
consisting of a Drug incorporated in or combined with a System and (except in
cases where the Durect Field definition does not require a catheter) Catheter,
which product is designed for use in a Durect Field and which enters the
Screening Stage of development (as described in Exhibit C). Product Candidates
shall be listed on Schedule 1, which Schedule shall be amended from time to time
as required by adding those Product Candidates in accordance with Section 2.1
and deleting those Product Candidates that have become Products or are no longer
being developed as provided hereunder. A Product Candidate shall become a
Product when it enters the Feasibility Stage of development (as described in
Exhibit C).

          1.21 "Product Payments" shall mean the payments described in Section
                ----------------
6.1.

          1.22 "Program" shall mean all activities for developing and obtaining
                -------
regulatory approval to Commercialize Product(s) developed under this Agreement
in the Durect Fields in  the Territory.

          1.23 "Program Information" shall mean any Technical Information
                -------------------
developed or acquired by either party and/or a Subcontractor under or in
connection

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                       5
<PAGE>

with the Program, and any Technical Information developed by one party using any
other Program Information or any of the other party's Confidential Information.

          1.24 "Regulatory Data" shall mean the medical, toxicological,
                ---------------
pharmacological and clinical data included within Technical Information to the
extent necessary to, required for, or included in any governmental regulatory
filing to obtain or maintain regulatory approval to market a Product.

          1.25 "Secondary Fields" shall mean the [***].
                ----------------

          1.26 "Subcontractors" shall mean any third party persons or entities
                --------------
(other than wholesalers) to which Durect or any Durect Affiliate directly or
indirectly grants any right to Commercialize a Product as provided for
hereunder.

          1.27 "Supply Agreement" shall mean an agreement for the supply of
                ----------------
Durect's, its Affiliates' and Subcontractors' total requirements of each Product
by ALZA, referenced in Section 5.6.

          1.28 "Subterritory" shall mean one of the following:
                ------------

               Subterritory A -- [* * *]
               Subterritory B -- [* * *]
               Subterritory C -- [* * *]
               Subterritory D -- [* * *]

          1.29 "System" shall mean a drug delivery system which includes and is
                ------
contained within an implantable (or externally worn) osmotic pump intended to
function by releasing the active agent or agents on a controlled basis. The term
"System" shall include all materials, technology and attributes contained
within, or incorporated in the osmotic pump (other than the Drug itself) and
shall include the formulation and stabilization of a therapeutic agent (such as
the Drug) in the System. The System shall not include a Catheter as defined in
Section 1.2, or (except to the extent agreed upon in writing by the parties) any
docking mechanism or other components used to connect a Catheter to the osmotic
pump, and shall not include by way of example, any delivery system that is
ingested in the gastrointestinal tract or that delivers drug through
substantially intact  skin.

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                       6
<PAGE>

          1.30 "Technical Information" shall mean know-how, trade secrets,
                ---------------------
formulations, inventions, data (including Regulatory Data), technology,
processes and information necessary or useful to the Products and/or the
Program, which a party hereto has the lawful and contractual right to disclose
to the other party, and any and all Intellectual Property Rights therein and
thereto. "Technical Information" shall include, without limitation, processes
and analytical methodology used in development, testing, analysis and
manufacture, and medical, clinical, toxicological and other scientific data.
Notwithstanding the foregoing, "Technical Information" shall not include
trademarks. Subject to the foregoing, ALZA Technical Information shall include:
(A) DUROS Technology (including but not limited to all information relating to
manufacture of Systems) and any other Technical Information owned by or licensed
to ALZA prior to April 21, 1998; (B) ALZA's Program Information (as set forth in
Section 8.1); and (C) Technical Information developed by ALZA outside the
Program after April 21, 1998 ("ALZA Technical Information"); and Durect
Technical Information shall include: (a) Technical Information owned by or
licensed to Durect prior to April 21, 1998; (b) Durect's Program Information (as
set forth in Section 8.1); and (c) Technical Information developed by Durect
outside the Program after April 21, 1998 ("Durect Technical Information").

          1.31 "Territory" shall mean all of the countries of the world, but
                ---------
shall exclude, for any Product: (i) countries which may be eliminated from the
Territory from time to time in accordance with this Agreement, and (ii) any
countries for which Durect does not have rights to commercialize the Drug
incorporated in such Product.

          1.32 "Work Plan" and "Cost Estimate" shall have the meaning set forth
                ---------       -------------
in Section 2.3.

                        SECTION 2- DEVELOPMENT PROGRAM
                        ------------------------------

          2.1  Product Development. Subject to the terms and conditions herein,
               -------------------
Durect shall diligently develop Products under the Program in accordance with
this Agreement, including making available such of its personnel, and taking
such steps as are

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                       7
<PAGE>

reasonably necessary, in order to carry out its obligations. In the event Durect
desires to initiate development work on a new product, it shall send to ALZA a
written notice setting forth a description of the proposed new product and
projected target dates for the filing of an IND, start of Phase III and filing
of an NDA (each a "Milestone"), which target dates shall be reasonable by
industry standards and shall be consistent with the timeline used by Durect for
internal planning and presentation to investors. Upon ALZA's written approval of
the target dates for the Milestones, which approval shall not be unreasonably
withheld, the proposed new product shall be added as a Product Candidate to
Schedule 1. From time to time, the parties will review the target dates for the
Milestones in good faith and, by mutual written agreement, revise and update the
target dates if necessary. Durect shall notify ALZA in writing when a Product
Candidate is ready to pass into the clinical development stage as outlined in
Exhibit C, in which event it shall be added as a Product to Schedule 2. Subject
to the terms and conditions of this Agreement, the addition or deletion of a
Product Candidate or Product to Schedule 1 or Schedule 2 shall be determined
based on the reasonable, good faith judgment of Durect, provided that any
proposed Product Candidate or proposed Product will not be added in the event
that: (i) such proposed Product Candidate or proposed Product was within the
past 12 months removed by ALZA from the Program pursuant to Section 2.5; or (ii)
ALZA determines, reasonably and in good faith, based on medical or technical
reasons, that the proposed Product Candidate or proposed Product is not suitable
for development because development or Commercialization of such proposed
Product or Product Candidate would be likely to be harmful to the reputation of
ALZA and/or DUROS Technology, provided, however, that: (a) ALZA's determination
pursuant to this clause (iii) shall be subject to review by a mutually
acceptable third party expert in the event of disagreement by the parties as to
such determination, and (b) ALZA shall not initiate development of such proposed
Product Candidate (or proposed Product), pursuant to Section 5.3 or otherwise,
for its own account or with a third party for a period of [***] from the date of
ALZA's determination without first proposing such proposed Product Candidate (or
proposed Product) to Durect for development and providing Durect with a period
of [***] in which to accept or reject such proposed Product Candidate (or

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                       8
<PAGE>

Proposed Product) in writing and diligently initiate development under the terms
of this Agreement.

          2.2  Sharing of Information.
               ----------------------
          During the term of this Agreement, representatives of ALZA and Durect
shall meet within 30 days after the end of each calendar quarter, unless
mutually agreed to by the parties, to discuss and provide information regarding
the status of development, clinical programs, regulatory applications and
development costs and expenses incurred for the Products and Product Candidates
listed on Schedules 1 and 2 including without limitation progress against
diligence obligations. Upon request by ALZA or Durect, the parties shall also
meet from time to time to discuss improvements made to the System by each party.
In addition, each party shall promptly provide any information as reasonably
requested by the other party from time to time regarding its activities and
progress with respect to the Program.   The information exchanged by the parties
pursuant to this Section 2.2 shall be in confidence subject to the terms of
Section 4.1.

          2.3  Work Plans and System Development.
               ---------------------------------
               (a) In the event that Durect desires that ALZA provide certain
development services relating to any Product or Product Candidate, and ALZA
agrees to provide such services to Durect, Durect and ALZA shall develop a
mutually acceptable development plan ("Work Plan") for each Product Candidate
(or Product) which shall set forth:  (i) the development activities to be
performed by ALZA and estimated time schedule therefor; (ii) and the estimated
Development Costs therefor ("Cost Estimates"); which Work Plans and Cost
Estimates shall be signed by an authorized officer of each party.  ALZA shall
diligently perform those development activities assigned to it under the Work
Plan and shall use diligent efforts to complete tasks in the Work Plan in an
expeditious and cost-effective manner.

               (b) Development work for the System may be performed by Durect or
ALZA (to the extent agreed upon in the Work Plans). Durect shall have the right
to subcontract to third parties development of System components (but not

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                       9
<PAGE>

System design). The subcontracting of all other System development work will be
subject to the prior written consent of ALZA. If Durect desires to subcontract
out the development of System components as permitted herein to any third party,
prior to providing any information relating to Systems to such third party,
Durect shall notify ALZA of the identity of such third party, and Durect shall
enter into a confidentiality and invention assignment agreement with such third
party in a form previously approved by ALZA which expressly makes ALZA a third-
party beneficiary of such agreement and permits ALZA to directly enforce its
terms. Unless agreed to in writing by ALZA, the rights granted to Durect to
perform development work for the System pursuant to this Section 2.3 shall
terminate after a change in control of Durect in which Durect becomes controlled
by a third party company, in which event ALZA shall have the right to elect to
perform all development work relating to the System and ALZA and Durect shall
enter into a Work Plan for such System development work which shall provide for
the continued diligent performance of such System development work so as to
minimize disruption of Product timelines. If ALZA elects not to perform
development work relating to the System after such change in control, then
Durect shall continue to have the right to perform development work relating to
the System as set forth in this Section 2.3. For the purposes of this Section
2.3, "control" shall have the same meaning as set forth in Section 1.1. All
other Product development activities may be performed by Durect, ALZA (to the
extent agreed upon in Work Plans) or subcontracted to third parties.

