Tableof Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

** **

----

** **

**Form 10-K**

** **

----

** **

**FORANNUAL AND TRANSITION REPORTS**

**PURSUANTTO SECTIONS 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

 

**(Mark One)**

 
| **x**                                                | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                       |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |       |                                                                                                                                                                                       |
| **For the fiscal year ended December 31, 2008** |
|                                                 |       |                                                                                                                                                                                       |
| **or**                                               |
|                                                 |       |                                                                                                                                                                                       |
| **o**                                                | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                   |
|                                                 | ** ** | ** **                                                                                                                                                                                 |
|                                                 | ** ** | **For the  transition period from               to              ** |

 

**Commission file number: 001-33291**

 

----

 

**OptimerPharmaceuticals, Inc.**

(Exact Name of Registrant as Specified in its Charter)

 
| **Delaware**                                                                | ** ** | **33-0830300**                        |
|-----------------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization)             |       | (I.R.S. Employer  Identification No.) |
| ** **                                                                  | ** ** | ** **                            |
| **10110 Sorrento Valley Road, Suite C, San Diego,  California, 92121** |
| (Address of principal executive offices and zip code)                       |
|                                                                        |
| Registrant’s telephone number, including area code: **(858) 909-0736** |

 

Securities registered pursuant to Section 12(b) ofthe Act:

 
| **Title of Each Class**                      | ** ** | **Name of Each Exchange on Which Registered** |
|----------------------------------------------|------------|-----------------------------------------------|
| **Common Stock, par value $0.001 per share** | ** ** | **Nasdaq Global Market**                      |

 

Securities registered pursuant to Section 12(g) ofthe Act:**None**

 

----

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

Yes   o No  x.

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.

Yes o No   x.

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90days.    Yes  x    No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

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

 
| Large accelerated filer  o | Accelerated filer  x | Non-accelerated filer  o | Smaller reporting company  o |
|--------------------------------------|--------------------------------|------------------------------------|----------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes  o  No  x.

 

The aggregate market value of the registrant’s common stock held bynon-affiliates as of June 30, 2008 (without admitting that any personwhose shares are not included in such calculation is an affiliate), computed byreference to the price at which the common stock was last sold as of such dateon the Nasdaq Global Market, was $226,483,907.

 

Thenumber of outstanding shares of the registrant’s common stock, par value $0.001per share, as of March 11, 2009 was 33,037,661.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of theDefinitive Proxy Statement for our 2009 Annual Meeting of Stockholders areincorporated by reference in Part III of this report.

 

 

 

----

Table of Contents

** **

**OPTIMERPHARMACEUTICALS**

 

**FORM 10-K—ANNUALREPORT**

**Forthe Fiscal Year Ended December 31, 2008**

 

**Tableof Contents**

 
| **PART I**   | ** **                                                                                                          | ** ** |
|-------------------|---------------------------------------------------------------------------------------------------------------------|------------|
| Item 1            | Business                                                                                                            | 3          |
| Item 1A      | Risk  Factors                                                                                                       | 21         |
| Item 1B           | Unresolved  Staff Comments                                                                                          | 40         |
| Item 2            | Properties                                                                                                          | 40         |
| Item 3            | Legal Proceedings                                                                                                   | 40         |
| Item 4            | Submission  of Matters to a Vote of Security Holders                                                                | 40         |
| **PART II**  | ** **                                                                                                          | ** ** |
| Item 5            | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities | 41         |
| Item 6            | Selected  Consolidated Financial Data                                                                               | 42         |
| Item 7            | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                          | 43         |
| Item 7A           | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 51         |
| Item 8            | Financial  Statements and Supplementary Data                                                                        | 52         |
| Item 9            | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure                               | 72         |
| Item 9A           | Controls and  Procedures                                                                                            | 72         |
| Item 9B           | Other Information                                                                                                   | 74         |
| **PART III** | ** **                                                                                                          | ** ** |
| Item 10           | Directors,  Executive Officers and Corporate Governance                                                             | 74         |
| Item 11           | Executive  Compensation                                                                                             | 74         |
| Item 12           | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 74         |
| Item 13           | Certain  Relationships and Related Transactions, and Director Independence                                          | 74         |
| Item 14           | Principal  Accountant Fees and Services                                                                             | 74         |
| **PART IV**  | ** **                                                                                                          | ** ** |
| Item 15           | Exhibits and  Financial Statement Schedules                                                                         | 74         |
| **Signatures**    |                                                                                                                | 77         |

 

2

----

Table of Contents

** **

**PART I**

 

**Cautionary Note Regarding Forward-Looking Statements**

 

This report and otherdocuments we file with the SEC contain forward looking statements that are basedon current expectations, estimates, forecasts and projections about us, ourfuture performance, our business or others on our behalf, our beliefs and ourmanagement’s assumptions. In addition, we, or others on our behalf, may makeforward looking statements in press releases or written statements, or in ourcommunications and discussions with investors and analysts in the normal courseof business through meetings, webcasts, phone calls and conference calls. Wordssuch as “expect,” “anticipate,” “will,” “could,” “would” “project,” “intend,”“plan,” “believe,” “predict,” “estimate,” “should,” “may,” “potential,”“continue,” “ongoing”, or variations of such words and similar expressions areintended to identify such forward looking statements. These statements are notguarantees of future performance and involve certain risks, uncertainties andassumptions that are difficult to predict. We describe our respective risks,uncertainties and assumptions that could affect the outcome or results ofoperations in “*Item 1A. Risk Factors*”.We have based our forward looking statements on our management’s beliefs andassumptions based on information available to our management at the time thestatements are made. We caution you that actual outcomes and results may differmaterially from what is expressed, implied or forecast by our forward lookingstatements. Except as required under the federal securities laws and the rules andregulations of the SEC, we do not have any intention or obligation to updatepublicly any forward looking statements after the distribution of this report,whether as a result of new information, future events, changes in assumptionsor otherwise.

 

**Item 1.Business**

 

**Overview**

 

We are abiopharmaceutical company focused on discovering, developing andcommercializing innovative anti-infective products. Our current developmentefforts are focused on products that treat gastrointestinal infections,****and related diseases where currenttherapies have limitations, including limited efficacy, serious adverse sideeffects, drug-to-drug interactions, difficult patient compliance and bacterialresistance.

 

We currently have twolate-stage anti-infective product candidates, fidaxomicin, formerly known asOPT-80, and prulifloxacin.

 

Fidaxomicin, our leadproduct candidate, is an antibiotic currently in its second Phase 3registration trial for the treatment of *Clostridiumdifficile*-infections, or CDI, the most common nosocomial, orhospital acquired diarrhea. In November 2008, we reported positive datafrom the first fidaxomicin Phase 3 trial, the largest single comparative studyever conducted against Vancocin® (oral vancomycin) in CDI. The top-lineanalysis of data from this trial showed that fidaxomicin achieved the primaryendpoint of clinical cure and demonstrated a significantly lower recurrencerate compared to Vancocin, the only FDA-approved antibiotic for the treatmentof CDI.   Fidaxomicin was alsowell-tolerated in the trial. The second fidaxomicin Phase 3 trial is on-goingand we anticipate completing enrollment and reporting data from this trial in2009.  We currently hold worldwide rightsto fidaxomicin.

 

Prulifloxacin is aprodrug in the fluoroquinolone class of antibiotics, a widely-used class ofbroad-spectrum antibiotics. We are developing prulifloxacin as a treatment forinfectious diarrhea in travelers.  Wehave announced positive results from each of our two Phase 3 trials assessingthe safety and efficacy of prulifloxacin as a once-daily (600 mg), three-day oraltherapy for the treatment of infectious diarrhea, including travelers’diarrhea.  In July 2008, we reportedpositive top-line data from the first of two Phase 3 trials. The top-lineanalysis of data from this study showed that prulifloxacin met the primaryendpoint of Time to Last Unformed Stool, or TLUS,******in both the modified intent-to treat,or mITT (n=187) and microbiologically evaluable (per protocol; n=165)populations compared to placebo.  Prulifloxacin was generally welltolerated and had a similar safety profile compared to placebo.  InFebruary 2009, we reported positive top-line data from the second Phase 3trial which showed that prulifloxacin met the study objective of superiority toplacebo in the resolution of diarrhea, measured by TLUS, in both the mITT(n=200) and microbiologically evaluable (per protocol; n=173) populations.  The trial also confirmed the overall efficacyand safety profile observed in the first Phase 3 trial, demonstrating thatprulifloxacin was generally well tolerated and had similar safety profilecompared to placebo.  With the results ofthese two Phase 3 trials we intend to file an NDA for prulifloxacin by the endof 2009.  We intend to conduct aPhase 4 trial of prulifloxacin subsequent to the NDA submission to compareprulifloxacin to ciprofloxacin for the treatment of infectious diarrhea.  We plan to seek a label for prulifloxacin andinitially plan to focus commercialization efforts on the treatment ofinfectious diarrhea in travelers.

 

We aredeveloping additional product candidates using our proprietary technology, includingour Optimer One-Pot Synthesis, or OPopSTM drug discovery platform. OPopS is acomputer-aided technology that enables the rapid and low-cost synthesis of awide array of carbohydrate-based compounds. Two components of the OPopS technology that allow us to synthesize newcompounds are GlycoOptimization and De Novo Glycosylation.  These technologies are capable of rapidlygenerating drug candidates for broad

 

3

----

Tableof Contents

 

therapeuticapplication.  One of the more advancedOPopS product candidates is OPT-88, a disease-modifying intra-articular, orwithin the cavity of a joint, therapy for osteoarthritis.  We plan to submit anInvestigational New Drug application in 2009 and subsequently to, eitherourselves or with a partner, initiate a Phase 1 study to assess safety ofrepetitive intra-articular injections of OPT-88 in patients with kneeosteoarthritis.

 

We also acquired exclusive rights from MemorialSloan-Kettering Cancer Center, or MSKCC, to develop and commercialize OPT-822,a novel carbohydrate-based cancer immunotherapy.  We plan to seek a partner and initiate Phase2/3 clinical trials for the treatment of metastatic breast cancer in Asia in2009.

 

We were incorporated in November 1998.Our principal offices are in San Diego, California. We make available, free ofcharge, on our website, *www.optimerpharma.com*,which includes links to reports we have filed with the Securities and ExchangeCommission, or SEC. Any information that is included on or linked to ourInternet site is not a part of this report or any registration statement thatincorporates this report by reference. Our filings may also be read and copiedat the SEC’s Public Reference Room at 100 F Street, NE, Washington,DC 20549. Information on the operation of the Public Reference Room may beobtained by calling the SEC at 1-800-732-0330. The SEC also maintains a websitethat contains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC. The address of thatsite is *www.sec.gov*.

 

**Antibiotic Market Background**

 

Infectious diseases canbe caused by bacteria present in the environment that enter the body throughthe skin or mucous membranes of the lungs, nasal passages and gastrointestinaltract, or GI tract. These bacteria can be pathogenic, or disease-causing, andcan overwhelm the body’s immune system by establishing themselves throughoutthe body in various tissues and organs where they proliferate. This can cause anumber of serious and, in some cases, fatal infections, including those of theGI tract, urinary tract, respiratory tract, bloodstream, skin and heart.

 

Bacteria can beclassified as either gram-positive or gram-negative.****The difference inclassification is largely based on a difference in bacteria cell wall structurein that gram-positive bacteria have exposed thick peptidoglycan, a polymerconsisting of sugars and amino acids, cell walls, while gram-negative bacteriado not. Antibiotics that treat bacterial infections can be classified as eitherbroad-spectrum or narrow-spectrum. Most antibiotics in use today are generallyconsidered broad-spectrum, meaning they target a wide variety of bacteria. Incontrast, narrow-spectrum antibiotics target a select group of bacteria such asgram-positive or gram-negative bacteria. Current research is increasinglyfocused on antibiotics that target specific bacteria, which may be beneficialfor the treatment of certain infections.

 

Antibiotics used to treatbacterial infections work by interfering with bacterial cellular activities,such as cell wall synthesis or protein synthesis. Antibiotics may bebacteriostatic or bactericidal. Bacteriostatic antibiotics stop the growth ofbacteria, which prevents the infecting bacteria from multiplying and allows thepatient’s own immune system to eradicate the infecting bacteria. Bactericidalantibiotics work by directly killing the bacteria, which is particularlyimportant for patients with weakened immune systems that cannot effectivelyeradicate the infecting bacteria on their own.

 

The anti-infective marketis one of the largest therapeutic categories worldwide. According to IMSHealth, the combined market for prescription antibacterial drugs in 2008exceeded $38 billion worldwide.  Thelargest antibacterial sales per region were: North America ($11 billion),Europe ($10 billion), Asia Pacific ($10 billion), Latin America ($3 billion),and others ($4 billion). The market for anti-infective products is generallydivided into two categories, nosocomial infections and community-acquiredinfections, which represent approximately 30% and 70% of the anti-infectivesmarket, respectively. According to the U.S. Centers for Disease Control andPrevention, or CDC, approximately two million healthcare associated(nosocomial) infections occur annually in the United States and theseinfections can increase average length of hospital stays by seven to nine days.Approximately four million healthcare associated (nosocomial) infections occurannually in Europe, three million in North America, two million in SouthAmerica and two million in East Asia (excluding China). Nosocomial infectionsare costly to address, with an estimated annual aggregate healthcare cost inthe United States and the United Kingdom of approximately $4.5 billion and $1.9billion, respectively. In addition, in the United States, nosocomial infectionscause approximately 100,000 deaths annually, making them one of the fiveleading causes of death in the United States. We believe that bacterialinfections, especially infections caused by difficult-to-treat, drug resistantbacteria, cause or contribute to a majority of these deaths.

 

**Our Market Opportunity**

 

Many marketed antibioticsused to treat infections have well-documented shortcomings. For example,current antibiotics often fail to reach sufficient concentrations at the siteof infection to adequately eliminate harmful bacteria. Certain of theseantibiotics have also been associated with serious adverse side effects,including renal toxicities, heart rhythm abnormalities, phototoxicity, rashesand central nervous effects, such as seizures. These side effects limit the useof antibiotics for certain patients. In addition,

 

4

----

Tableof Contents

 

certain antibiotics have interaction issues withprescribed drugs, such as cholesterol lowering agents. Safety problems canarise when increased doses of these antibiotics are needed to treat resistantbacteria. If bacteria develop resistance to currently available antibiotics,the underlying infection can become difficult or impossible to treat, and mayeven lead to death. Patients also often fail to comply with treatment regimensdue to many factors including the inability to tolerate an antibiotic due toits side effects, inconvenient method of dosing and undesirable frequency andlength of dosing. Because of these shortcomings associated with marketedantibiotics, we believe an opportunity exists to improve upon existingtreatments.

 

**Our Product Candidates**

 

We believe that ourproduct candidates may offer advantages over existing antibiotics in terms ofefficacy, safety, bacterial resistance and dosing convenience. We also believethat the markets for these product candidates present us with significantcommercial opportunities. Our product candidates are in various stages ofclinical development and none have been approved for sale by the FDA. Ourability to obtain FDA approval of any of our product candidates requires us tosuccessfully complete the clinical development of each such product candidate.Clinical trials involve a lengthy and expensive process with an uncertainoutcome, and efficacy and safety data of earlier studies and trials may not bepredictive of future trial results.

 

Our current productcandidate portfolio consists of the following:

 
| **Product Candidate**           | ** **   | **Target Indications**     | ** **   | **Development Status**                                      | ** **   | **Commercial Rights** | ** **   |
|--------------------------------------|--------------|---------------------------------|--------------|------------------------------------------------------------------|--------------|----------------------------|--------------|
| ***Anti-Infectives***                | *** *** | *** ***                    | *** *** | *** ***                                                     | *** *** | *** ***               | *** *** |
| Fidaxomicin  (1)                     |         | CDI treatment                   |         | Phase 3 — first trial completed; second trial on-going |         | Optimer worldwide          |         |
|                                 |         | CDI oral suspension             |         | Pre-clinical                                                     |         |                       |         |
|                                 |         | CDI prevention                  |         | Proof-of-Concept Trial (2)                                       |         |                       |         |
|                                 |         | Prevention of VRE in CDI        |         | Proof-of-Concept Trial (2)                                  |         |                       |         |
|                                 |         | MRS infections (2nd generation) |         | Pre-clinical                                                     |         |                       |         |
| Prulifloxacin                        |         | Infectious diarrhea             |         | NDA Preparation; Two Phase 3’s completed               |         | Optimer U.S.               |         |
| CEM-101  (OP-1068)                   |         | Respiratory tract infections    |         | Phase 1                                                          |         | Cempra worldwide (3)       |         |
|                                 |         |                            |         |                                                             |         |                       |         |
| ***Other Therapeutic Areas***        | *** *** | *** ***                    | *** *** | *** ***                                                     | *** *** | *** ***               | *** *** |
| OPT-822/OPT-821  Combination Therapy |         | Breast cancer                   |         | Planning Phase 2                                            |         | Optimer worldwide          |         |
| OPT-88                               |         | Osteoarthritis                  |         | Pre-clinical                                                     |         | Optimer worldwide          |         |

 

----

(1)                               We filed an investigational new drugapplication, or IND, with the FDA for fidaxomicin in August 2003.

(2)                               A proof-of-concept trial is anexploratory clinical trial to provide or establish evidence that a productcandidate is efficacious for a target indication.

(3)          We have the right to receive royalties from CempraPharmaceuticals, Inc. on any sales of CEM-101 (OP-1068).

 

***Anti-InfectiveProduct Candidates***

* *

*Fidaxomicin*

 

*Overview*. We are initially developing fidaxomicinfor the treatment of infections caused by *Clostridiumdifficile*, or *C. difficile,*bacteria. Fidaxomicin is a differentiated antibiotic for the treatment of CDI,the most common nosocomial diarrhea. Specifically, fidaxomicin has a narrowspectrum of activity against certain gram-positive bacteria.  Pre-clinical data indicates that fidaxomicinis bactericidal and acts by inhibiting RNA polymerase, a bacterial enzyme.  This data also shows that fidaxomicininhibits the growth of other potentially harmful bacteria such as Staphylococci,common bacteria that reside on the skin and in the GI tract, and Enterococci,common bacteria that reside in the GI tract.

 

Fidaxomicin is currentlyin the second of two planned Phase 3 registration trials for the treatmentof CDI.  In November 2008, wereported positive data from the first fidaxomicin Phase 3 trial.  The top-line analysis of data from this trialshowed that fidaxomicin achieved the primary endpoint of clinical cure anddemonstrated a significantly lower recurrence rate compared to Vancocin.  Fidaxomicin was also well-tolerated in thetrial. The second Phase 3 trial is on-going and we anticipate completingenrollment and

 

5

----

Tableof Contents

 

reporting data from this trial in 2009. Following ourrepurchase of certain development and commercialization rights from ParPharmaceutical, Inc. in February 2007, we hold worldwide rights tofidaxomicin.  The FDA has granted FastTrack status for fidaxomicin in the treatment of CDI. Fast Track designationindicates that fidaxomicin has the potential to treat life-threatening diseaseswith unmet medical needs.  The FDA alsochose fidaxomicin to be the only investigational new drug in the FDA’s CMA,Pilot 2 Program in the Division of Anti-Infective and OphthalmologyProducts. The CMA designation offers several potential benefits, including aprogram of continuous FDA feedback designed to streamline the developmentprocess. Participation in these programs will not eliminate any phase ofclinical development.

 

Currently, metronidazoleand oral vancomycin are two standard antibiotic therapies used to treat CDI.Both have shortcomings including limited efficacy, high recurrence rates,adverse side effects and poor patient compliance. Of the two standardtherapies, only oral vancomycin is FDA-approved to treat CDI.

 

*ClostridiumDifficile Infections*.CDI is a serious illness caused by infection of the inner lining of the colonby *C. difficile*, bacteriathat produce toxins resulting in inflammation, severe diarrhea and, in seriouscases, death. Outbreaks and illness related to *C. difficile*generally occur during or after therapy with broad-spectrum antibiotics.Broad-spectrum antibiotics can cause CDI by disrupting normally presentgastrointestinal bacteria, or gut flora, thereby allowing *C. difficile* to proliferate. Recentstudies have suggested that the use of proton pump inhibitors, or PPIs, awidely used group of heartburn drugs, may also be linked to *C. difficile* infections. CDI accountsfor up to 33% of antibiotic-associated diarrhea incidences as well as manycases of antibiotic-associated colitis, or inflammation of the colon. *C. difficile*can be transmitted by direct or indirect contact with infected patients viaspores that can live for months on dry surfaces.  According to the CDC, CDI is becoming moreprevalent outside the hospital.

 

We estimate that CDIaffects over 500,000 patients in the United States annually. In the UnitedKingdom, the reported number of CDI patients over 65 years of age wasapproximately 55,000 in 2006, and we believe that CDI incidence is growing inpatients worldwide. We believe that the incidence of CDI may be higher thanwhat is currently being reported because many hospitals are not required to anddo not report incidents of CDI. For example, a survey conducted in May 2008through August 2008 by the Association for Professionals in InfectionControl and Epidemiology, or APIC, showed that 13 out of every 1,000 inpatientswere either infected or colonized with *C- difficile*(94.4% infected). The rate is 6.5 to 20 times higher than previous incidenceestimates.     Additionally, recentreports indicate that the incidence of community-acquired CDI cases may beincreasing. For example, a study conducted in one major U.S. city and cited atthe 2006 Interscience Conference on antimicrobial Agents and Chemotherapy, orICCAC, reported that the percentage of CDI cases found to be community-acquiredincreased from 12% in 2006 to 22% in 2004 and to 29% in 2005.

 

According to a studycited in the New England Journal of Medicine, the increased rates of CDI andseverity of the disease may be caused by a combination of factors, includingthe excessive use of antibiotics and the emergence of a new hypervirulentstrain of *C. difficile* knownas North America Phenotype 1/027, or NAP1/027. A study published in the medicaljournal Lancet in September 2005 demonstrated that NAP1/027 produces 16 to23 times more toxins *in vitro*than other strains. NAP1/027 has been reported in at least 40 states in theUnited States and is characterized by increased virulence, morbidity andmortality as well as potential antimicrobial resistance. According to the datapresented at the 2006 ICAAC, NAP1/027 incidence in the United Kingdom increasedan estimated 200% in the two years after mandatory surveillance of the diseasewas initiated in hospitals in 2004.

 

Generally, CDI results inlonger hospital stays and increases average patient cost which is often notreimbursed to the hospital. In more complicated cases of CDI, hospitalizationmay be prolonged by up to two weeks. A recent analysis suggests that patientswith CDI have their hospital stay extended by at least 3 days compared withpatients without the infection, with the incremental cost of approximately$13,700 per patient. The total costs associated with hospital cases of CDI inUnited States are estimated at $3.2 billion. According to the data presented at the 2006 ICAAC, CDI results in anestimated increase in average patient cost of over $6,000 per patient in theUnited Kingdom and the total projected annual cost for treating the disease inEurope is approximately $3.8 billion.

 

Physicians often care forpatients with CDI by discontinuing previously administered broad-spectrumantibiotics, if possible, and providing supportive care such as fluid andelectrolyte replacement. If these measures fail, the standard therapy for CDIincludes the administration of metronidazole and/or oral vancomycin.

 

*CurrentTreatments and Limitations*. Metronidazole is generally used for patients in theUnited States and Europe experiencing their first episode or first recurrentepisode of CDI. Metronidazole is a generic drug that is used off-label to treatCDI due to its low cost and historical efficacy. The typical treatment regimenfor metronidazole is 250 mg every six hours, for a minimum of ten days.Metronidazole can be associated with numerous adverse side effects such asseizures, toxic reactions to alcohol, leukopenia, or reduction of white bloodcells, neuropathy, a disease affecting one or more nerves, unpleasant taste anddry mouth.

 

6

----

Tableof Contents

 

Oral vancomycin is usedin the United States and also in Europe and Japan for the treatment of CDI. Asa result of its broad antibacterial activity, intravenously administeredvancomycin is frequently used for certain other life-threatening infectionscaused by multi-drug resistant bacteria. In an effort to slow the continuingemergence of vancomycin-resistant bacteria, the medical community discouragesthe use of the drug for the treatment of CDI except for patients who are notresponding to metronidazole or for patients with severe, life-threateningcolitis. Oral vancomycin’s recommended treatment protocol is 125 mg or 250 mgdoses every six hours, for approximately ten days.

 

Both metronidazole andoral vancomycin have shortcomings as treatments for CDI including:

 

·                  Limited Efficacy. A controlled studyconducted in North America and reported in 2007 showed that approximately 19%of CDI patients treated with oral vancomycin and 28% of CDI patients treatedwith metronidazole do not respond to therapy, and these patients are at risk ofdeveloping more severe CDI.

 

·                  High Recurrence Rate. Approximately 20%of CDI patients who initially respond to oral vancomycin and 30% of CDIpatients who initially respond to metronidazole experience a clinicalrecurrence following the cessation of antibiotic administration.

 

·                  Bacterial Resistance. Widespread use oforal vancomycin is discouraged for the treatment of CDI in some hospitals dueto concerns over the development of cross-resistant bacteria, includingvancomycin-resistant Enterococci, or VRE, and vancomycin-resistantStaphylococcus, which can also cause other serious nosocomial infections.Furthermore, *C. difficile*resistance to metronidazole has been reported in at least one study.

 

·                  Adverse Side Effects. Metronidazole, whichis systemically absorbed and must be administered in high doses to treat CDI,may result in serious adverse side effects and complications, includingseizures, toxic reactions to alcohol, leukopenia, neuropathy, unpleasant tasteand dry mouth.

 

·                  Inducement of CDI. Oral vancomycin andmetronidazole are both broad-spectrum antibiotics that disrupt the normal gutflora. Because normal and healthy gut flora generally suppresses the growth of *C. difficile*, administration of oralvancomycin or metronidazole may actually induce the development of CDI.

 

·                  Inconvenient Dosing and DifficultCompliance. The current treatment regimen for both oral vancomycin andmetronidazole is inconvenient as both must be administered every six hours fora minimum of seven days, which may result in lower levels of patient compliance.

 

*Potential**Fidaxomicin**Advantages*. Fidaxomicin is a differentiatedmacrocycle antibiotic consisting of an 18-member ring structure. Fidaxomicin hassignificant differentiating features, including a narrow antimicrobialspectrum, fast-acting bactericidal activity against *C. difficile*, minimal systemic exposure and an enduringclinical effect. Based on our clinical and pre-clinical studies of fidaxomicin forthe treatment of CDI, we believe fidaxomicin may offer the followingadvantages:

 

·                  Demonstrated activity against *C. difficile*, including hypervirulentstrains such as NAP1/027, with low rates of treatment failures andrecurrences.  Our first Phase 3 studyprovided evidence of a high cure rate and substantially improved recurrencerates compared to Vancocin;

 

·                  Evidence of low *C. difficile* resistance, includinghypervirulent strains such as NAP1/027;

 

·                  Minimal systemic exposure resulting in afavorable safety profile;

 

·                  Limited disruption of normal gut floraresulting in a lower likelihood of inducement of CDI and decreased severity ofdisease; and

 

·                  Convenient, twice daily dosing regimen.

 

*Clinical Development*

 

*Phase 3Pivotal Trials*.In November 2008, we reported the results from a 629 patient NorthAmerican Phase 2b/3 clinical trial of fidaxomicin for the treatment ofCDI.  This trial was a multi-center,double-blind, controlled Phase 3 trial and was the largest single comparativestudy conducted against Vancocin in CDI. We enrolled 629 adult subjects at morethan 100 sites throughout North America. The primary endpoint of the study was clinical cure defined as patientsrequiring no further CDI therapy two days after 

 

7

----

Tableof Contents

 

completion of study medication, as determined by thetreating physicians.  The secondaryendpoint evaluated CDI recurrence up to four weeks post therapy with recurrencedefined as the return of diarrhea associated with CDI confirmed by a positivetoxin test.  Global cure, an exploratoryendpoint, was defined as patients who were cured and did not have arecurrence.  Patients were dosed witheither fidaxomicin at 200 mg twice daily (400 mg/day) or Vancocin at itsrecommended dosing regimen of 125 mg every six hours (500 mg/day) for ten days.In the initial Phase 2b portion of the trial, we enrolled a total of 93CDI patients at 32 sites. Following an interim blinded safety analysis by anindependent data safety monitoring board, we transitioned into a Phase 3clinical trial in March 2007.

 

In November 2008, wereported positive top-line data from this first Phase 3 study. In the study,92.1% of patients treated with fidaxomicin in the per protocol populationachieved clinical cure versus 89.8% for Vancocin.  In addition, only 13.3% of per protocolpatients treated with fidaxomicin experienced a recurrence versus 24.0% forVancocin (p = 0.004).  Per protocolpatients treated with fidaxomicin had a global cure of 77.7% which was greaterthan Vancocin at 67.1% (p = 0.006). Fidaxomicin was well-tolerated. The top-line trial results are summarized in the table below.

 
| **Per Protocol (microbiologically  evaluable)** | ** ** | **Fidaxomicin****(200 mg bid)** | ** ** | **Vancocin****®**** capsules   (125 mg qid)** | ** ** | **P-Value** | ** ** | **95% Confidence  Interval** |
|-------------------------------------------------|------------|---------------------------------|------------|---------------------------------------------------------|------------|-------------|------------|------------------------------|
| Clinical cure                                   |       | 92.1% (244/265 patients)        |       | 89.8% (254/283 patients)                                |       | NA          |       | (-2.6,)*                     |
| Recurrence                                      |       | 13.3% (28/211)                  |       | 24.0% (53/221)                                          |       | 0.004       |       | (-17.9, -3.3)                |
| Global  Cure **                                 |       | 77.7%  (206/265)                |       | 67.1%  (190/283)                                        |       | 0.006       |       | (3.1,  17.9)                 |

 
| **modified Intent-to-Treat (mITT)** | ** ** | **Fidaxomicin****(200 mg bid)** | ** ** | **Vancocin****®**** capsules   (125 mg qid)** | ** ** | **P-Value** | ** ** | **95% Confidence  Interval** |
|-------------------------------------|------------|---------------------------------|------------|---------------------------------------------------------|------------|-------------|------------|------------------------------|
| Clinical  cure                      |       | 88.2%  (253/287 patients)       |       | 85.8%  (265/309 patients)                               |       | NA          |       | (-3.1,)*                     |
| Recurrence                          |       | 15.4% (39/253)                  |       | 25.3% (67/265)                                          |       | 0.005       |       | (-16.6, -2.9)                |
| Global Cure **                      |       | 74.6% (214/287)                 |       | 64.1% (198/309)                                         |       | 0.006       |       | (3.1, 17.7)                  |

 

----

* one-sided 97.5% confidence intervals

** global cure rate is considered to be the mostsignificant outcome in a CDI treatment trial by a recent Cochrane review.

NA = Not Applicable (trial met non-inferiorityendpoint)

 

The Per Protocol (microbiologically evaluable)population is the patient group that had CDI confirmed by diarrhea with apositive toxin assay, met all inclusion/exclusion criteria, and received atleast 3 days of therapy and were considered a failure or received at least 8days of therapy and were considered a cure.

 

The modified Intent-to-Treat population is the patientgroup that had CDI confirmed by diarrhea with a positive toxin assay andreceived at least one dose of study medication.

 

We initiated a secondPhase 3 pivotal trial of the same design in the second quarter of 2007. Weanticipate completing enrollment and reporting data from the second trial in2009. If the second trial is successful, we intend to submit a New DrugApplication, or NDA, as soon as practical.

 

*Phase 2aStudy*. In July 2005,we completed an open-label, dose-ranging, randomized safety and clinicalevaluation study of fidaxomicin in patients with CDI at five sites. Fidaxomicinwas administered to 48 patients. Three patients withdrew from the trial forreasons unrelated to the administration of fidaxomicin, resulting in 45patients eligible for evaluation. Forty-one of these patients completed aten-day therapy regimen consisting of twice daily doses of 50 mg (100 mg/day),100 mg (200 mg/day) or 200 mg (400 mg/day). A primary endpoint of the trial wasclinical cure of CDI, as determined by the treating physician for each patienton the tenth day of administration. Additional endpoints investigated weretime-to-resolution of diarrhea, recurrence rate through six weekspost-treatment and total relief of CDI symptoms, defined as complete relief ofdiarrhea, fever and abdominal pain, and normalized white blood cell counts bythe end of the ten-day therapy.

 

Among the 45 evaluatedpatients, only four patients failed to achieve clinical cure by the end of tendays of therapy, two of whom were in the 100 mg/day dose group and two of whomwere in the 200 mg/day dose group. None of the patients in the 400 mg/day dosegroup failed to achieve clinical cure. All 41 cured subjects were subsequentlymonitored for six weeks following therapy for recurrence. CDI recurred in twoof the 41 cured subjects, one in the 100 mg/day dose group and one in the 400mg/day dose group. The median cure times, or time-to-resolution of diarrhea,were as follows: 5.5 days for the 100 mg/day dose group, 3.5 days for the 200mg/day dose group and 3.0 days for the 400 mg/day dose group.

 

8

----

Tableof Contents

 

A summary of the resultsof the Phase 2a clinical trial for fidaxomicin is presented below:

 
| ** **                       | ** ** | **Dose Group** | ** ** |
|----------------------------------|------------|---------------------|------------|
| **Parameter**                    | ** ** | **100 mg/day** | ** ** | **200 mg/day** | ** ** | **400 mg/day** | ** ** |
| Clinical  Cures                  |       | 86% (12/14)         |       | 87% (13/15) |   | 100% (16/16) |   |
| Total  Symptom Relief            |       | 43% (6/14)          |       | 53% (8/15) |   | 81% (13/16) |   |
| Recurrence                       |       | 8% (1/12)           |       | 0% (0/13) |   | 6% (1/16) |   |
| Median  Time to Cure of Diarrhea |       | 5.5 Days            |       | 3.5 Days |   | 3.0 Days |   |

 

Pharmacokinetic analyseswere performed on all patients. Fidaxomicin was not detectable in the blood inhalf of the patients and only three subjects had levels exceeding 0.02 mg/mL.Stool concentrations of fidaxomicin averaged over 1,400 mg/g of stool at the400 mg/day dose level at day ten. As *C. difficile*is present mainly in the gut, high stool concentrations suggest thatfidaxomicin is present where needed to treat CDI and low concentrations in theblood indicate fidaxomicin is minimally absorbed in the system, thus reducingthe risk of side effects. There were no adverse events determined by thephysicians to be related to fidaxomicin. At one site in this Phase 2atrial, we performed a microbiologic analysis of the stool of 29 patients. Thisanalysis showed that fidaxomicin did not cause any unusual disruptions ofnormal gut flora for patients in any of the three dose groups.

