DURECT CORPORATION & TRANSCEPT PHARMACEUTICALS, INC.

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Hello Readers,

Given the market’s continuous August swoon, it isn’t surprising that we were unable to close any positions over the last several weeks. In fact, August appears to have been the market’s worst month since May, 2012, and, obviously, this downward pressure has bruised our Current Portfolio. Usually, September is a pretty rough month for the markets and this September may be more stressful than usual because of the Syrian situation, which really isn’t about Syria; it’s about their ally Iran. We suspect Iran was behind the chemical weapons attacks as a way of testing the Obama administration. So, add that to the budget showdown and debt ceiling debates and the waters look real murky this month. Now, having said that, too often the market does the opposite of what is expected of it, or so we hope.

Here are the headlines since the last Newsletter about companies in the Current Portfolio; dates in parentheses are when we first recommended them. We are not giving updates about companies on the “Endangered List” unless we feel the news to be highly significant.

PLEASE NOTE: There are not many updates for this Newsletter, since the last part of August is a scanty news period.

Galena Biopharma (GALE)(9/5/13). Expands NeuVax intellectual property with European allowance.

Velti PLC (VELT)(6/20/13). A lump developed in our throat over this one as class action suits are piling up over claims that the company misled investors about payments from Europe. Usually when there is this much smoke, there’s fire. Fortunately, this hasn’t happened too often to us over the years, but it is still difficult as we place this on the “Endangered List”.

Flow International (FLOW)(6/5/13). Sets earnings call for September 9.

InspireMD (NSPR)(5/20/13). Completes first phase of manufacturing upgrade and partners with HealthLink for global logistics and distribution services. To present at the annual Rodman & Renshaw investment conference on September 15 and at the Stifel Annual Healthcare Conference on September 12.

Mela Sciences (MELA)(5/5/13). Receives NASDAQ notice about not complying with the minimum bid rule; this doesn’t worry us at this time.

Synacor (SYNC)(4/20/13). Extends partnership with Mediacom Communications to offer TV everywhere services to subscribers.

Alphatec (ATEC)(2/20/13). To present at the Stifel healthcare confab on September 11.

Apricus Biosciences (APRI)(2/5/13). Swiss agency recommends against approval of marketing authorization for Vitaros for ED.

Gevo, Inc. (GEVO)(1/20/13). Opens biorefinery to make plastic component from plants.

Horizon Pharma (HZNP)(12/20/12). Stock gets a lift as company announces settlement of DUEXIS patent litigation with Par Pharmaceutical. Then, files patent infringement suit against Watson Labs for filing ANDA against RAYOS.

Zynga (ZNGA)(10/5/12). The usual several dozen news stories and articles.

Overland Storage (OVRL)(7/20/12). To present at the Rodman & Renshaw investment conference on September 9. Sets 4thQt and FY earnings call for September 4, the day after we post this Newsletter.

Air Media Group (AMCN)(4/20/12). To present at 2013 China Best Ideas Investment Conference on September 10.

Mattson Technology (MTSN)(4/5/12). Northland Capital initiates coverage on the company.

Synthesis Energy Systems (SYMX)(8/20/11). To present at the Rodman & Renshaw investment confab on September 9.

Cover All Technologies (COVR)(7/20/11). Tier 1 division selects COVR Business Intelligence Suite.

On Track Innovations (OTIV)(6/20/11). Court denies T-Mobile USA’s request for reconsideration of Markman Hearing decision in OTIV’s patent infringement suit. Recent quarterly numbers could have looked better; balance sheet still seems okay.

Idera Pharmaceuticals (IDRA)(6/5/11). We are considering removing this from the “Endangered List” as company enters into a deal with NCI to evaluate use of TLR antagonists for treating genetically defined lymphomas, which sends stock on a small teat.

Thermogenesis (KOOL)(4/5/11). Recent numbers not great; balance sheet still looks okay, as company prepares for merger with TotipotentRX.

Our picks for this Newsletter are a drug developer with whom this is our second time around and another biotech, both NASDAQ-listed.