          2.4  Development Payments. In consideration for ALZA's work on the
               --------------------
Program, Durect shall pay to ALZA [* * *], provided that Durect shall not be
obligated to pay [* * *], and ALZA shall not be obligated to perform work-which
would result in [* * *]

          2.5  Durect Field(s) Diligence and Loss of Rights.  Durect shall
               --------------------------------------------
approve, fund and take other actions necessary to provide for development of
Products in each of the Durect Fields in accordance with the minimum diligence
requirements set forth in Exhibit F, and to pursue and fund proof of principle
work for Products in the Secondary

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      10
<PAGE>

Fields in accordance with Exhibit F. If Durect fails to meet the diligence
requirements relating to a Durect Field as set forth in Exhibit F, for which
such failure continues for [* * *] after-the delivery of written notice thereof
by ALZA, then ALZA's sole and exclusive remedy shall be to terminate the
restrictions on ALZA provided for in Section 5.3 upon written notice from ALZA
solely in the Durect Field in which such requirements were not met (or such
Durect Field as is otherwise provided for in Exhibit F under "Consequences for
Fields"), in which event such Durect Field shall be deemed to be eliminated from
the "Durect Fields" definition, and thereafter no Product Candidates shall be
added to Schedule 1 within such Durect Field and no Products shall be added to
Schedule 2 for such Durect Field except for those Product Candidates existing at
the time of such elimination and for which the screening stage has been or
subsequently is successfully completed. Notwithstanding the elimination of any
Durect Field hereunder, Durect shall continue to have rights to the Product
Candidates and Products already included in Schedules 1 and 2 as of the date
that such field is eliminated so long as it continues to meet its obligations
for such Product Candidates and/or Products, including those set forth in
Exhibit F, provided, however, that if Durect fails to meet such obligations with
respect to a Product Candidate or Product and such failure continues for [* * *
] after the delivery of written notice thereof by ALZA, then ALZA may eliminate
such Product Candidate or Product from this Agreement and ALZA shall have the
rights set forth in Section 11.6.

          2.6  Regulatory Activities.
               ---------------------
               (a) Durect shall diligently take all steps necessary to obtain
regulatory approval to market each Product in each Major Market Country of the
Territory, so long as Durect retains Commercialization rights for such Product
under this Agreement, including promptly preparing and filing necessary
applications for regulatory approval to market the Product in each such country
(including the IND and NDA and corresponding regulatory filings outside the
United States) and shall work diligently to obtain such approvals as
expeditiously as possible.  Durect shall use reasonable commercial diligence to
obtain such regulatory approvals in other countries of the

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      11
<PAGE>

Territory. ALZA may be delegated certain duties relating to clinical and
regulatory activities under the Program on a Product-by-Product basis by mutual
agreement as set forth in Work Plans. The CMC Section of any regulatory filing,
to the extent it relates to the System, may be maintained by ALZA, in one or
more of ALZA's Drug Master Files to the extent permissible under applicable laws
and regulations, for which Durect shall have the right of reference for each
Product hereunder. Durect shall prepare the CMC Section subject to ALZA's review
and decision-making authority under Section 2.6(b).

               (b) Notwithstanding the allocation of regulatory responsibilities
in this Section 2.6, the representatives of each party shall have the right to
review and comment upon all regulatory filings proposed to be made with respect
to any Product for each country of the Territory as to which Durect maintains
rights hereunder, provided that for any such comments to be considered, the
comments shall be provided within [* * *] after the receipt of any draft filings
for review. To the extent ALZA performs review of regulatory filings or attends
meetings with regulatory agencies as to matters beyond the requirements of its
activities under the Program (and not at Durect's request), it shall do so at
its cost and expense. Durect shall have the right to make final decisions with
regard to any regulatory filings relating to any Product, provided that
notwithstanding anything to the contrary herein, due to ALZA's continuing
interest in development and production of Systems for multiple applications,
ALZA shall have the right to approve regulatory matters relating to the System
or its function, manufacture or safety, including manufacturing specifications
and the relevant portions of the CMC Section of an NDA or its equivalent. Each
party shall with reasonable promptness provide the other party with copies of
all correspondence from or to such regulatory authorities concerning each such
Product. ALZA shall have the right to participate in any conference or meeting
with regulatory authorities with respect to each Product. Durect shall notify
ALZA in writing of its receipt of regulatory approval to market the Product in
any country of the Territory within [* * *] after receipt of any such approval.

          (c) Representatives of each party shall have the right to review and
comment on all proposed protocols for any clinical studies to be conducted by

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      12
<PAGE>

either party with respect to any Product, and each party shall make such changes
in such protocols as may be reasonably requested by the other in writing within
[* * *] after receiving the proposed protocols, provided that Durect shall make
final decisions on the protocols and their implementation. To the extent ALZA
conducts review of protocols as to matters beyond the requirements of its
activities in the Program (and not at Durect's request), ALZA shall do so at its
cost and expense.

               (d)  From time to time during the term of this Agreement, ALZA
may wish to include certain patent information in the patent certification of an
NDA filed or which may be filed by or on behalf of Durect under this Agreement
relating to a Product. If ALZA advises Durect in writing of the patent number
and expiration date, or such other information as the FDA may from time to time
require, of patents to be included in the NDA patent certification or any
amendment thereof, Durect shall include such information in the NDA, or amend
the NDA, within the applicable time limits required by law.

               (e)  Nothing contained in this Section 2.6 or elsewhere in this
Agreement is intended to conflict with any applicable regulations and laws
relating to procuring and maintaining regulatory approval for the Products in
all countries of the Territory where the Products will be developed and
Commercialized, and in the event of any conflict with the terms of this
Agreement and applicable laws, the applicable laws will control.

               SECTION 3 - DISCLOSURE OF INFORMATION
               -------------------------------------
          3.1  Disclosure.  Upon execution of this Agreement, and thereafter
               ----------
during the term hereof, at such times as the parties shall mutually agree, each
party shall disclose to the other, in confidence subject to Section 4.1 hereof,
relevant Confidential Information and Program Information necessary or useful to
the Program. Each party may use such Confidential Information and Program
Information disclosed by the other party for the purposes permitted by this
Agreement, but for no other purpose. Each party shall, at the request of the
other and on a confidential basis

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      13
<PAGE>

subject to Section 4.1, allow personnel of the other party to consult with its
staff at mutually agreeable times, to discuss and review such Confidential
Information and Program Information. All Confidential Information and Program
Information heretofore or hereafter disclosed by either party to the other
relating to the subject matter hereof shall be deemed to have been disclosed
pursuant to this Agreement and shall be subject to the provisions of this
Agreement including, but not limited to, Section 4.1.


               SECTION 4 - CONFIDENTIALITY OF INFORMATION
               ------------------------------------------
          4.1  Confidentiality.  Except as specifically authorized by this
               ---------------
Agreement, each party shall, for the term of this Agreement and for [* * *]
after its expiration or termination for any reason, keep confidential, not
disclose to others and use only for the purposes authorized herein, all of the
other party's Confidential Information and Program Information, except as
permitted by this Agreement; provided, however that the foregoing obligation
shall not apply to the extent that any such information is (i) already known to
the recipient at the time of disclosure, as evidenced by its prior written
records (but not including information known to Durect personnel as a result of
prior association with ALZA), (ii) publicly known prior to or after disclosure
other than through unauthorized acts or omissions of the recipient, or (iii)
disclosed in good faith to the recipient by a third party lawfully entitled to
make such disclosure, or (iv) independently developed by the recipient without
use of the disclosing party's Confidential Information as evidenced by written
records of the recipient; [***]. Notwithstanding the foregoing, any
Confidential Information may be (A) disclosed to governmental agencies and to
others where such information may be required to be included in patent
applications or regulatory filings permitted under the terms of this Agreement;
(B) provided to third

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      14
<PAGE>

parties under appropriate terms and conditions including confidentiality
provisions substantially equivalent to those in this Agreement for consulting,
manufacturing, development, external testing and marketing trials with respect
to the Product; (C) published, if and to the extent such publication has been
approved in writing by ALZA, to the extent it relates to ALZA Confidential
Information, or Durect, to the extent it relates to Durect Confidential
Information; or (D) disclosed to the extent required by applicable laws or
regulations or as ordered by a court or other regulatory body having competent
jurisdiction. In each of the foregoing cases, the recipient will use its
reasonable efforts to limit the disclosure and maintain confidentiality to the
extent possible.


               SECTION 5 - COMMERCIALIZATION RIGHTS
               ------------------------------------
          5.1  Grant of Rights.
               ---------------
               (a)  On the terms and conditions of this Agreement and subject to
ALZA's rights set forth in Section 5.5: (i) Durect shall have the exclusive
right to Commercialize each of the Products in the Territory, with the right to
record sales for its own account; (ii) on a Product-by-Product basis, Durect
shall have the right to appoint an Affiliate or Affiliates of Durect to
Commercialize Products in any country or countries of the Territory; (iii)
Durect shall also have the right, on a Product-by-Product basis, to appoint
and/or enter into agreements with Subcontractor(s) to Commercialize, sell and
distribute such Product in any country or countries of the Territory; and (iv)
Durect shall have the exclusive right (subject to the rights and obligations
under this Agreement respecting the development of the Systems including the
provisions of Section 2.3) to develop the Products and to appoint and/or enter
into agreements with Subcontractors to perform such development pursuant to this
Agreement. In the case of such appointment in any country by Durect of a non-
Affiliate: (i) such Subcontractor shall be subject to the terms and conditions
of this Agreement; (ii) [***]

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      15
<PAGE>

[***] and (iii) the rights of ALZA under this Agreement shall not be prejudiced
or in any other way reduced or limited by such subcontracting arrangement.
Subject to the terms and conditions of this Agreement, ALZA hereby grants to
Durect and its Affiliates a license under Intellectual Property Rights covering
ALZA Confidential Information (including information owned by ALZA as of April
21, 1998 relating to catheters and mechanisms for docking catheters to the
Systems), ALZA Program Information, and the Systems solely to the extent
necessary for Durect to Commercialize and Manufacture (subject to Section 5.6
hereof) Products, to perform development activities as contemplated herein, and
to otherwise perform its obligations in accordance with this Agreement.