 

In this study there was a42% presence of the super toxin-producing strain of C. *difficile,*the BI/NAP1/027 strain, and there was no significant difference in the overallcure rates with fidaxomicin between subjects with the BI/NAP1/027 strain andsubjects without the hypervirulent strain. The distribution of the BI/NAP1/027strain was nearly equal in all three dosing groups.

 

The bacterial isolatesfrom the study were also tested for susceptibility to fidaxomicin, vancomycin,and metronidazole. Overall antibiotic susceptibilities were consistent with thepreviously reported MIC90 values for the three antibiotics.  However, fidaxomicin showed no difference inMIC values between the BI/NAP1/027 strains and the non-BI/NAP1/027 strains, whereas currently available antibiotics,metronidazole and vancomycin, showed slightly higher MIC valuesfor the hypervirulent strains.

 

*Phase 1Studies*. We havecompleted two double-blind, oral, dose-escalating, placebo-controlledPhase 1 trials, one of which was a Phase 1a single-dose trial, andone of which was a Phase 1b multiple-dose trial. The trials were designedto determine the safety, tolerability, and pharmacokinetic characteristics offidaxomicin in healthy volunteers. Each Phase 1a patient received twosingle oral administrations of either a 100 mg dose followed by a 300 mg dose,or a 200 mg dose followed by a 450 mg dose of fidaxomicin. Each Phase 1bpatient received daily oral administrations of 150, 300, or 450 mg doses offidaxomicin for ten consecutive days. In both trials, there were eight subjectsfor each dose level, six of whom were randomly selected to receive fidaxomicinand two of whom received placebo. We collected blood, urine and stool samplesfor pharmacokinetic analysis. Vital signs including blood pressure, pulse, bodytemperature and electrocardiograms were measured following each dosing and on aregular basis throughout the study. In both studies, fidaxomicin was welltolerated by all subjects and no drug-related adverse events were observed.

 

Fidaxomicin alsoexhibited a favorable pharmacokinetic profile for CDI treatment. After oraladministration at either single dose or multiple doses, all blood samples hadlow, usually lower than 0.02 mg/mL, or undetectable levels of fidaxomicin whichindicates very low systemic absorption. In contrast, fidaxomicin was found tobe present in high concentrations in the stool. For example, at day ten for the450 mg per day multiple-dose group, the mean fidaxomicin stool concentrationexceeded 10,000 times the MIC90, orminimum concentration of a drug needed to inhibit growth of 90% ofmicroorganisms, of *C. difficile*.

 

*OralSuspension Formulation Development.*We are developing an oral suspension formulation whichcomplements the existing tablet form of fidaxomicin. This formulation isintended for use with intensive care unit and elderly patients. We plan tosubmit an IND to pursue development for this potential label indicationexpansion.

 

*Commercialization*

 

We hold worldwide rightsto fidaxomicin. In February 2007, we elected to exercise our right under aprospective buy-back agreement to repurchase Par Pharmaceutical, Inc.’srights to develop and commercialize fidaxomicin in North America and Israel. Wepaid Par a one-time $20.0 million termination fee. We are obligated to pay****Par a one-time $5.0 million milestonepayment, a 5% royalty on net sales by us or our affiliates of fidaxomicin inNorth America and Israel, and a 1.5% royalty on net sales by us or ouraffiliates of fidaxomicin in the rest of the world. In addition, in the eventwe license our right to market fidaxomicin in the rest of the world, we will berequired to pay Par a 6.25% royalty on net revenues we receive related tofidaxomicin. We are obligated to pay each of these royalties, if any, on acountry-by-country basis for seven years commencing on the applicablecommercial launch in each such country. We intend to seek one or more partnersfor the commercialization of fidaxomicin outside North America.

 

*Fidaxomicin**— Other Indications*

 

Based on our pre-clinicaland clinical studies for CDI treatment, we believe fidaxomicin may be effectiveagainst a broad range of indications with significant unmet medical needs. Ourstrategy is to develop fidaxomicin for its lead indication, CDI treatment,while also advancing its development for additional indications.

 

*CDIPrevention.* Webelieve fidaxomicin may be effective not only for treating CDI but also forpreventing CDI. Patients at high risk of developing CDI, such as elderlypatients in long-term care facilities or hospital patients on broad-spectrumantibiotics or PPIs, may benefit from prophylactic protection from the disease.Up to 20% of long-term care patients are colonized with *C. difficile*. There is currently notherapeutic drug approved for the prevention of CDI. Incidence of CDI outbreakshas been increasing in the 

 

9

----

Tableof Contents

 

hospital and community settings, and we believefidaxomicin may provide safe, potent and narrow-spectrum bactericidal activityagainst *C. difficile*,thereby protecting high-risk patients while limiting disruption to normal gutflora. We continue to evaluate the design of a proof-of-concept clinical trialof fidaxomicin to prevent CDI in high-risk populations.

 

*Preventionof VRE in CDI*.Pre-clinical data indicate that fidaxomicin is active *in vitro* against antibiotic-resistantEnterococci, including VRE. Enterococci are common bacteria that reside in theGI tract and generally do not pose a serious health risk. However, ifEnterococci enter the bloodstream, they can cause serious and life-threateninginfections, especially in subjects with weakened immune systems. Vancomycin isconsidered the last line of defense against such infection. However, growingbacterial resistance to vancomycin has emerged, requiring new therapeuticoptions.

 

Biological and stool concentrationdata from our Phase 1 and 2a CDI treatment trials indicate fidaxomicin maybe useful in the prevention of VRE bloodstream infections by minimizing thecolonization of these bacteria in the GI tract before they enter thebloodstream. With the completion of our first Phase 3 CDI trial, we arecurrently analyzing the propensity of Vancocin and fidaxomicin to promote VREcolonization.  Upon completion of thisanalysis, we will assess whether to conduct a VRE prevention in CDI clinicaltrial.

 

*Methicillin-ResistantStaphylococci, or MRS, Infections*. We believe second generation fidaxomicin compoundsmay be useful for the treatment of Staphylococcal infections. Methicillin is abroad-spectrum antibiotic that was previously used to treat infections causedby susceptible gram-positive bacteria, such as *Staphylococcusaureus*, or *S. aureus*,and *Staphylococcus epidermidis*,or *S. epidermidis*, thatwould otherwise be resistant to most penicillins.

 

*Prulifloxacin*

 

*Overview*. We are developing prulifloxacin for thetreatment of infectious diarrhea, including travelers’ diarrhea, acommunity-acquired infection which can be caused by a broad range of bacteria.We intend to initially seek  approval forprulifloxacin for the treatment of infectious diarrhea in travelers.Prulifloxacin is a prodrug in the fluoroquinolone class of antibiotics, awidely-used class of broad-spectrum antibiotics. A prodrug is an inactive formof a compound that is converted in the body to an active drug either byspontaneous chemical reaction or through the enzymatic process. Following oraladministration, prulifloxacin is converted to ulifloxacin, which is rapidlybactericidal by killing susceptible bacterial pathogens through inhibition ofDNA replication. Ulifloxacin has demonstrated potent broad-spectrum activityagainst gram-positive and gram-negative bacteria. We have completed twoPhase 3 clinical trials of prulifloxacin for the treatment of travelers’diarrhea and reported positive top-line data from each study. In July 2008,we reported positive top-line data from the first Phase 3 trial conducted inMexico and Peru and in February 2009, we reported positive top-line datafrom the second Phase 3 trial conducted in India, Guatemala and Mexico.  The top-line analysis of data from these studiesshowed that prulifloxacin met the primary endpoint of TLUS compared to placebo.Prulifloxacin was generally well tolerated and had a similar safety profilecompared to placebo.  With the results ofthese two Phase 3 trials we intend to file an NDA for prulifloxacin by the endof 2009.

 

We believe thatprulifloxacin will be a differentiated therapeutic option for travelers’diarrhea due to its broad and potent activity against gastrointestinalpathogens, favorable safety profile, clinical efficacy and convenient dosingregimen.

 

In June 2004, weacquired from Nippon Shinyaku Co., Ltd. the exclusive rights to develop andcommercialize prulifloxacin for all indications in the United States.Prulifloxacin has been marketed by other companies in Japan since 2002 to treata wide range of bacterial infections, including infectious diarrhea, and inItaly since 2004 to treat urinary tract infections, or UTIs, and respiratorytract infections, or RTIs. Other parties have found that prulifloxacin iswell-tolerated, as demonstrated by its use in the treatment of more than twomillion patients. A 1996 investigator-initiated clinical study of prulifloxacinin Japan by a third party for the treatment of infectious diarrhea evaluatedthe safety and efficacy of prulifloxacin in 122 subjects, with an endpoint ofclinical cure, as evidenced by eradication of bacterial pathogens.Prulifloxacin was considered effective in approximately 98% of the 54 subjectsevaluated for clinical cure. Prulifloxacin also eradicated the bacterialpathogen in approximately 95% of the 77 subjects evaluated for bacteriologicaleffect. One hundred eight of the 109 subjects evaluated for safety had noadverse effects while one subject experienced a mild rash that was possiblyrelated to prulifloxacin administration, but quickly recovered and continued toreceive all scheduled therapy.

 

*InfectiousDiarrhea*.Infectious diarrhea is associated with an infection caused by bacteria, virusesor parasites. Its symptoms include stomach cramps, vomiting, nausea, fever andheadache. Infectious diarrhea is the world’s second-leading cause of morbidityand mortality. It is a significant problem even in the United States where itis often found in otherwise healthy individuals.

 

Travelers’ diarrhea isinfectious diarrhea contracted by the ingestion of contaminated food or water.The CDC estimates that there are approximately 50,000 cases of travelers’diarrhea each day among the 50 million worldwide annual travelers to developingcountries. We estimate that approximately 23 million patients are treated withantibiotics for infectious diarrhea annually in the United 

 

10

----

Tableof Contents

 

States. Bacteria cause approximately 85% of travelers’diarrhea in most localities, and the majority of these cases involve *E. coli*, Shigella or Salmonella.Severe infections can cause large fluid loss and result in dehydration andhospitalization. The CDC estimates that 30% to 50% of travelers to high-riskregions (including most of Asia, the Middle East, Africa, Central America andSouth America) will develop travelers’ diarrhea during a one- to two-weekvisit. The risk of infection increases with the duration of travel, andinfection is possible throughout the world. A study of Americans visitingdeveloping countries found that 46% acquired diarrhea.

 

*CurrentTreatments and Limitations*. Authorities such as the Infectious Disease Societyof America and the CDC recommend treatment for travelers’ diarrhea with anantibiotic that has an appropriate spectrum of activity against typicalpathogens related to travelers’ diarrhea. These antibiotics includefluoroquinolones such as ciprofloxacin, macrolides such as azithromycin,sulfonamides such as trimethoprim-sulfamethoxazole, or TMP/SMX, tetracyclinessuch as doxycycline, and rifamycins such as rifaximin. Fluoroquinolones remainthe first-line treatment for infectious diarrhea because of their bactericidalnature, broad spectrum of activity and generally well-tolerated profile.

 

Many of the treatmentsfor travelers’ diarrhea have significant limitations. Limitations ofciprofloxacin, rifaximin and TMP/SMX, three of the most commonly prescribedtreatments for infectious diarrhea, include one or more of the following:

 

·                  Limited Spectrum of Activity and AntimicrobialResistance. Rifaximin is approved only for the treatment of travelers’ diarrheacaused by noninvasive strains of *E. coli*.Rifaximin is not recommended for the treatment of diarrhea caused by otherpathogens commonly associated with travelers’ diarrhea such as Shigella,Salmonella, Aeromonas, Campylobacter, Plesiomonas, and Yersinia. In addition,our studies with a panel of 582 infectious diarrhea-associated bacteria haveshown that 25% of *E. coli*and 67% of Shigella strains associated with travelers’ diarrhea are resistantto TMP/SMX.

 

·                  Possible Side Effects. Ciprofloxacin has beenassociated with phototoxicity and QT interval prolongation, a condition that isassociated with potentially life-threatening cardiac arrhythmias. Rifaximin hasbeen linked to allergic reactions to the drug. TMP/SMX has been associated withboth frequent mild allergic reactions and rare but serious adverse effectsincluding bone marrow suppression, severe liver damage, severe renal impairmentand agranulocytosis, an acute condition related to leukopenia.

 

·                  Convenience and Compliance. Ciprofloxacin is approvedas therapy for infectious diarrhea with a dosing regimen of twice dailyadministrations for five to seven days. Rifaximin is approved as a therapy fordiarrhea caused by noninvasive *E. coli*and is typically given three times daily for three days. These treatmentregimens may be inconvenient for traveling patients.

 

*PrulifloxacinAdvantages*. Webelieve that prulifloxacin will be a differentiated and better therapeuticcourse for bacterial infectious diarrhea for several reasons, including:

 

·                  Efficacy. In October 2008, positive top-line datawas presented at ICAAC/IDSA from the first of two Phase 3 trials. The firsttrial which was conducted in Mexico and Peru, and was a randomized,double-blind placebo-controlled clinical trial in which two-thirds of thepatients received prulifloxacin in 600 mg doses and one-third of the patientsreceived a placebo. Data from this study showed that prulifloxacin metthe primary endpoint of Time to Last Unformed Stool, or TLUS,******in both the modifiedintent-to treat, or mITT (n=187) and microbiologically evaluable (per protocol;n=165) populations compared to placebo.  The median TLUS for patientstreated with prulifloxacin was approximately 24 hours; this was significantly differentfrom the TLUS for placebo with a p-value of <0.0001.

 

                        In February2009, we reported the top-line analysis of data from the second of two Phase 3trials. The secondtrial was also a randomized, double-blind placebo-controlled clinical trial inwhich half of the patients received prulifloxacin in 600 mg doses and half ofthe patients received placebo.  The secondtrial was conducted in India, Guatemala and Mexico.  Data from this study showed thatprulifloxacin met the objective of superiority to placebo in the resolution ofdiarrhea, measured by TLUS in Both the mITT (n=200) and microbiologicallyevaluable (per protocol; n=173 populations compared to placebo.  The median TLUS for patients treated withprulifloxacin was 32.8 hours; this was significantly different from the TLUSfor placebo with a p-value of <0.0001.

.

·                  Unique Pharmacokinetic Profile. Ulifloxacin, the active metabolite ofprulifloxacin, quickly reached effective concentration levels following asingle administration of the drug in patients with profuse diarrhea.Approximately two-thirds of the oral dose of prulifloxacin remains in the stoolafter being converted to ulifloxacin while approximately one-third is absorbedand accumulated in tissues and in phagocytes, the white blood cells whichengulf bacterial pathogens. Ulifloxacin remains active in these tissues andavailable in the body to eliminate invasive and intracellular pathogens such asShigella and Salmonella and invasive forms of *E. coli*.

 

11

----

Table of Contents

 

·                  Spectrum of Activity. Ulifloxacin hasmore potent antibacterial activity relative to other antibacterial agentsagainst infectious diarrhea pathogens. In a recent study published inAntimicrobial Agents and Chemotherapy, ulifloxacin was the most active of nineantibacterial agents tested against a panel of 582 international infectiousdiarrhea-associated bacteria. The potency of six of these agents against commonbacterial pathogens that cause diarrhea is shown below, normalized to thepotency of rifaximin:

 
| ** **        | ** ** | **Comparative Potency Against Bacteria(1)** | ** ** |
|-------------------|------------|------------------------------------------------------------|------------|
| **Antibacterial** | ** ** | **E. coli  (100 isolates)**                      | ** ** | **Salmonella  (101 isolates)** | ** ** | **Shigella  (101 isolates)** | ** ** |
| Ulifloxacin       |       | 2,000                                                      |       | 533 |   | 2,000 |   |
| Ciprofloxacin     |       | 1,000                                                      |       | 133 |   | 1,000 |   |
| Azithromycin      |       | 4                                                          |       | 4 |   | 4 |   |
| Rifaximin         |       | 1                                                          |       | 1 |   | 1 |   |
| Doxycycline       |       | 1                                                          |       | 0.5 |   | 0.5 |   |
| TMP/SMX           |       | <0.25                                                   |       | >32 |   | <0.25 |   |

 

----

(1)         The potency of an antibiotic normalized to rifaximinis expressed as the quotient obtained by dividing the MIC90 concentrationof rifaximin by the MIC90 concentration of that antibiotic.

 

·                  Side Effects. Prulifloxacin has an established andfavorable safety profile with minimal potential to produce adverse side effectsassociated with other treatments for travelers’ diarrhea, such as QT intervalprolongation, phototoxicity, or central nervous system effects. In the firstphase 3 trial, prulifloxacin was generally well tolerated and had asimilar safety profile compared to placebo.

 

·                  Convenience and Compliance. If approved, we expectprulifloxacin will be marketed as therapy for infectious diarrhea with aconvenient dosing regimen of one tablet daily for three days.

 

*On-GoingClinical Development and Next Steps*. We conducted two Phase 3 clinical trials forthe registration of prulifloxacin in the United States for the treatment ofbacterial infectious diarrhea.

 

·                  *Phase 3 Trials*. In July 2008, we reported positivetop-line data from the first of two Phase 3 trials. The first trial which wasconducted in the United States, Mexico and Peru, was initiated in July 2006and was a randomized, double-blind placebo-controlled clinical trial in whichtwo-thirds of the patients received prulifloxacin in 600 mg doses and one-thirdof the patients received a placebo. The top-line analysis ofdata from this study showed that prulifloxacin met the primary endpoint of Timeto Last Unformed Stool, or TLUS,******in both the modified intent-to treat, or mITT (n=187)and microbiologically evaluable (per protocol; n=165) populations compared toplacebo.  The median TLUS for patients treated with prulifloxacin wasapproximately 24 hours; this was significantly different from the TLUS forplacebo with a p-value of <0.0001.  Prulifloxacin was generally welltolerated and had a similar safety profile compared to placebo.

 

In February 2009, we reported the top-line analysis of data fromthe second of two Phase 3 trials. The second trial was also a randomized, double-blindplacebo-controlled clinical trial in which half of the patients receivedprulifloxacin in 600 mg doses and half of the patients received placebo. Theprimary endpoint of both trials is TLUS. Secondary endpoints includemicrobiological eradication of the disease pathogen and relief of other diseasesymptoms. Data from this study showed that prulifloxacin met the objective ofsuperiority to placebo in the resolution of diarrhea, measured by TLUS in Boththe mITT (n=200) and microbiologically evaluable (per protocol; n=173populations compared to placebo.  Themedian TLUS for patients treated with prulifloxacin was 32.8 hours; this wassignificantly different from the TLUS for placebo with a p-value of<0.0001.  We plan on submitting an NDA as soon as practical.

 

·                  *Proposed Phase 4 MarketingSupport Trial*. Weanticipate that this trial will be a randomized, double-blind clinical trialusing ciprofloxacin as a comparator. We plan to initiate this trial subsequentto NDA submission of prulifloxacin.

 

*AdditionalIndication for Urinary Tract Infection*. After the anticipated launch of prulifloxacin forthe treatment of infectious diarrhea, we may seek additional approval ofprulifloxacin for the treatment of complicated UTIs, which are commonly causedby bacteria such as *E. coli*,Staphylococcus saprophyticus and Pseudomonas aeruginosa. According to theKidney and Urology Foundation of America, an estimated ten million physicianoffice visits in 2002 were due to UTIs, the second leading cause of infectionfollowing RTIs. UTIs account for up to 40% of nosocomial infections and, whenpresent, can increase the average hospital patient cost by approximately $675per patient. According to IMS Health, global sales of UTI prescriptionantibiotics exceeded $1.1 billion in 2003, with the United Statesaccounting for approximately 62% of this market. We believe prulifloxacin’sadvantages 

 

12

----

Tableof Contents

 

as a therapy for infectious diarrhea can be leveragedin the approval for treatment of complicated UTIs. Prulifloxacin is currentlyapproved as therapy for complicated and uncomplicated UTIs in Italy and Japan.Prulifloxacin was compared to ciprofloxacin as therapy for complicated lowerUTIs in a 257-patient, double-blind, comparator-controlled clinical trial thatwas conducted in Europe by third parties. In patients that were administeredprulifloxacin once daily for 10 days, clinical resolution of the infection wasachieved in approximately 95% of patients and the pathogen was eradicated inapproximately 90% of patients. In contrast, in patients that were administeredciprofloxacin twice daily for 10 days, clinical resolution was achieved inapproximately 93% of patients and the pathogen was eradicated in approximately78% of patients. A similar open-label study produced microbiologicaleradication and clinical cure in approximately 93% and approximately 96%,respectively, of 113 prulifloxacin-treated patients.

 

**Our OPopS Drug Discovery Platform**

 

*Background*. Carbohydrates are the most abundantclass of biological molecules in nature and are fundamental to manyphysiological processes, which can be inhibited or augmented bycarbohydrate-based drugs. We believe these processes represent potential drugtargets for infectious diseases, cancer and immune-related disorders.Carbohydrates, however, can be difficult to synthesize because of their complexmolecular structure. Historically, the synthesis of complex carbohydratemolecules took weeks to months to complete, and thus carbohydrate synthesis foruse in therapeutics has often been characterized as prohibitively difficult andtime-consuming. Numerous drugs currently on the market have carbohydratecomponents, which are often implicated in bacterial resistance, and numerousdiseases involve interactions with carbohydrate molecules. Carbohydratesynthesis involves the manipulation of existing drugs to improve their spectrumof activity or significantly reduce their side effects. Such drugs includeaminoglycosides, glycopeptides, macrolides and antivirals.

 

*OurTechnology*. Ourproprietary OPopS drug discovery platform allows us to develop potential drugcandidates through carbohydrate drug synthesis. OPopS is a computer-aidedtechnology that enables the rapid and low cost synthesis of a wide array ofcarbohydrate-based compounds. Specifically, the two components of our OPopStechnology that allow us to synthesize new compounds are:

 

·                  *GlycoOptimization*. This process enables the modificationof a carbohydrate group on an existing drug to improve its properties.

 

·                  *De Novo Glycosylation*. This process enables the addition ofnew carbohydrate groups on an existing drug to create new, patentablecompounds.

 

We acquired worldwiderights to this technology from The Scripps Research Institute, or TSRI, in July 1999.We have built approximately 500 carbohydrate building blocks, and through ourproprietary OptiMer software program, we are able to rapidly and reliablyproduce a wide variety of carbohydrate-based molecules. With OPopS, we are ableto reduce the time required for the synthesis of these molecules from weeks ormonths to hours. We believe OPopS enables us to develop patentable drugs,optimizing drug performance, improving activity, overcoming bacterialresistance issues and/or improving side effect profiles. Several of ourpre-clinical drug candidates have been developed with OPopS and we intend touse this technology to identify additional novel carbohydrate-based productcandidates with significant commercial potential.

 

**Other Pipeline Product Candidates**

 

Using our OPopStechnology, we are developing a pipeline of promising new drug candidates forthe treatment of various indications including infectious disease,osteoarthritis and breast cancer. Our strategy is to license these drugcandidates opportunistically to third-party partners in order to maximize thepotential for their development and commercialization. The most advancedpipeline product candidates are as follows:

 

*OPT-88: A Therapy for Osteoarthritis*

 

*Overview*. We intend to develop ourcarbohydrate-based product candidate OPT-88, to which we obtained rightsthrough an in-license from TSRI, as a disease-modifying intra-articular, orwithin the cavity of a joint, therapy for osteoarthritis. Osteoarthritis iscaused by the breakdown and eventual loss of the cartilage of one or morejoints in the body. Key symptoms include pain in joints such as knees, hips andfingers, inability to walk or bear weight and infection surrounding suchjoints. According to the National Institute of Arthritis and Musculoskeletaland Skin Diseases, osteoarthritis is one of the most common types of joint diseasesand is estimated to affect 33 million people in the United States in 2006.Pre-clinical studies of OPT-88 indicate reduced erosion of knee cartilage and areduction of pain for up to nine days after a single injection. With itsdisease-modifying activity and tolerability profile, OPT-88 represents apotentially new intra-articular therapy, and we believe it is a significantproduct opportunity for the osteoarthritis market.

 

13

----

Table of Contents

 

*Pre-ClinicalStudies and Future Plans*. *In vitro* studies ofOPT-88 in human cell cultures have shown that it significantly stimulatesrestoration of joint cartilage. Animal studies demonstrated a reduced pathologyand reduction in the erosion of knee cartilage. We held a pre-InvestigationalNew Drug application, or pre-IND, meeting with the FDA in the first quarter of2008 and plan to file an IND application for OPT-88 in 2009 to initiate a Phase1 study for assessing the safety of repetitive intra-articular injections inpatients with knee osteoarthritis using an escalating dose scheme.  If the Phase 1 study is successful, we planto conduct a subsequent proof-of-concept Phase 2 efficacy study.

 

*OPT-822/OPT-821: A CancerImmunotherapy*

 

*Overview*. We are currently developing ourcarbohydrate-based product candidate OPT-822, a carbohydrate-basedimmunostimulant therapy, combined with adjuvant therapy OPT-821, for the treatment of metastatic breast cancer.According to the American Cancer Society, breast cancer was the second mostcommon form of cancer among women in the United States, with more than 250,000new cases and more than 40,000 deaths in 2008. The survival rate for patientswith metastatic breast cancer remains limited, with a median survival of two tothree years and a five-year survival rate of 21% for those patients diagnosedwith late-stage cancer that has metastasized to other parts of the body. In July 2002,we acquired exclusive rights from Sloan-Kettering Institute for CancerResearch, or SKI, to develop and commercialize OPT-822 worldwide.  Carbohydrate antigens are known to stimulatethe immune response against cancer cells in the body.  We have applied our OPopS technology to manufactureeffectively complex carbohydrate cancer antigens, including Globo-H, aprominent antigen in breast cancer cells, and sialyl Lewis a, an antigen inbreast and small lung cancer cells. OPT-822 is a novel cancer immunotherapy and is composed of Globo Hlinked to a protein carrier.

 

*ClinicalStudies and Future Plans*.  SKI completed Phase 1safety studies of OPT-822 in prostate cancer patients and breast cancerpatients in 1999 and 2001, respectively. In these studies, OPT-822 appeared to be well tolerated and to stimulateresponse to tumor antigens.  Eighteen of27 metastatic breast cancer patients treated with OPT-822 in the studiessurvived after five years.  We currentlyplan to identify a strategic partner, apply for government grants for subsequentclinical trials, and then initiate a Phase 2/3****clinical trial in Asia to evaluate the clinical efficacy of OPT-822combined with OPT-822’s adjuvant therapy OPT-821.

 

*CEM-101 (OP-1068): Macrolide andKetolide Antibiotics*

 

Macrolide antibioticshave been marketed for the treatment of upper and lower respiratory tractinfections.  Macrolides such aserythromycin and azithromycin, and ketolides, such as telithromycin, arerelated classes of antibiotics which have strong gram-positive activity andinhibit bacterial growth.  However, anincreasing number of pathogens are now resistant to currently availablemacrolides and ketolide.  The leadingproduct candidate developed with our discovery technology, includingglycooptimization, CEM-101 (OP-1068), was effective against these resistantbacterial strains according to a pre-clinical study conducted by the Institutefor Medical Microbiology.  This productcandidate has shown to possess potent activity against multi-drug resistantStreptococcus pneumoniae and Streptococcus pyogenes, common RTI pathogens.  The pre-clinical study also showed thatCEM-101 was orally active with potent efficacy in animal models afteronce-a-day administration.  Cempra haslicensed from us a library of approximately 500 macrolides related to thisproduct candidate.  Cempra has informedus that it is initially planning to develop CEM-101 for RTIs in adults andchildren, including community-acquired mild and moderate pneumonia.

 

**Our Strategy**

 

Our principal objectiveis to become a leading biopharmaceutical company focused on the discovery,development and commercialization of innovative anti-infective compounds, withan initial focus on gastrointestinal infections and related diseases.  To achieve these objectives, our strategyincludes the following key elements:

 

·                  *Build a branded anti-infectivefranchise through current and in-licensed product candidates*. We currently have two late-stage antibiotic product candidates,fidaxomicin for the treatment of CDI, and prulifloxacin for the treatment ofinfectious diarrhea in travelers.  Wealso intend to develop these two lead products for additional indications andselectively in-license additional anti-infective compounds for developmentand/or commercialization.  In addition,in order to maximize the value of our franchise, we intend to opportunisticallyseek partners to commercialize our product candidates outside of our coremarkets.  We believe our management’sindustry knowledge and contacts will be a significant advantage in executingthis part of our strategy.

 

·                  *Develop our lead product candidatesfor clinical and regulatory approval*.  We arecurrently focusing our resources on developing fidaxomicin andprulifloxacin.  Fidaxomicin potentiallyoffers significant advantages over existing therapeutics for CDI, a serious andgrowing hospital-acquired illness. Prulifloxacin also potentially offers significant advantages overexisting therapeutics for infectious diarrhea and has an extensive record ofsafety and efficacy, having been used in over two million patients in Europeand Japan.  If our second trial forfidaxomicin for the treatment of CDI 

 

14

----

Tableof Contents

 

is successful, weplan to submit an NDA for fidaxomicin as soon as practical.  We reported the positive results of our twoprulifloxacin Phase 3 trials and we plan to file an NDA for prulifloxacin bythe end of 2009.

 

·                  *Build marketing and salescapabilities in our core markets*.  Our objectiveis to market innovative antibiotics in areas of unmet medical needs for thetreatment and prevention of nosocomial and serious community-acquiredinfections.  Specifically, we initiallyplan to commercialize and develop fidaxomicin and prulifloxacin in key definedmarkets.  In order to achieve thesegoals, we intend to develop our own marketing organization and sales force, aswell as evaluate partnering alternatives to commercialize our product candidates.

 

·                  *Leverage our internal discoverycapabilities and expertise in carbohydrate chemistry to expand our portfolio ofproduct candidates*.  We intend to expand our product portfolio byexploiting our internal expertise to discover and develop additional productcandidates.  We believe our proprietarytechnology and our capabilities and expertise in carbohydrate chemistry willenable us to more rapidly identify and develop successful product candidates.  We may opportunistically seek partners forthe development and commercialization of product candidates in order tomaximize value and maintain our strategic focus.

 

**Marketing and Sales**

 

We currently have alimited marketing organization, and do not have a sales organization for themarketing, sale and distribution of pharmaceutical products.  We plan to develop a sales organizationinternally or through collaborations with third parties.  We hold worldwide rights to fidaxomicin andrights to commercialize prulifloxacin in the United States. Assuming approvalby the FDA, we plan to build our own marketing and sales force for fidaxomicinin North America and prulifloxacin in the United States.  We plan to seek collaborations with one ormore third parties for the commercialization of fidaxomicin outside of NorthAmerica.  In the United States, we planto target our marketing and sales of fidaxomicin to hospital-based andlong-term care physicians, including gastroenterologists, infectious diseasespecialists and internists.  We plan totarget our marketing and sales of prulifloxacin to high-prescribing physiciansof antibiotics for travelers’ diarrhea, including those at travel clinics.

 

 We have established a medical affairs group tointroduce our product candidates to key opinion leaders in CDI and healthcareprofessionals focusing on infectious diseases and gastroenterology.  We also continue to evaluate the marketingand sales capabilities that will be necessary to launch and commercializefidaxomicin and prulifloxacin in our target markets.

 

**Collaborations, Commercial andLicense Agreements and Grants**

 

*ParPharmaceutical, Inc.* In February 2007, we exercised our right under a prospectivebuy-back agreement to repurchase Par’s rights to develop and commercializefidaxomicin in North America and Israel and paid Par a one-time $20.0 milliontermination fee.  As a result, we nowhold worldwide rights to fidaxomicin.  Wealso paid Par $1.9 million for fidaxomicin clinical supply material and activepharmaceutical ingredient in 2007.  Weare obligated to pay Par a one-time $5.0 million milestone payment, a 5%royalty on net sales by us or our affiliates of fidaxomicin in North Americaand Israel, and a 1.5% royalty on net sales by us or our affiliates offidaxomicin in the rest of the world.  Weare required to pay the one-time $5.0 million milestone payment after theearliest to occur of (i) the successful completion by us of our secondpivotal Phase 3 trial for fidaxomicin, (ii) our grant to a thirdparty of the rights to fidaxomicin or (iii) the submission to the FDA ofan NDA for fidaxomicin.  In the event welicense our right to market fidaxomicin in the rest of the world, we will berequired to pay Par a 6.25% royalty on net revenues we receive related tofidaxomicin.  We are obligated to payeach of these royalties, if any, on a country-by-country basis for seven yearscommencing on the applicable commercial launch in each such country.* *Theagreement also includes a mutual release between the parties and ourindemnification of Par for actions related to fidaxomicin, the agreementsassigned to us by Par and certain other matters.

 

*Biocon*. In connection with the exercise of our rights under the prospectivebuy-back agreement, Par assigned to us a supply agreement with Biocon Limited,or Biocon, regarding the active pharmaceutical ingredient, or API, forfidaxomicin. Under this agreement, Biocon is obligated to supply to us ourrequirements of the fidaxomicin API for certain markets. The supply agreementwill terminate upon the tenth anniversary of the commercial launch of fidaxomicinunless earlier terminated by mutual agreement or material default of eitherparty.

 

*NipponShinyaku*.  In June 2004, we entered into a licenseagreement with Nippon Shinyaku.  Underthe terms of the agreement, we acquired the non-exclusive right to import andpurchase prulifloxacin, and the exclusive right (with the right to sublicense)within the United States to develop, make, use, offer to sell, sell and licenseproducts suitable for consumption by humans containing prulifloxacin.