DURECT CORPORATION (NASDAQ: DRRX) – $1.09. Twelve-month hi-low has been $1.85 – 61 cents. Located in Cupertino, CA, with about 100 employees, this drug developer has 102 million shares outstanding, $21.01 million in total current assets, $36.64 million in total assets, little debt, and $7.32 million in total liabilities. Institutional ownership is around 44%. One analyst rates the stock a “strong buy” and one as a “buy. www.durect.com

And yes, Durect Corporation is another golden oldie which was in the Current Portfolio several years ago and worked out well. So, since the balance sheet still looks healthy and they may have increased their product candidate arsenal over the last few years, why not try it again with the stock at nearly a dollar.

Founded in 1998, and public for over ten years, Durect focuses on developing products for treating various chronic and episodic disease areas such as pain, central nervous system disorders, cardiovascular disease, and other chronic diseases. At last count, the company’s product pipeline consisted of at least eight investigational drug candidates in clinical development. Durect makes and sells ALZET osmotic pumps used in laboratory research, and a range of LACTEL standard and custom biodegradable polymers and excipients used as raw materials for pharmaceutical and medical device clients.

Durect’s product pipeline includes REMOXY, an oral oxycodone gelatin capsule for chronic pain; POSIDUR, a Phase III clinical trial release formulation of bupivacaine for treating post-surgical pain; ELADUR, a Phase II transdermal bupivacaine patch intended to provide delivery of bupivacaine; and TRANSDUR, a Phase II transdermal sufentanil patch to deliver sufentanil. Other pipeline products comprise ORADUR-based opioids, including hydrocodone and hydromorphone for treating pain, which are in Phase I clinical trial; oxymorphone, an ORADUR-based opioid for which IND has been accepted by the FDA; ORADUR-ADHD, which is in Phase I clinical trial for treating attention deficit hyperactivity disorder; and Relday, an injectable risperidone product in Phase I clinical trial to treat the symptoms of schizophrenia and bipolar I disorder.

Durect has strategic agreements with Hospira, Nycomed Danmark ApS, Pain Therapeutics, Zogenix, and Pfizer.

Unlike most small biotechs of its kind, Durect does show revenues. For FY2012, ending 12/31/12, revenue was $53.07 million with net income of $16.2 million. During the first six months of the current FY, ending 6/30/13, revenue was $8.07 million with $10.33 million in net losses.

There is obviously a lot going on with this company and, with the stock a nearly a dollar, it may be worth another run at it.

Our 24-month target for the stock is $1.75 to $2.00.

For more information, contact DRRX’s Matthew Hogan at 408-777-4936.

TRANSCEPT PHARMACEUTICALS, INC. (NASDAQ: TSPT) – $2.69. Twelve-month hi-low has been $6.77 – $2.76. Based in Point Richmond, CA, with just under 20 employees, this biotech has 18.76 million shares outstanding, $81.29 million in total current assets, little debt, and $1.35 million in total liabilities. Institutional ownership is around 66%. Two analysts rate the stock a “buy” and four as a “hold”. www.transcept.com

Sometimes we go after biotechs that haven’t a deep pipeline, but, what they do have seems quite promising, especially when the company is sitting on a pile of money, as is the case with Transcept Pharmaceuticals, Inc.

Founded in 2002, and public for over four years, Transcept focuses on developing products addressing the therapeutics needs in neuroscience. Its main product is Intermezzo sublingual tablet C-IV, which was approved nearly two years ago by the FDA for treating insomnia when a middle-of-the-night awakening is followed by difficulty returning to sleep. The company claims this is the first and only prescription sleep aid approved for middle-of-the-night dosing. Transcept has a collaboration agreement with Purdue Pharmaceutical Products for commercializing Intermezzo in the U.S. and the right for them to negotiate similar arrangements in Canada and Mexico.

Transcept also has a Phase II study of TO-2061, a low dose of ondansetron adjunctive treatment for patients with obsessive compulsive disorder (OCD) who have not adequately responded to first-line therapy.

This is another small biotech that is still basically in the R&D stage and is not generating a lot of revenue but is seeing big loss; i.e. for the first six months of the current FY, ending 6/30/13, royalty revenue was $963,000 with $17.21 million in losses.

Without sounding overly cute, this one could be a “sleeper” and a half-dozen analysts seem to think so. Also, we like the balance sheet.

Our 24-month target for the stock is $4.75 to $5.00.

For more information, contact TSPT’s Leone Patterson at 510-215-3500; lpatterson@transcept.com

Look for the September 20, 2013 Newsletter to be posted on 9/16 or 9/17.

Thank you,

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