               (b)  Subject to the terms and conditions of this Agreement,
including but not limited to Section 5.3, Durect shall have the exclusive right
to Commercialize each Product on Schedule 2: (A) in Subterritories A, B and C
for a period of [* * *] from the [* * *] in such Subterritory; (B) in
Subterritory D for a period of [* * *] from the [* * *]

               (c)  Subject to the terms and conditions of this Agreement,
Durect shall have an option to extend year-by-year the period of
Commercialization rights granted under Section 5.1(a) on a Product-by-Product,
Subterritory-by-Subterritory basis (with respect to the Products, Subterritories
and countries for which Durect has retained rights), by written notice to ALZA
given at least [* * *] prior to the expiration of Durect's rights under Section
5.1(b) for such Product in such Subterritory.

               (d)  If the option to extend Commercialization rights is
exercised in accordance with Section 5.1(c) for any Product in any Subterritory,
Durect shall commence making payments automatically under the provisions of
Section 6.3 for such

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      16
<PAGE>

Product with respect to such Subterritory as the obligations to make Product
Payments for such Product in such Subterritory under Section 6.1 expire. In the
event that Durect exercises its option to extend its rights described in Section
5.1(c), the Commercialization rights granted under Section 5.1(a) for such
Product in such Subterritory shall continue for the extension term(s) and under
the conditions set forth in Section 6.3.

               [***]

          5.2  Commercial Diligence.  Within 30 days after the filing for
               --------------------
regulatory approval in the first Major Market Country for each Product, Durect
shall notify ALZA in writing as to its plans for Commercializing such Product in
the Territory. Durect shall diligently pursue regulatory approval and
Commercialization of the Products in the Territory. Promptly after obtaining the
necessary regulatory approvals (and pricing approval where applicable) in any
country of the Territory (and in any event within [* * *] after such approvals)
Durect (or its Affiliates or Subcontractors) shall commence and shall continue
diligently to Commercialize the Product on a nationwide basis in such country
using the same efforts that an established pharmaceutical company normally
devotes to its own comparable products, so long as Durect retains
Commercialization rights under this Agreement. Without limiting the foregoing,
at any time after the [* * *] ALZA may, upon [* * *] prior written notice to
Durect, identify any country in which a Product is not being commercially sold
by Durect, its Affiliates or Subcontractors and

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      17
<PAGE>

for which neither Durect or its Affiliates or Subcontractors are, nor have been
for at least the preceding [* * *], diligently seeking regulatory approval to
Commercialize the Product in such country (the "Identified Country"). ALZA and
Durect shall attempt in good faith, for up to [* * *] from the date of such
notice, to seek a mutually acceptable means of Commercializing the Product in
such Identified Country, which may include both ALZA and Durect negotiating an
agreement with a third party. If after such [* * *] no such means has been
agreed upon, then ALZA may, by written notice to Durect, terminate the rights of
Durect hereunder to Commercialize such Product in such Identified Country. For
each Product with respect to which Durect does not retain Commercialization
rights in any particular country ("Terminated Countries"), ALZA shall have the
rights to such Product in such Terminated Countries in accordance with Section
11.6.

          5.3  Durect Field Exclusivity.
               ------------------------
               (a)  Subject to the terms and conditions of this Agreement
(including without limitation Section 5.3(c) and Section 2.5), ALZA shall not:
(i) develop for its own account a product using the System that is designed for
use in any Durect Field, or (ii) grant to a third party any rights to develop,
manufacture or Commercialize products using the System (or license Intellectual
Property Rights covering ALZA Technical Information) that ALZA knows or has
reason to know, at the time such third party arrangement is entered into, would
be a product designed for use in a Durect Field. Nothing herein shall be deemed
to restrict ALZA from developing or granting rights with respect to any products
that are not designed and developed for use in a Durect Field, subject to the
following:

               (A)  ALZA may not itself develop or Commercialize, nor grant
rights to a third party to develop or Commercialize any product using the System
which incorporates Sufentanil so long as Durect and/or a Subcontractor
(including ALZA) is diligently developing or Commercializing the non-
catheterized Product using Sufentanil as the Drug ("Sufentanil Product") in
accordance with the terms of this Agreement.

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      18
<PAGE>

               (B)  In the event ALZA (or a third party to whom ALZA has granted
rights) Commercializes a product using the System which incorporates an opioid
compound (other than Sufentanil) as the active ingredient, then starting upon
the FDA approval for such other product and during such period as Durect and/or
a Subcontractor is diligently developing or Commercializing the Sufentanil
Product in accordance with the terms of this Agreement, [***]

               (C)  In the event that ALZA (or a third party to whom ALZA has
granted rights) Commercializes the Sufentanil Product as a result of ALZA's
exercise of its option right under Section 5.5(a), then if ALZA (or any third
party to whom ALZA has granted rights) commences Commercialization of any
product using the System which incorporates any opioid other than Sufentanil,
then commencing upon the FDA approval of such other product, [* * *] in which
event [* * *]

     If Durect can reasonably show that a third party contractor of ALZA is
manufacturing or Commercializing products using the System, which products are
being used in the Durect Fields, then ALZA agrees to notify such third party
contractor of Durect's rights in the Durect Fields and, to the extent it has the
legal right to do so, to use its reasonable commercial efforts to stop such
third party from manufacturing or Commercializing such products in the Durect
Fields.  However, Durect acknowledges that ALZA may not have the right to limit
uses of products that are not designed for use in a Durect Field.  The
obligations of ALZA under Section 5.3 shall continue only for such period as is
covered by specifically agreed-upon diligence requirements as set forth in
Section 2.5 or Exhibit F.

               (b)  From time to time during the term of this Agreement, Durect
and ALZA may, at their discretion, discuss opportunities to add either
additional products or additional fields of products to the definition of Durect
Fields under this Agreement, by written agreement of the parties; provided that
neither party shall be obligated to enter into negotiations or into such an
agreement, or to reserve for the other party rights to any additional products
or fields until such time as an agreement is

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      19
<PAGE>

made to that effect. In addition, if any such additional Products, or Products
in such additional fields, involves clinical applications in the areas of [* *
*] or delivery of drugs to the [* * *] and subject to the exception provided in
the next sentence below, then ALZA shall have an option to obtain exclusive
Commercialization rights to such Products as set forth in Section 5.5(a). The
foregoing option to ALZA shall not apply to any Product which Durect
Commercializes through a Subcontractor who holds exclusive rights (by ownership
or exclusive license) to a United States patent which: (i) covers the Drug
incorporated into such Product, or the Drug's manufacture or use which but for a
license from the Subcontractor would preclude Durect from the development,
Commercialization or manufacture of such Product incorporating such Drug, and
(ii) will provide at least [***] from the time Durect and the Subcontractor
enter into an agreement for the development and/or Commercialization of such
Product (any such Product shall herein be referred to as "Proprietary Product").

               (c)  Notwithstanding Section 5.3(a), if ALZA is requested by a
third party to develop a product using the System without a catheter, which
product is designed for use in the Cancer Antigen Field, then ALZA shall notify
Durect in writing of such opportunity. Durect shall notify ALZA within [* * *]
after the receipt of such notice from ALZA as to whether or not Durect wishes to
pursue such opportunity as a Product under this Agreement with such third party.
If Durect and such third party enter into a written agreement providing for the
development and Commercialization of the product within [* * *] after Durect's
receipt of the notice from ALZA described in the first sentence of this Section
5.3(c), then such product shall be developed as a Product under this Agreement,
and if such condition has not been met, then ALZA shall be free to pursue such
opportunity using the System without a catheter with such third party; provided,
however, that: (A) ALZA may not develop or grant rights to a third party to
develop or Commercialize any such product using the System in the Cancer Antigen
Field which product incorporates the same Drug as a Product which is then being
developed or Commercialized diligently by Durect or a Subcontractor under this

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      20
<PAGE>

Agreement in the Cancer Antigen Field; and (B) for a period of [* * *]
("Exclusion Period"), ALZA will refrain from developing or granting rights to a
third party to Commercialize any such product in the Cancer Antigen Field which
product is designed for the same clinical use for which a Product is then being
developed or Commercialized diligently by Durect or a Subcontractor under this
Agreement in the Cancer Antigen Field. Durect may extend such Exclusion Period,
by written notice to ALZA at least [* * *] before expiration of such Exclusion
Period, by up to an additional [* * *] if Durect (i) has met and continues to
meet all of its diligence requirements under Section 2.5 in a timely manner, and
(ii) is [* * *] in the Cancer Antigen Field, but in no event shall any extension
to the Exclusion Period be granted beyond [* * *] Subject to the foregoing,
[* * *]

          5.4  Other Technologies; Conversion of Rights. The parties acknowledge
               ----------------------------------------
that ALZA is relying on Durect's commitment to utilizing DUROS Technology in
development of its products. Accordingly, the Commercialization rights for
Products granted to Durect under this Agreement shall become non-exclusive
rights, and the restrictions on ALZA provided for in Section 5.3 will terminate
upon written notice from ALZA, if at any time during the term of this Agreement
Durect develops or Commercializes any drug delivery technology for use in any of
the Durect Fields and that would be used in a manner similar to the DUROS
Technology. In such event, no additional Product Candidates or Products shall be
added to Schedules 1 or 2 (but Durect shall retain exclusive rights only to
Products already included in Schedule 2 and only for so long as Durect continues
to meet its obligations for such Products including those set forth in Exhibit F
and does not develop any product using such other drug delivery technology that
contains the same Drug for use in the same Durect Field as any of such
Products). Nothing in this Section 5.4 shall be deemed to restrict Durect from
developing and Commercializing any type of drug delivery technology in any
fields of use outside of the Durect Fields. During the term of this Agreement,
Durect shall have the right to delete any Durect Field(s) from the "Durect
Fields" definition by written notice to ALZA effective [* * * ] after
such notice is received by ALZA, in which event,

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      21
<PAGE>

all rights of Durect in such Durect Field shall terminate; provided, however,
such deletion of any Durect Field by Durect shall not affect the rights and
obligations of the parties with respect to any other Durect Fields not deleted
in accordance with this Section 5.4.