 

15

----

Tableof Contents

 

Under the terms of theagreement, we paid Nippon Shinyaku a $1.0 million upfront licensing fee andwill be required to pay Nippon Shinyaku a milestone payment in the amount of$1.0 million upon the submission of a NDA for prulifloxacin in the UnitedStates.  We also agreed to exclusivelypurchase prulifloxacin from Nippon Shinyaku and to purchase a certain amount ofprulifloxacin annually that is to be mutually agreed upon by us and NipponShinyaku, commencing in the year of the first commercial sale of prulifloxacinin the United States.  If Nippon Shinyakuis unable to supply us with the required amount of prulifloxacin, then NipponShinyaku is obligated to grant us a non-exclusive, worldwide license to make orhave made prulifloxacin, in which event we will owe Nippon Shinyaku a royaltybased on the amount of net sales of prulifloxacin generated by us and oursublicensees.  Additionally, we will oweNippon Shinyaku certain royalties based on the amount of net sales ofprulifloxacin less the amount of prulifloxacin we buy from Nippon Shinyaku.

 

Either party mayterminate the agreement 60 days after giving notice of a material breach whichremains uncured 60 days after written notice. If not terminated earlier, the agreement will terminate upon the laterof ten years from the date of the first commercial sale of prulifloxacin in theUnited States or the date on which the last valid patent claim relating toprulifloxacin expires in the United States.

 

*Sloan-KetteringInstitute for Cancer Research*.  In July 2002,we entered into a license agreement with Sloan-Kettering Institute for CancerResearch, or SKI, to acquire, together with certain non-exclusive licenses,exclusive, worldwide licensing and sublicensing rights to certain patented andpatent-pending carbohydrate-based cancer immunotherapies, which includesOPT-822.  As partial consideration forthe licensing rights, we paid to SKI a one-time fee consisting of both cash and55,383 shares of our common stock.  Underthe agreement, which was amended in June 2005, we owe SKI milestonepayments in the following amounts for each licensed product: (i) $500,000upon the commencement of Phase 3 clinical studies, (ii) $750,000 uponthe submission of the first NDA, (iii) $1.5 million upon marketingapproval in the United States and (iv) $1.0 million upon marketingapproval in each and any of Japan and certain European countries, but only tothe extent that we, and not a sublicensee, achieve such milestones.  We also owe SKI royalties based on net salesgenerated from the licensed products and income we source from our sublicensingactivities, which royalty payments are credited against a minimum annualroyalty payment we owe to SKI during the term of the agreement.

 

The term of the agreementcontinues until the later of July 31, 2017, or the expiration of the lastto expire of the patents licensed under this agreement, unless the agreement isearlier terminated.  The agreement can beterminated by SKI for a variety of reasons, including (i) upon 60 days’notice in the event we fail to meet a development milestone specified in theagreement or (ii) upon 30 days’ notice, in the event we fail to pay anylicensing fees, royalties or patent expenses due under the agreement within 30days of the due date and thereafter fail to pay such deficit in-full within the30-day notice period.

 

*CempraPharmaceuticals, Inc.*  In March 2006,we entered into a collaborative research and development and license agreementwith Cempra, a biotechnology company focused on anti-infectives.  We are collaborating with Cempra to discover,develop and commercialize drugs based on macrolide and ketolide compounds.  We granted to Cempra an exclusive worldwidelicense, except in Association of Southeast Asian Nations, or ASEAN, countriesas of the effective date of the agreement, with the right to sublicense, ourpatent and know-how related to our macrolide and ketolide antibacterialprogram, several other pre-clinical compounds and our related proprietarytechnology.  Cempra is responsible formany of the costs associated with the development and commercialization ofproduct candidates arising under the agreement, including manufacturing,marketing and sales costs.  As partialconsideration for granting Cempra the license, we obtained equity interest inCempra.   We will receive milestonepayments as product candidates are developed and/or co-developed byCempra.  The milestone payments will betriggered upon the completion of certain clinical development milestones and incertain instances, regulatory approval of products.  The aggregate amount of such milestonepayments we may receive is based in part on the number of products developedunder the agreement and can exceed $24.5 million.  We will also receive royalty payments basedon a percentage of net sales of licensed products.  In consideration of the foregoing, Cemprawill receive milestone payments of $1.0 million from us for each of the firsttwo products we develop which receive regulatory approval in ASEAN countries aswell as royalty payments on the net sales of such products.

 

The research term of thisagreement was completed on March 31, 2008. Subject to certain exceptions, on a country-by-country basis, thegeneral terms of this agreement continue until the later of: (i) theexpiration of the last to expire patent rights related to a covered product inthe applicable country or (ii) ten years from the first commercial sale ofa covered product in the applicable country. Either party may terminate the agreement in the event of a materialbreach by the other party, subject to prior notice and the opportunity to cure.  Either party may also terminate the agreementfor any reason upon 30 days’ prior written notice provided that all licensesgranted by the terminating party to the non-terminating party will survive uponthe express election of the non-terminating party.

 

*TheScripps Research Institute*. In July 1999, we acquired exclusive, worldwiderights to our OPopS technology from The Scripps Research Institute, orTSRI.  This agreement includes thelicense to us of patents, patent applications and copyrights related to our  OPopS technology.  We also acquired, pursuant to three separatelicense agreements with TSRI, exclusive, worldwide rights to over 20 TSRIpatents and patent applications related to other potential drug compounds andtechnologies, including HIV/FIV protease inhibitors, aminoglycosideantibiotics, polysialytransferase, selectin inhibitors, nucleic acid binders,carbohydrate mimetics and osteoarthritis.

 

16

----

Table of Contents

 

Under the four agreementswith TSRI, we paid TSRI license fees consisting of an aggregate of 239,996shares of our common stock with a deemed aggregate fair market value of$46,400, as determined on the dates of each such payment.  Additionally, under each agreement, we oweTSRI royalties based on net sales by us, our affiliates and sublicensees of thecovered products and royalties based on revenue we generate from sublicensesgranted pursuant to the agreements.  Forthe first licensed product under each of the four agreements, we also will oweTSRI payments upon achievement of certain milestones.  In three of the four TSRI agreements, themilestones are the successful completion of a Phase 2 trial or its foreignequivalent, the submission of an NDA or its foreign equivalent and governmentmarketing and distribution approval.  Inthe remaining TSRI agreement, the milestones are the initiation of aPhase 3 trial or its foreign equivalent, the submission of an NDA or itsforeign equivalent and government marketing and distribution approval.  The aggregate potential amount of milestonepayments we may be required to pay TSRI under all four TSRI agreements isapproximately $14.0 million.

 

Each TSRI agreementterminates in part as follows: (i) with respect to each product whichutilizes patent rights licensed under the agreement, on a country-by-countrybasis concurrently with the expiration of the last to expire of the applicablepatent rights, (ii) with respect to each product which utilizes technologylicensed under the agreement but which does not utilize patent rights alsolicensed thereunder, 15 years after the date of the first commercial sale ofthe product in each country and (iii) with respect to software licensedunder the 1999 OPopS agreement, 75 years after the date the applicablecopyright is filed in the United States.

 

*Inc.Research, Inc.*  In November 2005, we entered into amaster services agreement with Inc Research, Inc., formerly known asAdvanced Biologics, which was subsequently amended in January 2006.  Under the terms of the agreement, IncResearch will, from time to time, at our request and pursuant to separate workorders, perform research and/or administrative services in connection withcertain of our clinical trials, including trial management, data collection,statistical programming or analysis, quality assurance auditing, scientific andmedical communications, regulatory affairs consulting, regulatory submissionsand strategic consulting.  Pursuant tothe master services agreement, we have issued work orders totaling $42.4million to-date for services.  Unlessextended by the mutual agreement of the parties, the master services agreementwill terminate on November 16, 2012. We may terminate the master services agreement at any time and for any reason,upon 30 days’ prior notice to Inc Research.

 

*NIHSmall Business Innovation Research Award*.  In June 2005,we received a National Institutes of Health Small Business Innovation ResearchProgram Phase II Award in the amount of $612,000 from the NationalInstitute of Allergy and Infectious Diseases, or NIAID.  The award was used to facilitate discovery ofa new macrolide class of antibiotics through glycosylation, our proprietarychemistry technology and evaluation of the lead compound in pre-clinical settings.  This grant was completed in May 2008.

 

In September 2007,we received an award from the National Institute of Allergy and InfectiousDiseases, or NIAID, for a maximum amount of $3 million over three years. Thisaward is renewable for $1 million each year until August 2010.  The award will be used to conductsupplementary studies to the ongoing fidaxomicin trials to confirm narrowspectrum activity and potency of fidaxomicin against hypervirulent epidemicstrains, to support additional toxicology and macrobiological studies todemonstrate the safety and efficacy of the fidaxomicin compound and its majormetabolite in CDI patients and to support a surveillance study of *C. difficile* isolates across North Americato compare activity of fidaxomicin with existing CDI treatments.

 

**Manufacturing**

 

We rely on third partiesto manufacture our product candidates and currently have no plans to developour own manufacturing facility.  Werequire in our manufacturing and processing agreements that all third-party contractmanufacturers and processors produce APIs and finished products in accordancewith current Good Manufacturing Practices, or cGMP, and all other applicablelaws and regulations.  We maintainconfidentiality agreements with potential and existing manufacturers in orderto protect our proprietary rights related to our drug candidates.

 

Par assigned to us itscontract with Biocon to manufacture clinical trial supplies of the API forfidaxomicin in February 2007 in connection with our repurchase of rightsto fidaxomicin for North America and Israel. The manufacturing facilities of Biocon have been approved by the FDA forother companies’ drug products, however, Biocon’s facilities have not yet beenapproved by the FDA for the manufacture of our fidaxomicin drug supplies.  We may contract with other third-partycontract manufacturers for additional commercial supply of fidaxomicin.

 

In June 2004, aspart of our license agreement for exclusive rights to develop and commercializeprulifloxacin in the United States, we entered into a supply agreement withNippon Shinyaku for the manufacture and supply of the API forprulifloxacin.  In turn, Nippon Shinyakucontracts with Juzen Chemical Co. for the manufacture of the API forprulifloxacin.  The tablets used in our

 

17

----

Tableof Contents

 

Phase 3 clinical trials for prulifloxacin weremanufactured by Angelini ACRAF, or Angelini. We are also in discussion with Angelini and other contract manufacturersfor the manufacturing, packaging and labeling of prulifloxacin for commercialsale in the United States.  Themanufacturing facilities of Juzen have been approved by the FDA for othercompanies’ drug products; however, Juzen’s facilities have not yet beenapproved for the manufacture of our prulifloxacin drug supplies.  Angelini’s facilities have not been approvedby the FDA for the manufacture of any drug.

 

We have used bothin-house capabilities and outside third-party cGMP manufacturers for thepreparation of compounds for pre-clinical development and for the manufactureof limited quantities of finished products for clinical development.  We have developed a proprietary syntheticprocess in our laboratories for Globo-H, the carbohydrate portion of ourOPT-822 cancer immunotherapy.  Thirdparties with cGMP facilities have manufactured OPT-822 for clinicaltrials.  We also plan to use third-partycGMP manufacturers for the production of the adjuvant, OPT-821, as well as forthe production of our carbohydrate-based product candidate OPT-88, a disease-modifyingintra-articular therapy for osteroarthritis.

 

**Intellectual Property**

 

The proprietary natureof, and protection for, our products, product candidates, processes andknow-how are important to our business. We seek patent protection in the United States and internationally forour product candidates and other technology where available and whenappropriate.  Our policy is to patent orin-license the technology, inventions and improvements that we considerimportant to the development of our business. In addition, we use license agreements to selectively convey to othersrights to our own intellectual property. We also rely on trade secrets, know-how and continuing innovation todevelop and maintain our competitive position. We cannot be sure that patents will be granted with respect to any ofour pending patent applications or with respect to any patent applicationsfiled by us in the future, nor can we be sure that any of our existing patentsor any patents that may be granted to us in the future will be commerciallyuseful in protecting our technology.  Forthis and more comprehensive risks related to our intellectual property, pleasesee “Risk Factors — Risks Related to Our Intellectual Property.”

 

We have established andcontinue to build proprietary positions for our pipeline product candidates andtechnology in the United States and abroad. We have built a portfolio of more than 80 patents and patentapplications that we either own or have licensed around our key products andtechnologies.  As of February 28,2009, this portfolio included 5 issued U.S. patents and 16 pending U.S. patentapplications.  Foreign counterparts tothese included 12 issued patents and 52 pending patent applications.

 

For our lead productcandidate fidaxomicin, we have one issued patent, one allowed patent and sixU.S. pending patent applications, and one issued patent and 34 pending foreigncounterparts in Australia, Canada, China, Europe, Japan, South Korea, India,Taiwan, Mexico and Brazil.  If issued,these fidaxomicin related patent applications may cover the composition ofmatter, the specific crystalline polymorph forms, specific methods formanufacturing, methods of using and pharmaceutical formulations containing thevarious components.  If issued, these patentapplications would expire between 2023 and 2027.  For our other product candidateprulifloxacin, we have licensed one issued U.S. patent and one pending U.S.patent application from Nippon Shinyaku. The U.S. patent, covers the compound prulifloxacin, however, this patentexpired in February 2009.  Ifissued, the U.S. pending patent application for prulifloxacin would expire in2023 and may cover processes for producing a drug-form of prulifloxacin.  Absent additional patent protection we intendto rely on a five-year marketing exclusivity period for prulifloxacin that maybe afforded to us under the Hatch-Waxman Act. The remainder of our patents and patent applications, and licensedpatents and patent applications, relate to our other products and technology,and expire between 2015 and 2023.

 

**Government Regulation and ProductApproval**

 

*FDA Approval Process*

 

Regulation bygovernmental authorities in the United States and other countries is asignificant factor in the development, manufacture and marketing ofpharmaceuticals and antibiotics.  All ofour products will require regulatory approval by governmental agencies prior tocommercialization.  In particular,pharmaceutical drugs are subject to rigorous pre-clinical testing and clinicaltrials and other premarketing approval requirements by the FDA and regulatoryauthorities in other countries.  In theUnited States, various federal, and, in some cases, state statutes andregulations, also govern or impact the manufacturing, safety, labeling,storage, record-keeping and marketing of pharmaceutical products.  The lengthy process of seeking requiredapprovals and the continuing need for compliance with applicable statutes andregulations require the expenditure of substantial resources.  Regulatory approval, if and when obtained forany of our product candidates, may be limited in scope, which may significantlylimit the indicated uses for which our product candidates may be marketed.  Furthermore, approved drugs and manufacturersare subject to ongoing review and discovery of previously unknown problems thatmay result in restrictions on their manufacture, sale or use or in theirwithdrawal from the market.

 

18

----

Table of Contents

 

Before testing anycompounds with potential therapeutic value in human subjects in the UnitedStates, we must satisfy stringent government requirements for pre-clinicalstudies.  Pre-clinical testing includesboth *in vitro* and *in vivo* laboratory evaluation andcharacterization of the safety and efficacy of a drug and its formulation.  Pre-clinical testing results obtained fromstudies in several animal species, as well as data from *in vitro* studies, are submitted to the FDAas part of an IND and are reviewed by the FDA prior to the commencement ofhuman clinical trials.  Thesepre-clinical data must provide an adequate basis for evaluating both the safetyand the scientific rationale for the initial trials in human volunteers. Inorder to test a new drug in humans in the United States, an IND must besubmitted to the FDA.  The IND willbecome effective automatically 30 days after receipt by the FDA, unless the FDAraises concern or questions, in which case, the IND sponsor and the FDA mustresolve any outstanding concerns before a hold is lifted and clinical trialscan proceed.

 

Clinical trials aretypically conducted in three sequential phases, Phases 1, 2 and 3, withPhase 4 trials potentially conducted after initial marketingapproval.  These phases may becompressed, may overlap or may be omitted in some circumstances. Certainclinical trials are required to be publicly registered, as withwww.clinicaltrials.com, and their results made publicly available.

 

·                  *Phase 1*. Phase 1 human clinical trials evaluate a drug’s safety profile andthe range of safe dosages that can be administered to healthy volunteers and/orpatients, including the maximum tolerated dose that can be given to a trialsubject with the target disease or condition. Phase 1 trials also determine how a drug is absorbed, distributed,metabolized and excreted by the body and the duration of its action.  In some cases, we may decide to run what isreferred to as a “Phase 1a” evaluation in which we administer single dosesof a new drug candidate in a small group of people to evaluate itspharmacokinetic properties, safety, dose range and side effects.  We may also decide to run what is referred toas a “Phase 1b” evaluation, which is a second safety-focused Phase 1trial in which we administer a new drug candidate at its targeted dosingregimen in a small group of people to evaluate its pharmacokinetic properties,safety, dose range and side effects.

 

·                  *Phase*** ***2*. Phase 2 clinical trials are typically designed to evaluate thepotential effectiveness of the drug in patients and to further ascertain thesafety of the drug at the dosage given in a larger patient population.  In some cases, we may decide to run what isreferred to as a “Phase 2a” evaluation, which is a trial to determine theideal dosing regimen and length of treatment and to evaluate effectiveness andsafety.  We may also decide to conductwhat is referred to as a “Phase 2b” evaluation, which is a second,confirmatory Phase 2 clinical trial in which we collect more efficacy andsafety data prior to initiation of a Phase 3 clinical trial.  If positive and accepted by the FDA, resultsfrom Phase 2b study can serve as a part of pivotal clinical trial in theapproval of a drug candidate.

 

·                  *Phase 3*. In Phase 3 clinical trials, often referred to as pivotal orregistrational clinical trials, the drug is usually tested in one or morecontrolled, randomized trials comparing the investigational new drug to anapproved form of therapy or placebo in an expanded and well-defined patientpopulation and at multiple clinical sites. The goal of these trials is to obtain definitive statistical evidence ofsafety and effectiveness of the investigational new drug regimen as compared toa placebo or an approved standard therapy in defined patient populations with agiven disease and stage of illness.

 

·                  *Phase 4*. Phase 4 clinical trials are studies required of or agreed to by asponsor that are conducted after the FDA has approved a product formarketing.  These studies are used togain additional experience from the treatment of patients in the intendedtherapeutic indication.  Failure topromptly conduct any mandatory Phase 4 clinical trials that are committedto as part of an NDA’s approval could result in withdrawal of approval or otherlegal sanction.

 

After completion ofPhase 1, 2 and 3 clinical trials, if there is substantial evidence thatthe drug is safe and effective, an NDA is prepared and submitted for the FDA toreview.  The NDA must contain all of theessential information on the drug gathered to that date, including data frompre-clinical and clinical trials, and the content and format of an NDA mustconform to all FDA regulations and guidelines. Accordingly, the preparation and submission of an NDA is a significantundertaking for a company. The FDA reviews all submitted NDAs before it acceptsthem for filing and may request additional information from the sponsor ratherthan accepting an NDA for filing.  Inthis case, the NDA must be re-submitted with the additional information and,again, is subject to review before filing. Once the submission is accepted for filing, the FDA begins an in-depthreview of the NDA.  Most NDAs arereviewed by the FDA within ten months of submission.  The review process is often significantlyextended by the FDA through requests for additional information andclarification.  The FDA may refer theapplication to an appropriate advisory committee, typically a panel ofclinicians, for review, evaluation and a recommendation as to whether theapplication should be approved.  The FDAis not bound by the recommendation but typically gives it great weight.  If the FDA evaluations of both the NDA andthe manufacturing facilities are favorable, the FDA may issue either anapproval letter or a complete response, the latter of which usually contains anumber of conditions that must be satisfied in order to secure final approval.

 

19

----

Table of Contents

 

Any products wemanufacture or distribute under FDA approvals are subject to pervasive andcontinuing regulation by the FDA, including record-keeping requirements andreporting of adverse experiences with the products.  Drug manufacturers and their subcontractorsare required to register with the FDA and, where appropriate, state agencies,and are subject to periodic unannounced inspections by the FDA and stateagencies for compliance with cGMP regulations which impose procedural anddocumentation requirements upon us and any third party manufacturers weutilize.

 

The FDA closely regulatesthe marketing and promotion of drugs.  Acompany can make only those claims relating to safety and efficacy that areapproved by the FDA.  Failure to complywith these requirements can result in adverse publicity, warning letters,corrective advertising and potential civil and criminal penalties.  Physicians may prescribe legally availabledrugs for uses that are not described in the product’s labeling and that differfrom those tested by us and approved by the FDA.  Such off-label uses are common across medicalspecialties.  Physicians may believe thatsuch off-label uses are the best treatment for many patients in variedcircumstances.  The FDA does not regulatethe behavior of physicians in their choice of treatments.  The FDA does, however, restrictmanufacturer’s communications on the subject of off-label use and healthcarepayors, including the federal government, can use the False Claims Act andrelated statutes to pursue drug companies for off-label promotions that resultin the submission of claims for payment for uses that have not been approved bythe FDA as safe and effective.

 

The FDA’s policies maychange and additional government regulations may be enacted that could preventor delay regulatory approval of our product candidates or approval of newindications after the initial approval of our existing product candidates.  We cannot predict the likelihood, nature orextent of adverse governmental regulations that might arise from futurelegislative or administrative action, either in the United States or abroad.

 

We will also be subjectto a wide variety of foreign regulations governing the development, manufactureand marketing of our products.  Whetheror not FDA approval has been obtained, approval of a product by the comparableregulatory authorities of foreign countries must still be obtained prior tomanufacturing or marketing the product in those countries.  The approval process varies from country tocountry and the time needed to secure approval may be longer or shorter thanthat required for FDA approval.  Wecannot assure you that clinical trials conducted in one country will beaccepted by other countries or that approval in one country will result inapproval in any other country.

 

*Fast Track Products Designation*

 

The FDA has granted FastTrack status for fidaxomicin in the treatment of CDI.  The FDA’s Fast Track program is intended tofacilitate the development and expedite the review of drugs that are intendedfor the treatment of a serious or life-threatening condition and demonstratethe potential to address unmet medical needs for their condition.  Under Fast Track designation, the FDA mayinitiate review of sections of an NDA before the application is complete.  This rolling review is available if theapplicant provides a schedule for the submission of the remaining informationand pays applicable user fees.  However,the time period specified in the Prescription Drug User Fee Act, which governsthe time period goals the FDA has committed to for reviewing an application,does not begin until the complete application has been submitted.  The Fast Track designation may be withdrawnby the FDA if the FDA believes that the designation is no longer supported bydata emerging in the clinical trial process. Participation in the Fast Track program does not eliminate any phase ofclinical studies.  Additionally, in somecases, a Fast Track designated product may also qualify for priority review, orreview within a six-month time frame from the time an NDA is accepted forfiling.  A Fast Track designated productwould ordinarily meet the FDA’s criteria for priority review.  We cannot guarantee any of our products willobtain priority review designation, or if a priority designation is received,that review or approval will be faster than conventional FDA procedures.

 

**Competition**

 

The pharmaceuticalindustry is highly competitive.  We facesignificant competition from pharmaceutical companies and biotechnologycompanies that are researching and selling products designed to treatinfectious disease.  Many of thesecompanies have significantly greater financial, manufacturing, marketing andproduct development resources than us. Additionally, many of these companies have substantially greaterexperience developing, manufacturing and commercializing drugs which may allowthem to bring their products to market quicker than we can.  Several pharmaceutical and biotechnologycompanies have already established themselves in the markets for the treatmentof CDI and/or infectious diarrhea and many additional companies are currentlydeveloping products for the treatment of CDI and/or infectious diarrhea, whichwe expect will compete with fidaxomicin and prulifloxacin if approved formarketing.  Potentially significant competitorsto fidaxomicin and prulifloxacin, both currently marketed and in clinicaldevelopment, include the following:

 

20

----

Table of Contents

 
| **Product**                                 | ** ** | **Stage of Development** | ** ** | **Company**                         |
|---------------------------------------------|------------|------------------------------------|------------|-------------------------------------|
| **Fidaxomicin****Competitors**              | ** ** | ** **                         | ** ** | ** **                          |
| FlagylTM/metronidazole                  |       | Marketed                           |       | Pfizer, Sanofi-Aventis and generics |
| VancocinTM/oral vancomycin              |       | Marketed                           |       | Viropharma and generics             |
| XifaxanTM/rifaximin                     |       | Phase 3                       |       | Salix and generics                  |
| ramoplanin                                  |       | Phase 2  completed            |       | Oscient                             |
| ACAM-Cdiff                                  |       | Phase 2                            |       | Sanofi-Pasteur                      |
| MDX-066/  MDX-1388 (antibodies combination) |       | Phase 2                       |       | Medarex                             |
| ** **                                  |       |                               |       |                                |
| **Prulifloxacin  Competitors**              |       |                               |       |                                |
| CiproTM/ciprofloxacin                   | ** ** | Marketed                           | ** ** | Bayer and generics                  |
| ZithromaxTM/azithromycin                |       | Marketed                           |       | Pfizer                              |
| XifaxanTM/rifaximin                     |       | Marketed                           |       | Salix and generics                  |
| BactrimTM/SeptraTM/TMP/SMX          |       | Marketed                           |       | Roche and generics                  |
| VibramycinTM/doxycycline                |       | Marketed                           |       | Pfizer and generics                 |
| LevaquinTM/levofloxacin                 |       | Marketed                           |       | Johnson & Johnson          |
| ETEC Vaccine                                |       | Phase 2 completed             |       | Intercell                           |

 

**Research and Development**

 

Our research anddevelopment efforts are primarily focused on developing fidaxomicin andprulifloxacin and our other product candidates. Our research and development expense was approximately $29.0 million, $41.6million and $10.5 million in years 2008, 2007 and 2006, respectively.  Research and development expenses in 2007include the one-time termination payment of $20 million related to theprospective buy-back agreement with Par, and the $1.9 million fidaxomicinclinical supply material and active pharmaceutical ingredient which wepurchased from Par.

 

**Employees**

 

As of March 2, 2009,we employed 55 persons, 19 of whom hold Ph.D., M.D. or DVM degrees.  Ten employees were engaged in discoveryresearch, nineteen in clinical research and regulatory affairs, four incommercial and corporate development and 22 in support administration,including finance, information systems, facilities and human resources.  None of our employees is subject to acollective bargaining agreement.  Weconsider our relations with our employees to be good.

 

**Item 1a.Risk Factors**

 

**Risks Related to Our Business**

 

**We are a company with limited sourcesof revenue, and we are largely dependent on the success of our lead productcandidate****fidaxomicin****and, to a lesser degree, our other lead productcandidate prulifloxacin.**

 

We are abiopharmaceutical company with no products approved for commercial sale and, todate, we have not generated any revenues from product sales.  Our ability to generate future revenuesdepends heavily on our success in:

 

·                  developing and securing U.S. and/or foreign regulatoryapprovals for fidaxomicin and prulifloxacin and, to a lesser extent, otherproduct candidates;

 

·                  commercializing. alone or with a partner, any productcandidates for which we receive approval from the FDA; and/or comparableforeign regulatory authorities; and

 

·                  generating a pipeline of innovative product candidatesutilizing our drug discovery platform or through licensing strategies.

 

Our product candidateswill generally require extensive clinical study and evaluation, regulatoryapproval in multiple jurisdictions, substantial investment and significantmarketing efforts before we generate any revenues from product sales.  We are not permitted to market or promote ourproduct candidates before we receive regulatory approval from the FDA orcomparable foreign regulatory authorities. We have not submitted an NDA, or received marketing approval for eitherfidaxomicin or prulifloxacin, and we cannot be certain that either of theseproduct candidates will be successful in on-going or future clinical trials orreceive regulatory 

 

21

----

Tableof Contents

 

approval.  If wedo not receive regulatory approval for and successfully commercializefidaxomicin and prulifloxacin, we will not generate any revenues from productsales for several years, if at all, and we may not be able to continue ouroperations.

 

We believe our initialsuccess will be more dependent on fidaxomicin than prulifloxacin, because webelieve that the market for the treatment of CDI is larger than the market forthe treatment of infectious diarrhea. Even if we successfully obtain regulatory approval to market fidaxomicinor prulifloxacin, our revenues for either drug candidate will be dependent uponthe size of the markets in the territories for which we have commercialrights.  If the markets for the treatmentof CDI or infectious diarrhea are not as significant as we estimate, ourbusiness and prospects will be harmed.

 

**We have incurred significantoperating losses since inception and anticipate that we will incur continuedlosses for the foreseeable future.**

 

We have experiencedsignificant operating losses since our inception in 1998.  As of December 31, 2008, we had anaccumulated deficit of approximately $133.4 million.  We have generated no revenues from productsales to date.  We have funded ouroperations through December 31, 2008 from the sale of approximately $169.5million of our securities and through research funding pursuant tocollaborations with partners or government grants.  We expect to continue to incur substantialadditional operating losses for the next several years as we advance ourclinical trials and research and development initiatives, prepare submissionsfor regulatory approval of our lead product candidates and build our marketingand sales capabilities.  Because of thenumerous risks and uncertainties associated with developing, obtainingregulatory approval for and commercializing our product candidates, we areunable to predict the extent of any future losses.  We may never successfully commercialize ourproduct candidates and thus may never have any significant future revenues orachieve and sustain profitability.

 

**If we fail to obtain additionalfinancing, we may be unable to commercialize****fidaxomicin****and prulifloxacin ordevelop and commercialize our other product candidates, or continue our otherresearch and development programs.**

 

We will requireadditional capital to commercialize our current lead product candidates,fidaxomicin and prulifloxacin.  We cannotbe certain that additional funding will be available on acceptable terms, or atall.  Recently, the credit markets andthe financial services industry have been experiencing a period ofunprecedented turmoil and upheaval characterized by the government take-over,bankruptcy, failure, collapse or sale of various financial institutions.  These events have generally made equity anddebt financing more difficult to obtain, and may negatively impact our abilityto complete financing transactions.  Tothe extent that we raise additional funds by issuing equity securities, ourstockholders may experience significant dilution.  Any debt financing, if available, may requireus to pledge our assets as collateral or involve restrictive covenants, such aslimitations on our ability to incur additional indebtedness, limitations on ourability to acquire or license intellectual property rights and other operatingrestrictions that could negatively impact our ability to conduct ourbusiness.  If we are unable to raiseadditional capital when required or on acceptable terms, we may have tosignificantly delay, scale back or discontinue the development orcommercialization of one or more of our product candidates or one or more ofour other research and development initiatives. We also could be required to:

 

·                  seek collaborators for one or more of our current orfuture product candidates at an earlier stage than otherwise would be desirableor on terms that are less favorable than might otherwise be available; or

 

·                  relinquish or license on unfavorable terms our rightsto technologies or product candidates that we otherwise would seek to developor commercialize ourselves.

 

Any of the above eventscould significantly harm our business and prospects and could cause our stockprice to decline.

 

We do not currently havesufficient resources to commercialize fidaxomicin and prulifloxacin on our own.If we are unable to raise additional capital or are unable to effectivelycollaborate with one or more partners for the commercialization of fidaxomicin orprulifloxacin, we will not generate significant revenues from sales of theseproducts and our business will be materially harmed.

 

**We are dependent on third partycollaborators and we may be unable to enter into future collaborationagreements or we may have disagreements with these collaborators.**

 

We currently plan tobuild our own marketing and sales force for fidaxomicin in North America andprulifloxacin in the United States, and we intend to seek one or more partnersfor the commercialization of fidaxomicin outside of North America.  With respect to our OPT-88 andOPT-822/OPT-821 product candidates, we currently plan to conduct a limitedamount of additional research and development before seeking a partner toadvance these product candidates. We cannot be certain that we would besuccessful in attracting any such partners. If we were not able to find appropriate partners for the continueddevelopment and commercialization of fidaxomicin, or our other productcandidates, we would either have to delay further development and 

 

22

----

Tableof Contents

 

commercialization initiatives,  which would harm our business and prospects,or raise significant additional funds to develop clinical and commercializationcapabilities internally.

 

We are subject to anumber of additional risks associated with our dependence on collaborationswith third parties.** **Conflicts may arise between us andcollaborators, such as conflicts concerning the interpretation of clinicaldata, the achievement of milestones, the interpretation of financial provisionsor the ownership of intellectual property developed during thecollaboration.  If any such conflictsarise, a collaborator could act in its own self-interest, which may be adverseto our best interests.  Any suchdisagreement between us and a collaborator could result in one or more of thefollowing, each of which could delay or prevent the development orcommercialization of fidaxomicin, and our other product candidates, and in turnprevent us from generating sufficient revenues to achieve or maintainprofitability:

 

·                  reductions in the payment of royalties or otherpayments we believe are due pursuant to the applicable collaborationarrangement or agreement;

 

·                  uncertainties regarding ownership of intellectualproperty rights arising from our collaborative activities, which could preventus from entering into additional collaborations and commercializing suchrights;

 

·                  actions taken by a collaborator inside or outside ourcollaboration which could negatively impact our rights or benefits under ourcollaboration; or

 

·                  unwillingness on the part of a collaborator to keep usinformed regarding the progress of its development and commercializationactivities or to permit public disclosure of the results of those activities.

 

In addition, acollaborator may not have or devote sufficient resources to develop andcommercialize our product candidates, may elect to underfund, discontinue ormay not properly perform pre-clinical studies or clinical trials, or may divertresources to other programs that are potentially competitive with our productcandidates.

 

**If we are unable to obtain FDAapproval of our product candidates, we will not be able to commercialize themin the United States.**

 

We need FDA approvalprior to marketing our product candidates in the United States.  If we fail to obtain FDA approval to marketour product candidates, we will be unable to sell our product candidates in theUnited States, which will significantly impair our ability to generate anyrevenues.

 

This regulatory reviewand approval process, which includes evaluation of pre-clinical studies andclinical trials of our product candidates as well as the evaluation of ourmanufacturing processes and our third-party contract manufacturers’ facilities,is lengthy, expensive and uncertain.  Toreceive approval for a product candidate, we must, among other things,demonstrate with substantial evidence from well-controlled clinical trials thatthe product candidate is both safe and effective for each indication for whichapproval is sought.  Satisfaction of theapproval requirements typically takes several years and the time needed tosatisfy them may vary substantially, based on the type, complexity and noveltyof the pharmaceutical product.  We cannotpredict if or when we might receive regulatory approvals for any of our productcandidates currently under development. Moreover, any approvals that we obtain may not cover all of the clinicalindications for which we are seeking approval, or could contain significantlimitations in the form of narrow indications, warnings, precautions orcontra-indications with respect to conditions of use.  In such an event, our ability to generaterevenues from such products would be greatly reduced and our business would beharmed.