          5.5  ALZA Rights.
               -----------
               (a)   Durect hereby grants to ALZA options to obtain exclusive
worldwide Commercialization rights to each Product in the Cancer Antigen Field
which is not a Proprietary Product (as defined in Section 5.3(b) above) and each
additional Product for which ALZA has option rights under Section 5.3(b) (each
an "Option Product") and an option to obtain exclusive Commercialization rights
in the U.S. and Canada to the Sufentanil Product subject to the following
conditions. At the time that [* * *], Durect may deliver written notice thereof
to ALZA, along with the data and a report summarizing such data regarding such
Product, provided that Durect must deliver such notice to ALZA [* * *] unless
mutually agreed to in writing by the parties. No later than [* * *] after such
notice from Durect ("Option Period"), ALZA shall notify Durect in writing
whether it elects to:

               (i)   enter into an agreement with Durect to develop and
Commercialize such Product, in which case the parties shall negotiate in good
faith an agreement for the development and Commercialization of such Product,
which agreement shall require ALZA to Commercialize such Product with the same
degree of diligence as required of Durect under Section 5.2; or

               (ii)  not obtain Commercialization rights to such Product, in
which event Durect shall be entitled to enter into an agreement with a third
party to develop and Commercialize such Product; or

               (iii) solely with respect to an Option Product, extend the Option
Period by increments of [***] until such time as [* * *] and thereafter by
increments of [***] until such time [***] (each increment an "Extension
Period"), provided that ALZA shall be required to fund development work for such


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      22
<PAGE>

Product during each such Extension Period, but provided further that ALZA shall
not be required to fund development work on more than [***] in order to extend
its options for all Products in such Durect Field. [***]

          If ALZA elects to exercise its option to the Sufentanil Product or any
other Product subject to this Section 5.5(a) at any time during the Option
Period or any Extension Period, and the parties are unable to agree on terms for
such Commercialization rights within [***] after such exercise, either party
may elect to submit the determination of such terms to special arbitration in
accordance with Section 15, provided that judgment must be rendered no later
than [***] after the commencement of arbitration (as defined in Section 15).
In such arbitration, the arbitrators shall be instructed to make a determination
as to the fair market value of the rights granted to the Product in question as
between two independent companies negotiating at arms' length and shall
determine appropriate terms, including reasonable diligence provisions, taking
into account, among other things, evidence presented concerning the terms agreed
upon by other parties in arms' length negotiations for products at a similar
stage of development and with similar market potential.  Upon such decision by
the arbitrators, the decision shall become a binding agreement of the parties.

               [***]

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      23
<PAGE>

[***]

          5.6  Manufacture of Product.
               ----------------------
               (a)  Subject to the terms and conditions of this Agreement,
including those set forth in this Section 5.6: (i) Durect shall have the
exclusive right, in the Territory, to manufacture, assemble and finish
commercial and clinical supplies of Products, including the right to make
Systems and fill Systems solely and specifically for incorporation into Products
and not for any other purpose (collectively "Manufacture"); (ii) on a
                                             -----------
Product-by-Product basis, Durect shall have the right to appoint such Affiliates
for which Durect possesses, directly or indirectly, the power to direct or cause
the direction of the management or policies of such Affiliates to Manufacture
Products in [* * *] and such other countries as shall be agreed upon by the
parties from time to time; and (iii) on a Product-by-Product basis, Durect shall
also have the right to subcontract out to third parties who normally engage in
such subcontract assembly work for others the manufacture of production and
process equipment, System components, the filling of Systems, and sterilization
and final assembly of Product for commercial and clinical supplies of Products,
provided that System subassembly may not be subcontracted to third parties
without ALZA's written approval. Other than subcontracting as specifically set
forth in Section 5.6(a)(ii)-(iii) above, the Manufacture of Product shall be
performed only by Durect and may not be subcontracted to any parties other than
ALZA without the prior written consent of ALZA. Unless agreed to in writing by
ALZA, the rights granted to Durect pursuant to this Section 5.6 or manufacturing
rights granted elsewhere in this Agreement shall terminate upon a change in
control of Durect in which Durect becomes controlled by a third party company,
in which event, ALZA shall have the right to elect to supply all of Durect's and
its Affiliates and Subcontractor's clinical and commercial requirements for
Product (excluding any Catheter or other components as agreed upon by the
parties which are external to the System), at ALZA's [* * *] as determined in
accordance with Exhibit G

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      24
<PAGE>

hereto, and ALZA and Durect shall enter into a written supply agreement for such
manufacture and supply to Durect, its Affiliates and Subcontractors which shall
include such provisions for interim supply to ensure uninterrupted supply of
Products (at a price to Durect of ALZA's [* * *] until ALZA is able to fully
meet Durect and its Affiliates and Subcontractor's requirements after such a
change in control. If ALZA elects not to supply Durect and its Affiliates and
Subcontractor's requirements after such a change in control, then Durect shall
continue to have the right to Manufacture Product as set forth in this Section
5.6. For the purposes of this Section 5.6(a), "control" shall have the same
meaning as set forth in Section 1.1.

               (b)  The parties acknowledge that ALZA has provided Durect with
reasonable assistance (including making available scientific, engineering and
manufacturing and other personnel) and transferred to Durect appropriate
documentation relating to Systems manufacture in accordance with a work plan
agreed upon by the Parties. All such materials and information shall remain the
sole property of ALZA.  At the request of ALZA, Durect shall promptly transfer
back to ALZA any and all improvements, documentation or other Technical
Information that may be developed by Durect or its subcontractors relating to
Manufacture of Systems.  To the extent such transfer requires technical
assistance from Durect, ALZA shall reimburse Durect for the cost of such
assistance as determined in accordance with Exhibit E.

               (c)  All Manufacturing of Product by Durect hereunder shall be in
strict accordance with all applicable laws and regulations, including the
"current good manufacturing practices" regulations of the U.S. Food and Drug
Administration.  If Durect desires to subcontract any part of manufacturing of
Systems as permitted herein to any third party, prior to providing any
manufacturing information relating to Systems to such third party, Durect shall
notify ALZA of the identity of such third party, and Durect shall enter into a
confidentiality and invention assignment agreement in a form previously approved
by ALZA with such third party which expressly makes ALZA a third-party
beneficiary of such agreement and permits ALZA to directly enforce its terms.

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      25
<PAGE>

          5.7  Identification of ALZA.  At ALZA's request, Durect shall cause
               ----------------------
each Product and its packaging to display prominently, in a manner reasonably
acceptable to ALZA, an ALZA name and logo, and to identify ALZA as a developer
of such Product. All uses of the ALZA name and marks shall be subject to prior
review and approval by ALZA within 30 days.

                             SECTION 6 - PAYMENTS
                             --------------------
          6.1  Product Payments.  In consideration of the rights granted to
               ----------------
Durect hereunder, the performance of the Program by ALZA and ALZA's other
obligations under this Agreement, Durect shall make Product Payments to ALZA on
Net Sales of the Product for the term of the Commercialization rights set forth
in Section 5.1. The payments to be made under this Section 6.1 are in
recognition of the unusual nature of the arrangements between the parties,
pursuant to which ALZA will provide access to technology over several years,
without profit, in anticipation of possible future payments under this section
6.1.  By the payments under this Section 6.1, it is the intent of the parties
that ALZA's efforts and expenditures in creating DUROS Technology to be utilized
in the Program be recognized by a long-term financial sharing in Durect's
Product revenues.

               (a)  Product Payments on Net Sales of Product due under this
Section 6.1 for any calendar year shall be based on the prior calendar year's
total Net Sales of Product in the Territory, with payment rates for such
calendar year to be the applicable percentages set forth herein. The applicable
payment rate shall be calculated by [* * *] but shall not be [* * *]. During
the first calendar year of Product sales, the payment rate will be [* * *].

          Examples:

               Sales in Year X-1*   Payment Rate
                   ($ Million)      For Year X**
               ------------------   ------------

                  [* * *                  * * *]

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      26
<PAGE>

                  [* * *                  * * *]
                  [* * *                  * * *]
                  [* * *                  * * *]
                  [* * *                  * * *]

*   Net Sales in the Territory by Durect, its Affiliates and Subcontractors for
    the prior calendar year.
**  The applicable payment rate for the current calendar year.


          (b)  In addition to Product Payments under Section 6.1(a), Durect
shall make payments to ALZA equal to [* * *] with respect to Products after
deducting from such consideration: (i) any tax or other government charge (other
than income tax) levied on such consideration to the extent borne by Durect, its
Affiliates and Subcontractors and (ii) any payments (or portions thereof) that
constitute reimbursement of (and are determined based upon) genuine research,
development and/or manufacturing costs incurred by Durect, its Affiliates and
Subcontractors including but not limited to reimbursement of expenses for
reagents, materials, equipment, salaries, testing, clinical trials, insurance
and any overhead reasonably attributable to such research, development or
manufacture.

          6.2  Minimum Payments.  Durect shall make Minimum Payments to ALZA, on
               ----------------
a Subterritory by Subterritory basis for Subterritories A, B and C, as follows:
With respect to each Product, periodically during the Program, commencing in the
calendar quarter when a Product first becomes a Product, Durect shall provide
ALZA with good faith projections of Net Sales for each of the first [* * *] of
marketing such Product in each Subterritory. At least [* * *] Durect shall
update such projections, with one update to be delivered no later than [* * *]
days after NDA filing (or if earlier, the first filing for regulatory clearance
to market the Product in a Major Market Country), and a final update to be
delivered within [* * *] after the first regulatory clearance to market the
Product in a Major Market Country. Such projections shall be consistent with
those provided for purposes of forecasting amounts to be manufactured by Durect
or supplied by ALZA pursuant to the Supply Agreement. Minimum Payments shall
commence and shall be paid as follows:

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      27
<PAGE>

               Subterritory        Minimum Payment Commences With
               ------------        ------------------------------

               A or B*             First Minimum Payment Year
               A or B**            Second Minimum Payment Year
               C                   Third Minimum Payment Year

*   Whichever of Subterritory A or B in which the Product is first approved in a
    Major Market Country.
**  The other of Subterritory A or B.

Once commenced in accordance with the above table, [* * *] of the total final
projection for each of the first [* * *] of marketing of the Product for such
Subterritory [* * *], and Minimum Payments for each such Subterritory shall
              -----
continue thereafter at the [* * *] Minimum Payments paid to ALZA by Durect shall
be fully creditable against Product Payments on Net Sales under Section 6.1 for
the Minimum Payment Year for which the Minimum Payments are made. No Minimum
Payments will be payable in Subterritory D.

          6.3  Optional Payments to Extend Commercialization Rights; Payment
               -------------------------------------------------------------
Adjustments. If Durect exercises its option to extend its sole Commercialization
-----------
rights under Section 5.1 in accordance with Section 5.1(c) hereof for any
Subterritory, Durect shall pay to ALZA, for each country of such Subterritory,
beginning on the date when the obligation to make Product Payments under Section
6.1 has terminated for such Subterritory and for as long as Durect elects to
continue its sole Commercialization rights under Section 5.1(c) hereof for such
Subterritory [* * *]. Payments by Durect under this Section 6.3 for each
Subterritory shall continue until such time as Durect provides written notice to
ALZA, not less than [* * *] before the beginning of any calendar year, that
payments under this Section 6.3 will cease as to such Subterritory at the
beginning of the calendar year set forth in such notice, at which time the
rights under Section 5.1 shall terminate for such Product for such Subterritory.

          6.4  Compulsory License.  During the period that Durect retains the
               ------------------
sole Commercialization rights to a Product in any country, if in such country
any third party tries to obtain from ALZA or Durect or any Affiliate or
Subcontractor thereof a compulsory license or rights pursuant to governmental
authority to market the Product

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      28
<PAGE>

in such country, ALZA and Durect will use all reasonable efforts to oppose the
grant of such license or rights and to obtain the highest royalty or payment
rate possible if such compulsory license cannot be avoided. In the event that a
third party obtains such compulsory license in such country, Durect shall have
the benefit of any more favorable payment terms with respect to such Product in
such country as is granted under such compulsory license or right, from the date
of first commercial sale by the third party of the Product in such country.

          6.5  Payment Estimates.  Within [* * *] after the end of each Payment
               -----------------
Computation Period, beginning with the Payment Computation Period as to which
payments are first due to ALZA under this Section 6, Durect shall provide ALZA
with a written estimate of Product sales as to which payments will be due in
respect of the Payment Computation Period in question.

          6.6  Other Consideration.
               -------------------
               (i)   Simultaneous with the execution of this Agreement, Durect
is issuing to ALZA 1,000,000 shares of Durect Common Stock pursuant to the
Common Stock Purchase Agreement attached hereto as Exhibit I.

               (iii) Simultaneously with the execution of this Agreement, Durect
is issuing to ALZA warrants to purchase, 1,000,000 shares of Durect Common Stock
pursuant to the Warrant Agreement attached hereto as Exhibit J.

                        SECTION 7 - PAYMENT PROCEDURES
                        ------------------------------
          7.1  Development Cost Payments. Payments due under Sections 2.4 and
               -------------------------
2.6 hereof shall be made [[* * *]] after the date of receipt by Durect of ALZA's
invoice.

          7.2  Product-Based Payments.  Payments to ALZA from Durect due under
               ----------------------
Sections 6.1 and 6.3 hereof shall be made [[* * *] after the end of each Payment
Computation Period with respect to Net Sales of the applicable Products during
such Payment Computation Period. Payments to ALZA from Durect due under Section
6.2 shall be made [[* * *] after the end of each Payment Computation

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      29
<PAGE>

Period as to which payments are due. Each payment under this Section 7.2 shall
be accompanied by a report setting forth the calculations of the amounts payable
to ALZA on a Product-by-Product and Subterritory-by-Subterritory basis.

          7.3  Manner of Payment.  All payments due hereunder shall be made in
               -----------------
United States dollars and, unless otherwise agreed in writing, shall be made by
wire transfer to such bank as ALZA may designate in writing without set-off and
free and clear of, and without any deduction or withholding for or on account
of, any taxes, duties, levies, fees or charges except those taxes or duties
levied against ALZA which are legally required to be withheld by Durect.
Payments due on Net Sales made in currency other than United States dollars
shall first be calculated in the foreign currency and then converted to United
States dollars on the basis of the exchange rate in effect for the purchase of
United States dollars with such foreign currency as quoted in the Wall Street
                                                                  -----------
Journal (or comparable publication if not quoted in the Wall Street Journal)
-------
with respect to the currency of the country of origin of such payment on the
last business day of the Payment Computation Period for which the payment is
being made.  If restrictions on the transfer of currency exist in any country
such as to prevent Durect from making payments in the United States, Durect
shall take all reasonable steps to obtain a waiver of such restrictions or
otherwise to enable Durect to make such payments, failing which Durect shall, or
shall cause a United States Affiliate to, pay the amounts due upon sales in such
country in United States dollars.

          7.4  Books of Account.  Each party shall maintain true and complete
               ----------------
books of account containing an accurate record of all data necessary for the
proper computation of payments due from it or charges made by it under this
Agreement.  Each party shall have the right, through the independent certified
public accountant employed by the other party to conduct its regular annual
audit, or through a firm of independent public accountants selected by mutual
agreement of the parties, to examine the books of account of the other party at
any time within two years after the date of the payment or charges to which they
relate (but not more than once in each calendar year) for the purpose of
verifying the amount of such payments or charges


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      30
<PAGE>

and the accuracy of such books of account. Such examination shall be made during
normal business hours at the place of business of the party being audited. The
parties agree that information furnished as a result of any such examination
shall be limited to a written statement by such certified public accountants to
the effect that they have reviewed the books of account of the party being
audited and either (i) the amounts of the payments due or charges made under
this Agreement are in conformity with such books of account and the applicable
provisions of this Agreement or (ii) setting forth any required adjustments. The
fees and expenses of the accountants performing such verification shall be borne
by the party requesting the audit. If any such audit shows any underpayment or
overcharge, a correcting payment or refund shall be made within 30 days after
receipt of the written statement described above. Notwithstanding the foregoing,
if any such audit results in any underpayment or overcharge with respect to any
Payment Computation Period of more than the greater of (i) [[* * *] or (ii) [[*
* *] of the payment or charge actually due, then the party being audited shall
bear all costs of the audit.

          7.5  Late Payments.  All payments not made when due hereunder shall
               -------------
bear interest [***].

     SECTION 8 - OWNERSHIP AND USE OF PROGRAM INFORMATION
     ----------------------------------------------------

          8.1  Ownership.  All Program Information, including but not limited to
               ---------
Program Information relating to the site specific administration of drugs (e.g.
pharmaco-kinetics and pharmaco-distribution) and/or relating to any Drug as
such, or any Catheter as such, except for any Program Information that is the
property of ALZA as set forth herein, shall be the sole property of Durect (and
shall be included in Durect Technical Information for purposes of this
Agreement).  ALZA shall promptly disclose to Durect any such Program
Information, and ALZA and its personnel and subcontractors working on the
Program shall execute and deliver such assignments, confirmations of
assignments, or other written instruments as are necessary to vest in Durect
clear and marketable title to Program Information assigned to Durect hereunder.
Notwithstanding


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      31
<PAGE>

the foregoing, all Program Information relating to the System or its manufacture
or to any combination of Systems with other components, active agents, features
or processes and any Technical Information developed by Durect (whether or not
pursuant to the Program) that relates to DUROS Technology shall be the sole
property of ALZA (and shall be included in ALZA Technical Information for
purposes of this Agreement). Durect shall promptly disclose to ALZA any such
Program Information and Technical Information, and Durect and its personnel and
Subcontractors working on the Program shall execute and deliver such
assignments, confirmations of assignments, or other written instruments as are
necessary to vest in ALZA clear and marketable title to Program Information
assigned to ALZA hereunder. In addition to the foregoing, to the extent Durect
develops any Technical Information relating to [***] and subject to ALZA abiding
by the terms and conditions of the Amended and Restated Market Stand-Off
Agreement entered into between Durect and ALZA dated June 19, 1998 and attached
hereto as Exhibit H, Durect grants to ALZA a worldwide, royalty free,
nonexclusive license, with the right to grant sublicenses, to any such Technical
Information.

          8.2  Use.  Each party shall have the right to use, disclose and
               ---
license to any third party all Program Information owned by such party under
Section 8.1, provided such use, disclosure or license does not conflict with the
rights granted to the other party under this Agreement.

          8.3  Patents.  Each party shall be responsible, at its own expense,
               -------
for filing and prosecuting patent applications as it deems appropriate and for
paying maintenance fees on patents issued therefrom, for the term of this
Agreement, with respect to Technical Information owned by it.  Each party shall
promptly render all necessary assistance reasonably requested by the other party
in applying for and prosecuting patent applications based on Technical
Information owned by the other party under this Agreement.


          SECTION 9 - INTELLECTUAL PROPERTY INDEMNITY AND ENFORCEMENT
          -----------------------------------------------------------


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      32
<PAGE>

          9.1  Claims by Third Parties.  If a claim, suit or proceeding
               -----------------------
("Claim") is brought by a third party against Durect and/or ALZA alleging that
the making, using, selling, offering for sale or importing of Product infringes
an Intellectual Property Right of such third party (except for any patent which
covers a manufacturing process used by Durect and not by ALZA), then each party
will give prompt written notice to the other of such Claim.  If such alleged
infringement of such third party's Intellectual Property Right arises from or
relates to DUROS Technology, the System or ALZA Technical Information, then ALZA
shall have the right to conduct the defense of any suit resulting from such
Claim.  ALZA shall advise Durect in writing, within 30 days after Durect's
notice, whether it intends to defend at its own expense such Claim.  If ALZA
elects not to so defend or to otherwise dispose of such Claim, Durect may,
subject to Section 9.2 below, defend at its own expense such Claim. Except as
specifically provided above, Durect shall indemnify and hold harmless ALZA from
and against any claims of infringement by a third party.

          9.2  Infringement by Third Parties.  If, at any time during the term
               -----------------------------
of this Agreement, either party shall become aware of any third party who is
infringing or suspected to be infringing any patent owned by ALZA by the
manufacture, use or sale of any product that is substantially similar to a
Product and contains the same Drug as such Product (an "Infringing Product"),
the following provisions shall apply:

               (a)  The party becoming so aware shall forthwith give written
notice to the other ("Notice"). If there is disagreement as to whether the act
complained of is in fact an infringement of an ALZA patent, the parties shall
refer such issue to a mutually acceptable independent patent counsel. The costs
incurred in this regard shall be shared equally.