 

TheFDA has substantial discretion in the approval process and may either refuse toconsider our applications for substantive review or may form the opinion afterreview of our data that our applications are insufficient to allow approval ofour product candidates.  If the FDA doesnot consider or approve an application that we submit, it may require that weconduct additional clinical, pre-clinical or manufacturing validation studiesand submit that data before it will reconsider our application.  Depending on the extent of these or any otherstudies, approval of any applications that we submit may be delayed by severalyears, or may require us to expend more resources than we have available.  For example, we intend to rely in part oncertain legacy data from a third party to support an NDA for prulifloxacin. Ifwe are unable to obtain this data in a timely manner or the FDA deems this datato insufficient, it may delay our filing of a NDA for prulifloxacin and couldrequire us to complete additional studies. It is also possible that additional studies, if performed and completed,may not be successful or considered sufficient by the FDA for approval or evento make our applications approvable.  Ifany of these outcomes occur, we may be forced to abandon one or more of ourfuture applications for approval, which might significantly harm our businessand prospects.

 

It is possible that noneof our existing product candidates or any product candidates we may seek todevelop in the future will ever obtain the appropriate regulatory approvalsnecessary for us or our collaborators to commence product sales.  Increased scrutiny 

 

23

----

Tableof Contents

 

by regulatory authorities may result in significantdelays in obtaining regulatory approvals, as well as more stringent productlabeling and post-marketing testing requirements.

 

Although the FDA hasgranted Fast Track status to fidaxomicin and selected it for participation in aCMA Pilot 2 Program, we cannot be certain that we will receive anybenefits from these designations or that the designations will expediteregulatory review or approval of fidaxomicin. Participation in these programs will not eliminate any phase of clinicaldevelopment.  Moreover, our participationin the CMA Pilot 2 Program will involve frequent scientific discussionsand other interactions with the staff of the FDA during the investigational newdrug phase of our development of fidaxomicin. These frequent discussions could subject fidaxomicin to a greater levelof scrutiny than it might otherwise have received or require us to make morefrequent submissions and endure other burdens that would have been avoided ifwe had not participated in the program. Therefore, despite any potential benefits of fidaxomicin’s Fast Trackand CMA Pilot 2 Program designations, significant uncertainty remainsregarding the clinical development and regulatory approval process forfidaxomicin.

 

**Clinical trials involve a lengthy andexpensive process with an uncertain outcome, and results of earlier studies andtrials may not be predictive of future trial results.**

 

Clinical testing isexpensive and can take many years to complete, and its outcome isuncertain.  Failure can occur at any timeduring the clinical trial process.  Theresults of pre-clinical studies and early clinical trials of our productcandidates may not be predictive of the results of later-stage clinical trials.For example, results from the first fidaxomicin Phase 3 trial, while positive,may not predict results from the second Phase 3 trial which is on-going.  Product candidates in later stages ofclinical trials may fail to show the desired safety and efficacy traits despitehaving progressed through pre-clinical studies and initial clinicaltesting.  In addition, the type andamount of clinical data necessary to gain regulatory approval for our productcandidates may change or we may inaccurately characterize suchrequirements.  For example, we recentlyannounced our intention to prepare a Marketing Authorization Application, orMAA, for submission to the European Medicines Agency, or EMEA, for fidaxomacinbased on the results from our first Phase 3 trial.  Although we currently believe that the EMEAwill accept an MAA for fidaxomicin based on only one completed Phase 3 trial,we may be incorrect in this belief and may be required to resubmit our filingfollowing the completion of our second Phase 3 trial.  Such a resubmission would involve additionaldelay and expense related to any approval of fidaxomicin in Europe.

 

Even after we completeour planned clinical trials, our product candidates could fail to receiveregulatory approval for many reasons, including the following:

 

·                  the results of our clinical trials maynot demonstrate to the satisfaction of or meet the level of statisticalsignificance required by the FDA or comparable foreign regulatory authoritiesthat a product candidate is safe and effective for any indication;

 

·                  the FDA or comparable foreign regulatoryauthorities may disagree with the design or implementation of our clinicaltrials;

 

·                  the results of our clinical trials may not demonstrate that a productcandidate’s clinical and other benefits outweigh its safety risks;

 

·                  the results of our clinical trials maynot demonstrate that a product candidate presents an advantage over existingtherapies, or over placebo in any indications for which the FDA requires aplacebo-controlled trial;

 

·                  the FDA or comparable foreign regulatoryauthorities may disagree with our interpretation of data from pre-clinicalstudies or clinical trials;

 

·                  the data collected from clinical trialsof our product candidates may not be sufficient to support the submission ofan  NDA or other submission or to obtainregulatory approval in the United States or elsewhere; and

 

·                  the approval policies or regulations ofthe FDA or comparable foreign regulatory authorities may significantly changein a manner rendering our clinical data insufficient for approval.

 

**Delays in clinical trials are commonand have many causes, and any such delays could result in increased costs to usand jeopardize or delay our ability to achieve regulatory approval and commenceproduct sales as currently contemplated.**

 

We may experience delaysin clinical trials of our product candidates. We reported positive top-line data from the first of two Phase 3 trialsevaluating fidaxomicin for the treatment of CDI. We anticipate completingenrollment and reporting data from the second trial in 2009. If the secondtrial is also successful, we intend to file an NDA as soon as practicablethereafter. In addition, we 

 

24

----

Tableof Contents

 

are planning to conduct a registration study for otherformulations and proof-of-concept clinical trials for other indications offidaxomicin.  We reported positivetop-line data from the two Phase 3 trials evaluating prulifloxacin for thetreatment of infectious diarrhea in travelers. We intend to conduct aPhase 4 trial of prulifloxacin subsequent to NDA submission to compareprulifloxacin to ciprofloxacin for the treatment of infectious diarrhea.  We do not know whether planned clinicaltrials will begin on time, will need to be redesigned or will be completed onschedule, if at all.  Clinical trials canbe delayed for a variety of reasons, including delays in obtaining regulatory approvalto commence a trial, in reaching agreement on acceptable terms with prospectiveclinical research organizations, or CROs, and clinical trial sites, inobtaining institutional review board approval at each site, in recruitingsuitable patients to participate in a trial, in having patients complete atrial or return for post-treatment follow-up, in adding new sites or inobtaining sufficient supplies of clinical trial materials.  Many factors affect patient enrollment,including the size and nature of the patient population, the proximity ofpatients to clinical sites, the eligibility criteria for the trial, the designof the clinical trial, competing clinical trials, clinicians’ and patients’perceptions as to the potential advantages of the drug being studied inrelation to other available therapies, including any new drugs that may beapproved for the indications we are investigating and whether the clinicaltrial design involves comparison to placebo.

 

We could encounter delaysif prescribing physicians encounter unresolved ethical issues associated withenrolling patients in clinical trials of our product candidates in lieu ofprescribing existing antibiotics that have established safety and efficacyprofiles or with administering placebo to patients in our placebo-controlledtrials.  Further, a clinical trial may besuspended or terminated by us, our collaborators, the FDA or other regulatoryauthorities due to a number of factors, including failure to conduct theclinical trial in accordance with regulatory requirements or our clinical protocols,inspection of the clinical trial operations or trial site by the FDA or otherregulatory authorities resulting in the imposition of a clinical hold,unforeseen safety issues or adverse side effects, failure to demonstrate abenefit from using a drug, changes in governmental regulations oradministrative actions or lack of adequate funding to continue the clinicaltrial.  If we experience delays in thecompletion of, or termination of, any clinical trial of our product candidates,the commercial prospects of our product candidates will be harmed, and ourability to generate product revenues from any of these product candidates willbe delayed.  In addition, any delays incompleting our clinical trials will increase our costs, slow down our product developmentand approval process and jeopardize our ability to commence product sales andgenerate revenues.  Any of theseoccurrences may significantly harm our business, financial condition andprospects.

 

**We may be required to suspend ordiscontinue clinical trials due to adverse events, adverse side effects orother safety risks that could preclude approval of our product candidates.**

 

Our clinical trials maybe suspended at any time for a number of reasons.  We may voluntarily suspend or terminate our clinicaltrials if at any time we believe that they present an unacceptable risk toparticipants.  In addition, regulatoryagencies may order the temporary or permanent discontinuation of our clinicaltrials at any time if they believe that the clinical trials are not beingconducted in accordance with applicable regulatory requirements or that theypresent an unacceptable safety risk to participants.  In the first Phase 3 clinical trial offidaxomicin, the most common drug-related side effects reported were nausea,vomiting, constipation, anorexia, headache and dizziness.  Patients treated with prulifloxacin haveexperienced drug-related side effects including abdominal pain, diarrhea,nausea, renal toxicities, cardiac arrhythmias, photosensitivity, rash, excessiveflushing of the skin and central nervous system effects, such as seizures.  The FDA recommended that we conduct a studyto determine the effect, if any, of prulifloxacin on the prolongation of the QTinterval, a condition that is associated with potentially life-threateningcardiac arrhythmias.  In response to theFDA’s recommendation, we initiated such a QT interval study, which is currentlyongoing and expected to be completed in 2009. If adverse, drug-related events are encountered or suspected,, ourtrials would be interrupted, delayed or halted and the FDA or comparableforeign regulatory authorities could order us to cease further development ofor deny approval of our product candidates for any or all targeted indications.  Even if we believe our product candidates aresafe, our data is subject to review by the FDA, which may disagree with ourconclusions and delay or deny approval of our product candidates which wouldsignificantly harm the commercial prospects of such product candidates.  Moreover, we could be subject to significantliability if any volunteer or patient suffers, or appears to suffer, adverseside effects as a result of participating in our clinical trials.  Any of these occurrences may significantlyharm our business and prospects.

 

**We rely on third parties to conductour clinical trials.  If these thirdparties do not successfully carry out their contractual duties or meet expecteddeadlines, we and our collaborators may not be able to obtain regulatoryapproval for or commercialize our product candidates.**

 

We have entered intoagreements with third-party CROs, such as INC Research to provide monitors forand to manage data for our on-going clinical programs.

 

We and the CROsconducting clinical trials for our product candidates are required to complywith current good clinical practices, or GCPs, regulations and guidelinesenforced by the FDA for all of our products in clinical development.  The FDA enforces GCPs through periodicinspections of trial sponsors, principal investigators and trial sites.  If we or the CROs conducting clinical trialsof our product candidates fail to comply with applicable GCPs, the clinicaldata generated in the clinical trials may be 

 

25

----

Tableof Contents

 

deemed unreliable and the FDA may require additionalclinical trials before approving any marketing applications.  We cannot assure you that, upon inspection,the FDA will determine that any clinical trials of our product candidatescomply with GCPs.  In addition, ourclinical trials must be conducted with product produced under cGMP regulations,and will require a large number of test subjects.  Our failure to comply with these regulationsmay require us to repeat clinical trials, which would be costly and delay theregulatory approval process and commercialization of our product candidates.

 

Typically, the CROsconducting clinical trials of our product candidates have the right toterminate their agreements with us or our collaborators upon notice in theevent of an uncured material breach.  Inaddition, some CROs have an ability to terminate their respective agreementswith us if we fail to perform our obligations, if it can be reasonablydemonstrated that the safety of the subjects participating in our clinicaltrials warrants such termination, if we make a general assignment for thebenefit of our creditors or if we are liquidated.  We have relied substantially on INC Researchto conduct the clinical trials for fidaxomicin and prulifloxacin.  INC Research has also subcontracted withother third-party CROs for various aspects of the clinical trials.  If any relationships with INC Research orthese other third-party CROs terminate, we or our collaborators may not be ableto enter into arrangements with alternative CROs or we may enter intoarrangements with alternative CROs that do not have the expertise orrelationships that INC Research has with government agencies.

 

In addition, thesethird-party CROs are not our employees, and we cannot control whether or notthey devote sufficient time and resources to our on-going clinicalprograms.  These CROs may also haverelationships with other commercial entities, including our competitors, forwhom they may also be conducting clinical studies or other drug developmentactivities, which could harm our competitive position.  If CROs do not successfully carry out theircontractual duties or obligations or meet expected deadlines, if they need tobe replaced, or if the quality or accuracy of the clinical data they obtain iscompromised due to the failure to adhere to our clinical protocols, regulatoryrequirements, or for other reasons, our clinical trials may be extended,delayed or terminated, and we may not be able to obtain regulatory approval foror successfully commercialize our product candidates.  As a result, our financial results and thecommercial prospects for our product candidates would be harmed, our costscould increase and our ability to generate revenues could be delayed.

 

**If we fail to gain and/or maintainmarketing approvals from regulatory authorities in international markets for****fidaxomicin****and any future productcandidates for which we have rights in international markets, our marketopportunities will be limited.**

 

Sales of our productcandidates outside of the United States will be subject to foreign regulatoryrequirements governing clinical trials and marketing approval.  Even if the FDA grants marketing approval fora product candidate, comparable regulatory authorities of foreign countriesmust also approve the marketing of the product candidate in thosecountries.  This is important for thecommercialization of fidaxomicin for which we currently have exclusive worldwidemarketing rights.  Obtaining foreignregulatory approvals could result in significant delays, difficulties and costsfor us and require additional pre-clinical studies or clinical trials whichwould be costly and time consuming. Regulatory requirements can vary widely from country to country andcould delay the introduction of our products in those countries.  Clinical trials conducted in one country maynot be accepted by regulatory authorities in other countries, and regulatoryapproval in one country does not guarantee regulatory approval will be obtainedin any other country.  In addition, ourfailure to obtain regulatory approval in any country may delay or have negativeeffects on the process for regulatory approval in others.  For example, if our planned MAA forfidaxomicin is rejected or unanticipated concerns are raised by the EMEA duringits review, a subsequent NDA submission for fidaxomicin could be negativelyimpacted. Other than prulifloxacin, which is sold by other parties in Japan, Italyand certain other European countries, none of our product candidates isapproved for sale in any international market for which we have rights. If wefail to comply with regulatory requirements in our international markets or toobtain and maintain required approvals, our target market will be reduced andour ability to generate revenues will be diminished, which would significantlyharm our business, results of operations and prospects.

 

**We currently have no salesorganization and have no experience as a company in marketing drugproducts.  If we are unable to expand ourmarketing capabilities and establish sales capabilities or enter intoagreements with third parties to market and sell our product candidates, we maynot be able to generate product revenues.**

 

We currently have alimited marketing organization and do not have a sales organization formarketing, sales and distribution of pharmaceutical products.  In order to commercialize any products, wemust build our marketing, sales, distribution, managerial and othernon-technical capabilities or make arrangements with third parties to performthese services.  We plan to build our ownmarketing and sales force to commercialize fidaxomicin in North America andwill seek third-party partners outside North America.  We own exclusive rights to commercializeprulifloxacin in the United States, and we contemplate establishing our ownsales force or seeking third-party partners to sell prulifloxacin in the UnitedStates.  The establishment anddevelopment of our own sales force to market any products we may develop willbe expensive and time consuming and could delay any product launch, and wecannot be certain that we will be able to successfully develop thiscapability.  We do not currently havesufficient funds to develop a sales force and other resources that we believewould be necessary to adequately market fidaxomicin and prulifloxacin in theUnited States.

 

26

----

Tableof Contents

 

We will also have to compete with other pharmaceuticaland biotechnology companies to recruit, hire, train and retain marketing andsales personnel.  To the extent we relyon third parties to commercialize our products, if any, we may receive lessrevenues than if we commercialized these products ourselves.  In addition, we may have little or no controlover the sales efforts of any third parties involved in commercializing ourproducts.  In the event we are unable todevelop our own marketing and sales force or collaborate with a third-partymarketing and sales organization, we would not be able to commercialize ourproduct candidates which would negatively impact our ability to generateproduct revenues.

 

**We may not be able to enter intoacceptable agreements to market and commercialize****fidaxomicin****outside of NorthAmerica or if, needed, adequately build our own marketing and salescapabilities.**

 

If appropriate regulatoryapprovals are obtained, we intend to commercialize fidaxomicin outside of NorthAmerica through collaboration arrangements with third parties.  We may be unable to enter into collaborationarrangements in international markets. In addition, there can be no guarantee that if we enter into thesecollaboration arrangements with other parties that they will be successful orresult in more revenues than we could obtain by marketing fidaxomicin on ourown. If we are unable to enter into collaboration arrangements for our productsor develop an effective international sales force, our ability to generateproduct revenues would be limited, which would adversely affect our business,financial condition, results of operations and prospects. If we are unable toenter into such collaboration arrangements, we may need to develop our ownmarketing and sales force to market fidaxomicin in a number of countries inEurope and Latin America to hospital-based and long-term care physicians.  These efforts may not be successful as wehave no relationships among such hospital-based and long-term care physiciansand do not currently have sufficient funds to develop an adequate sales forcein these regions.  There is no guaranteethat we will be able to develop an effective international sales force tosuccessfully commercialize our products in these international markets.  If we cannot commercialize fidaxomicin, wewill have to rely solely on prulifloxacin and earlier stage product candidatesfor any future revenues, and our ability to achieve and sustain profitability willbe materially and adversely harmed.

 

**If our product candidates are unableto compete effectively with branded and generic antibiotics, our commercialopportunity would be reduced or eliminated.**

 

If approved, our leadproduct candidates will compete against both branded antibiotic therapies, suchas Vancocin Pulvules with respect to fidaxomicin and Xifaxan®/rifazamin withrespect to prulifloxacin, and generic antibiotics such as metronidazole andoral vancomycin with respect to fidaxomicin and ciprofloxacin with respect toprulifloxacin.  In addition, weanticipate that fidaxomicin will compete with other antibiotic andanti-infective product candidates currently in development for the treatment ofCDI, such as Xifaxan®/rifaxamin and AliniaTM/nitazoxanide.  Many of these products have been or will bedeveloped and marketed by major pharmaceutical companies, who havesignificantly greater financial resources and expertise in research anddevelopment, pre-clinical testing, conducting clinical trials, obtainingregulatory approvals, manufacturing and marketing approved products than wedo.  As a result, these companies mayobtain regulatory approval more rapidly than we are able to and may be moreeffective in selling and marketing their products as well.  Smaller or early-stage companies may alsoprove to be significant competitors, particularly through collaborativearrangements with large, established companies.

 

We anticipate that, ifapproved, fidaxomicin and prulifloxacin will face increasing competition in theform of generic versions of branded products of competitors that will losetheir patent exclusivity.  For example,fidaxomicin, if approved, will immediately face steep competition from aninexpensive generic form of metronidazole. Fidaxomicin would currently face generic oral vancomycin competition inEurope and in the future may face competition from generic oral vancomycin inthe United States as well.  Genericantibiotic therapies typically are sold at lower prices than branded antibioticsand are generally preferred by managed care providers of health services.  For example, because metronidazole is sold atsuch a low price, we believe it will be difficult to sell fidaxomicin as afirst-line therapy for the treatment of CDI. If we are unable to demonstrate to physicians and patients that, basedon experience, clinical data, side-effect profiles and other factors, ourproducts are preferable to these generic antibiotic therapies, we may nevergenerate meaningful product revenues.  Inaddition, many antibiotics experience bacterial resistance over time because oftheir continued use.  There can be noguarantee that bacteria would not develop resistance to fidaxomicin,prulifloxacin or any of our other product candidates.  Our commercial opportunity would also bereduced or eliminated if our competitors develop and commercialize generic orbranded antibiotics that are safer, more effective, have fewer side effects orare less expensive than our product candidates.

 

**We currently depend, and will in thefuture continue to depend, on third parties to manufacture our productcandidates, including****fidaxomicin****and prulifloxacin. If these manufacturers fail to provide us and our collaborators withadequate supplies of clinical trial materials and commercial product or fail tocomply with the requirements of regulatory authorities, we may be unable todevelop or commercialize our products.**

 

We outsource allmanufacturing of clinical trial supplies of our product candidates to thirdparties.  We seek to establish long-termsupply arrangements with third-party contract manufacturers.  We intend to continue outsourcing themanufacture of our product candidates to third parties for any future clinicaltrials and large-scale commercialization of any product candidates that receiveregulatory approval and become commercial drugs.

 

27

----

Table of Contents

 

Our ability to developand commercialize fidaxomicin and prulifloxacin and any other productcandidates depends in part on our ability to arrange for collaborators or otherthird parties to manufacture our products at a competitive cost, in accordancewith strictly enforced regulatory requirements and in sufficient quantities forclinical testing and eventual commercialization.  We have not yet manufactured commercialbatches of fidaxomicin, prulifloxacin or any of our other productcandidates.  Collaborators or third-partymanufacturers that we select to manufacture our product candidates for clinicaltesting or on a commercial scale may encounter difficulties with the small- andlarge-scale formulation and manufacturing processes required for suchmanufacture.  Such difficulties could resultin delays in clinical trials, regulatory submissions and approvals, orcommercialization of our product candidates. The inability of us or our collaborators to enter into and maintainagreements with third-party manufacturers on acceptable terms would causeshortages of clinical trial supplies of our product candidates, therebydelaying or preventing regulatory approval and/or commercialization of theaffected product candidate, and adversely affecting our ability to generaterevenues.  Further, development oflarge-scale manufacturing processes will require additional validation studies,which the FDA must review and approve, and the time it will take us or a thirdparty manufacturer to develop such large-scale processes and capabilities maydelay any product launch following regulatory approval.  Even if we are able to establish additionalor replacement manufacturers, identifying these sources and entering intodefinitive supply agreements and obtaining regulatory approvals may involve asubstantial amount of time and cost and such supply arrangements may not beavailable on acceptable economic terms.

 

In addition, we, ourcollaborators and other third-party manufacturers of our products must complywith strictly enforced cGMP requirements enforced by the FDA through itsfacilities inspection program.  Theserequirements include quality control, quality assurance and the maintenance ofrecords and documentation.  We currentlyrely on Biocon to manufacture fidaxomicin active pharmaceutical ingredient andrely on Patheon, Inc. to manufacture the drug product supplies.  As such, Biocon and Patheon will be subjectto ongoing periodic unannounced inspections by the FDA and other agencies forcompliance with current cGMP, and similar foreign standards. We also rely onNippon Shinyaku, which contracts with Juzen, Angelini and Patheon tomanufacture prulifloxacin drug supplies. The manufacturing facilities of Biocon, Juzen and Patheon have beeninspected and approved by the FDA for other companies’ drug products; however,none of Biocon’s, Juzen’s nor Patheon’s facilities have yet been inspected bythe FDA for the manufacture of our drug supplies.  Angelini’s facilities have not been inspectedor approved by the FDA.  We or otherthird-party manufacturers of our products may be unable to comply with cGMPrequirements and with other FDA, state, local and foreign regulatoryrequirements.  We and our collaboratorshave little control over third-party manufacturers’ compliance with theseregulations and standards.  A failure tocomply with these requirements by our third-party manufacturers, includingBiocon, Juzen, Angelini, and Patheon could result in the issuance of untitledletters and/or warning letters from authorities, as well as sanctions beingimposed on us, including fines and civil penalties, suspension of production,suspension or delay in product approval, product seizure or recall orwithdrawal of product approval.  Inaddition, we have no control over these manufacturers’ ability to maintainadequate quality control, quality assurance and qualified personnel.  If the safety of any quantities supplied bythird parties is compromised due to their failure to adhere to applicable lawsor for other reasons, we may not be able to obtain or maintain regulatoryapproval for or successfully commercialize one or more of our productcandidates, which would significantly harm our business and prospects.

 

**The commercial success of our productcandidates will depend upon attaining significant market acceptance of theseproduct candidates among physicians, patients, healthcare payors and themedical community.**

 

Even if our productcandidates are approved by the appropriate regulatory authorities for marketingand sale, physicians may not prescribe our product candidates, which wouldprevent us from generating revenues or becoming profitable.  Market acceptance of fidaxomicin,prulifloxacin and any of our future product candidates by physicians, patientsand healthcare payors will depend on a number of factors, many of which arebeyond our control, including:

 

·                  the clinical indications for which theproduct candidate is approved;

 

·                  acceptance by physicians and patients ofeach product candidate as a safe and effective treatment;

 

·                  perceived advantages over alternativetreatments;

 

·                  the cost of treatment in relation toalternative treatments, including numerous generic antibiotics;

 

·                  the extent to which the product candidateis approved for inclusion on formularies of hospitals and managed careorganizations;

 

·                  the extent to which bacteria developsresistance to the product candidate, thereby limiting its efficacy in treatingor managing infections;

 

28

----

Table of Contents

 

·                  whether the product candidate isdesignated under physician treatment guidelines as a first-line therapy or as asecond- or third-line therapy for particular infections;

 

·                  the availability of adequatereimbursement by third parties, such as insurance companies and otherhealthcare payors;

 

·                  limitations or warnings contained in aproduct’s FDA-approved labeling;

 

·                  relative convenience and ease ofadministration; and

 

·                  prevalence and severity of adverse sideeffects.

 

Because fidaxomicin is adifferentiated antibiotic for the treatment of CDI, it may encounter additionalhurdles to market acceptance by physicians, who may be skeptical about itsclinical benefits or healthcare payors who may resist reimbursing apremium-priced therapeutic particularly in light of the availability of genericalternatives.

 

We plan to target ourmarketing of prulifloxacin primarily to high-prescribing physicians ofantibiotics for travelers’ diarrhea, including those at travel clinics.  Because of the number of these physicians inthe United States, we will be required to expend significant time and resourcesto obtain broad market acceptance of prulifloxacin among these physicians.  We do not have experience in marketing tothis population of physicians and do not currently have the resources to beable to conduct such marketing efforts on our own.  As such, we may not be successful in any ofthese marketing efforts which would limit the commercial success ofprulifloxacin.

 

 In addition, in July 2008 the FDAnotified makers of fluoroquinolone antimicrobial drugs for systemic use that aboxed warning is necessary for those products due to the risk of tendonitis andtendon rapture.  As prulifloxacin is afluoroquinolone antibiotic it may be required to carry a black boxwarning.  Although these risks have beendescribed for years on the product label of many fluoroquinolones the increasedawareness of this risk may impact the market potential for the fluoroquinoloneclass of antibiotics, including prulifloxacin. Furthermore, because prulifloxacin has already been marketed by othercompanies outside the United States to treat a wide range of bacterialinfections, including infectious diarrhea, UTIs and RTIs, patients may be ableto obtain prulifloxacin from these other companies, and not from us, ifprulifloxacin is approved in the market where the patient is located.  We have rights to prulifloxacin only in theUnited States.  These patients may obtainprulifloxacin in these other markets from other companies even if thesepatients are from the United States.

 

**If we fail to develop andcommercialize other products or product candidates, we may be unable to growour business.**

 

A key element of ourstrategy is to commercialize a portfolio of new anti-infective products inaddition to fidaxomicin and prulifloxacin. As a significant part of our growth strategy, we intend to develop andcommercialize additional products and product candidates through our discoveryresearch program using our proprietary technology, including OPopS.  The success of this strategy depends upon ourability to identify, select and acquire pharmaceutical product candidates andproducts that fit into our development plans on terms that are acceptable tous. To supplement this strategy, we may also obtain rights to additional productcandidates from third parties through acquisition or in-licensing transactions.

 

Any product candidate weidentify or to which we acquire rights will likely require additionaldevelopment efforts prior to commercial sale, including pre-clinical studies,extensive clinical testing and approval by the FDA and applicable foreignregulatory authorities.  All productcandidates are prone to the risks of failure that are inherent inpharmaceutical product development, including the possibility that the productcandidate will not be shown to be sufficiently safe and/or effective forapproval by regulatory authorities.  Inaddition, we cannot assure you that any such products that are approved will bemanufactured or produced economically, successfully commercialized or widelyaccepted in the marketplace or be more effective than other commerciallyavailable alternatives.

 

A significant portion of theresearch that we are conducting involves new and unproven technologies.  Research programs to identify new diseasetargets and product candidates require substantial technical, financial andhuman resources whether or not we ultimately identify any candidates.  Our research programs may initially showpromise in identifying potential product candidates, yet fail to yield productcandidates for clinical development.

 

If we are unable todevelop suitable potential product candidates through internal researchprograms or by obtaining rights to novel therapeutics from third parties, ourbusiness and prospects will suffer.

 

29

----

Table of Contents

 

Our focus on drugdiscovery and development using our technology platform, including our patentedproprietary OPopS drug discovery platform, is novel and unique.  As a result, we cannot be certain that ourproduct candidates will produce commercially viable drugs that safely andeffectively treat infectious diseases or other diseases.  To date, our technology platform has yieldedonly a small number of anti-infective product candidates.  In addition, we do not have significantclinical data with respect to any of these potential product candidates.  Even if we are successful in completingclinical development and receiving regulatory approval for one commercially viabledrug for the treatment of one disease using our technology platform andcarbohydrate chemistry focus, we cannot be certain that we will also be able todevelop and receive regulatory approval for other drug candidates for thetreatment of other forms of that disease or other diseases.  If we fail to develop and commercializeviable drugs using our platform and specialized focus, we will not besuccessful in developing a pipeline of potential product candidates to followfidaxomicin and prulifloxacin, and our business prospects would significantlybe harmed.

 

**Our future growth depends on ourability to identify and acquire or in-license products.  If we do not successfully identify andacquire or in-license related product candidates or integrate them into ouroperations, we may have limited growth opportunities.**

 

We in-licensed the U.S.rights to prulifloxacin from Nippon Shinyaku who, along with Meiji-Seika KaishaLtd., conducted the initial development of this product candidate.  An important part of our business strategy isto continue to develop a pipeline of product candidates by acquiring orin-licensing products, businesses or technologies that we believe are astrategic fit for our business.  Futurein-licenses or acquisitions, however, may entail numerous operational andfinancial risks, including:

 

·                  exposure to unknown liabilities;

 

·                  disruption of our business and diversion of ourmanagement’s time and attention to develop acquired products or technologies;

 

·                  incurrence of substantial debt or dilutive issuancesof securities to pay for acquisitions;

 

·                  higher than expected acquisition and integrationcosts;

 

·                  increased amortization expenses;

 

·                  difficulty and cost in combining the operations andpersonnel of any acquired businesses with our operations and personnel;

 

·                  impairment of relationships with key suppliers orcustomers of any acquired businesses due to changes in management andownership; and

 

·                  inability to retain key employees of any acquiredbusinesses.

 

We have limited resourcesto identify and execute the acquisition or in-licensing of third-partyproducts, businesses and technologies and integrate them into our currentinfrastructure.  In particular, we maycompete with larger pharmaceutical companies and other competitors in our effortsto establish new collaborations and in-licensing opportunities.  These competitors likely will have access togreater financial resources than us and may have greater expertise inidentifying and evaluating new opportunities. Moreover, we may devote resources to potential acquisitions orin-licensing opportunities that are never completed, or we may fail to realizethe anticipated benefits of such efforts.

 

**Our ability to pursue the developmentand commercialization of prulifloxacin, our other product candidates and ourfuture product candidates depends upon the continuation of our licenses fromthird parties.**

 

Our license agreementwith Nippon Shinyaku provides us with an exclusive license to develop andcommercialize prulifloxacin for any indication in the United States, with aright to sublicense to third parties.  Inthe event Nippon Shinyaku is not able to supply us with prulifloxacin, thelicense agreement provides us with a non-exclusive, worldwide right and licenseto manufacture or have prulifloxacin manufactured for us.  Either we or Nippon Shinyaku may terminatethe license agreement immediately upon the bankruptcy or dissolution of theother party or upon a breach of any material provision of the agreement if thebreach is not cured within 60 days following written notice.  In addition, we are entitled to terminate theagreement in the event that the FDA compels us to cease sales of prulifloxacinin the United States.  If our licenseagreement with Nippon Shinyaku terminates, we will lose our rights to develop,manufacture and commercialize prulifloxacin and our potential revenues would belimited.  

 

30

----

Tableof Contents

 

Similarly, if our agreement with the Scripps ResearchInstitute, or TSRI, for the license of our OPopS technology is terminated, wewill not be able to further develop future product candidates using our OPopStechnology.

 

**If product liability lawsuits arebrought against us, we may incur substantial liabilities and may be required tolimit commercialization of our product candidates.**

 

We face an inherent riskof product liability lawsuits related to the testing of our product candidates,and will face an even greater risk if product candidates are introducedcommercially.  An individual may bring aliability claim against us if one of our product candidates causes, or merelyappears to have caused, an injury.  If wecannot successfully defend ourselves against the product liability claim, wemay incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

·                  decreased demand for our product candidates;

 

·                  injury to our reputation;

 

·                  termination of clinical trial sites or entire clinicaltrial programs;

 

·                  withdrawal of clinical trial participants;

 

·                  significant litigation costs;

 

·                  substantial monetary awards to or costly settlementwith patients;

 

·                  product recalls;

 

·                  loss of revenues; and

 

·                  the inability to commercialize our product candidates.

 

We may become dependentupon consumer perceptions of us and the safety and quality of our productcandidates.  We could be adverselyaffected if we or our product candidates are subject to negativepublicity.  We could also be adverselyaffected if any of our potential products or any similar products distributedby other companies prove to be, or are asserted to be, harmful toconsumers.  Also, because of ourdependence upon consumer perceptions, any adverse publicity associated withillness or other adverse effects resulting from consumers’ use or misuse of ourpotential products or any similar products distributed by other companies couldhave a material adverse impact on our results of operations.

 

We have global clinicaltrial liability insurance that covers our clinical trials up to a $10.0 millionannual aggregate limit.  Our current orfuture insurance coverage may prove insufficient to cover any liability claimsbrought against us.  We intend to expandour insurance coverage to include the sale of commercial products if marketingapproval is obtained for our product candidates, which would increase our insurancepremiums.  Because of the increasingcosts of insurance coverage, we may not be able to maintain insurance coverageat a reasonable cost or obtain insurance coverage that will be adequate tosatisfy any liability that may arise.