               (b)  If, with or without the advice of independent counsel, ALZA
desires to litigate such alleged third party infringement, ALZA shall bear all
costs thereof and shall be entitled to all recoveries.  ALZA shall have the
right to join Durect in such suit at ALZA's cost and expense.  ALZA shall notify
Durect within 90 days after the delivery of Notice by one party to the other
above whether it intends to so litigate.


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      33
<PAGE>

          (c)  If ALZA determines not to litigate in accordance with paragraph
(b) above, the parties will promptly confer, and if both parties jointly desire
to litigate such third party infringement, they shall share any costs thereof
and any recovery therein equally, unless otherwise agreed by the parties.

          (d)  With respect to alleged infringement of such patents, the claims
of which are limited to applications of DUROS Technology in the Durect Fields,
and which do not include claims for other applications, if no action is taken or
agreed to be taken under paragraph (b) or (c) above within 90 days after the
Notice and (i) the unit sales volume of the Infringing Product in any country is
equal to or exceeds [*  *  *] of the unit sales volume by Durect and its
Affiliates and Subcontractors of the Product that is substantially similar to
the Infringing Product in such country, and (ii) the patent counsel described in
paragraph (a) above has opined that the act complained of is, or most likely is,
an infringement in such country, then Durect may, in its sole discretion, and at
its sole cost and expense, bring suit in its name (or, if ALZA is an
indispensable party, in the name of and on behalf of ALZA) to restrain such
third party infringement in such country, and in such instance, Durect shall be
entitled to receive and retain, for its own use and benefit, any recovery
awarded in such suit.

          9.3  Cooperation.  Each party shall cooperate with the other party, to
               -----------
the extent reasonably requested, in any legal action brought by or against the
other party or both of them and relating to the subject matter of this
Agreement, provided that such cooperation shall be at the expense of the party
bringing the action, and each party shall have the right to participate at its
own expense in any defense, compromise or settlement of any such legal action,
to the extent that in its judgment it may be prejudiced thereby.  Neither party
shall settle any claim or suit in any manner that may adversely affect any
patent of the other party or that would require any payment or grant of license
or other rights by the other party, without the prior written consent of the
other party, to be given or withheld in the other party's sole discretion.

                    SECTION 10 - REPORTS OF ADVERSE REACTION
                    ----------------------------------------


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      34
<PAGE>

          10.1  Reports.  During the term of this Agreement, each party shall
                -------
promptly inform the other party of any information that it obtains or develops
regarding the efficacy or safety of any Product and shall promptly report to the
other party any information or notice of adverse or unexpected reactions or side
effects related to the utilization or medical administration of any Product
(and, in the case of ALZA, the System, and in case of Durect, the Drug, Catheter
or other part of the Product, but in each case, only if such adverse reaction
appears to be potentially relevant to the Product).  Each party shall comply,
and shall cooperate with the other party in complying, with the adverse reaction
reporting requirements of the Food, Drug and Cosmetic Act, 21 USC 321 et seq.,
and regulations thereunder with respect to the Product.  Each party shall
provide the other party with copies of Adverse Drug Experience Reports filed
with the FDA as to the Product.  Each party's obligations under this Section
10.1 shall be subject to its legal and contractual obligations prohibiting the
disclosure of such information.  Durect agrees and acknowledges that ALZA may
provide information it obtains under this Section 10.1 to ALZA's other clients
developing and/or marketing products incorporating the System.

           SECTION 11 - TERM AND TERMINATION; MODIFICATION OF RIGHTS
           ---------------------------------------------------------

          11.1  Term.  This Agreement shall remain in effect for as long as
                ----
Durect is obligated to make payments to ALZA under this Agreement, unless
earlier terminated pursuant to this Section 11.

          11.2  Termination for Breach; Insolvency.
                ----------------------------------
                (a) In addition to the rights and remedies provided elsewhere in
this Agreement, if either party breaches or defaults in the performance or
observance of any of its material obligations under this Agreement, and such
breach or default is not cured within [* * *] after receipt by such party of a
written notice from the nonbreaching party specifying the breach or default (or
such longer period as is reasonably necessary if the breach is of such a nature
that it cannot reasonably be cured within [* * *] the nonbreaching party shall
have the right to terminate this


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      35
<PAGE>

Agreement upon [* * *] written notice to the breaching or defaulting party.
Failure to pay any amounts due under this Agreement within [* * *] after notice
that such amounts are overdue shall be deemed a material breach of this
Agreement.

          (b)  Either party may terminate this Agreement and the rights granted
hereunder, effective upon giving written notice of such termination to the other
party, if such other party is liquidated or dissolved, or enters into any
proceeding, whether voluntary or otherwise, in bankruptcy, reorganization, or
arrangement for the appointment of a receiver or trustee to take possession of
such other party's assets or any other proceeding under any law for the relief
of creditors, or makes an assignment for the benefit of creditors.

          11.3 Termination by Durect.  Durect may terminate this Agreement at
               ---------------------
any time upon not less than [* * *] prior written notice to ALZA.  In such
event, this Agreement shall terminate as of the effective date of such notice.

          11.4 Effect of Termination.  Except as provided in Section 16.8, all
               ---------------------
rights and obligations of the Parties shall cease upon expiration or termination
of this Agreement.  The expiration or termination of this Agreement for whatever
reason shall not affect: (i) Durect's obligation to pay ALZA, within [*  *  *]
after the receipt of ALZA's invoice, for all Development Costs incurred up to
the effective date of the termination and for all uncancellable obligations of
ALZA incurred in connection with the Program prior to the date of termination
pursuant to approved Work Plans; and (ii) the parties' obligations to pay to
each other all other amounts due under this Agreement accruing prior to and up
to the effective date of such expiration or  termination.

          11.5 [***]


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      36
<PAGE>

[***]

          11.6 Certain Program Information and Other Rights.  Solely with
               --------------------------------------------
respect to (i) any Product which has been eliminated from this Agreement
pursuant to Section 2.5; (ii) any country for which the Commercialization rights
granted to Durect under Section 5.1 have expired, or have been terminated
pursuant to this Agreement with respect to any Product or (iii) upon the
expiration or termination of this Agreement (except for termination by Durect
due to a breach by ALZA under Section 11.2); and in each case solely to the
extent required by ALZA to develop, make, have made, use and sell the Product to
which such termination or elimination relates in the relevant Subterritory or
country, Durect hereby grants to ALZA the exclusive right and license, with the
right to sublicense, solely to use any and all data, rights and information
necessary for such purpose, including but not limited to regulatory filings and
Program Information to which ALZA does not already have rights hereunder, and
the right to cross-reference any and all regulatory filings with respect to the
Product.  (To the extent possible, regulatory filings for those countries for
which ALZA obtains commercialization rights shall be transferred to ALZA.)  If
and when ALZA Commercializes a Product pursuant to this Section, in order to
compensate Durect for its investment in developing such filings and information,
ALZA shall make payments to Durect at a rate as set forth in Section 6.1 (but
determined based on ALZA's net sales of Product), but only until the aggregate
of such payments is equal to [* * *] with respect to the applicable
Product (or with respect to the Product in such applicable country if ALZA
obtains rights only as

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      37
<PAGE>

to a specified country or countries). Notwithstanding the foregoing, in the
event of the elimination of a Product under this Agreement, if Durect has
developed and successfully filed an NDA covering such Product prior to such
elimination, then in consideration of the rights granted ALZA respecting such
Product ALZA shall pay Durect [* * *] after the obligation to make payments
under the preceding sentence has expired, provided that the obligations to pay
royalties shall expire for the Territory [* * *] In each case, such payments by
ALZA will be subject to adjustments under the same terms as are applicable to
Durect's Product Payment obligations under this Agreement.


                           SECTION 12 - FORCE MAJEURE
                           --------------------------

          12.1 Force Majeure.  Neither party to this Agreement shall be liable
               -------------
for failure or delay in the performance of any of its obligations hereunder, if
such failure or delay is due to causes beyond its reasonable control, including,
without limitation, acts of God, earthquakes, fires, strikes, acts of war, or
intervention of any governmental authority, but any such delay or failure shall
be remedied by such party as soon as possible after the removal of the cause of
such failure or delay.

                            SECTION 13 - ASSIGNMENT
                            -----------------------

          13.1 Assignment.  This Agreement shall not be assigned by either party
               ----------
without the prior written consent of the other party, except that either party
may assign this Agreement, in whole or in part, to an Affiliate of such party or
to the successor (including the surviving company in any consolidation,
reorganization or merger) or assignee of all or substantially all of its
business.  This Agreement will be binding upon any permitted assignee of either
party.  No assignment shall have the effect of relieving any party to this
Agreement of any of its obligations hereunder.

                          SECTION 14 - INDEMNIFICATION
                          ----------------------------


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      38
<PAGE>

          14.1 Durect Indemnity.  Durect shall defend, indemnify and hold
               ----------------
harmless ALZA and its Affiliates, and their officers, directors, employees and
agents (collectively, "ALZA Indemnitees") from and against any and all losses,
liabilities, claims, obligations, costs and expenses (including without
limitation reasonable attorneys' fees) (collectively, "Losses") arising out of
the Program (including the use, storage and handling of the Drug hereunder) or
the use, design, labeling or manufacture, processing or packaging (subject to
the terms of the Supply Agreement) or sale or Commercialization of Products by
Durect, its Affiliates and Subcontractors, including without limitation any
product liability claims with respect to any Products, except for Losses arising
from the gross negligence or willful misconduct of ALZA, material breach of this
Agreement by ALZA, or breach by ALZA of any product warranty in the Supply
Agreement; provided that such ALZA Indemnitee:  (i) provides reasonable notice
to Durect of such Loss and permits Durect to control, in a manner not adverse to
such ALZA Indemnitee, the defense, settlement, adjustment or compromise of any
such Claim using counsel reasonably acceptable to such ALZA Indemnitee; and (ii)
reasonably cooperates with Durect in the defense of any such Claim, subject to
Durect's payment of all reasonable costs and expenses associated with such
cooperation, and further provided that Durect shall not be liable for any such
costs or expenses incurred without its prior written authorization.  Durect
shall not enter into any settlement that affects an ALZA Indemnitee's rights or
interest without prior written approval by the ALZA Indemnitee.  The ALZA
Indemnitee shall have no authority to settle any claim for Losses on behalf of
Durect.  The ALZA Indemnitee shall have the right to participate, at its own
expense, in the defense of any such claim or demand to the extent it so desires.

          14.2 ALZA Indemnity.  ALZA shall defend, indemnify and hold harmless
               --------------
Durect and its Affiliates, and their officers, directors, employees and agents
(collectively, "Durect Indemnitees") from and against any Losses arising from
the gross negligence or willful misconduct of ALZA, material breach of this
Agreement by ALZA, or breach by ALZA of any product warranty in the Supply
Agreement; provided that


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      39
<PAGE>

such Durect Indemnitee: (i) provides reasonable notice to ALZA of such Loss and
permits ALZA to control, in a manner not adverse to such Durect Indemnitee, the
defense, settlement, adjustment or compromise of any such Claim using counsel
reasonably acceptable to such Durect Indemnitee; and (ii) reasonably cooperates
with ALZA in the defense of any such Claim, subject to ALZA's payment of all
reasonable costs and expenses associated with such cooperation, and further
provided that ALZA shall not be liable for any such costs or expenses incurred
without its prior written authorization. ALZA shall not enter into any
settlement that affects a Durect Indemnitee's rights or interest without prior
written approval by the Durect Indemnitee. The Durect Indemnitee shall have no
authority to settle any claim for Losses on behalf of ALZA. The Durect
Indemnitee shall have the right to participate, at its own expense, in the
defense of any such claim or demand to the extent it so desires.

          14.3 Disclaimer of Consequential Damages.  IN NO EVENT WILL EITHER
               -----------------------------------
DURECT OR ALZA BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL,
INCIDENTAL, OR PUNITIVE DAMAGES INCURRED BY A PARTY ARISING UNDER OR AS A RESULT
OF THIS AGREEMENT (OR THE TERMINATION HEREOF) INCLUDING, BUT NOT LIMITED TO, THE
LOSS OF PROSPECTIVE PROFITS OR ANTICIPATED SALES, OR ON ACCOUNT OF EXPENSES,
INVESTMENTS, OR COMMITMENTS IN CONNECTION WITH THE BUSINESS OR GOODWILL OF ALZA
OR DURECT OR OTHERWISE.

          14.4 Insurance.  Durect shall obtain and maintain in full force and
               ---------
effect during the term of this Agreement a policy of products liability
insurance covering liabilities that may arise from the Products and naming ALZA
as an additional named insured, in such amounts as are reasonable in view of the
development and Commercialization status of the Products.  Durect shall provide
ALZA a certificate of such insurance within 15 days after request by ALZA.

                           SECTION 15 - ARBITRATION
                           ------------------------


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      40
<PAGE>

          15.1 Arbitration.  All disputes which may arise under, out of, in
               -----------
connection with, or relating to this Agreement shall be settled by arbitration
conducted in Santa Clara County, California, in accordance with the then
existing rules of the American Arbitration Association, and judgment upon the
award rendered by the arbitrators may be entered in any court having
jurisdiction thereof.  The parties hereby agree that service of any notices in
the course of such arbitration at their respective addresses as provided for in
Section 16.4 of this Agreement shall be valid and sufficient.

          15.2 Arbitrators.  In any arbitration pursuant to this Section 15, the
               -----------
award shall be rendered by a majority of the members of a board of arbitration
consisting of three members who shall be appointed by the parties jointly, or if
the parties cannot agree as to three arbitrators within 30 days after the
commencement of the arbitration proceeding, then one arbitrator shall be
appointed by ALZA and one arbitrator shall be appointed by Durect within 60 days
after the commencement of the arbitration proceeding.  The third arbitrator
shall be appointed by mutual agreement of such two arbitrators.  In the event of
failure of the two arbitrators to agree within 75 days after commencement of the
arbitration proceeding upon the appointment of the third arbitrator, the third
arbitrator shall be appointed by the American Arbitration Association in
accordance with its then existing rules.  Notwithstanding the foregoing, in the
event that any party shall fail to appoint an arbitrator it is required to
appoint within the specified time period, such arbitrator and the third
arbitrator shall be appointed by the American Arbitration Association in
accordance with its then existing rules.  For purposes of this Section 15, the
"commencement of the arbitration proceeding" shall be deemed to be the date upon
which a written demand for arbitration is received by the American Arbitration
Association from one of the parties.

                           SECTION 16 - MISCELLANEOUS
                           --------------------------

          16.1 Amendment.  Any waiver by any party hereto of a breach of any
               ---------
provisions of this Agreement shall not be implied and shall not be valid unless
such


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      41
<PAGE>

waiver is recited in writing and signed by such party. Failure of any party to
require, in one or more instances, performance by the other party in strict
accordance with the terms and conditions of this Agreement shall not be deemed a
waiver or relinquishment of the future performance of any such terms or
conditions or of any other terms and conditions of this Agreement. A waiver by
either party of any term or condition of this Agreement shall not be deemed or
construed to be a waiver of such term or condition for any other term. All
rights, remedies, undertakings, obligations and agreements contained in this
Agreement shall be cumulative and none of them shall be a limitation of any
other remedy, right, undertaking, obligation or agreement of either party. This
Agreement may not be amended except in a writing signed by both parties.

          16.2 Relationship of the Parties.  For all purposes of this Agreement,
               ---------------------------
Durect and ALZA shall be deemed to be independent entities and anything in this
Agreement to the contrary notwithstanding, nothing herein shall be deemed to
constitute Durect and ALZA as partners, joint venturers, co-owners, an
association or any entity separate and apart from each party itself, nor shall
this Agreement constitute any party hereto an employee or agent, legal or
otherwise, of the other party for any purposes whatsoever.  Neither party hereto
is authorized to make any statements or representations on behalf of the other
party or in any way obligate the other party, except as expressly authorized in
writing by the other party.  Anything in this Agreement to the contrary
notwithstanding, no party hereto shall assume nor shall be liable for any
liabilities or obligations of the other party, whether past, present or future.

          16.3 Governing Law.  This Agreement shall be governed by the laws of
               -------------
the State of California, excluding any choice of law rules which may direct the
application of the laws of another jurisdiction.

          16.4 Notices.  Notices required under this Agreement shall be in
               -------
writing and sent by registered or certified mail, postage prepaid, or by telex
or facsimile and confirmed by registered or certified mail and addressed as
follows:

          If to ALZA:    ALZA Corporation
                         1900 Charleston Rd.
                         Mountain View, CA  94309


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      42
<PAGE>

                         Attention: General Counsel

          If to Durect:  Durect Corporation
                         10240 Bubb Road
                         Cupertino, CA  95014
                         Attention: Chief Executive Officer

All notices shall be deemed to be effective five days after the date of mailing
or upon receipt if sent by facsimile (but only if followed by certified or
registered confirmation).  Either party may change the address at which notice
is to be received by written notice pursuant to this Section 16.4.

          16.5 Severability.  If any provision of this Agreement is held by a
               ------------
court of competent jurisdiction to be invalid or unenforceable, it shall be
modified, if possible, to the minimum extent necessary to make it valid and
enforceable or, if such modification is not possible, it shall be stricken and
the remaining provisions shall remain in full force and effect; provided,
however, that if a provision is stricken so as to significantly alter the
economic arrangements of this Agreement, the party adversely affected may
terminate this Agreement upon 60 days' prior written notice to the other party.

          16.6 Headings.  The headings set forth at the beginning of the various
               --------
sections of this Agreement are for reference and convenience and shall not
affect the meanings of the provisions of this Agreement.

          16.7 Public Disclosure.
               -----------------

          (a)  Neither party shall, without the prior written consent of the
other party, disclose to third parties, nor originate any publicity, news
release or public announcement, written or oral, whether to the public, the
press, stockholders or otherwise, referring to the existence or terms of this
Agreement, including its existence, the subject matter to which it relates, the
performance under it or any of its specific terms and conditions, except such
announcements or disclosures as, in the opinion of the counsel for the party
making such announcement, are required by law, including United States
securities laws, and each party may disclose the existence of this Agreement and
the material terms and conditions hereof under circumstances that


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      43
<PAGE>

reasonably ensure the confidentiality thereof to: (i) any government or
regulatory authorities, including without limitation the United States
Securities and Exchange Commission to the extent required by applicable law,
(ii) its legal representatives, advisors and prospective investors, and (iii) to
prospective Subcontractors to the extent required for entering into agreements
with such Subcontractors. If a party decides to make an announcement it believes
to be required by law with respect to this Agreement, it will give the other
party such notice as is reasonably practicable and an opportunity to comment
upon the announcement.

               (b)  Durect shall submit for review to ALZA, and obtain ALZA's
prior written consent for any reference to or description of ALZA or its
technology, proprietary rights or products that is to be disseminated to third
parties.

         16.8  Survival.  The provisions of Sections 1, 4, 8, 11, 15, 16.3,
               --------
16.4, 16.5, 16.6, 16.7 and this Section 16.8, (and Sections 6.1, 6.2, 6.3, 6.6,
7, 9, 10, and 14 with respect to events occurring prior to termination), shall
survive the termination for any reason of this Agreement. Neither party shall be
liable to the other due to the termination of this Agreement as provided herein,
whether in loss of goodwill, anticipated profits or otherwise.

         16.9  No Conflict. Each party represents that neither this Agreement
               -----------
nor any of its obligations hereunder will conflict or result in a breach of any
arrangement or agreement between such party and any third party. Each party
represents that it has not been debarred and has not been the subject of
debarment proceedings by the FDA.