 

**Even if we receive regulatoryapproval for our product candidates, we will be subject to ongoing significantregulatory obligations and oversight.**

 

Even if we receiveregulatory approval to sell our product candidates, the FDA and foreignregulatory authorities will likely impose significant restrictions on theindicated uses or marketing of such products, or impose ongoing requirementsfor potentially costly post-approval studies. In addition, following any regulatory approval of our productcandidates, we and our collaborators will be subject to continuing regulatoryobligations, such as requirements for storage, recordkeeping and safetyreporting, and additional post-marketing obligations, including regulatoryoversight of the labeling, packaging, promotion and marketing of ourproducts.  If we or our collaboratorsbecome aware of previously unknown problems with any of our product candidatesin the United States or overseas or at our third-party manufacturers’facilities, a regulatory agency may impose restrictions on our products, ourthird-party manufacturers or on us, including requiring us to reformulate ourproducts, conduct additional clinical trials, make changes in the labeling ofour products, implement changes to, or obtain re-approvals of, our third-partymanufacturers’ facilities, or withdraw the product from the market.  In addition, we or our collaborators mayexperience a significant drop in the sales of the affected products and ourproduct revenues will be reduced, our reputation in the marketplace may sufferand we may become the target of lawsuits, including class action suits.  Moreover, if we or our collaborators orthird-party manufacturers fail to comply with applicable regulatoryrequirements, we may be subject to civil or criminal fines, suspension or withdrawalof regulatory approvals, product 

 

31

----

Tableof Contents

 

recalls, seizure of products, operating restrictions,costly new manufacturing requirements and criminal prosecution.  Any of these events could harm or preventsales of the affected products and reduce our related revenues or couldsubstantially increase the costs and expenses of commercializing and marketingthese products, which would significantly harm our business, financialcondition and prospects.

** **

**If we fail to attract and retainsenior management and key scientific personnel, we may be unable tosuccessfully develop our product candidates, conduct our clinical trials andcommercialize our product candidates.**

 

Our success depends inpart on our continued ability to attract, retain and motivate highly qualifiedmanagement, clinical and scientific personnel and on our ability to develop andmaintain important relationships with leading academic institutions, cliniciansand scientists.  We are highly dependentupon our senior management and scientific staff, particularly Michael N.Chang, Ph.D., our President and Chief Executive Officer, Tessie M. Che,Ph.D., our Senior Vice President and Chief Operating Officer, Francois-XavierFrapaise, M.D., our Senior Vice President and Chief Scientific Officer,Youe-Kong Shue, Ph.D., our Vice President, Clinical Development, Sherwood L.Gorbach, M.D., our Vice President of Medical Affairs and Chief Medical Officer,and Kevin P. Poulos, our Chief Commercial Officer.  The loss of services of any of Drs. Chang,Che, Frapaise, Shue, Gorbach or Shue or Mr. Poulos or one or more of ourother members of senior management could delay or prevent the successfulcompletion of our planned clinical trials or the commercialization of ourproduct candidates.  Replacing keyemployees may be difficult and costly and may take an extended period of timebecause of the limited number of individuals in our industry with the breadthof skills and experience required to develop and commercialize productssuccessfully.  We do not maintain “keyperson” insurance policies on the lives of these individuals or the lives ofany of our other employees.  We employthese individuals on an at-will basis and their employment can be terminated byus or them at any time, for any reason and with or without notice.

 

We will need to hireadditional personnel as we expand our clinical development and commercialactivities.  We may not be able toattract or retain qualified management and scientific personnel on acceptableterms in the future due to the intense competition for qualified personnelamong biotechnology, pharmaceutical and other businesses, particularly in theSan Diego, California area.  If we arenot able to attract and retain the necessary personnel to accomplish ourbusiness objectives, we may experience constraints that will impedesignificantly the achievement of our research and development objectives, our abilityto raise additional capital and our ability to implement our businessstrategy.  In particular, if we lose anymembers of our senior management team, we may not be able to find suitablereplacements, and our business and prospects may be harmed as a result.

 

**We will need to increase the size ofour organization, and we may experience difficulties in managing growth.**

 

We are a small companywith 55 employees as of March 2, 2009. To continue our clinical trials and commercialize our product candidates,we will need to expand our employee base for managerial, operational,marketing, sales, financial and other resources.  Future growth will impose significant addedresponsibilities on members of management, including the need to identify,recruit, maintain and integrate additional employees and may take time awayfrom running other aspects of our business, including development andcommercialization of our product candidates. Our future financial performance and our ability to commercialize ourproduct candidates and to compete effectively will depend, in part, on ourability to manage any future growth effectively.  To that end, we must be able to:

 

·                  manage our development efforts effectively;

 

·                  manage our current clinical trials effectively;

 

·                  integrate additional management, administrative andmanufacturing personnel;

 

·                  build a marketing and sales organization; and

 

·                  maintain sufficient administrative, accounting andmanagement information systems and controls.

 

We may not be able toaccomplish these tasks, and accordingly, may not achieve our research,development and commercialization goals. Our failure to accomplish any of these goals could harm our financialresults and prospects.

 

**Third-party payor coverage andreimbursement may be insufficient or unavailable altogether for our productcandidates, which could diminish our sales or affect our ability to sell ourproducts profitably.**

 

Market acceptance andsales of our product candidates will depend on reimbursement policies and maybe affected by future healthcare reform measures.  Government third-party payors, such as theMedicare and Medicaid programs, and private payors, including healthmaintenance organizations, decide which drugs they will pay for and establishreimbursement levels for these drugs.

 

32

----

Tableof Contents

 

Because third-party payors increasingly arechallenging prices charged and the cost-effectiveness of medical products,significant uncertainty exists as to the ability of our product candidates toreceive adequate coverage and reimbursement. We cannot be sure that third-party payors will place our product candidateson approved formularies or that reimbursement will be available in whole or inpart for any of our product candidates. Also, we cannot be sure that insufficient reimbursement amounts will notreduce

 the demand for,or the price of, our products, if approved.

 

Many healthcareproviders, such as hospitals, receive a fixed reimbursement amount perprocedure or other treatment therapy, and these amounts are not necessarilybased on the actual costs incurred.  As aresult, these healthcare providers may choose only the least expensivetherapies regardless of efficacy.  Wecannot guarantee that our product candidates will be the least expensivealternative and thus providers may decide not to use them or buy them fortreatment.

 

We have not commencedefforts to have our product candidates reimbursed by government or third-partypayors.  If reimbursement is notavailable or is available only to limited levels, we may not be able tocommercialize our products successfully or at all, which would harm our businessand prospects.

 

**Recent proposed legislation maypermit re-importation of drugs from foreign countries into the United States,including foreign countries where the drugs are sold at lower prices than inthe United States, which could materially adversely affect our operatingresults and our overall financial condition.**

 

We may face competitionfor our products from lower priced products from foreign countries that haveplaced price controls on pharmaceutical products.  Imports from Canada and elsewhere maycontinue to increase due to market and political forces, and the limitedenforcement resources of the FDA, the U.S. Customs Service, and othergovernment agencies.  For example, U.S.Customs Service generally does not prevent individuals from importing fromCanada less than a 90-day supply of a prescription drug for personal use, whenthe drug otherwise complies with the Federal Food, Drug and Cosmetic Act.  Further, several states and local governmentshave implemented importation schemes for their citizens, and, in the absence offederal action to curtail such activities, we expect other states and localgovernments to launch importation efforts. The importation of foreign products that compete with our own productcandidates could negatively impact our business and prospects.

 

**Current healthcare laws andregulations and future legislative or regulatory reforms to the healthcaresystem may affect our ability to sell our product candidates profitably.**

 

In both the United Statesand certain foreign jurisdictions, there have been, and we anticipate therewill continue to be, a number of legislative and regulatory changes to thehealthcare system that could impact our ability to sell our productsprofitably.  We cannot be certain thatfidaxomicin and prulifloxacin or other current or future drug candidates willsuccessfully be placed on the list of drugs covered by particular health planformularies, nor can we predict the negotiated price for our drug candidates,which will be determined by market factors. Many states have also createdpreferred drug lists and include drugs on those lists only when themanufacturers agree to pay a supplemental rebate.  If fidaxomicin and prulifloxacin or othercurrent or future drug candidates are not included on these preferred druglists, physicians may not be inclined to prescribe them to their Medicaidpatients, thereby diminishing the potential market for our products.

 

As a result oflegislative proposals and the trend towards cost-effectiveness criteria andmanaged healthcare in the United States, third-party payors are increasinglyattempting to contain healthcare costs by limiting both coverage and the levelof reimbursement of new drugs.  They mayalso refuse to provide any coverage of uses of approved products for medicalindications other than those for which the FDA has granted marketapprovals.  As a result, significantuncertainty exists as to whether and how much third-party payors will reimbursefor newly-approved drugs, which in turn will put pressure on the pricing ofdrugs.  Further, we do not have experiencein ensuring approval by applicable third-party payors outside of the UnitedStates for reimbursement of our products. The availability of numerous generic antibiotics at lower prices thanbranded antibiotics can also be expected to substantially reduce the likelihoodof reimbursement for fidaxomicin and prulifloxacin.  We also anticipate pricing pressures inconnection with the sale of our products due to the trend toward managedhealthcare, the increasing influence of health maintenance organizations andadditional legislative proposals.

 

**We must comply with federal and state“fraud and abuse” laws, and, if we are unable to fully comply with such laws,we could face substantial penalties, which may adversely affect our business,financial condition and results of operations.**

 

We are subject to variousfederal and state laws pertaining to healthcare fraud and abuse, includinganti-kickback laws, the False Claims Act, the Foreign Corrupt Practices Act andstate laws requiring reporting and certification under comprehensive complianceprograms governing our financial relationships with healthcare providers.  Violations of these laws are punishable bycriminal and civil sanctions, including, in some instances, exclusion fromparticipation in federal and state healthcare programs, including Medicare andMedicaid, and the curtailment or restructuring of operations.  We believe that our operations are inmaterial 

 

33

----

Tableof Contents

 

compliance with such laws and we are aware of the needto increase our compliance resources if we begin marketing products.  However, because of the far-reaching natureof these laws, there can be no assurance that we would not be required to alterone or more of our practices to be in compliance with these laws.  In addition, there can be no assurance thatthe occurrence of one or more violations of these laws or regulations would notresult in a material adverse effect on our financial condition and results ofoperations.

** **

**Our business involves the use ofhazardous materials and we and our third-party manufacturers must comply withenvironmental laws and regulations, which can be expensive and restrict how wedo business.**

 

Our third-partymanufacturers’ activities and, to a lesser extent, our own activities involvethe controlled storage, use and disposal of hazardous materials, including thecomponents of our product candidates and other hazardous compounds.  We and our manufacturers are subject tofederal, state and local laws and regulations governing the use, manufacture,storage, handling and disposal of these hazardous materials.  Although we believe that the safetyprocedures for handling and disposing of these materials comply with thestandards prescribed by these laws and regulations, we cannot eliminate therisk of accidental contamination or injury from these materials.  We currently have insurance coverage in theamount of approximately $250,000 for damage claims arising from contaminationon our property.  These amounts may notbe sufficient to adequately protect us from liability for damage claimsrelating to contamination.  If we aresubject to liability exceeding our insurance coverage amounts, our business andprospects would be harmed.  In the eventof an accident, state or federal authorities may also curtail our use of thesematerials and interrupt our business operations.

 

**Our business and operations wouldsuffer in the event of computer, telecommunications or other system failure.**

** **

Despite theimplementation of security measures, our internal computer systems arevulnerable to damage from computer viruses, unauthorized access, naturaldisasters, terrorism, war and telecommunication and electrical failures.  Any system failure, accident or securitybreach that causes interruptions in our operations could result in a materialdisruption of our drug development programs. For example, the loss of clinical trial information from completed orongoing clinical trials for fidaxomicin or prulifloxacin, which is maintainedby our third-party CRO, could result in delays in our regulatory approvalefforts and significantly increase our costs to recover or reproduce thedata.  To the extent that any disruptionor security breach results in a loss or damage to our data or applications, orinappropriate disclosure of confidential or proprietary information, we mayincur liability and the further development of our product candidates may bedelayed.

** **

**Risks Related to Our IntellectualProperty**

 

**It is difficult and costly to protectour intellectual property and our proprietary technologies, and we may not beable to ensure their protection.**

 

Our commercial successwill depend in part on obtaining and maintaining patent protection and tradesecret protection of the use, formulation and structure of our productcandidates, and the methods used to manufacture them, as well as successfullydefending these patents against third-party challenges, including those fromgeneric drug manufacturers.  Our abilityto protect our product candidates from unauthorized making, using, selling,offering to sell or importing by third parties is dependent upon the extent towhich we have rights under valid and enforceable patents or trade secrets thatcover these activities.

 

The patent positions ofpharmaceutical and biotechnology companies can be highly uncertain and involvecomplex legal and factual questions for which important legal principles remainunresolved.  No consistent policyregarding the breadth of claims allowed in biotechnology patents has emerged todate in the United States.  Thebiotechnology patent situation outside the United States is even moreuncertain.  Changes in either the patentlaws or in interpretations of patent laws in the United States and othercountries may diminish the value of our intellectual property.  Accordingly, we cannot predict the breadth ofclaims that may be allowed or enforced in our licensed patents, our patents orin third-party patents.

 

The degree of futureprotection for our proprietary rights is uncertain, because legal means affordonly limited protection and may not adequately protect our rights or permit usto gain or keep our competitive advantage. For example:

 

·                  others may be able to make compounds that are similarto our product candidates but that are not covered by the claims of our pendingpatent applications or licensed patents, or for which we are not licensed underour license agreements;

 

·                  others may be able to make competing pharmaceuticalformulations containing our product candidates or components of our productformulations that are either not covered by the claims of our licensed patents,not licensed to us under our license agreements or are subject to patents thatexpire;

 

34

----

Table of Contents

 

·                  we or our licensors might not have been the first tomake the inventions covered by our pending patent applications or the pendingpatent applications and issued patents of our licensors;

 

·                  we or our licensors might not have been the first tofile patent applications for these inventions;

 

·                  others may independently develop similar oralternative technologies or duplicate any of our technologies;

 

·                  it is possible that our pending patent applications orour licensed patent applications will not result in issued patents;

 

·                  our pending patent applications or the pending patentapplications and issued patents of our licensors may not provide us with anycompetitive advantages, may be designed around by our competitors, includinggeneric drug companies, or may be held invalid or unenforceable as a result oflegal challenges by third parties;

 

·                  we may not develop additional proprietary technologiesthat are patentable; or

 

·                  the patents of others may have an adverse effect onour business.

 

In addition, to theextent we are unable to obtain and maintain patent protection for one of ourlead product candidates or in the event such patent protection expires, it mayno longer be cost effective to extend our portfolio by pursuing additionaldevelopment of a product candidate for follow-on indications.

 

We have filed 8 patentapplications related to fidaxomicin, six of which are pending, one of which hasresulted in the issuance of a polymorph patent and one of which has resulted inthe allowance of a manufacturing patent from the United States Patent andTrademark Office or U. S. PTO.

 

These patent applicationsrelated to fidaxomicin encompass various topics relating to:

 

·                  composition of matter for fidaxomicin (allowed inTaiwan);

 

·                  composition of matter for fidaxomicin relatedsubstances and use for CDI;

 

·                  polymorphic forms (issued in U.S.);

 

·                  composition comprising a polymorphic form;

 

·                  manufacturing processes (allowed in U.S.; issued inAustralia);

 

·                  treatment of diseases;

 

·                  formulation; and

 

·                  fidaxomicin related compounds, including metabolites,e.g. OP-1118.

 

If we are unable toobtain a composition of matter patent, our competitors, including generic drugcompanies, may be able to design other similar formulations of the activeingredient of fidaxomicin.  Furthermore,even when the process patent is issued and if the formulation patentapplications become issued patents, our competitors, including generic drugcompanies, may be able to design around our manufacturing processes orformulation for fidaxomicin.  As aresult, our competitors may be able to develop competing products.

 

In addition, we currentlyplan to submit an NDA for prulifloxacin for the treatment of infectiousdiarrhea in travelers in 2009.  Thecomposition of matter patent covering prulifloxacin is expired in February 2009.Although in some cases the U.S. PTO will grant an extension of a patent termwhere the related product is subject to FDA approval, this extension wasunavailable to us with respect to the prulifloxacin composition of matterpatent because we did not submit an NDA for prulifloxacin prior to theexpiration of this patent.  There arecurrently no other active issued patents which would prevent third parties frompotentially marketing prulifloxacin in the United States.  Therefore, we will likely rely on one or moreregulatory marketing exclusivities for prulifloxacin in the United States.  Specifically, if our NDA for prulifloxacin isapproved, we expect to receive a five-year period of marketing exclusivityunder the Hatch-Waxman Act. This exclusivity period is available to the firstapplicant to gain approval of an NDA for a new chemical entity, or NCE, thathas not previously been approved as an active ingredient under Section 505(b) ofthe Food Drug and Cosmetic 

 

35

----

Tableof Contents

 

Act, or FDCA. While we expect that the NCE exclusivity period will be available forprulifloxacin, if we or Nippon Shinyaku are unsuccessful in obtainingadditional patents related to prulifloxacin, we may face generic competition inthe United States five years after our NDA for prulifloxacin is approved by theFDA.  If we are unable to obtainmarketing exclusivity beyond five years from the approval of our NDA, ourpotential revenues from prulifloxacin sales in the U.S. will be limited.

 

We depend, in part, onour licensors and collaborators to protect a portion of our proprietaryrights.  In such cases, our licensors andcollaborators may be primarily or wholly responsible for the maintenance ofpatents and prosecution of patent applications relating to important areas ofour business.  For example, NipponShinyaku, SKI, TSRI and Cempra are responsible for the maintenance of patentsand prosecution of patent applications relating to prulifloxacin,OPT-822/OPT-821 combination therapy, our OPopS technology, and OP-1068 alsoknown as CEM-101, respectively.  We mayalso be dependent on Par to provide technical support for patent applicationsrelating to fidaxomicin.  If any of theseparties fail to adequately protect these product candidates with issuedpatents, our business and prospects would be significantly harmed.

 

Under our agreement withNippon Shinyaku, in the event Nippon Shinyaku fails to take all steps necessaryto seek extension of the patents licensed to us in the United States 180 daysafter we request such action be taken, then we have the right to take allnecessary actions to extend the licensed patents.  Our agreements with SKI, TSRI, Cempra and Pardo not have explicit provisions regarding our rights to take necessary actionwith respect to maintenance of patents and prosecution of patent applicationsnor do such agreements provide us with any legal recourse in the event suchparties do not so maintain and/or prosecute. If any of these parties fails to adequately maintain patents andprosecute patent applications relating to technology licensed to or from us, wemay be required to take further action on our own to protect thistechnology.  However, we may not besuccessful in maintaining such patents or prosecuting such patent applicationsand if so, our business and prospects would be significantly harmed.

 

We also rely on tradesecrets to protect our technology, especially where we do not believe patentprotection is appropriate or obtainable. However, trade secrets are difficult to protect.  Although we use reasonable efforts to protectour trade secrets, our employees, consultants, contractors, outside scientificcollaborators and other advisors may unintentionally or willfully disclose ourinformation to competitors.  Enforcing aclaim that a third-party entity illegally obtained and is using any of ourtrade secrets is expensive and time consuming, and the outcome isunpredictable.  In addition, courtsoutside the United States are sometimes less willing to protect tradesecrets.  Moreover, our competitors mayindependently develop equivalent knowledge, methods and know-how.

 

If we or our licensorsfail to obtain or maintain patent protection or trade secret protection for ourproduct candidates or our technologies, third parties could use our proprietaryinformation, which could impair our ability to compete in the market andadversely affect our ability to generate revenues and attain profitability.

 

**We may incur substantial costs as aresult of litigation or other proceedings relating to our patent, trademark andother intellectual property rights, and we may be unable to protect our rightsto, or use, our technology.**

 

If we choose to go tocourt to stop someone else from using our inventions, that individual orcompany has the right to ask the court to rule that the underlying patentsare invalid and/or should not be enforced against that third party.  These lawsuits are expensive and wouldconsume time and other resources even if we were successful in stopping theinfringement of these patents.  There isalso the risk that, even if the validity of these patents is upheld, the courtwill refuse to stop the other party on the ground that such other party’sactivities do not infringe our rights to these patents.

 

Furthermore, a thirdparty may claim that we or our manufacturing or commercialization partners areusing inventions covered by the third party’s patent rights and may go to courtto stop us from engaging in our normal operations and activities, includingmaking, using or selling our product candidates.  These lawsuits are costly and could affectour results of operations and divert the attention of managerial and technicalpersonnel.  There is a risk that a courtwould decide that we or our commercialization partners are infringing the thirdparty’s patents and would order us or our partners to stop the activitiescovered by the patents.  In addition,there is a risk that a court will order us or our partners to pay the otherparty damages for having violated the other party’s patents.  We have indemnified our commercial partnersagainst patent infringement claims and thus would be responsible for any oftheir costs associated with such claims and actions.  The biotechnology industry has produced aproliferation of patents, and it is not always clear to industry participants,including us, which patents cover various types of products or methods of use.  The coverage of patents is subject tointerpretation by the courts and the interpretation is not always uniform.  If we are sued for patent infringement, wewould need to demonstrate that our products or methods of use either do notinfringe the patent claims of the relevant patent and/or that the patent claimsare invalid, and we may not be able to do this. Proving invalidity, in particular, is difficult since it requires ashowing of clear and convincing evidence to overcome the presumption ofvalidity enjoyed by issued patents.

 

36

----

Tableof Contents

 

Although we haveconducted searches of third-party patents with respect to fidaxomicin andprulifloxacin, these searches may not have identified all third-party patentsrelevant to those products and we have not conducted an extensive search ofpatents issued to third parties with respect to our other productcandidates.  Consequently, no assurancecan be given that third-party patents containing claims covering our products,technology or methods do not exist, have not been filed, or could not be filedor issued.  Because of the number ofpatents issued and patent applications filed in our technical areas or fields,we believe there is a risk that third parties may allege they have patentrights encompassing our products, technology or methods.  In addition, we have not conducted anextensive search of third-party trademarks, so no assurance can be given thatsuch third-party trademarks do not exist, have not been filed, could not befiled or issued, or could not exist under common trademark law.  While we have filed a trademark applicationfor the names “Optimer” and “Optimer Pharmaceuticals,” we are aware that thename “Optimer” has been registered as a trademark with the U.S. PTO by morethan one third party, including one in the biotechnology space.  As such, we believe there is a significantrisk that third parties may allege they have trademark rights encompassing thenames for which we have applied for protection.

 

Because some patentapplications in the United States may be maintained in secrecy until thepatents are issued, because patent applications in the United States and many foreignjurisdictions are typically not published until eighteen months after filing,and because publications in the scientific literature often lag behind actualdiscoveries, we cannot be certain that others have not filed patentapplications for technology covered by our licensors’ issued patents or ourpending applications or our licensors’ pending applications, or that we or ourlicensors were the first to invent the technology.  Our competitors may have filed, and may inthe future file, patent applications covering technology similar to ours.  Any such patent application may have priorityover our or our licensors’ patent applications and could further require us toobtain rights to issued patents covering such technologies.  If another party has filed a U.S. patentapplication on inventions similar to ours, we may have to participate in aninterference proceeding declared by the U.S. PTO, to determine priority ofinvention in the United States.  Thecosts of these proceedings could be substantial, and it is possible that suchefforts would be unsuccessful, resulting in a loss of our U.S. patent positionwith respect to such inventions.

 

Some of our competitorsmay be able to sustain the costs of complex patent litigation more effectivelythan we can because they have substantially greater resources.  In addition, any uncertainties resulting fromthe initiation and continuation of any litigation could have a material adverseeffect on our ability to raise the funds necessary to continue our operations.

 

**Risks Related to the SecuritiesMarket and Ownership of Our Common Stock**

 

**The market price of our common stockmay be highly volatile.**

 

Before our initial publicoffering in February 2007, there was no public market for our commonstock.  We cannot assure you that anactive trading market will exist for our common stock**.** You may not be able to sell your shares quickly or at themarket price if trading in our common stock is not active.

 

The trading price of ourcommon stock is likely to be highly volatile and could be subject to widefluctuations in price in response to various factors, many of which are beyondour control, including:

 

·                  general economic and market conditions and otherfactors that may be unrelated to our operating performance or the operatingperformance of our competitors, including the current turmoil in the creditmarket and financial services industry;

 

·                  announcement of FDA or comparable foreignregulatory agency approval or non-approval of our product candidates, orspecific label indications for their use, or delays in the FDA or comparableforeign regulatory agency review process;

 

·                  actions taken by the FDA or other regulatory agencieswith respect to our product candidates, clinical trials, manufacturing processor marketing and sales activities;

 

·                  changes in laws or regulations applicable to ourproducts, including but not limited to clinical trial requirements forapprovals;

 

·                  the success of our development efforts and clinicaltrials, particularly with respect to fidaxomicin and prulifloxacin;

 

·                  announcements by our collaborators with respect toclinical trial results and communications from the FDA or comparable foreignregulatory agencies;

 

·                  the success of our efforts to acquire or in-licenseadditional products or product candidates;

 

37

----

Table of Contents

 

·                  developments concerning our collaborations andpartnerships, including but not limited to those with our sources ofmanufacturing supply and our commercialization partners;

 

·                  actual or anticipated variations in our quarterlyoperating results;

 

·                  announcements of technological innovations by us, ourcollaborators or our competitors;

 

·                  new products or services introduced or announced by usor our commercialization partners, or our competitors and the timing of theseintroductions or announcements;

 

·                  third-party coverage or reimbursement policies;

 

·                  actual or anticipated changes in earnings estimates orrecommendations by securities analysts;

 

·                  conditions or trends in the biotechnology andbiopharmaceutical industries;

 

·                  announcements by us or our competitors of significantacquisitions, strategic partnerships, joint ventures or capital commitments;

 

·                  general economic and market conditions and otherfactors that may be unrelated to our operating performance or the operatingperformance of our competitors, including the turmoil on the credit markets andfinancial services industry;

 

·                  changes in the market valuations of similar companies;

 

·                  sales of common stock or other securities by us or ourstockholders in the future;

 

·                  additions or departures of key scientific ormanagement personnel;

 

·                  disputes or other developments relating tointellectual property, proprietary rights, including patents, litigationmatters and our ability to obtain patent protection for our technologies; and

 

·                  trading volume of our common stock.

 

In addition, the stockmarket in general and the market for biotechnology and biopharmaceuticalcompanies in particular have experienced extreme price and volume fluctuationsthat have often been unrelated and/or disproportionate to the operatingperformance of those companies.  Thesebroad market and industry factors may significantly harm the market price ofour common stock, regardless of our operating performance.  In the past, following periods of volatilityin the market, securities class-action litigation has often been institutedagainst companies.  Such litigation, ifinstituted against us, could result in substantial costs and diversion ofmanagement’s attention and resources, which could significantly harm ourbusiness, financial condition and prospects.

 

**Future sales of our common stock inthe public market could cause our stock price to decline.**

 

Persons who were ourstockholders prior to our initial public offering continue to hold asubstantial number of shares of our common stock. Many of these stockholdersare able to sell their shares in the public market. Significant portions ofthese shares are held by a small number of stockholders. Sales by suchstockholders of a substantial number of shares, or the expectation that suchsales may occur, could significantly reduce the market price of our commonstock.  Moreover, the holders of a substantialnumber of shares of our common stock have rights, subject to certainconditions, to require us to file registration statements to permit the resaleof their shares in the public market or to include their shares in registrationstatements that we may file for ourselves or other stockholders.

 

We have also registeredall common stock that we have issued under our employee benefits plans. As aresult, these shares can be freely sold in the public market upon issuance,subject to any applicable restrictions under the securities laws. In addition,our directors and executive officers may in the future establish programmedselling plans under Rule 10b5-1 of the Securities Exchange Act for thepurpose of effecting sales of our common stock. If any of these events cause alarge number of our shares to be sold in the public market, the sales couldreduce the trading price of our common stock and impede our ability to raisefuture capital.

 

38

----

Table of Contents

 

**Negative conditions in the globalcredit markets may impair the liquidity of a portion of our investmentportfolio.**

 

Our investment securitiesconsist of high-grade auction rate securities, money market funds, corporatedebt securities and government agency securities. As of December 31, 2008,we held two auction rate preferred securities valued at $1.0 million withperpetual maturity dates that reset every 28 days. The negative conditions inthe global credit markets have prevented some investors from liquidating theirholdings, including their holdings of auction rate securities.  There was insufficient demand at auction forthese two auction rate preferred securities. As a result, these affected securities are currently not liquid, and wecould be required to hold them until they are redeemed by the issuer or tomaturity.  In the event we need to accessthe funds that are in an illiquid state, we will not be able to do so without aloss of principal, until a future auction on these investments is successful,the securities are redeemed by the issuer or they mature. As of December 31,2008, the carrying value of all auction rate securities had been reduced by$118,000, from $1,150,000 to $1,032,000, reflecting an estimated change infair market value due primarily to a lack of liquidity. Although the auctionrate securities continue to pay interest according to their stated terms, basedon valuation models, we have recorded an unrealized loss for another-than-temporary change in valuation of $118,000.  If the credit ratings of the security issuersdeteriorate or if uncertainties in these markets continue and any decline inmarket value is determined to be other-than-temporary, we would be required toadjust the carrying value of the investment through an impairment charge, whichcould negatively affect our financial condition, cash flow and reportedearnings.

 

**We will continue to incur significantcosts as a result of operating as a public company, and our management will berequired to devote substantial time to new compliance initiatives.**

 

As a public company, wewill continue to incur significant legal, accounting and other expenses.  In addition, the Sarbanes-Oxley Act, as wellas rules subsequently implemented by the Securities and ExchangeCommission, or SEC, and the Nasdaq Global Market, or Nasdaq, impose variousrequirements on public companies, including requiring establishment andmaintenance of effective disclosure and financial controls and changes incorporate governance practices.  Ourmanagement and other personnel need to devote a substantial amount of time tothese compliance initiatives.  Moreover,these rules and regulations will increase our legal and financialcompliance costs and will make some activities more time-consuming andcostly.  For example, these rules andregulations to make it more difficult and more expensive for us to maintaindirector and officer liability insurance, and we may be required to incursubstantial costs in the future to maintain the same or similar coverage.

 

The Sarbanes-Oxley Act of 2002 requires, among otherthings, that we maintain effective internal controls for financial reportingand disclosure controls and procedures. As a result, as of December 31,2008, we were required to perform an evaluation of our internal controls overfinancial reporting to allow management to report on the effectiveness of thosecontrols, as required by Section 404 of the Sarbanes-Oxley Act.Additionally, our independent auditors were required to perform a similarevaluation and report on the effectiveness of our internal controls overfinancial reporting. At December 31, 2008, management and our independentauditors did not identify any material weaknesses in our internal controls overfinancial reporting. Our efforts to comply with Section 404 and relatedregulations has required, and continues to require, the commitment ofsignificant financial and managerial resources. While we anticipate maintainingthe integrity of our internal controls over financial reporting and all otheraspects of Section 404, we cannot be certain that a material weakness willnot be identified when we test the effectiveness of our control systems in thefuture. If a material weakness is identified, we could be subject to sanctionsor investigations by Nasdaq, the SEC or other regulatory authorities, whichwould require additional financial and management resources, costly litigationor a loss of public confidence in our internal controls, which could have anadverse effect on the market price of our stock.

 

**Some provisions of our charterdocuments and Delaware law may have anti-takeover effects that could discouragean acquisition of us by others, even if an acquisition would be beneficial toour stockholders and may prevent attempts by our stockholders to replace orremove our current management.**

 

Provisions in our amendedand restated certificate of incorporation and bylaws, as well as provisions ofDelaware law, could make it more difficult for a third party to acquire us,even if doing so would benefit our stockholders, or remove our currentmanagement.  These provisions include:

 

·                  a board of directors divided into three classesserving staggered three-year terms, such that not all members of the board willbe elected at one time;

 

·                  authorizing the issuance of “blank check” preferredstock, the terms of which may be established and shares of which may be issuedwithout stockholder approval;

 

·                  limiting the removal of directors by the stockholders;

 

39

----

Table of Contents

 

·                  prohibiting stockholder action by written consent,thereby requiring all stockholder actions to be taken at a meeting of ourstockholders;

 

·                  a requirement of approval of not less than 66 2/3% of all outstanding shares of our capital stockentitled to vote to amend any bylaws by stockholder action, or to amendspecific provisions of our certificate of incorporation;

 

·                  eliminating the ability of stockholders to call aspecial meeting of stockholders; and

 

·                  establishing advance notice requirements fornominations for election to the board of directors or for proposing mattersthat can be acted upon at stockholder meetings.

 

These provisions mayfrustrate or prevent any attempts by our stockholders to replace or remove ourcurrent management by making it more difficult for stockholders to replacemembers of our board of directors, which is responsible for appointing themembers of our management.  In addition,we are subject to Section 203 of the Delaware General Corporation Law,which generally prohibits a Delaware corporation from engaging in any of abroad range of business combinations with a stockholder owning 15% or more ofour outstanding voting stock for a period of three years following the date onwhich the stockholder became an interested stockholder, unless suchtransactions are approved by our board of directors.  This provision could have the effect ofdelaying or preventing a change of control, whether or not it is desired by orbeneficial to our stockholders.  Such adelay or prevention of a change of control transaction could cause the marketprice of our stock to decline.

 

**Item 1B.Unresolved Staff Comments**

 

None.

 

**Item 2.Properties**

 

Our facilities currentlyconsist of approximately 26,000 square feet of laboratory and office space intwo facilities in San Diego, California. We believe these facilities are adequate to meet our current needs andthat additional space will be available on commercially reasonable terms asneeded.

 

**Item 3.Legal Proceedings**

 

We are not currently aparty to any legal proceeding.

 

**Item 4.Submission of Matters to a Vote of Security Holders**

 

No matters weresubmitted to a vote of security holders during the fourth quarter of fiscalyear ended December 31, 2008.

 

40

----

Table ofContents

 

**PART II**

 

**Item 5. Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities**

 

Our common stock has beentraded on the Nasdaq Global Market under the symbol “OPTR” since February 9,2007. Prior to that time, there was no public market for our common stock. Thefollowing table sets forth the range of high and low sale prices for our commonstock for each completed fiscal quarter since February 9, 2007.

 
| **2008**        | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| First  Quarter  |       | $        | 7.30       |    | $          | 5.90 |   |
| Second  Quarter |       | $        | 9.00       |    | $          | 5.85 |   |
| Third  Quarter  |       | $        | 9.70       |    | $          | 7.24 |   |
| Fourth  Quarter |       | $        | 12.14      |    | $          | 3.30 |   |

 
| **2007**                                    | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------------|------------|----------|------------|---------|------------|
| First  Quarter (from February 9, 2007) |       | $        | 10.74      |    | $          | 7.24 |   |
| Second  Quarter                             |       | $        | 10.40      |    | $          | 8.50 |   |
| Third  Quarter                              |       | $        | 10.42      |    | $          | 7.75 |   |
| Fourth  Quarter                             |       | $        | 8.86       |    | $          | 6.50 |   |

 

As of March 11,2009, there were approximately 71 holders of record of our common stock.

** **

**Dividends**

 

We have never paid ordeclared cash dividends on our capital stock. We currently intend to retainfuture earnings, if any, for use in the expansion and operation of our businessand do not anticipate paying any cash dividends in the foreseeable future.

** **

**Performance Measurement Comparison(1)**

 

The following stockperformance graph illustrates a comparison of the total stockholder return onour common stock since February 9, 2007, which is the date our commonstock first began trading on the Nasdaq Global Market, to two indices: theNasdaq Composite Index and the Nasdaq Biotechnology Index.  The graph assumes an initial investment of$100 on February 9, 2007, and that all dividends were reinvested.

 

**COMPARISON OF CUMULATIVE TOTAL RETURN***

**Among Optimer Pharmaceuticals Inc, The NASDAQ Composite Index**

**And The NASDAQ Biotechnology Index**

 

 

----

*$100invested on 2/9/07 in stock & 1/31/07 in index-including reinvestment ofdividends.

Fiscalyear ending December 31.

 

(1) This section isnot “soliciting material”, is not deemed “filed” with the SEC, is not subjectto the liabilities of Section 18 of the Exchange Act, and is not to beincorporated by reference in any of our filings under the Exchange Act whethermade before or after the date hereof and irrespective of any generalincorporation language in any such filing.

 

41

----

Table of Contents

 

**Item6.  Selected Consolidated Financial Data**

 

You should readthe following selected consolidated financial and operating informationtogether with “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and our consolidated financial statements and notesthereto included elsewhere in this report. Historical results for any priorperiod are not necessarily indicative of the results to be expected for anyfuture period.

 
| ** **                                                                | ** ** | **Years Ended December 31,**                           | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2008**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Statement  of Operations Data:**                                        |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Collaboration  and grant revenues                                         |       | $                                                                     | 1,023      |   | $ | 767 |   | $ | 933 |   | $ | 2,147 |   | $ | 1,111 |   |
| Operating  expenses:                                                      |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Research  and development                                                 |       | 29,036                                                                |       | 41,569 |   | 10,481 |   | 7,047 |   | 8,571 |   |
| Marketing                                                                 |       | 2,451                                                                 |       | 2,048 |   | — |   | — |   | — |   |
| General  and administrative                                               |       | 6,683                                                                 |       | 5,351 |   | 3,523 |   | 2,782 |   | 2,697 |   |
| Total  operating expenses                                                 |       | 38,170                                                                |       | 48,968 |   | 14,004 |   | 9,829 |   | 11,268 |   |
| Loss  from operations                                                     |       | (37,147                                                               | )          | (48,201 | ) | (13,071 | ) | (7,682 | ) | (10,157 | ) |
| Interest  income and other, net                                           |       | 1,562                                                                 |       | 2,062 |   | 1,169 |   | 237 |   | 247 |   |
| Net  loss                                                                 |       | (35,585                                                               | )          | (46,139 | ) | (11,902 | ) | (7,445 | ) | (9,910 | ) |
| Accretion  to redemption amount of redeemable convertible preferred stock |       | —                                                                |       | — |   | (329 | ) | (223 | ) | (12 | ) |
| Net  loss attributable to common stockholders                             |       | $                                                                     | (35,585    | ) | $ | (46,139 | ) | $ | (12,231 | ) | $ | (7,668 | ) | $ | (9,922 | ) |
| Basic  and diluted net loss per share attributable to common stockholders |       | $                                                                     | (1.24      | ) | $ | (2.12 | ) | $ | (4.81 | ) | $ | (3.22 | ) | $ | (4.76 | ) |
| Weighted  average shares outstanding                                      |       | 28,683                                                                |       | 21,715 |   | 2,543 |   | 2,383 |   | 2,084 |   |

 
| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **(in thousands)**               | ** ** |
| **Balance Sheet Data:**                            |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash,  cash equivalents and short-term investments |       | $                                     | 39,326     |   | $ | 58,806 |   | $ | 21,341 |   | $ | 29,880 |   | $ | 1,953 |   |
| Working  capital                                   |       | 32,258                                |       | 52,173 |   | 17,990 |   | 28,490 |   | 1,231 |   |
| Total  assets                                      |       | 42,295                                |       | 60,786 |   | 24,114 |   | 32,335 |   | 4,903 |   |
| Redeemable  convertible preferred stock            |       | —                                |       | — |   | 65,460 |   | 65,078 |   | 32,175 |   |
| Accumulated  deficit                               |       | (133,382                              | )          | (97,698 | ) | (51,558 | ) | (39,656 | ) | (32,212 | ) |
| Total  stockholders’ equity (deficit)         |       | 34,231                                |       | 52,903 |   | (46,702 | ) | (35,143 | ) | (28,463 | ) |
|                                                    |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

42

----

Table of Contents

** **

**Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperation**

 

*Thefollowing discussion and analysis should be read in conjunction with our“Selected Consolidated Financial Data” and consolidated financial statementsand accompanying notes appearing elsewhere in this report.  This discussion and other parts of thisreport may contain forward-looking statements based upon current expectationsthat involve risks and uncertainties. Our actual results and the timing of selected events could differmaterially from those anticipated in these forward-looking statements as aresult of several factors, including those set forth under “Risk Factors” andelsewhere in this report.*

 

Overview

 

We are abiopharmaceutical company focused on discovering, developing andcommercializing innovative anti-infective products. Our current developmentefforts are focused on products that treat gastrointestinal infections,****and related diseases where currenttherapies have limitations, including limited efficacy, serious adverse sideeffects, drug-to-drug interactions, difficult patient compliance and bacterialresistance.

 

We currently have twolate-stage anti-infective product candidates, fidaxomicin, formerly known asOPT-80, and prulifloxacin.

 

Fidaxomicin, our leadproduct candidate, is an antibiotic currently in its second Phase 3registration trial for the treatment of CDI, the most common nosocomial, or hospitalacquired, diarrhea. In November 2008, we reported positive data from thefirst fidaxomicin Phase 3 trial, the largest single comparative study everconducted against Vancocin. The top-line analysis of data from this trialshowed that fidaxomicin achieved the primary endpoint of clinical cure anddemonstrated a significantly lower recurrence rate compared to Vancocin, theonly FDA-approved antibiotic for the treatment of CDI.  Fidaxomicin was also well-tolerated in thetrial.  The second fidaxomicin Phase 3trial is on-going and we anticipate completing enrollment and reporting datafrom this trial in 2009.  We currentlyhold worldwide rights to fidaxomicin.

 

Prulifloxacin is aprodrug in the fluoroquinolone class of antibiotics, a widely-used class of broad-spectrum antibiotics. We aredeveloping prulifloxacin as a treatment for infectious diarrhea intravelers.  In July 2008, wereported positive top-line data from the first Phase 3 trial conducted inMexico and Peru and in February 2009, we reported positive top-line datafrom the second Phase 3 trial conducted in India, Guatemala and Mexico.  The top-line analysis of data from thesestudies showed that prulifloxacin met the primary endpoint of TLUS compared toplacebo. We intend to conduct a Phase 4 trial of prulifloxacin subsequentto the NDA submission to compare prulifloxacin to ciprofloxacin for thetreatment of infectious diarrhea.  Weplan to initially seek approval for prulifloxacin for the treatment of infectiousdiarrhea in travelers.

 

We aredeveloping additional product candidates using our proprietary technology,including our Optimer One-Pot Synthesis, or OPopSTM drug discovery platform.OPopS is a computer-aided technology that enables the rapid and low-costsynthesis of a wide array of carbohydrate-based compounds.  Two components of the OPopS technology thatallow us to synthesize new compounds are GlycoOptimization and De NovoGlycosylation.  These technologies arecapable of rapidly generating drug candidates for broad therapeutic application.  One of the more advanced OPopS productcandidates is OPT-88, a disease-modifying intra-articular, or within the cavityof a joint, therapy for osteoarthritis.  We plan tosubmit an Investigational New Drug application in 2009 and subsequently to,either ourselves or with a partner, initiate a Phase 1 study to assess safetyof repetitive intra-articular injections of OPT-88 in patients with kneeosteoarthritis.

 

We also acquired exclusive rights from MemorialSloan-Kettering Cancer Center to develop and commercialize OPT-822, a novelcarbohydrate-based cancer immunotherapy. We plan to seek a partner and initiatePhase 2/3 clinical trials for the treatment of metastatic breast cancer in Asiain 2009.

 

We were incorporated in November 1998.  Since inception, we have focused ondeveloping our product candidates, including fidaxomicin andprulifloxacin.  We have never beenprofitable and have incurred significant net losses since our inception.  As of December 31, 2008, we had anaccumulated deficit of $133.4 million. These losses have resulted principally from costs incurred in connectionwith research and development activities, including the costs of clinical trialactivities associated with our current lead product candidates, license feesand general and administrative expenses. We expect to continue to incur operating losses for the next severalyears as we pursue the clinical development and commercialization of ourproduct candidates, as well as acquire or in-license additional products orproduct candidates, technologies or businesses that are complementary to ourown.

 

43

----

Table of Contents

 

**Financial Operations Overview**

 

*Collaboration and Grant Revenues*

 

We have not generated anyrevenues from sales of commercial products. Since inception, we have generated revenues primarily as a result ofvarious collaborations with pharmaceutical and biotechnology companies and grantsfrom government agencies.  We may alsoperiodically recognize as revenues non-refundable payments for achievingcertain milestones during the term of our collaboration agreements.

 

*Research and Development Expense*

 

Research and developmentexpense consists of expenses incurred in connection with identifying anddeveloping our drug candidates and developing and advancing our drug discoverytechnology.  Our research and developmentexpenses consist primarily of salaries and related employee benefits, costs associatedwith clinical trials managed by our CROs and costs associated with non-clinicalresearch activities and regulatory approvals. Our most significant costs are for clinical trials, including paymentsto vendors such as CROs, investigators, manufacturers of clinical supplies andrelated consultants.  Our historicalresearch and development expenses have resulted predominantly from our clinicaltrials of fidaxomicin and prulifloxacin, the development of our carbohydratetechnology platforms, including OPopS, in-licensing fees and general researchactivities.  We charge all research anddevelopment expenses to operations as they are incurred because the underlyingtechnology associated with these expenditures relates to our research anddevelopment efforts and has no alternative future uses.  From inception through December 31,2008, we incurred total research and development expenses of approximately$113.4 million.

 

We use our internalresearch and development resources across several projects, and much of thisuse is not allocable to a specific project. Accordingly, we do not account for all of our internal research anddevelopment costs on a project basis.  Inaddition to our internal resources, we use external service providers andvendors to conduct our clinical trials, to manufacture our product candidatesto be used in clinical trials and to provide various other research anddevelopment related products and services. These external costs are allocable to specific projects.

 

External costs are expensedas incurred.  We incurred $18.6 million,$34.4 million and $64.7 million of research and development expenses directlyrelated to the development of fidaxomicin for the years ended December 31,2008 and 2007, and cumulatively through December 31, 2008,respectively.  The decrease in theseresearch and development expenses, from 2007 to 2008, resulted primarily fromexpense recorded in 2007 related to a $20 million payment to Par Pharmaceuticalto regain the rights to fidaxomicin in North America.  We incurred $7.5 million, $4.0 million, and$16.2 million of research and development expenses directly related to thedevelopment of prulifloxacin for the years ended December 31, 2008 and2007, and cumulatively through December 31, 2008, respectively.  All other research and development expenseswere for other clinical programs.

 

We expect our research and development expenses toincrease as we complete our clinical trial activities with respect tofidaxomicin, prepare regulatory filings for marketing approval of fidaxomicinand prulifloxacin, incur expenses related to large-scale manufacturing offidaxomicin and prulifloxacin, advance our other product candidates through thedevelopment process and invest in additional product opportunities and researchprograms.  Although we expect our costsassociated with clinical trials to decrease as we complete the second of twoPhase 3 clinical trials for fidaxomicin, we expect to incur substantial costsin the preparation of applications for regulatory approval and manufacturingand scale-up for fidaxomicin and prulifloxacin. The process of conducting pre-clinical and clinical trials and obtainingregulatory approval for our product candidates is time-consuming, expensive andsubject to many uncertainties. For example, the cost of clinical trials mayvary significantly over the life of a project as a result of a variety offactors, including the number of patients enrolled, the rate ofenrollment and the duration of patient treatment and follow-up.  In addition, it is not uncommon for the FDAto request additional data following its review of an NDA, which cansignificantly lengthen the regulatory approval process and increase expenses.

 

Asa result of the uncertainties discussed above, we are unable to determine with anysignificant degree of certainty the duration and completion costs of ourresearch and development projects or when and to what extent we will generaterevenues from the commercialization and sale of any of our product candidates.  However, while we do not have specificestimates for the costs of all of our projects, we currently estimate that wewill incur external costs of approximately $8.3 million to complete thePhase 3****clinical trials forfidaxomicin to treat CDI and approximately $1.3 million to complete thePhase 3 clinical trials for Prulifloxacin to treat infectious diarrhea intravelers.

 

*General and Administrative Expense*

 

General andadministrative expense consists primarily of compensation, includingstock-based compensation, and other expenses related to an allocated portion offacility cost, legal fees and other professional services expenses, ourcorporate 

 

44

----

Tableof Contents

 

administrative employees and insurance costs.  We anticipate that we will maintain ourexisting level of general and administrative expenditures.  However, we will make determinations as tothe necessary levels of general and administrative expenditures on an on-goingbasis in response to our research and development activities and regulatoryobligations.

 

*Interest Income (Expense) and Other,Net*

 

Interest income (expense)and other, net consists of interest earned on our cash, cash equivalents andshort-term investments and other-than-temporary declines in the market value ofavailable-for-sale securities and cash and non-cash interest charges related tobridge financings.

 

*Net Operating Losses and Tax CreditCarryforwards*

 

As of December 31,2008 we had federal, state and foreign net operating loss carryforwards ofapproximately $120.5 million, $123.9 million and $2.6 million,respectively.  If not utilized, the netoperating loss carryforwards will begin expiring in 2020 for federal purposesand 2012 for state purposes.  The foreignlosses originate from our subsidiary in Taiwan. The losses from our subsidiary in Taiwan expire five years afterorigination.  As of December 31,2008, we had both federal and state research and development tax creditcarryforwards of approximately $2.2 million and $1.5 million,respectively.  The federal tax creditswill begin expiring in 2020 unless previously utilized and the state taxcredits carryforward indefinitely.  As ofDecember 31, 2008, we had a state manufacturer’s investment tax creditcarryforward of approximately $103,000 which will begin to expire in 2011,unless previously utilized.  Under Section 382of the Internal Revenue Code of 1986, as amended, substantial changes in ourownership may limit the amount of net operating loss and tax creditcarryforwards that could be utilized annually in the future to offset taxableincome.  Any such annual limitation maysignificantly reduce the utilization of the net operating losses and taxcredits before they expire.

 

As of December 31,2008, we have completed a Section 382/383 analysis regardingthe limitation of the net operating losses and credit carryovers and haddetermined that the maximum amount of U.S. federal and state NOL and creditcarryovers are available for utilization, subject to the annuallimitation.  Based on the analysis, therelated deferred tax assets were reinstated in 2008 and the correspondingvaluation allowance was increased.  Anycarryforwards that will expire prior to utilization as a result of futurelimitations will be removed from deferred tax assets with a correspondingreduction of the valuation allowance. Due to the existence of the valuation allowance, future changes in theunrecognized tax benefits will not impact the effective tax rate.

 

**Critical Accounting Policies andEstimates**

 

Our Management’sDiscussion and Analysis of our Financial Condition and Results of Operations isbased on our consolidated financial statements, which have been prepared inconformity with generally accepted accounting principles in the UnitedStates.  The preparation of theseconsolidated financial statements requires us to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, expenses and relateddisclosures.  Actual results could differfrom those estimates. While our significant accounting policies are describedin more detail in Note 1 of the Notes to Consolidated Financial Statementsappearing elsewhere in this report, we believe the following accounting policiesto be critical to the judgments and estimates used in the preparation of ourconsolidated financial statements.

 

*Revenue Recognition*

 

Our collaborationagreements contain multiple elements, including non-refundable upfront fees,payments for reimbursement of third-party research costs, payments for ongoingresearch, payments associated with achieving specific development milestonesand royalties based on specified percentages of net product sales, if any.  We apply the revenue recognition criteriaoutlined in Staff Accounting Bulletin, or SAB No. 104, *Revenue Recognition* and Emerging IssuesTask Force, or EITF, Issue 00-21, *RevenueArrangements with Multiple Deliverables*, or EITF 00-21.  In applying these revenue recognitioncriteria, we consider a variety of factors in determining the appropriatemethod of revenue recognition under these arrangements, such as whether theelements are separable, whether there are determinable fair values and whetherthere is a unique earnings process associated with each element of a contract.

 

Cash received in advanceof services being performed is recorded as deferred revenue and recognized asrevenue as services are performed over the applicable term of the agreement.

 

When a payment isspecifically tied to a separate earnings process, revenues are recognized whenthe specific performance obligation associated with the payment iscompleted.  Performance obligationstypically consist of significant and substantive milestones.  Revenues from milestone payments may beconsidered separable from funding for research services because of theuncertainty surrounding the achievement of milestones for products in earlystages of development.  Accordingly,these milestone 

 

45

----

Tableof Contents

 

payments are allowed to be recognized as revenue ifand when the performance milestone is achieved if they represent a substantive earningsprocess as described in EITF 00-21.

 

In connection withcertain research collaboration agreements, revenues are recognized fromnon-refundable upfront fees, which we do not believe are specifically tied to aseparate earnings process, ratably over the term of the agreement or the periodover which we have significant involvement or perform services.  Research fees are recognized as revenue asthe related research activities are performed.

 

Revenues derived fromreimbursement of direct out-of-pocket expenses for research costs associated withgrants are recorded in compliance with EITF Issue 99-19, *Reporting Revenue Gross as a Principal Versus Net asan Agent*, and EITF Issue 01-14, *Income Statement Characterization of Reimbursements Received for“Out-of-Pocket” Expenses Incurred*. According to the criteria established by these EITF Issues, intransactions where we act as a principal, with discretion to choose suppliers,bear credit risk and perform part of the services required in the transaction,we record revenue for the gross amount of the reimbursement.  The costs associated with thesereimbursements are reflected as a component of research and development expensein the consolidated statements of operations.

 

None of the payments thatwe have received from collaborators to date, whether recognized as revenue ordeferred, are refundable even if the related program is not successful.

 

*Research and Development*

 

Research anddevelopment costs are expensed as incurred and consist primarily of costsassociated with clinical trials, compensation, including stock-basedcompensation, and other expenses related to research and development, includingpersonnel costs, facilities costs and depreciation.

 

When nonrefundablepayments for goods or services to be received in the future for use in researchand development activities are made, we apply the criteria outlined in EITFIssue 07-3, or EITF 07-3,  *Accounting for Non-Refundable Advance Payments forGoods or Services to be Used in Future Research and Development Activities.*Inaccordance with EITF 07-3, these types of payments are deferred andcapitalized. The capitalized amounts are expensed when the related goods aredelivered or the services are performed.

 

*Accrued Clinical Trial Costs*

 

A substantial portion ofour on-going research and development activities are performed under agreementswe enter into with external service providers, including CROs, who conduct manyof our research and development activities. We accrue the costs incurred under these contracts based on factors suchas estimates of work performed, milestones achieved, patient enrollment andcosts historically incurred for similar contracts.  As actual costs become known, we adjust ouraccruals.  Historically, our accrualshave been within management’s estimates, and no material adjustments toresearch and development expenses have been recognized.  Subsequent changes in estimates may result ina material change in our accruals, which could also materially affect ourresults of operations.

 

*Stock-Based Compensation*

 

Effective January 1,2006, we adopted Statement of Financial Accounting Standards, or SFAS, No. 123(R),*Share-Based Payment*, whichrevises SFAS No. 123, *Accounting forStock-Based Compensation* and supersedes Accounting Principles BoardOpinion No. 25, *Accounting for Stock Issuedto Employees*.  SFAS No. 123(R) requiresthat share-based payment transactions with employees be recognized in thefinancial statements based on their fair value and recognized as compensationexpense over the vesting period.  We usedthe modified prospective method when we adopted SFAS No. 123(R) andaccordingly we did not restate the results of operations for the prior periods.Compensation expense of $1.8 million, $1.2 million and $0.7 million wasrecognized in the years ended December 31, 2008, 2007 and 2006,respectively.

 

Stock-based compensationexpense is estimated as of the grant date based on the fair value of the awardand is recognized as expense over the requisite service period, which generallyrepresents the vesting period. We estimate the fair value of our stock optionsusing the Black-Scholes option-pricing model and the fair value of our stockawards based on the quoted market price of our common stock.

 

Estimating thefair value for stock options requires judgment, including estimating stock-pricevolatility, expected term, expected dividends and risk-free interest rates. Theexpected volatility rates are based on the historical fluctuation in the stockprice since inception. The average expected term is calculated using SAB No. 107,“*Simplified Method for Estimating theExpected Term*.” 

 

46

----

Tableof Contents

 

Expected dividends areestimated based on our dividend history as well as our current projections. Therisk-free interest rate for periods approximating the expected terms of theoptions is based on the U.S. Treasury yield curve in effect at the time ofgrant. These assumptions are updated on an annual basis or sooner if there is asignificant change in circumstances that could affect these assumptions.

 

Equity instrumentsissued to non-employees are recorded at their fair value as determined inaccordance with SFAS No.123(R) and EITF Issue 96-18, *Accountingfor Equity Instruments That are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling Goods and Services*, and areperiodically revalued as the equity instruments vest and are recognized asexpense over the related service period.

 

**Results of Operations**

 

***Comparison of YearsEnded December 31, 2008 and 2007***

 

*Collaborationand Grant Revenues*.  Collaboration and grant revenues for theyears ended December 31, 2008 and 2007 were $1,023,000 and $767,000,respectively.  The increase of $256,000,or 33%, was primarily due to an increase in revenue from a NIH research grant,which was partially offset by a decrease in revenue from a collaboration with anatural healthcare company which was completed in 2007.

 

*Researchand Development Expense*.  Research and development forthe years ended December 31, 2008 and 2007 was $29,036,000 and$41,569,000, respectively.  The decreaseof $12,533,000, or 30%, was due primarily to a $20.0 million payment in 2007 toPar to regain the rights to fidaxomicin in North America, and the purchase of$1.9 million of clinical supply material and active pharmaceuticalingredient.  This decrease was partiallyoffset by an increase in expenses of $7.0 million related to our fidaxomicin andprulifloxacin Phase 3 clinical trials in 2008.

 

*Marketing Expense*. * *Marketing expense for the yearsended December 31, 2008 and 2007 was $2,451,000 and $2,048,000,respectively. The increase of $403,000, or 20%, was primarily due to anincrease in medical education and pre-launch marketing efforts related tofidaxomicin.

 

*General and Administrative Expense*.  General andadministrative expense for the years ended December 31, 2008 and 2007 was$6,683,000 and $5,351,000, respectively. The increase of $1,332,000 or 25% was due to higher legal, accounting,investor relations, and compensation expenses, including an increase of$247,000 in stock compensation expense over the same period in the prior year.

 

*InterestIncome and Other, net*.  Net interest income and otherfor the years ended December 31, 2008 and 2007 were $1,562,000 and$2,061,000, respectively.  The decreaseof $500,000, or 24%, was primarily due to lower cash and short-term investmentsand lower overall interest rates. In addition, we recorded an impairment on ourlong-term investments of $118,000 in 2008.

** **

***Comparison of YearsEnded December 31, 2007 and 2006***

 

*Collaborationand Grant Revenues*.  Collaboration and grant revenues for theyears ended December 31, 2007 and 2006 were $767,000 and $933,000,respectively.  The decrease of $166,000,or 18%, was primarily due to a decrease in revenue from a NIH grant and theconclusion of a development and license agreement, partially offset by anincrease of $370,000 related to a collaboration with a natural healthcarecompany.

 

*Researchand Development Expense*.  Research and development forthe years ended December 31, 2007 and 2006 was $41,569,000 and$10,481,000, respectively.  The increaseof $31,088,000, or 297% was due primarily to the $20.0 million payment to Parto reacquire the rights to fidaxomicin in North America and Israel, theadvancement of our fidaxomicin and prulifloxacin clinical trials, including theinitiation of the second pivotal Phase 3 trial for fidaxomicin, and thepurchase of $1.9 million of fidaxomicin clinical supply material and activepharmaceutical ingredient for the fidaxomicin clinical study.

 

*Marketing. *We incurred $2,048,000 of marketing expense in theyear ended December 31, 2007 and no such expense in the year ended December 31,2006.  The expenses in the year ended December 31,2007 were related to salaries and pre-launch activities which include medicaleducation, scientific conferences, and public relations services.

 

*Generaland Administrative Expense*.  General andadministrative expense for the year ended December 31, 2007 and 2006 was$5,351,000 and $3,523,000, respectively. The increase of $1,828,000, or 52%, was due to increased expenses tosupport a public 

 

47

----

Tableof Contents

 

company infrastructure which included higher legalexpenses, insurance and compensation expenses, including a $679,000 of stockcompensation expense, an increase of $265,000 over the prior year.

* *

*InterestIncome and Other, net*.  Net interest income and otherfor the year ended December 31, 2007 and 2006 were $2,062,000 and$1,169,000, respectively.  The increasewas primarily due to higher cash and short-term investment balances as a resultof our initial public offering completed in February 2007 and our privateplacement offering which closed in October 2007.

 

**Liquidity and Capital Resources**

 

*Sources of Liquidity*

 

Since inception, ouroperations have been financed primarily through the sale of equity securities.  Through March 9, 2009, we received grossproceeds of approximately $202.4 million from the sale of shares of ourpreferred and common stock as follows:

 

·                  in May 2000, we sold a total of 1.6 millionshares of Series A preferred stock for proceeds of $3.4 million;

 

·                  from March 2001 to December 2001, we sold atotal of 4.1 million shares of Series B preferred stock for proceeds of$32.2 million;

 

·                  in April 2005, we sold a total of 1.5 millionshares of Series C preferred stock for proceeds of $12.0 million;

 

·                  from April 2005 to November 2005, we sold atotal of 2.9 million shares of Series D preferred stock for proceeds of$22.3 million;

 

·                  in February 2007, we sold a total of 7.0 millionshares of our common stock in connection with our initial public offering forproceeds of $49.0 million;

 

·                    in October 2007, we sold a total of 4.6 millionshares of our common stock in connection with a private placement offering forproceeds $35.9 million;

 

·                  in July 2008, we sold atotal of 1.7 million shares of our common stock in a registered direct offeringfor proceeds of $14.7 million; and

 

·                  in March 2009, we solda total of 3.3 million shares of our common stock and warrants to purchase upto an aggregate of 91,533 shares of our common stock in a registered directoffering for proceeds of $32.9 million.

 

Until required foroperations, we invest a substantial portion of our available funds in moneymarket funds, corporate debt securities, United States government instrumentsand other readily marketable debt instruments, all of which areinvestment-grade quality.  We haveestablished guidelines relating to diversification and maturities of ourinvestments to preserve principal and maintain liquidity.

 

*Cash Flows*

 

As of December 31,2008, our cash, cash equivalents and short-term investments totaledapproximately $39.3 million as compared to $58.8 million as of December 31,2007. The decrease of approximately $19.5 million was primarily due to cashused in operations and was partially offset by $14.7 million raised in aregistered direct offering in July 2008. In addition, as noted above, in March 2009, we raised $32.9 millionin a registered direct offering.

 

We cannot be certain if,when or to what extent we will receive cash inflows from the commercializationof our product candidates.  We expect ourdevelopment expenses to be substantial and to increase over the next few yearsas we advance the development of our product candidates and prepare forregulatory submissions and commercialization.

 

In February 2007, weregained worldwide rights to fidaxomicin from Par under a prospective buy-backagreement.   We paid Par a one-time $20.0million termination fee and purchased $1.9 million of fidaxomicin clinicalsupply material and active pharmaceutical ingredient.  We are obligated to pay Par a one-time $5.0million milestone payment, a 5% royalty on net sales by us or our affiliates offidaxomicin in North America and Israel, and a 1.5% royalty on net sales by usor our affiliates of fidaxomicin in the rest of the world.  In addition, in the event we license ourright to market fidaxomicin in the rest of the world, we will be required topay Par a 6.25% royalty on net revenues we receive related to fidaxomicin.  We are obligated to pay each of theseroyalties, if any, on 

 

48

----

Tableof Contents

 

a country-by-country basis for seven years commencingon the applicable commercial launch in each such country.   In connection with theexercise of our rights under the prospective buy-back agreement, Par assignedto us a supply agreement with Biocon. Under this agreement, Biocon is obligatedto supply to us our requirements of the fidaxomicin API for certain markets. Wemay be obligated to pay a  $3.0 millionprepayment to Biocon, subject to future set-offs.

 

In June 2004, weentered into a license agreement with Nippon Shinyaku pursuant to which weacquired the non-exclusive right to import and purchase prulifloxacin, and theexclusive right (with the right to sublicense), within the United States, todevelop, make, use, offer to sell, sell and license products suitable forconsumption by humans containing prulifloxacin. Additionally, we acquired rights within the United States to a keypatent which covers the compound and the treatment of bacterial infections inhumans and animals.  Under the terms ofthe agreement, we will be required to pay Nippon Shinyaku a milestone paymentin the amount of $1.0 million upon the filing, if any, of an NDA forprulifloxacin in the United States.

 

InOctober 2008, our Compensation Committee adopted a Severance Benefit Plancovering certain eligible employees of the Company, including executiveofficers.  Pursuant to the plan, upon aninvoluntary termination other than for cause an eligible employee may beentitled to receive specified severance benefits. The benefits may include cashseverance payments and acceleration of stock award vesting.  The level of benefits provided under the plandepends upon an eligible employee’s position and years of service, and whetherthe termination is related to a change in control.

 

*Funding Requirements*

 

Our future capital usesand requirements depend on numerous factors including, but not limited to, thefollowing:

 

·                  the progress of our clinical trials, includingexpenses to support the trials and the milestone payments that may becomepayable to Par and Nippon Shinyaku;

 

·                  our ability to establish and maintain strategiccollaborations, including partnerships and other arrangements;

 

·                  the costs involved in prosecuting, enforcing ordefending patent claims or other intellectual property rights;

 

·                  the costs and timing of regulatory approvals;

 

·                  the costs of establishing sales or distributioncapabilities;

 

·                  the commercial success of our products; and

 

·                  the extent to which we in-license, acquire or investin other indications, products, technologies and businesses.

 

We believe that ourexisting cash and cash equivalents will be sufficient to meet our capitalrequirements for at least the next 15 months.

 

Until we can generatesignificant cash from our operations, we expect to continue to fund ouroperations with existing cash resources that were primarily generated fromofferings of our equity securities and collaborations and governmentgrants.  In addition, we may financefuture cash needs through the sale of additional equity securities, strategiccollaboration agreements and debt financing. However, we may not be successful in entering into additionalcollaboration agreements, in receiving milestone or royalty payments under newor existing collaboration agreements, in obtaining new government grants or inobtaining equity or debt financing.  In addition,we cannot be sure that our existing cash and investment resources will beadequate, that financing will be available when needed or that, if available,financing will be obtained on terms favorable to us or our stockholders.  Having insufficient funds may require us todelay, scale-back or eliminate some or all of our development programs,relinquish some or even all of our rights to product candidates at an earlierstage of development or renegotiate less favorable terms than we wouldotherwise choose.  Failure to obtainadequate financing also may adversely affect our ability to operate as a goingconcern.  If we raise funds by issuingequity securities, substantial dilution to existing stockholders would likelyresult.  If we raise funds by incurringadditional debt financing, the terms of the debt may involve significant cashpayment obligations as well as covenants and specific financial ratios that mayrestrict our ability to operate our business.

 

49

----

Table of Contents

 

**Off-Balance Sheet Arrangements**

 

We do not have anyoff-balance sheet arrangements.

 

**Contractual Obligations**

 

The following tabledescribes our long-term contractual obligations and commitments as of December 31,2008:

 
| ** **                   | ** ** | **Payments Due by Period** | ** ** |
|------------------------------|------------|-------------------------------------------|------------|
| ** **                   | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-2 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
| ** **                   | ** ** | **(in thousands)**                   | ** ** |
| Operating  lease obligations |       | $                                         | 2,099      |   | $ | 856 |   | $ | 1,243 |   | $ | — |   | $ | — |   |
|                              |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We contracted with a CROfor clinical research services for the fidaxomicin Phase 3 clinical trialsand prulifloxacin Phase 3 clinical trials. We have issued purchase orders totaling $42.4 million as of December 31,2008 for these services, $8.4 million, $9.8 million and $20.4 million wereissued in 2008, 2007, and 2006, respectively. As of December 31, 2008, we have paid $28.6 million related tothese purchase orders.  We can terminatethe service agreement at any time upon 60 days’ written notice to the CRO.  We have not included any amounts related to theCRO contract in the table above.

 

The contractualobligations table does not include (a) a potential future milestonepayment in the amount of $1.0 million to Nippon Shinyaku due upon filing ourfirst NDA in the United States for prulifloxacin, (b) potential futuremilestone payments to Cempra in the amount of $1.0 million due upon theregulatory approval of each of the first two products we develop under ourlicensing agreement with Cempra in any country which is a member of theAssociation of Southeast Asian Nations, or ASEAN, (c) potential futuremilestone payments to SKI for each product licensed under the SKI agreement asfollows: (i) $500,000 upon the commencement of Phase 3 clinicalstudies, (ii) $750,000 upon the filing of the first NDA, (iii) $1.5million upon marketing approval in the United States and (iv) $1.0 millionupon marketing approval in each and any of Japan and certain Europeancountries, (d) potential future milestone payments of up to $14.0 millionto TSRI due upon achievement of certain clinical milestones, the filing of NDAsor their foreign equivalents and government marketing and distributionapproval, or (e) a future $5.0 million milestone payment to Par upon theearliest occurrence of (i) the successful completion by us of our pivotalPhase 3 trial for fidaxomicin, (ii) our grant to a third party of therights to fidaxomicin or (iii) the submission to the FDA of an NDA forfidaxomicin.  We may also be required topay royalties on any net sales of prulifloxacin, fidaxomicin and other licensedproduct candidates.  The milestone androyalty payments under our license agreements are not included in the tableabove because we cannot, at this time, determine when or if the relatedmilestones will be achieved or the events triggering the commencement ofpayment obligations will occur.