         16.10 Entire Agreement.  This Agreement, including the exhibits hereto,
               ----------------
sets forth the entire understanding between the parties hereto as to the subject
matter hereof and supersedes all other documents, agreements, verbal consents,
arrangements and understandings by or between the parties with respect to the
subject matter hereof including but not limited to the Prior Agreement. Prior to
the execution of this Agreement, the parties have had numerous discussions,
conversations and negotiations, and have generated correspondence, writings and
other memoranda with respect to the subject matter hereof. Notwithstanding all
of such activities, this

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      44
<PAGE>

Agreement (including the exhibits hereto) is intended to define the full extent
of the parties' respective agreements, arrangements and obligations with respect
to the subject matter hereof, and each party represents that it is not relying
on any such other discussions, conversations, negotiations, correspondence,
writings and memoranda in executing and delivering this Agreement or performing
its respective obligations hereunder.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above by their duly authorized
representatives.


DURECT
CORPORATION                             ALZA CORPORATION


By: /s/ Peter Staple                    By: /s/ James E. Brown
    __________________________              __________________________

Title: Executive Vice President         Title:  Chief Executive Officer
      __________________________              __________________________

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      45
<PAGE>

                 EXHIBIT A - Specified Anticancer Antigens for
                             Immunization Therapy


<TABLE>
<CAPTION>
------------------------------------------------------------------------------
     Name and/or                                 Reference
     Abbreviation
==============================================================================
<S>                                     <C>
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
       *  *  *                                    *  *  *
==============================================================================
</TABLE>

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      46
<PAGE>

                  EXHIBIT B - Manufacturing Process Transfer

                             [work plan attached]



**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      47
<PAGE>

                         EXHIBIT C - Development Stages


[* * *]


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      48
<PAGE>

        EXHIBIT D - Countries of Sub-Territory C [***]


[* * *]


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      49
<PAGE>

          EXHIBIT E - Cost Calculation for Purposes of Section 2.3(a)

Development Costs are equal to the sum of (i) research expenses, (ii) general
and administrative expenses and (iii) capital asset expenditures.

     (i)   Research expenses include both direct expenses and indirect expenses.

           (a)   Direct expenses include direct research salaries (including
                 project management and temporary labor), clinical expenses,
                 supplies and other expenses incurred specifically in connection
                 with the Program.

           (b)   Indirect expenses include general research management and
                 support costs of the research and product development
                 organization. Indirect expenses are allocated to all projects
                 and billed to clients at a fixed rate* of 160% of direct
                 research salaries.

           Examples of items included in direct and indirect expenses are listed
           on Exhibit E-1

           (ii)  General and administrative expenses are allocated among the
           research and product development, manufacturing and marketing
           organizations. The portion allocated to the research and product
           development organization is then allocated to all research and
           development projects and billed to clients at a fixed rate* of 80% of
           direct research salaries.

                 Examples of items included in general and administrative
           expenses are listed on Exhibit E-1.

           (iii) Capital asset expenditures are the actual costs of new capital
           assets acquired specifically for the project.


--------------
     * This fixed billing rate will not be changed prior to January 1, 1999 and,
if changed on or after January 1, 1999, such changes will be limited to not more
than one change per calendar year and shall be a maximum of 10% of the rate in
effect at the time of the increase.

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      50
<PAGE>

                  EXHIBIT E-1 - Examples of Research Expenses

Direct Expenses

Direct research salaries*
Project clinical expenses and outside services
Project specific supplies
Project travel and related expenses
Miscellaneous project expenses
Regulatory and filing fees and maintenance payments

Indirect Expenses

Research management and indirect salaries*
General research supplies and materials
General research consulting and outside services
Facilities expenses
Telephone and communications
Equipment depreciation, rent, maintenance and services
Research travel and related expenses
Patent and trademark expenses
Miscellaneous indirect research expenses

                                  Examples of
                                  -----------
                      General and Administrative Expense
                      ----------------------------------

Corporate management, administrative, and indirect salaries*
Telephone and communications
Equipment depreciation, rent, maintenance and services
Board of directors and corporate consulting
Annual audit, accounting and legal expenses
Facilities expenses
Information services (data processing) expenses
Interest expense
Miscellaneous general and administrative expenses

*Salaries include fringe benefits at a fixed rate of 52% of salaries. This fixed
rate will not be changed prior to January 1, 1999 and, if changed on or after
January 1, 1999, such changes will be limited to not more than one change per
calendar year and shall be a maximum of 10% of the rate in effect at the time of
the increase.


                                      51
<PAGE>

                   EXHIBIT F - Minimum Diligence Obligations

     Durect will comply with the following minimum diligence obligations of
Durect respecting research and development of Products:

     A.   Diligence in Durect Fields
          --------------------------

          Durect will fund the amounts as described below for the development of
Products in the Durect Fields. The first partial "Contract Year" will start on
September 1, 1998 and end on December 31, 1998, and each subsequent "Contract
Year" will start on January 1 of each subsequent year.

<TABLE>
<CAPTION>
                                        Number of        Total development
                  Products being        separate        costs per Contract
                   developed in      Products being        Year for each
Contract Year    Fields identified      funded(1)      Product ($mm)/(2)//(3)/
-------------------------------------------------------------------------------
<S>              <C>                 <C>               <C>
(Partial) 1      [* * *]                [* * *]        [* * *]

          2      [* * *]                [* * *]        [* * *]

          3      [* * *]                [* * *]        [* * *]

          4      [* * *]                [* * *]        [* * *]

          5      [* * *]                [* * *]/(4)/   [* * *]

          6      [* * *]                [* * *]/(4)/   [* * *]

          7      [* * *]                [* * *]/(4)/   [* * *]
</TABLE>

(1)  To be included, a Product must be funded to the extent of at least [* * *]]
                                                                               -
     of fully allocated development costs per year

(2)  During the year a Product is initiated after Contract Year 1, the "total
     development cost" for that year can be the year-end spending rate based on
     at least 3 months' activity.

(3)  For each Contract Year for which more than one cost level is given, the
     lower cost figures apply to the Products in earlier stages of development.

(4)  At least [* * *] Products which shall be [[* * *].


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      52
<PAGE>

**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      53
<PAGE>

Notwithstanding the table above, Durect shall be deemed to be meeting its
minimum obligations under this Part A with respect to a particular Field (other
than the [* * *]) during Contract Years 5, 6, and 7 if Durect funds at least
[[* * *]] during each such year for development of at least [* * *] Product in
that Field and conducts a research program to determine the feasibility of
other Products in that Field in an amount equal to at least [[* * *]] for each
such year.                                                          -


Consequences for Fields:
-----------------------

Years 1, 2 and 3: If the above development obligations for Years 1, 2 and 3 are
----------------
not met in one of such Contract Years, then [* * *]. In such case, if Durect had
not identified in writing prior to the commencement of each Contract Year which
Field it intends to pursue for purposes of the above table, then ALZA may select
the Field [* * *]; otherwise it will be the Field as previously identified by
Durect. If such obligations are not met for two of such Contract Years, [* * *].

Year 4:  If obligations are not met for the [* * *], then the Field for which
------
the obligation is not met [* * *]. If obligations are not met for any Field,
then [* * *].

Years 5, 6 and 7: If obligations are not met for any specific Field, then
----------------
[* * *].

After Year 7: Product development levels must be sufficient to fully develop
------------
the commercial potential of each Field. In order to maintain rights to each
Field, appropriate levels of development efforts for such Field need to be
jointly agreed upon before the end of Year 7.

________________________________________________________________________________

     B.   Proof of Principle:  Secondary Fields
          -------------------------------------

     During Year 1, Durect will fund at least [[* * *]] of proof of principle
                                                      -
work in at least [* * *] of the Secondary Fields (which amount shall be
reasonably pro-rated if the initial financing of Durect is completed later
than August 1, 1998). Durect will diligently pursue and fund proof of
principle work in each Secondary Field during each subsequent Contract Year
until proof of principle is positively established. Proof of Principle shall
be established for a Secondary Field when Durect has received, for a Product
Candidate in such Secondary Field, [* * *]

     Proof of Principle will be positively established for at least [* * *]
Secondary Field in Contract Year 3, for [* * *] Secondary Field by the end of
Contract Year 4, and for the [* * *] by the end of Contract Year 5; for each
such year in which Durect has not met the foregoing Proof of Principle
requirements, ALZA will have the right to [* * *].


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      54
<PAGE>

     C.   Product Development Diligence
          -----------------------------

     Durect's minimum diligence obligations with regard to development of a
particular Product will be deemed to have been met if Durect has achieved each
Milestone (as defined in Section 2.1) within [[* * *]] of the corresponding
                                                     -
target date.


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      55
<PAGE>

                        EXHIBIT G - Manufacturing Costs

"Cost of Manufacturing" shall mean ALZA's standard cost of manufacturing
Product, including packaging thereof, determined in accordance with generally
accepted accounting procedures and consistent with ALZA's accounting practices
on its other products, and including the cost of materials, direct labor and
benefits, and allocated overhead, the total expressed as Manufacturing Cost per
Unit of Product manufactured.

        A.   Materials.  Includes those items which form an integral and direct
part of the Product, or are necessary for its production, as well as cartons,
labels, package inserts, shippers, etc.

        B.   Direct Labor and Benefits.  Includes labor and related payroll
taxes and employment benefits spent in the actual production of the Product. It
is that portion of basic wages, taxes and benefits which can be identified with
or charged to a specific product.

        C.   Overhead.  Overhead includes all operating expenses incurred by and
in support of all manufacturing cost centers and quality operations. Cost
elements included are:

             -   Direct labor, related payroll taxes and employee benefits

             -   Depreciation

             -   Taxes

             -   Insurance

             -   Rent

             -   Repairs and maintenance

             -   Supplies, scrap and inventory expenses

             -   Utilities

             -   Factory administration expenses

             -   Other similar cost elements of factory overhead

             -   Allocation of general and administrative overhead allocated to
                 Product manufacturing centers and quality operations.


                                      56
<PAGE>

          EXHIBIT H - Amended and Restated Market Stand-Off Agreement


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      57
<PAGE>

                  EXHIBIT I - Common Stock Purchase Agreement


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      58
<PAGE>

                         EXHIBIT J - Warrant Agreement


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      59
<PAGE>

                        SCHEDULE 1 - Product Candidates


**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.

                                      60
<PAGE>

                             SCHEDULE 2 - Products