 

**Recently Issued AccountingPronouncements**

 

In December 2007,the Financial Accounting Standards Board, or FASB issued Statement of FinancialAccounting Standards, or SFAS No. 160, *“Noncontrolling Interests in Consolidated Financial Statements —An Amendment of ARB No. 51”*, or SFAS 160.  SFAS 160 requires the recognition of anoncontrolling interest, sometimes called minority interest, as equity in theconsolidated financial statements and separate from the parent’s equity. Theamount of net income attributable to the noncontrolling interest will beincluded in consolidated net income on the face of the income statement.SFAS 160 clarifies that changes in a parent’s ownership interest in asubsidiary that do not result in deconsolidation are equity transactions if theparent retains its controlling financial interest. In addition, this statementrequires that a parent recognize a gain or loss in net income when a subsidiaryis deconsolidated. Such gain or loss will be measured using the fair value ofthe noncontrolling equity investment on the deconsolidation date. SFAS 160also includes expanded disclosure requirements regarding the interests of theparent and its noncontrolling interest. SFAS 160 is effective for fiscalyears, and interim periods within those fiscal years, beginning on or after December 15,2008. Earlier adoption is prohibited. We do not expect the adoption of thisstandard to have a material impact on our financial position, cash flows, orresults of operations.

 

In December 2007,the FASB issued SFAS 141 (revised 2007), “Business Combinations”, orSFAS 141(R). SFAS 141(R) establishes principles and requirements forhow an acquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, any noncontrolling interest in theacquiree and the goodwill acquired in connection with business combinations.SFAS 141(R) also establishes disclosure requirements to enable theevaluation of the nature and financial effects of the business combination.SFAS 141(R) is effective for fiscal years beginning on or after December 15,2008.  We do not expect the adoption ofthis standard to have a material impact on our financial position, cash flows,or results of operations.

 

In March 2008,the FASB issued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133*.This new standard requires enhanced disclosures for derivative instruments,including those 

 

50

----

Table of Contents

 

used in hedging activities. It is effective for fiscalyears and interim periods beginning after November 15, 2008. We do not expect the adoption of thisstandard to have a material impact on our financial position, cash flows, orresults of operations.

 

InApril 2008, the FASB issued FASB Staff Position, or FSP, FAS 142-3, *Determination of the Useful Life of Intangible Assets*.FSP FAS 142-3 amends the factors that should be considered in developingrenewal or extension assumptions used to determine the useful life of arecognized intangible asset under FASB Statement No. 142, *Goodwill and Other Intangible Assets*. FSPFAS 142-3 is effective for fiscal years beginning after December 15,2008 and early adoption is prohibited. We do not expect the adoption of this standard to havea material impact on our financial position, cash flows, or results ofoperations.

 

In January 2009, theFASB FSP issued FSP EITF 99-20-1, *Amendments to theImpairment Guidance of EITF 99-20*. This new standard amends theimpairment guidance in EITF Issue No. 99-20, *Recognitionof Interest Income and Impairment on Purchased Beneficial Interests andBeneficial Interests That Continue to Be Held by a Transferor in SecuritizedFinancial Assets,* to achieve more consistent determination, ofwhether an other-than-temporary impairment has occurred. FSP EITF 99-20-1 alsoretains and emphasizes the objective of an other than-temporary impairmentassessment and the related disclosure requirements in FASB Statement No. 115,*Accounting for Certain Investments in Debtand Equity Securities,*and other related guidance. FSP EITF 99-20-1is effective for interim and annual reporting periods ending after December 15,2008, and shall be applied prospectively. Retrospective application to a priorinterim or annual reporting period is prohibited. We adopted this standard inour fiscal year ended December 31, 2008. The adoption did not have a material impact on our financial position,cash flows, or results of operations.

 

**Item 7A.Quantitative and Qualitative Disclosures about Market Risk**

 

Our cash and cashequivalents and short-term investments as of December 31, 2008 consistedprimarily of money market funds, corporate debt securities, United Statesgovernment instruments and other readily marketable debt instruments.  Our primary exposure to market risk isinterest income sensitivity, which is affected by changes in the general levelof U.S. interest rates.  The primaryobjective of our investment activities is to preserve principal while at thesame time maximizing the income we receive from our investments withoutsignificantly increasing risk.  Ahypothetical ten percent change in interest rates during the year ended December 31,2008 would have resulted in approximately a $177,000 change in net loss.Accordingly, we do not expect that our operating results or cash flows would beaffected to any significant degree a sudden change in market interest rates onour securities portfolio.  In general,money market funds are not subject to market risk because the interest paid onsuch funds fluctuates with the prevailing interest rate.

 

51

----

Tableof Contents

 

**Item 8. Financial Statements and Supplementary Data**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Report  of Independent Registered Public Accounting Firm                                                   |   | 53 |
|------------------------------------------------------------------------------------------------------------|--------|----|
| Consolidated Balance Sheets                                                                                |   | 54 |
| Consolidated Statements of Operations                                                                      |   | 55 |
| Consolidated Statements of Redeemable Convertible  Preferred Stock and Stockholders’ Equity (Deficit) |   | 56 |
| Consolidated Statements of Cash Flows                                                                      |   | 57 |
| Notes to Consolidated Financial Statements                                                                 |   | 58 |

 

52

----

**Table of Contents**

** **

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

The Board of Directors andStockholders of Optimer Pharmaceuticals Inc.

 

We have audited the accompanying consolidatedbalance sheets of Optimer Pharmaceuticals, Inc. as of December 31,2008 and 2007, and the related consolidated statements of operations,redeemable convertible preferred stock and stockholders’ equity (deficit), andcash flows for each of the three years in the period ended December 31,2008. These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Optimer Pharmaceuticals, Inc. at December 31,2008 and 2007, and the consolidated results of its operations and its cash flowsfor each of the three years in the period ended December 31, 2008, inconformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States),Optimer Pharmaceuticals, Inc.’s internal control over financial reportingas of December 31, 2008, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 11,2009 expressed an unqualified opinion thereon.

 
|                        |   | /s/  ERNST & YOUNG LLP |
|------------------------|--------|---------------------------------|
|                   |   |                            |
| San  Diego, California |   |                            |
| March 11,  2009   |   |                            |

 

53

----

Tableof Contents

 

**Optimer Pharmaceuticals, Inc.**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                      | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **ASSETS**                                                                                                                                                                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                 |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                       |       | $                     | 16,778,880 |   | $ | 3,191,814 |   |
| Short-term investments                                                                                                                                                          |       | 22,547,515            |       | 55,613,785 |   |
| Research grant, contract and other  receivables                                                                                                                                 |       | 211,299               |       | 95,184 |   |
| Prepaid expenses and other current assets                                                                                                                                       |       | 533,371               |       | 872,810 |   |
| Total current assets                                                                                                                                                            |       | 40,071,065            |       | 59,773,593 |   |
| Restricted cash                                                                                                                                                                 |       | 170,000               |       | — |   |
| Property and equipment, net                                                                                                                                                     |       | 694,183               |       | 705,374 |   |
| Long-term investments                                                                                                                                                           |       | 1,032,000             |       | — |   |
| Other assets                                                                                                                                                                    |       | 328,250               |       | 306,573 |   |
| Total assets                                                                                                                                                                    |       | $                     | 42,295,498 |   | $ | 60,785,540 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                   |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                            |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                |       | $                     | 3,767,831  |   | $ | 2,602,152 |   |
| Accrued expenses                                                                                                                                                                |       | 4,045,660             |       | 4,998,025 |   |
| Total current liabilities                                                                                                                                                       |       | 7,813,491             |       | 7,600,177 |   |
| Deferred rent                                                                                                                                                                   |       | 251,504               |       | 281,894 |   |
| Commitments and contingencies                                                                                                                                                   |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                      |       |                  |       |   |   |
| Preferred stock, par value $0.001,  10,000,000 shares and no shares authorized at December 31, 2008 and  2007, respectively                                                |       | —                |       | — |   |
| Common stock, $0.001 par value, 75,000,000  shares authorized, 29,716,751 shares and 27,903,705 shares issued and outstanding  at December 31, 2008 and 2007, respectively |       | 29,717                |       | 27,904 |   |
| Treasury stock, at cost; no shares and  46,153 shares held December 31, 2008 and 2007, respectively                                                                        |       | —                |       | (100,000 | ) |
| Additional paid-in capital                                                                                                                                                      |       | 167,544,806           |       | 150,681,519 |   |
| Accumulated other comprehensive gain (loss)                                                                                                                                     |       | 38,088                |       | (8,396 | ) |
| Accumulated deficit                                                                                                                                                             |       | (133,382,108          | )          | (97,697,558 | ) |
| Total stockholders’ equity                                                                                                                                                 |       | 34,230,503            |       | 52,903,469 |   |
| Total liabilities and stockholders’ equity                                                                                                                                 |       | $                     | 42,295,498 |   | $ | 60,785,540 |   |

 

See accompanying notes.

 

54

----

Table of Contents

 

**Optimer Pharmaceuticals, Inc.**

**Consolidated Statements ofOperations**

 
| ** **                                                                                            | ** ** | **Years Ended December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                                            | ** ** | **2008**                                    | ** **  | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                            | ** ** | ** **                                  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                                             |       |                                        |        |   |   |   |   |
| Research grants                                                                                       |       | $                                           | 973,370     |   | $ | 333,610 |   | $ | 676,764 |   |
| Collaborative research agreements                                                                     |       | 50,000                                      |        | 433,555 |   | 256,326 |   |
| Total revenues                                                                                        |       | 1,023,370                                   |        | 767,165 |   | 933,090 |   |
| Operating  expenses:                                                                                  |       |                                        |        |   |   |   |   |
| Research and development                                                                              |       | 29,035,828                                  |        | 41,569,067 |   | 10,480,924 |   |
| Marketing                                                                                             |       | 2,451,191                                   |        | 2,048,002 |   | — |   |
| General and administrative                                                                            |       | 6,682,881                                   |        | 5,350,800 |   | 3,523,221 |   |
| Total operating expenses                                                                              |       | 38,169,900                                  |        | 48,967,869 |   | 14,004,145 |   |
| Loss from operations                                                                                  |       | (37,146,530                                 | )           | (48,200,704 | ) | (13,071,055 | ) |
| Interest income and other, net                                                                        |       | 1,561,934                                   |        | 2,061,527 |   | 1,169,160 |   |
| Net loss                                                                                              |       | (35,584,596                                 | )           | (46,139,177 | ) | (11,901,895 | ) |
| Accretion to redemption amount of  redeemable convertible preferred stock                             |       | —                                      |        | — |   | (329,207 | ) |
| Net loss allocable to common stockholders                                                             |       | $                                           | (35,584,596 | ) | $ | (46,139,177 | ) | $ | (12,231,102 | ) |
|                                                                                                  |       |                                        |        |   |   |   |   |
| Basic and diluted net loss per share  attributable to common stockholders                             |       | $                                           | (1.24       | ) | $ | (2.12 | ) | $ | (4.81 | ) |
| Shares used to compute basic and diluted  net loss per share attributable to common stockholders |       | 28,682,542                                  |        | 21,715,332 |   | 2,542,893 |   |

 

See accompanying notes.

 

55

----

Table of Contents

 

Optimer Pharmaceuticals, Inc.

Consolidated Statements ofStockholders’ Equity (Deficit)

 
| ** **                                                                             | ** ** | ** **                                                          | ** ** | **Stockholders’ Equity (Deficit)**            | ** ** | ** **            | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                             | ** ** | **Redeemable Convertible**                                     | ** ** | ** **                                                   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **Redeemable Convertible Series B, C and** | ** ** | ** **                                                   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **other** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **D Preferred Stock**                                     | ** ** | **Series A Convertible Preferred Stock** | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **Additional paid-** | ** ** | **comprehensive** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **Shares**                                                          | ** ** | **Amount**                                                   | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **in capital** | ** ** | **income (loss)** | ** ** | **deficit** | ** ** | **Total** | ** ** |
| Balance at  December 31, 2005                                                     |       | 8,525,784                                                           |       | $                                                            | 65,078,437 |                  | 1,569,204  |   | $ | 1,569 |   | 2,414,236 |   | $ | 2,414 |   | — |   | — |   | $ | 4,558,456 |   | $ | (49,224 | ) | $ | (39,656,486 | ) | $ | (35,143,271.00 | ) |
| Issuance of  common stock upon exercise of options                                     |       | —                                                              |       | —                                                       |       | —                |       | — |   | 290,240 |   | 290 |   | — |   | — |   | 156,096 |   | — |   | — |   | 156,386 |   |
| Accretion of  redemption amount for Series B, C and D convertible preferred stock |       | —                                                              |       | 329,208                                                      |       | —                |       | — |   | — |   | — |   | — |   | — |   | (329,208 | ) | — |   | — |   | (329,208 | ) |
| Exercise of Series D  warrants                                                    |       | 6,666                                                               |       | 51,998                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Compensation  expense related to grants of consultant stock options                    |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | 158,850 |   | — |   | — |   | 158,850 |   |
| Employee stock  based compensation under FAS123(R)                                     |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | 553,181 |   | — |   | — |   | 553,181 |   |
| Repurchase of  common stock                                                            |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | (46,153 | ) | (100,000 | ) | — |   | — |   | — |   | (100,000 | ) |
| Retirement of  Series A convertible preferred stock                               |       | —                                                              |       | —                                                       |       | (46,153               | )          | (46 | ) | — |   | — |   | — |   | — |   | (99,954 | ) | — |   | — |   | (100,000 | ) |
| Comprehensive  loss:                                                                   |       |                                                                |       |                                                         |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss  on short-term investment                                              |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | (5,872 | ) | — |   | (5,872 | ) |
| Foreign currency  translation adjustment                                               |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | 10,125 |   | — |   | 10,125 |   |
| Net loss                                                                               |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (11,901,895 | ) | (11,901,895 | ) |
| Comprehensive  loss                                                                    |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (11,897,642 | ) |
| Balance at  December 31, 2006                                                     |       | 8,532,450                                                           |       | 65,459,643                                                   |       | 1,523,051             |       | 1,523 |   | 2,704,476 |   | 2,704 |   | (46,153 | ) | (100,000 | ) | 4,997,421 |   | (44,971 | ) | (51,558,381 | ) | (46,701,704 | ) |
| Issuance of  common stock upon exercise of options                                     |       | —                                                              |       | —                                                       |       | —                |       | — |   | 182,382 |   | 182 |   | — |   | — |   | 176,365 |   | — |   | — |   | 176,547 |   |
| Issuance of  common stock during the initial public offerings, net                     |       | —                                                              |       | —                                                       |       | —                |       | — |   | 7,000,000 |   | 7,000 |   | — |   | — |   | 43,612,117 |   | — |   | — |   | 43,619,117 |   |
| Issuance of  common stock through stock awards                                         |       | —                                                              |       | —                                                       |       | —                |       | — |   | 17,500 |   | 18 |   | — |   | — |   | 148,208 |   | — |   | — |   | 148,226 |   |
| Issuance of  common stock pursuant to employee stock purchase plan                     |       |                                                                |       |                                                         |       | —                |       | — |   | 22,682 |   | 23 |   | — |   | — |   | 134,942 |   | — |   | — |   | 134,965 |   |
| Issuance of  common stock during private placement, net                                |       |                                                                |       |                                                         |       | —                |       | — |   | 4,600,000 |   | 4,600 |   | — |   | — |   | 33,550,388 |   | — |   | — |   | 33,554,988 |   |
| Conversion of  preferred stock to common stock                                         |       | (8,532,450                                                          | )          | (65,459,643                                                  | )          | (1,523,051            | )          | (1,523 | ) | 12,246,229 |   | 12,247 |   | — |   | — |   | 65,448,919 |   | — |   | — |   | 65,459,643 |   |
| Issuance of  common stock upon exercise of warrants                                    |       |                                                                |       |                                                         |       | —                |       | — |   | 1,130,436 |   | 1,130 |   | — |   | — |   | 1,369,137 |   | — |   | — |   | 1,370,267 |   |
| Compensation  expense related to grants of consultant stock options                    |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | 34,720 |   | — |   | — |   | 34,720 |   |
| Employee stock  based compensation under FAS123(R)                                     |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | 1,209,302 |   | — |   | — |   | 1,209,302 |   |
| Comprehensive  loss:                                                                   |       |                                                                |       |                                                         |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss  on short-term investment                                              |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | (31,923 | ) | — |   | (31,923 | ) |
| Foreign currency  translation adjustment                                               |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | 68,498 |   | — |   | 68,498 |   |
| Net loss                                                                               |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (46,139,177 | ) | (46,139,177 | ) |
| Comprehensive  loss                                                                    |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (46,102,602 | ) |
| Balance at  December 31, 2007                                                     |       | —                                                              |       | —                                                       |       | —                |       | — |   | 27,903,705 |   | 27,904 |   | (46,153 | ) | (100,000 | ) | 150,681,519 |   | (8,396 | ) | (97,697,558 | ) | $ | 52,903,469 |   |
|                                                                                        |            |                                                                     |            |                                                              |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

Table of Contents

 

Optimer Pharmaceuticals, Inc.

Consolidated Statements ofStockholders’ Equity (Deficit)

 
| ** **                                                          | ** ** | ** **                                                          | ** ** | **Stockholders’ Equity (Deficit)**            | ** ** | ** **            | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **Redeemable Convertible**                                     | ** ** | ** **                                                   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Redeemable Convertible Series B, C and** | ** ** | ** **                                                   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **other** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **D Preferred Stock**                                     | ** ** | **Series A Convertible Preferred Stock** | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **Additional paid-** | ** ** | **comprehensive** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Shares**                                                          | ** ** | **Amount**                                                   | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **in capital** | ** ** | **income (loss)** | ** ** | **deficit** | ** ** | **Total** | ** ** |
| Issuance of  common stock upon exercise of options                  |       | —                                                              |       | —                                                       |       | —                |       | — |   | 68,077 |   | 68 |   | — |   | — |   | 69,694 |   | — |   | — |   | 69,762 |   |
| Issuance of  common stock, net                                      |       | —                                                              |       | —                                                       |       | —                |       | — |   | 1,743,396 |   | 1,743 |   | — |   | — |   | 14,738,332 |   | — |   | — |   | 14,740,075 |   |
| Issuance of  common stock pursuant to employee stock purchase plan  |       |                                                                |       | —                                                       |       | —                |       | — |   | 47,726 |   | 48 |   | — |   | — |   | 291,185 |   | — |   | — |   | 291,233 |   |
| Compensation  expense related to grants of consultant stock options |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | 25,637 |   | — |   | — |   | 25,637 |   |
| Employee stock  based compensation under FAS123(R)                  |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | 1,738,439 |   | — |   | — |   | 1,738,439 |   |
| Retirement of  treasury stock                                       |       | —                                                              |       | —                                                       |       | —                |       | — |   |   |   | (46 | ) | 46,153 |   | 100,000 |   | — |   | — |   | (99,954 | ) | — |   |
| Comprehensive  loss:                                                |       |                                                                |       |                                                         |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss  on short-term investment                           |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | (5,374 | ) | — |   | (5,374 | ) |
| Foreign currency  translation adjustment                            |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | 51,858 |   | — |   | 51,858 |   |
| Net loss                                                            |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (35,584,596 | ) | (35,584,596 | ) |
| Comprehensive loss                                                  |       | —                                                              |       | —                                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (35,538,112 | ) |
| Balance at  December 31, 2008                                  |       | —                                                              |       | $                                                            | —     |                  | —     |   | $ | — |   | 29,762,904 |   | $ | 29,717 |   | — |   | $ | — |   | $ | 167,544,806 |   | $ | 38,088 |   | $ | (133,382,108 | ) | $ | 34,230,503 |   |
|                                                                     |            |                                                                     |            |                                                              |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

Table of Contents

 

**Optimer Pharmaceuticals, Inc.**

**Consolidated Statements of CashFlows**

 
| ** **                                                                    | ** ** | **Years Ended December 31,** | ** **  |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                    | ** ** | **2008**                                    | ** **  | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                    | ** ** | ** **                                  | ** **  | ** ** | ** ** | ** ** | ** ** |
| **Operating activities**                                                      |       |                                        |        |   |   |   |   |
| Net loss                                                                      |       | $                                           | (35,584,596 | ) | $ | (46,139,177 | ) | $ | (11,901,895 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:  |       |                                        |        |   |   |   |   |
| Depreciation and amortization                                                 |       | 219,878                                     |        | 285,515 |   | 496,211 |   |
| Stock based compensation                                                      |       | 1,764,076                                   |        | 1,244,022 |   | 712,031 |   |
| Stock awards                                                                  | ** ** | **—**                                  |        | 148,226 | ** ** | **—** | ** ** |
| Non-cash compensation related to  forgiveness of note receivable from officer | ** ** | **—**                                  | ** **  | **—** |   | 262,500 |   |
| Loss on disposal of assets                                                    | ** ** | **—**                                  | ** **  | **—** |   | (45,339 | ) |
| Impairment of long-term securities                                            |       | 118,000                                     | ** **  | **—** | ** ** | **—** | ** ** |
| Deferred rent                                                                 |       | (30,390                                     | )           | (10,490 | ) | 12,970 |   |
| Changes in operating assets and  liabilities:                                 |       |                                        |        |   |   |   |   |
| Prepaid expenses and other current assets                                     |       | 339,439                                     |        | 676,252 |   | (1,449,189 | ) |
| Research grant, contract and other  receivables                               |       | (116,115                                    | )           | 68,318 |   | 466,626 |   |
| Restricted cash                                                               |       | (170,000                                    | **)**       | **—** | ** ** | **—** | ** ** |
| Other assets                                                                  |       | (21,677                                     | )           | 8,917 |   | (2,894 | ) |
| Accounts payable and accrued expenses                                         |       | 213,314                                     |        | 2,536,584 |   | 2,943,357 |   |
| Net cash used in operating activities                                         |       | (33,268,071                                 | )           | (41,181,833 | ) | (8,505,622 | ) |
|                                                                          |       |                                        |        |   |   |   |   |
| **Investing activities**                                                      |       |                                        |        |   |   |   |   |
| Purchases of short-term investments                                           |       | (31,306,561                                 | )           | (86,993,067 | ) | (10,478,237 | ) |
| Sales or maturity of short-term investments                                   |       | 63,250,000                                  |        | 46,610,000 |   | 5,190,000 |   |
| Purchase of property and equipment                                            |       | (208,686                                    | )           | (246,326 | ) | (46,173 | ) |
| Net cash provided by (used) in investing  activities                          |       | 31,734,753                                  |        | (40,629,393 | ) | (5,334,410 | ) |
|                                                                          |       |                                        |        |   |   |   |   |
| **Financing activities**                                                      |       |                                        |        |   |   |   |   |
| Proceeds from sale of common stock                                            |       | 15,101,070                                  |        | 77,485,617 |   | 156,386 |   |
| Proceeds from exercise of Series D  warrants                             |       | —                                      |        | 1,370,267 |   | 51,998 |   |
| Repurchase of common stock                                                    |       | —                                      |        | — |   | (100,000 | ) |
| Repurchase of Series A preferred stock                                   |       | —                                      |        | — |   | (100,000 | ) |
| Net cash provided by financing activities                                     |       | 15,101,070                                  |        | 78,855,884 |   | 8,384 |   |
| Effect of exchange rate changes on cash and  cash equivalents                 |       | 19,314                                      |        | 24,718 |   | 10,127 |   |
| Net increase (decrease) in cash and cash  equivalents                         |       | 13,587,066                                  |        | (2,930,624 | ) | (13,821,521 | ) |
| Cash and cash equivalents at beginning of  year                               |       | 3,191,814                                   |        | 6,122,438 |   | 19,943,959 |   |
| Cash and cash equivalents at end of year                                      |       | $                                           | 16,778,880  |   | $ | 3,191,814 |   | $ | 6,122,438 |   |
|                                                                          |       |                                        |        |   |   |   |   |
| **Supplemental disclosure of cash flow  information:**                        |       |                                        |        |   |   |   |   |
| Conversion of redeemable convertible  preferred stock to common stock         |       | $                                           | —      |   | $ | 65,461,166 |   | $ | — |   |
| Retirement of treasury stock                                                  |       | 100,000                                     |        | — |   | — |   |

 

See accompanying notes.

 

57

----

Table of Contents

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                                     ****Organization and Summary ofSignificant Accounting Policies**

 

OptimerPharmaceuticals, Inc. (“Optimer” or the “Company”) was incorporated inDelaware on November 18, 1998.  TheCompany has a wholly owned subsidiary, Optimer Biotechnology, Inc., whichis incorporated and located in Taiwan.

 

Optimeris a biopharmaceutical company focused on discovering, developing and commercializinganti-infective products.  The Companycurrently has two anti-infective product candidates, fidaxomicin for thetreatment of *Clostridium difficile*-infections,and prulifloxacin, for the treatment of infectious diarrhea. The Company isdeveloping additional product candidates using its proprietary technology,including its OPoPSTM drug discovery platform.

 

*StockSplit*

 

InJanuary 2007, the Company’s board of directors and stockholders authorizeda 1-for-2.1667 reverse stock split for all outstanding preferred and commonshares.  All share information has beenretroactively restated to reflect the reverse stock split.

 

*Principlesof Consolidation*

 

Theconsolidated financial statements include all the accounts of the Company andits wholly owned subsidiary.  All intercompanybalances and transactions have been eliminated in consolidation.

 

*Use ofEstimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes.  Actual resultscould differ from those estimates.

 

*Cash, CashEquivalents and Short-Term Investments*

 

Investmentswith original maturities of less than 90 days at the date of purchase areconsidered to be cash equivalents.  Allother investments are classified as short-term investments which are deemed bymanagement to be available-for-sale and are reported at fair value with netunrealized gains or losses reported within other comprehensive loss in theconsolidated statement of redeemable convertible preferred stock andstockholders’ equity.  Realized gains andlosses, and declines in value judged to be other than temporary, are includedin investment income or interest expense. The cost of securities sold is computed using the specificidentification method.

 

*Concentrationof Credit Risk*

 

Financialinstruments that potentially subject the Company to a significant concentrationof credit risk consist primarily of cash and cash equivalents and short-terminvestments.  The Company maintainsdeposits in federally insured financial institutions in excess of federallyinsured limits.  However, managementbelieves the Company is not exposed to significant credit risk due to thefinancial position of the depository institutions in which those deposits areheld.  Additionally, the Company hasestablished guidelines regarding diversification of its investments and theirmaturities, which are designed to maintain safety and liquidity.

 

*Propertyand Equipment*

 

Propertyand equipment, including leasehold improvements, are stated at cost.  Depreciation is calculated using thestraight-line method over the estimated useful lives of the assets, generallyfive years.  Leasehold improvements areamortized over the shorter of their useful lives or the terms of the relatedleases.

 

*DeferredRent*

 

Rentexpense is recorded on a straight-line basis over the term of the lease.  The difference between rent expense accruedand amounts paid under the lease agreement is recorded as deferred rent in theaccompanying consolidated balance sheets.

 

58

----

Tableof Contents

 

*ForeignCurrency Translation*

 

Thefinancial statements of foreign subsidiaries having the U.S. dollar as thefunctional currency, with certain transactions denominated in a local currency,are remeasured into U.S. dollars at their historical rates.  The remeasurement of local currency amountsinto U.S. dollars creates translation adjustments that are included in netloss.  Transaction and translation gainsor losses were not material to the Company’s financial statements for anyperiods presented.

 

*Fair Valueof Financial Instruments*

 

Thecarrying amount of cash and cash equivalents, short-term investments andaccounts payable and accrued liabilities are considered to be representative oftheir respective fair values because of the short-term nature of thoseinstruments.  The fair value ofavailable-for-sale securities is based upon market prices quoted on the lastday of the fiscal period.

 

*Impairmentof Long-Lived Assets*

 

Inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*, long-lived assets, such as property andequipment, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to estimatedundiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceedsits estimated future cash flows, an impairment charge is recognized by theamount by which the carrying amount of the asset exceeds the fair value of theasset.  Assets to be disposed of would beseparately presented in the balance sheet and reported at the lower of thecarrying amount or the fair value less costs to sell, and are no longerdepreciated.  Assets and liabilities thatare part of a disposed group and classified as held for sale would be presentedseparately in the appropriate asset and liability sections of the balancesheet.  Although the Company hasaccumulated losses since inception, the Company believes the future cash flowsto be received from its long-lived assets will exceed the assets’ carryingvalue and, accordingly, the Company has not recognized any impairment lossesthrough December 31, 2008.

 

*IncomeTaxes*

 

Incometaxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax creditcarryforwards.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.  The Company provides a valuation allowanceagainst net deferred tax assets unless, based upon the available evidence, itis more likely than not that the deferred tax assets will be realized.

 

*RevenueRecognition*

 

TheCompany’s license and collaboration agreements contain multiple elements,including non-refundable upfront fees, payments for reimbursement ofthird-party research costs, payments for ongoing research, payments associatedwith achieving specific development milestones and royalties based on specifiedpercentages of net product sales, if any. The Company applies the revenue recognition criteria outlined in StaffAccounting Bulletin (“SAB”) No. 104, *RevenueRecognition* and Emerging Issues Task Force (“EITF”)Issue 00-21, *Revenue Arrangements withMultiple Deliverables* (“EITF 00-21”).  In applying these revenue recognitioncriteria, the Company considers a variety of factors in determining theappropriate method of revenue recognition under these arrangements, such aswhether the elements are separable, whether there are determinable fair valuesand whether there is a unique earnings process associated with each element ofa contract.

 

Cashreceived in advance of services being performed is recorded as deferred revenueand recognized as revenue as services are performed over the applicable term ofthe agreement.

 

Whena payment is specifically tied to a separate earnings process, revenues arerecognized when the specific performance obligation associated with the paymentis completed.  Performance obligationstypically consist of significant and substantive milestones pursuant to therelated agreement.  Revenues frommilestone payments may be considered separable from funding for researchservices because of the uncertainty surrounding the achievement of milestonesfor products in early stages of development. Accordingly, these payments are allowed to be recognized as revenue ifand when the performance milestone is achieved if they represent a separateearnings process as described in EITF 00-21.

 

59

----

Tableof Contents

 

Inconnection with certain research collaboration agreements, revenues arerecognized from non-refundable upfront fees, which the Company does not believeare specifically tied to a separate earnings process, ratably over the term ofthe agreement.  Research fees arerecognized as revenue as the related research activities are performed.

 

Revenuesderived from reimbursement of direct out-of-pocket expenses for research costsassociated with grants are recorded in compliance with EITF Issue 99-19, *Reporting Revenue Gross as a Principal Versus Net asan Agent*, and EITF Issue 01-14, *Income Statement Characterization of Reimbursements Received for “Out-of-Pocket”Expenses Incurred*.  Accordingto the criteria established by these EITF Issues, in transactions where theCompany acts as a principal, with discretion to choose suppliers, bear creditrisk and perform part of the services required in the transaction, the Companyrecords revenue for the gross amount of the reimbursement.  The costs associated with thesereimbursements are reflected as a component of research and development expensein the consolidated statements of operations.

 

Noneof the payments that the Company has received from collaborators to date,whether recognized as revenue or deferred, are refundable even if the relatedprogram is not successful.

 

*Researchand Development Expenses*

 

TheCompany accounts for research and development costs in accordance with SFAS No. 2,*Accounting for Research and DevelopmentCosts* (“SFAS No. 2”). SFAS No. 2 specifies that research and development costsshould be charged to expense until technological feasibility has been establishedfor the product.  Once technologicalfeasibility is established, all product costs should be capitalized until theproduct is available for general release to customers.  The Company has determined that technologicalfeasibility for its product candidates will be reached when the requisiteregulatory approvals are obtained to make the product available for sale, orapproval of the new drug application (“NDA”) for such product.  The Company’s research and developmentexpenses consist primarily of license fees, salaries and related employeebenefits, costs associated with clinical trials managed by the Company’s contractresearch organizations, or CROs, and costs associated with non-clinicalactivities and regulatory approvals.  TheCompany uses external service providers and vendors to conduct clinical trials,to manufacture supplies of product candidates to be used in clinical trials andto provide various other research and development-related products andservices.

 

When nonrefundable payments for goods or services to be received in thefuture for use in research and development activities are made, the Companyapplies the criteria outlined in EITF issue No. 07-3 (“ EITF 07-3”),  *Accountingfor Non-Refundable Advance Payments for Goods or Services to be Used in FutureResearch and Development Activities .*In accordance with EITF 07-3,these types of payments are deferred and capitalized. The capitalized amountsare expensed when the related goods are delivered or the services areperformed.

 

*Stock-BasedCompensation*

 

EffectiveJanuary 1, 2006, the Company adopted SFAS No. 123(R), *Share-Based Payment*, which revises SFAS No. 123,*Accounting for Stock-Based Compensation*and supersedes Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*.  SFAS No. 123(R) requires thatshare-based payment transactions with employees be recognized in the financialstatements based on their fair value and recognized as compensation expenseover the vesting period.  The Companyused the modified prospective-transition-method when it adopted SFAS 123(R),and accordingly, the Company did not restate its results of operations for theprior periods. Compensation expense of $1.8 million, $1.2 million and $0.7million was recognized in the years ended December 31, 2008, 2007 and2006, respectively.

 

Stock-basedcompensation expense is estimated as of the grant date based on the fair valueof the award and is recognized as expense over the requisite service period,which generally represents the vesting period. The Company estimates the fairvalue of its stock options using the Black-Scholes option-pricing model and thefair value of its stock awards based on the quoted market price of its commonstock.

 

Estimating the fair value for stock options requires judgment,including estimating stock-price volatility, expected term, expected dividendsand risk-free interest rates. The expected volatility rates are based on thehistorical fluctuation in the stock price since inception. The average expectedterm is calculated using SAB No. 107, “*Simplified Method for Estimating the Expected Term*”.Expected dividends are estimated based on the Company’s dividend history aswell as the Company’s current projections. The risk-free interest rate forperiods approximating the expected terms of the options is based on theU.S. Treasury yield curve in effect at the time of grant. Theseassumptions are updated on an annual basis or sooner if there is a significantchange in circumstances that could affect these assumptions.

 

Equityinstruments issued to non-employees are recorded at their fair value asdetermined in accordance with SFAS No. 123(R) and EITF 96-18, *Accounting for Equity Instruments That are Issued toOther Than Employees for Acquiring, or in*

 

60

----

Table of Contents

 

*Conjunctionwith Selling Goods and Services*, and are periodically revalued as the equity instruments vest and arerecognized as expense over the related service period.

 

*ComprehensiveIncome (Loss)*

 

TheCompany has applied SFAS No. 130, *ReportingComprehensive Income*, which requires that all components ofcomprehensive income (loss), including net income (loss), be reported in thefinancial statements in the period in which they are recognized.  Comprehensive income (loss) is defined as thechange in equity during a period from transactions and other events andcircumstances from non-owner sources. Net income (loss) and other comprehensive income (loss), includingforeign currency translation adjustments and unrealized gains and losses oninvestments, is required to be reported, net of their related tax effect, toarrive at comprehensive income (loss).

 

*Net LossPer Share Attributable to Common Stockholders*

 

Basicnet loss per share attributable to common stockholders is calculated bydividing the net loss attributable to common stockholders by the weightedaverage number of shares of common stock outstanding for the period, withoutconsideration for common stock equivalents. Diluted net loss per share attributable to common stockholders iscomputed by dividing the net loss attributable to common stockholders by theweighted average number of common stock equivalents outstanding for the perioddetermined using the treasury-stock method. For purposes of this calculation, convertible preferred stock, stockoptions and warrants are considered to be common stock equivalents and are onlyincluded in the calculation of diluted net loss per share attributable tocommon stockholders when their effect is dilutive.

 
| ** **                                                                                                  | ** ** | **Years Ended December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                                                  | ** ** | **2008**                                    | ** **  | **2007** | ** ** | **2006** | ** ** |
| **Historical**                                                                                              |       |                                        |        |   |   |   |   |
| Numerator:                                                                                                  |       |                                        |        |   |   |   |   |
| Net loss attributable to common  stockholders                                                               |       | $                                           | (35,584,596 | ) | $ | (46,139,177 | ) | $ | (12,231,102 | ) |
| Denominator:                                                                                                |       |                                        |        |   |   |   |   |
| Weighted average common shares outstanding                                                                  |       | 28,682,542                                  |        | 21,715,332 |   | 2,542,893 |   |
| Net loss attributable to common  stockholders per share — basic and diluted                       |       | $                                           | (1.24       | ) | $ | (2.12 | ) | $ | (4.81 | ) |
| **Historical outstanding anti-dilutive securities  not included in diluted net loss per share calculation** |       |                                        |        |   |   |   |   |
| Preferred stock (as converted)                                                                              |       | —                                      |        | — |   | 12,223,548 |   |
| Preferred stock warrants (as converted)                                                                     |       | —                                      |        | — |   | 22,705 |   |
| Common stock options                                                                                        |       | 1,979,660                                   |        | 1,615,317 |   | 1,496,945 |   |
| Common stock warrants                                                                                       |       | —                                      |        | 13,845 |   | 1,144,604 |   |
| Total                                                                                                       |       | 1,979,660                                   |        | 1,629,162 |   | 14,887,802 |   |

 

*RecentAccounting Pronouncements*

 

InDecember 2007, the FASB issued Statement of Financial AccountingStandards, or SFAS No. 160, *“NoncontrollingInterests in Consolidated Financial Statements — An Amendment of ARB No. 51”*(“SFAS No. 160”).  SFAS No. 160requires the recognition of a noncontrolling interest, sometimes calledminority interest, as equity in the consolidated financial statements andseparate from the parent’s equity. The amount of net income attributable to thenoncontrolling interest will be included in consolidated net income on the faceof the income statement. SFAS No. 160 clarifies that changes in aparent’s ownership interest in a subsidiary that do not result indeconsolidation are equity transactions if the parent retains its controllingfinancial interest. In addition, this statement requires that a parentrecognize a gain or loss in net income when a subsidiary is deconsolidated.Such gain or loss will be measured using the fair value of the noncontrollingequity investment on the deconsolidation date. SFAS No. 160 alsoincludes expanded disclosure requirements regarding the interests of the parentand its noncontrolling interest. SFAS No. 160 is effective for fiscalyears, and interim periods within those fiscal years, beginning on or after December 15,2008. Earlier adoption is prohibited. The Company does not expect the adoptionof this standard to have a material impact on its financial position, cashflows, or results of operations.

 

InDecember 2007, the FASB issued SFAS 141 (revised 2007), “BusinessCombinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles andrequirements for how an acquirer recognizes and measures in its financial statementsthe identifiable assets acquired, the liabilities assumed, any noncontrollinginterest in the acquiree and the goodwill acquired in connection with businesscombinations. SFAS 141(R) also establishes disclosure requirements toenable the evaluation of the nature and financial effects of the businesscombination. SFAS 141(R) is effective for fiscal years beginning onor after December 15, 2008. The Company does not expect the adoption ofthis standard to have a material impact on its financial position, cash flows,or results of operations.

 

61

----

Tableof Contents

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASBStatement No. 133*. This new standard requires enhanceddisclosures for derivative instruments, including those used in hedgingactivities. It is effective for fiscal years and interim periods beginningafter November 15, 2008. The Company does not expect the adoption of this standard to have amaterial impact on its financial position, cash flows, or results ofoperations.

 

In April 2008, the FASB issued FASB Staff Position, (‘FSP”)FAS 142-3, *Determination of the UsefulLife of Intangible Assets*. FSP FAS 142-3 amends the factorsthat should be considered in developing renewal or extension assumptions usedto determine the useful life of a recognized intangible asset under FASBStatement No. 142, *Goodwill and OtherIntangible Assets*. FSP FAS 142-3 is effective for fiscal yearsbeginning after December 15, 2008 and early adoption is prohibited. TheCompany does not expect the adoption of this standard to have a material impacton its financial position, cash flows, or results of operations.

 

InJanuary 2009, the FASB issued FSP EITF 99-20-1, *Amendmentsto the Impairment Guidance of EITF 99-20*. This new standard amendsthe impairment guidance in EITF Issue No. 99-20, *Recognitionof Interest Income and Impairment on Purchased Beneficial Interests andBeneficial Interests That Continue to Be Held by a Transferor in SecuritizedFinancial Assets,* to achieve more consistent determination ofwhether an other-than-temporary impairment has occurred. FSP EITF 99-20-1 alsoretains and emphasizes the objective of an other than-temporary impairmentassessment and the related disclosure requirements in FASB Statement No. 115,*Accounting for Certain Investments in Debtand Equity Securities,*and other related guidance. FSP EITF 99-20-1is effective for interim and annual reporting periods ending after December 15,2008, and shall be applied prospectively. Retrospective application to a priorinterim or annual reporting period is prohibited. The Company adopted this standardin its fiscal year ended December 31, 2008. The adoption did not have amaterial impact on the Company’s financial position, cash flows, or results ofoperations.

 

**2.****                                     ****RestrictedCash**

 

In September 2008, the Companyestablished a letter of credit as required under its lease related to a newoffice facility.  The letter of creditterminates 60 days after the lease expires (currently scheduled to occur on November 30,2011) and is secured by a $170,000 certificate of deposit.

 

**3.****                                     ****FairValue of Financial Instruments**

 

The Company adopted SFAS 157 effective January 1,2008 for financial assets and liabilities measured on a recurring basis. SFAS157 applies to all financial assets and financial liabilities that are beingmeasured and reported on a fair value basis. As defined in SFAS157, fair value is based on the price that would be received to sell an assetor paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date.  SFAS 157requires disclosure that establishes a framework for measuring fair value andexpands disclosure about fair value measurements. The statement requires fairvalue measurement be classified and disclosed in one of the following threecategories:

 
| Level  1: |   | Quoted  prices in active markets for identical assets and liabilities; or                                                                                                                                 |
|-----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Level  2: |   | Quoted  prices for identical or similar assets and liabilities in markets that are  not active, or observable inputs other than quoted prices in active markets  for identical assets and liabilities; or |
| Level  3: |   | Unobservable  inputs.                                                                                                                                                                                     |

 

Thefollowing table summarizes the Company’s assets measured at fair value on arecurring basis subject to the disclosure requirements of SFAS 157 as of December 31,2008:

 
| ** **                | ** ** | **Quoted Prices in  Active Markets  (Level 1)** | ** ** | **Other  Observable  Inputs  (Level 2)** | ** ** | **Unobservable  Inputs  (Level 3)** | ** ** | **Total**  | ** ** |
|---------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|------------|------------|
| Cash and cash equivalents |       | $                                                                   | 16,778,880 |                                          | $          | —                                   |       | $          | —     |   | $ | 16,778,880 |   |
| Marketable securities     |       | 22,547,515                                                          |       | —                                        |       | —                                   |       | 22,547,515 |       |
| Auction rate securities   |       | —                                                              |       | —                                        |       | 1,032,000                                |       | 1,032,000  |       |
|                           |            |                                                                     |            |                                               |            |                                          |            |            |            |  |  |  |  |

 

62

----

Table of Contents

 

A reconciliation of the beginning and endingbalances of assets measured at fair value on a recurring basis using Level 3inputs is as follows:

 
| ** **                                                                             | ** ** | **Auction Rate   Preferred Securities** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Beginning balance at January 1, 2008                                              |       | $                                                      | —     |   |
| Total gains and losses                                                                 |       |                                                   |       |
| Realized net income                                                                    |       | —                                                 |       |
| Unrealized gains/losses included in  accumulated other comprehensive income            |       | —                                                 |       |
| Unrealized gains/losses included in  interest income and other, net                    |       | (118,000                                               | )          |
| Purchases, sales, issuances and settlements                                            |       | —                                                 |       |
| Transfers in (out) of Level 3                                                          |       | 1,150,000                                              |       |
| Ending balance at December 31, 2008                                               |       | $                                                      | 1,032,000  |   |
|                                                                                   |       |                                                   |       |
| Change in unrealized gains (losses)  included in net loss related to assets still held |       | $                                                      | (118,000   | ) |

 

All of the Company’s investments inavailable-for-sale securities are recorded at fair value based on quoted marketprices. At December 31, 2008, the Company held two auction rate preferredsecurities valued at $1.0 million with perpetual maturity dates that resetevery 28 days.  Since February 2008,the auctions for these securities have failed. Although these auction rate preferred securities continue to payinterest according to their stated terms, the market to sell such securitiescontinues to be illiquid and the decline in value was judged to be other thantemporary. Based on valuation models on the individual securities, the Companyhas recognized in the consolidated statement of operations an unrealized lossof approximately $118,000 in investment income. These securities have beenclassified as long-term investments on the consolidated balance sheets as theCompany does not believe it could liquidate the securities in the near term.

** **

**4.****            ****Short-Term Investments**

 

Thefollowing is a summary of the Company’s investment securities, all of which areclassified as available-for-sale. Determination of estimated fair value isbased upon quoted market prices.

 
| ** **                  | ** ** | **December 31, 2008**      | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **Gross   Amortized Cost** | ** ** | **Gross   Unrealized Gains** | ** ** | **Gross   Unrealized Losses** | ** ** | **Market Value** | ** ** |
| Corporate debt securities   |       | $                                    | 13,464,268 |   | $ | 3,089 |   | $ | (49,257 | ) | $ | 13,418,100 |   |
| Foreign debt securities     |       | 1,503,901                            |       | 5,824 |   | — |   | 1,509,725 |   |
| Government debt securities  |       | 7,584,720                            |       | 37,106 |   | (2,136 | ) | 7,619,690 |   |
|                        |       |                                 |       |   |   |   |   |   |   |
| Total investment securities |       | $                                    | 22,552,889 |   | $ | 46,019 |   | $ | (51,393 | ) | $ | 22,547,515 |   |

 
| ** **                                       | ** ** | **December 31, 2007**      | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **Gross   Amortized Cost** | ** ** | **Gross   Unrealized Gains** | ** ** | **Gross   Unrealized Losses** | ** ** | **Market Value** | ** ** |
| Certificates of deposits.                        |       | $                                    | 4,802,335  |   | $ | 1,515 |   | $ | (2,234 | ) | $ | 4,801,616 |   |
| Commercial paper                                 |       | 7,464,847                            |       | 259 |   | (650 | ) | 7,464,456 |   |
| Corporate debt securities                        |       | 20,856,371                           |       | 9,378 |   | (43,527 | ) | 20,822,222 |   |
| Foreign debt securities                          |       | 3,323,878                            |       | 6,947 |   | (3,479 | ) | 3,327,346 |   |
| U.S. securities and other government obligations |       | 3,500,647                            |       | 5,118 |   | — |   | 3,505,765 |   |
| Taxable auction securities                       |       | 14,200,000                           |       | — |   | — |   | 14,200,000 |   |
| Other securities                                 |       | 1,498,251                            |       | — |   | (5,871 | ) | 1,492,380 |   |
| Total investment securities                      |       | $                                    | 55,646,329 |   | $ | 23,217 |   | $ | (55,761 | ) | $ | 55,613,785 |   |

 

63

----

Tableof Contents

 

Investmentsin net unrealized loss positions as of December 31, 2008 are as follows:

 
| ** **                 | ** ** | ** **                            | ** ** | **Less Than 12 Months of   Temporary Impairment** | ** ** | **Greater Than 12 Months of   Temporary Impairment** | ** ** | **Total Temporary   Impairment** | ** ** |
|----------------------------|------------|---------------------------------------|------------|---------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **Number of   Investments** | ** ** | **Fair Value**                                                             | ** ** | **Unrealized   Losses**                                                       | ** ** | **Fair Value**                        | ** ** | **Unrealized   Losses** | ** ** | **Fair Value** | ** ** | **Unrealized   Losses** | ** ** |
| Corporate debt securities  |       | 16                                    |       | $                                                                               | 11,156,015 |                                                                               | $          | (49,257                                    | )          | $ | — |   | $ | — |   | $ | 11,156,015 |   | $ | (49,257 | ) |
| Government debt securities |       | 3                                     |       | 493,627                                                                         |       | (2,136                                                                             | )          | —                                     |       | — |   | 493,627 |   | (2,136 | ) |
| Total                      |       | 19                                    |       | $                                                                               | 11,649,642 |                                                                               | $          | (51,393                                    | )          | $ | — |   | $ | — |   | $ | 11,649,642 |   | $ | (51,393 | ) |

 

Theamortized cost and estimated fair value of securities available-for-sale at December 31,2008, by contractual maturity, are as follows:

 
| ** **                           | ** ** | **Amortized Cost** | ** ** | **Estimated Fair Value** | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| Due in one year or less              |       | $                       | 22,552,889 |                               | $          | 22,547,515 |   |
| Due after one year through two years |       | —                  |       | —                             |       |
| Total                                |       | $                       | 22,552,889 |                               | $          | 22,547,515 |   |

 

TheCompany considered a number of factors to determine whether the decline invalue in its investments is other than temporary, including the length of timeand the extent of which the market value has been less than cost, the financialcondition of the issuer and the Company’s intent to hold and ability to retainthese short-term investments.  Based onthese factors, the Company believes that the decline in value is temporary andprimarily related to the change in market interest rates since purchase.  The Company anticipates full recovery ofamortized cost with respect to these securities at maturity or sooner in theevent of a change in the market interest rate environment.

 

**5.****            ****Property and Equipment**

 

Propertyand equipment is stated at cost and consists of the following:

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Equipment                                       |       | $                     | 3,089,953  |   | $ | 3,016,275 |   |
| Furniture and fixtures                          |       | 291,665               |       | 279,923 |   |
| Leasehold improvements                          |       | 1,399,163             |       | 1,368,179 |   |
| Computer equipment and software                 |       | 308,144               |       | 224,802 |   |
|                                            |       | 5,088,925             |       | 4,889,179 |   |
| Less accumulated depreciation and  amortization |       | (4,394,742            | )          | (4,183,805 | ) |
| Total property and equipment, net               |       | $                     | 694,183    |   | $ | 705,374 |   |

 

Depreciationof property and equipment is computed using the straight-line method over theestimated useful lives of the assets, which typically is five years.  Leasehold improvements and assets acquiredunder capital leases are amortized over their estimated useful life or therelated lease term, whichever is shorter. The depreciation of equipment under capital leases is included indepreciation expense.  As of December 31,2008 and 2007, the Company did not have any capital leases.

 

**6.****             ****Accrued Expenses**

 

Accruedexpenses consisted of the following:

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Accrued preclinical and clinical expenses |       | $                     | 2,541,437  |   | $ | 3,726,891 |   |
| Accrued research services                 |       | 215,490               |       | 172,754 |   |
| Accrued legal fees                        |       | 51,132                |       | 64,007 |   |
| Accrued salaries, wages and benefits      |       | 1,199,338             |       | 980,448 |   |
| Other accrued liabilities                 |       | 38,263                |       | 53,925 |   |
| Total accrued expenses                    |       | $                     | 4,045,660  |   | $ | 4,998,025 |   |

 

64

----

Tableof Contents

 

**7.     Revenue and OtherCollaborative Agreements**

 

*Revenuesfrom Research Grants*

 

TheCompany has received several research grants from U.S. government agenciessince 2003, all of which except for one were completed on or prior to December 31,2008. The active grant was awarded from National Institute of Allergy andInfectious Diseases (“NIAID”) in September 2007. This grant is renewablefor $1 million each year until August 2010 to a maximum of $3 million. Theaward will be used to conduct supplementary studies to the ongoing fidaxomicin trialsto confirm narrow spectrum activity and potency of fidaxomicin againsthypervirulent epidemic strains, to support additional toxicology andmicrobiological studies to demonstrate the safety and efficacy of thefidaxomicin compound and its major metabolite in CDI patients and to support asurveillance study of *C. difficile*isolates across North America to compare activity of fidaxomicin with existingCDI treatments.  For the years ended December 31,2008, 2007 and 2006, the Company recognized revenues related to research grants of $973,370, $338,735 and $493,960,respectively.

 

*OtherCollaborative Agreements*

 

TheCompany holds worldwide rights to fidaxomicin. In February 2007, the Company repurchased the rights to develop andcommercialize fidaxomicin in North America and Israel from Par under aprospective buy-back agreement. Under the prospective buy-back agreement, theCompany paid Par a one-time $20.0 million termination fee and $1.9 million forfidaxomicin clinical supply material and active pharmaceutical ingredient in2007.  The Company is also obligated topay Par a one-time $5.0 million milestone payment, a potential $3.0 millionprepayment to Biocon, subject to future set-offs following the assignment, ifany, by Par to the Company of its supply agreement with Biocon, a 5% royalty onnet sales by the Company, its affiliates or its licensees of fidaxomicin inNorth America and Israel, and a 1.5% royalty on net sales by the Company or itsaffiliates of fidaxomicin in the rest of the world.  The one-time $5.0 million milestone paymentis required to be paid after the earliest to occur of (i) the successfulcompletion by the Company of its second pivotal Phase 3 trial forfidaxomicin, (ii) the Company’s grant to a third party of the rights tofidaxomicin or (iii) the submission to the FDA of an NDA forfidaxomicin.  In addition, in the eventthe Company licenses its right to market fidaxomicin in the rest of the world,the Company will be required to pay Par a 6.25% royalty on net revenuesreceived by it related to fidaxomicin. The Company is obligated to pay each of these royalties, if any, on acountry-by-country basis for seven years commencing on the applicablecommercial launch in each such country.

 

InMarch 2006, the Company entered into a collaborative research anddevelopment and license agreement with Cempra Pharmaceuticals, Inc.(“Cempra”).  The Company granted toCempra an exclusive worldwide license, except in Association of Southeast AsianNations, or ASEAN countries, with the right to sublicense, the Company’s patentand know-how related to the Company’s macrolide and ketolide antibacterialprogram.  As partial consideration forgranting Cempra the licenses, the Company obtained equity of Cempra and the Companyassigned no value to such equity.  TheCompany may receive milestone payments as product candidates are developedand/or co-developed by Cempra, in addition to milestone payments based oncertain sublicense revenue.  Theaggregate potential amount of such milestone payments is not capped and, basedin part on the number of products developed under the agreement, may exceed$24.5 million.  The Company will alsoreceive royalty payments based on a percentage of net sales of licensedproducts.  The milestone payments will betriggered upon the completion of certain clinical development milestones and incertain instances, regulatory approval of products.  In consideration of the foregoing, Cempra mayreceive milestone payments from the Company in the amount of $1.0 million foreach of the first two products the Company develops which receive regulatoryapproval in ASEAN countries, as well as royalty payments on the net sales ofsuch products.  The research term of theagreement was completed on March 2008. Subject to certain exceptions, on a country-by-country basis, thegeneral terms of this agreement continue until the later of: (i) theexpiration of the last to expire patent rights of a covered product in theapplicable country or (ii) ten years from the first commercial sale of acovered product in the applicable country. Either party may terminate the agreement in the event of a materialbreach by the other party, subject to prior notice and the opportunity tocure.  Either party may also terminatethe agreement for any reason upon 30 days’ prior written notice provided thatall licenses granted by the terminating party to the non-terminating party willsurvive upon the express election of the non-terminating party.

 

InJune 2004, the Company entered into a license agreement with Nippon Shinyaku,Co., Ltd. (“Nippon Shinyaku”).  Under theterms of the agreement, the Company acquired the non-exclusive right to importand purchase prulifloxacin, and the exclusive right (with the right tosublicense), within the United States, to develop, make, use, offer to sell,sell and license products suitable for consumption by humans containingprulifloxacin.  Under this agreement, theCompany paid Nippon Shinyaku an up-front fee in the amount of $1.0 million andwill be required to make one future milestone payment in the amount of $1.0million upon filing, if any, its first NDA for prulifloxacin in the UnitedStates.  Under the agreement, the Companypays Nippon Shinyaku for certain materials. If Nippon Shinyaku is unable to supply the Company with the contractedamount of prulifloxacin, then Nippon Shinyaku will grant to the Company anon-exclusive, worldwide license to make or have made prulifloxacin, in whichevent the Company will owe Nippon Shinyaku a royalty based on the amount of netsales of prulifloxacin generated by the Company and the Company’ssubsidiary.  Additionally, the Companywill owe Nippon Shinyaku certain royalties based on the amount of net sales ofprulifloxacin less the 

 

65

----

Tableof Contents

 

amount of prulifloxacin theCompany buys from Nippon Shinyaku. Either party may terminate the agreement 60 days after giving notice ofa material breach which remains uncured 60 days after written notice.  If not terminated earlier, the agreement willterminate upon the later of ten years from the date of the first commercialsale of prulifloxacin in the United States or the date on which the last validpatent claim relating to prulifloxacin expires in the United States.

 

InJuly 2002, the Company entered into a license agreement withSloan-Kettering Institute to acquire, together with certain nonexclusivelicenses, exclusive, worldwide licensing and sublicensing rights to certainpatented and patent-pending carbohydrate-based cancer immunotherapies.  As partial consideration for the licensingrights, the Company paid to SKI a one-time fee consisting of both cash and55,383 shares of its common stock.  Underthe agreement, which was amended in June 2005, the Company owes SKImilestone payments in the following amounts for each licensed product: (i) $500,000upon the commencement of Phase 3 clinical studies, (ii) $750,000 uponthe filing of the first NDA, (iii) $1.5 million upon obtaining marketingapproval in the United States and (iv) $1.0 million upon obtainingmarketing approval in each and any of Japan and certain European countries, butonly to the extent that the Company, and not a sublicensee, achieves suchmilestones.  The Company may also owesSKI royalties based on net sales generated from the licensed products andincome the Company receives from its sublicensing activities, which royaltypayments are credited against a minimum annual royalty payment the Company mayowes to SKI during the term of the agreement. The term of the agreement continues until the later of July 31,2017, or the expiration of the last to expire of the patents licensed underthis agreement, unless the agreement is earlier terminated.  The agreement can be terminated by SKI for avariety of reasons, including (i) upon 60 days’ notice in the event theCompany fails to meet a development milestone specified in the agreement or (ii) upon30 days’ notice, in the event the Company fails to pay any licensing fees,royalties or patent expenses due under the agreement within 30 days of the duedate and thereafter fails to pay such deficit in-full within the 30-day noticeperiod.

 

InJuly 1999, the Company acquired exclusive, worldwide rights to its OPopS technologyfrom the Scripps Research Institute (“TSRI”). This agreement includes the license to the Company of patents, patentapplications and copyrights related to OPopS technology.  The Company also acquired, pursuant to threeseparate license agreements with TSRI, exclusive, worldwide rights to over 20TSRI patents and patent applications related to other potential drug compoundsand technologies, including HIV/FIV protease inhibitors, aminoglycosideantibiotics, polysialytransferase, selectin inhibitors, nucleic acid binders,carbohydrate mimetics and osteoarthritis. Under the four agreements, the Company paid TSRI license fees consistingof an aggregate of 239,996 shares of its common stock with a deemed aggregatefair market value of $46,400, as determined on the dates of each suchpayment.  Additionally, under eachagreement, the Company may owe TSRI royalties based on net sales by theCompany, its affiliates and sublicensees of the covered products and royaltiesbased on revenue the Company generates from sublicenses granted pursuant to theagreements.  For the first licensedproduct under each of the four agreements, the Company will also owe TSRIpayments upon achievement of certain milestones.  In three of the four TSRI agreements, themilestones are the initiation of a Phase 2 trial or its foreignequivalent, the filing of an NDA or its foreign equivalent and governmentmarketing and distribution approval.  Inthe remaining TSRI agreement, the milestones are the successful completion of aPhase 3 trial or its foreign equivalent, the filing of an NDA or itsforeign equivalent and government marketing and distribution approval.  The aggregate potential amount of milestonepayments the Company may be required to pay TSRI under all four TSRI agreementsis approximately $14.0 million.  EachTSRI agreement terminates in part as follows: (i) with respect to eachproduct which utilizes patent rights licensed under the agreement, on acountry-by-country basis concurrently with the expiration of the last to expireof the applicable patent rights, (ii) with respect to each product whichutilizes technology licensed under the agreement but which does not utilizepatent rights also licensed thereunder, 15 years after the date of the firstcommercial sale of the product in each country and (iii) with respect tosoftware licensed under the 1999 OPopS agreement, 75 years after the date theapplicable copyright is filed in the United States.

 

**8.     Commitments**

 

*Leases*

 

TheCompany leases office and research facilities under operating lease agreementsthat extend through November 2011. The Company has recorded deferred rent of $251,504 and $281,894 as of December 31,2008 and 2007, respectively, in conjunction with one of the lease agreements.

 

AtDecember 31, 2008, annual minimum rental payments due under the Company’soperating leases are as follows:

 
| **Years ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2009                                         |       | $          | 855,722    |   |
| 2010                                         |       | 653,357    |       |
| 2011                                         |       | 589,961    |       |
| Total minimum lease payments                 |       | $          | 2,099,040  |   |

 

Rentexpense was $831,137, $768,854 and $837,551, for the years ended December 31,2008, 2007, and 2006, respectively.

 

66

----

Table of Contents

 

*Contract Research OrganizationPurchase Orders*

 

The Company hascontracted with a contract research organization (“CRO”), whereby the CROagreed to provide clinical research services to the Company for the fidaxomicinPhase 3 clinical trials and prulifloxacin Phase 3 clinicaltrials.  At December 31, 2008, theCompany had issued purchase orders totaling $42.4 million for these services,$8.4 million, $9.8 million and $20.4 million of which were issued in 2008, 2007and 2006, respectively.  As of December 31,2008, the Company had paid $28.6 million related to these purchase orders.  The Company can terminate the serviceagreement at any time upon 60 days’ prior written notice to the CRO.

 

**9.     Stockholders’ Equity**

 

*Public Offering*

* *

In July 2008, the Company receivedapproximately $14.8 million in gross proceeds from the sale of1,743,396 million shares of its common stock at $8.48 per share in aregistered direct offering to institutional investors. These shares were soldpursuant to a shelf registration statement relating to $100 million worth ofcommon or preferred stock, debt securities, warrants or any combination ofthese securities.

 

*Private Placement*

 

On October 30, 2007,the Company completed a private placement in which it raised gross proceeds ofapproximately $35.9 million through the sale, at a price of $7.80 per share, of4.6 million shares of its common stock. Pursuant to the terms of the privateplacement, the Company filed a registration statement with the SEC to registerfor resale the shares of common stock sold in the private placement. Thisregistration statement became effective December 19, 2007.

 

*Initial Public Offering*

 

On February 14,2007, the Company completed the initial public offering of 7.0million shares of common stock at $7.00 per share in connection with theclosing of our initial public offering resulting in aggregate proceeds ofapproximately $43.6 million, net of underwriting discounts and commissions andoffering expenses.

 

*Treasury Stock*

 

The Company retired the 43,156 shares of commonstock held in its treasury on September 3, 2008.  The Company recorded the retirement of thetreasury shares at costand the retired treasury shares became part of the Company’s authorizedbut unissued shares of common stock.

 

*Warrants*

 

In connection with theCompany’s building lease agreement signed in 2000, the Company issued a warrantto purchase 13,845 shares of common stock at a purchase price of $10.83.  The estimated fair value of the warrant atthe date of grant was not material using the Black-Scholes valuationmodel.  As of December 31, 2007, noshares had been issued pursuant to this warrant.  This warrant expired on February 9,2008.

 

*Equity Compensation Plans*

 

*StockOptions*

 

In November 1998,the Company adopted the 1998 Stock Plan (the “1998 Plan”).  The Company terminated and ceased grantingoptions under the 1998 Plan upon the closing of the Company’s initial publicoffering in February 2007.

 

In December 2006,the Company’s board of directors approved the 2006 Equity Incentive Plan (“2006Plan”).  The 2006 Plan became effectiveupon the closing of the Company’s initial public offering. A total of 2,000,000shares of the Company’s common stock were initially made available for saleunder the plan.  the 2006 Plan providesfor annual increases in the number of shares available for issuance thereunderon the first day of each fiscal year, beginning with the Company’s 2008 fiscalyear, equal to the lesser of (i) 5% of the outstanding shares of theCompany’s common stock on the last day of the immediately preceding fiscalyear; (ii) 750,000 shares; or (iii) such other amount as the board ofdirectors may determine. Pursuant to this provision, 750,000 additional sharesof the Company’s common stock were reserved for issuance under the 2006 Plan onJanuary 1, 2008 and 2009.  Under the2006 Plan, the exercise price of options granted must at least be equal to thefair market value of the Company’s common stock on the date of grant.

 

67

----

Tableof Contents

 

Options granted underboth the 1998 Plan and the 2006 Plan generally expire 10 years from the date ofgrant (five years for a 10% stockholder) and vest over a period of fouryears.  The exercise price of optionsgranted must at least be equal to the fair market value of the Company’s commonstock on the date of grant.  The 2006 Planis administered by the compensation committee of the Company’s board ofdirectors.  In September 2008, theCompany’s board of directors established a New Hire Stock Option Committeeconsisting of the Chief Executive Officer and the Chief Financial Officer.

 

Following is a summary ofstock option activity:

 
| ** **                           | ** ** | **Options** | ** ** | **Weighted-   Average   Exercise Price** | ** ** |
|--------------------------------------|------------|-------------|------------|---------------------------------------------------------|------------|
| Balance as of December 31, 2005 |       | 1,455,022   |       | $                                                       | 0.78       |   |
| Granted                              |       | 367,517     |       | $                                                       | 2.08       |   |
| Exercised                            |       | (279,163    | )          | $                                                       | 0.52       |   |
| Canceled                             |       | (46,431     | )          | $                                                       | 0.71       |   |
| Balance as of December 31, 2006 |       | 1,496,945   |       | $                                                       | 1.17       |   |
| Granted                              |       | 310,353     |       | $                                                       | 8.84       |   |
| Exercised                            |       | (182,385    | )          | $                                                       | 0.96       |   |
| Canceled                             |       | (9,596      | )          | $                                                       | 3.70       |   |
| Balance as of December 31, 2007 |       | 1,615,317   |       | $                                                       | 2.65       |   |
| Granted                              |       | 452,250     |       | $                                                       | 6.95       |   |
| Exercised                            |       | (68,078     | )          | $                                                       | 1.02       |   |
| Canceled                             |       | (19,829     | )          | $                                                       | 7.66       |   |
| Balance as of December 31, 2008 |       | 1,979,660   |       | $                                                       | 3.64       |   |

 

The aggregate intrinsicvalue of options exercised during the year ended December 31, 2008 wasapproximately $522,059.  The aggregateintrinsic value of options outstanding and options exercisable as of December 31,2008 was approximately $16,774,766 and $12,390,043, respectively.

 

The following tablesummarizes information concerning outstanding and exercisable stock options asof December 31, 2008:

 
| ** **              | ** ** | **December 31, 2008**                                                         | ** ** |
|-------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **              | ** ** | **Options Outstanding**                                                            | ** ** | **Options Exercisable** | ** ** |
| **Exercise Price** | ** ** | **Number of Shares   Subject to   Options   Outstanding** | ** ** | **Weighted Average   Remaining   Contractual   Life (in years)** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Number of Shares   Exercisable** | ** ** | **Weighted   Average   Exercise Price** | ** ** |
| $0.22 - $0.65           |       | 403,063                                                                                 |       | 2.8 |   | $ | 0.59 |   | 403,063 |   | $ | 0.59 |   |
| $1.08                   |       | 518,747                                                                                 |       | 6.3 |   | $ | 1.08 |   | 477,060 |   | $ | 1.08 |   |
| $2.17 - $6.90           |       | 726,121                                                                                 |       | 8.4 |   | $ | 4.68 |   | 219,748 |   | $ | 2.50 |   |
| $7.10-$10.00            |       | 331,729                                                                                 |       | 8.5 |   | $ | 9.05 |   | 126,744 |   | $ | 9.16 |   |
| $0.22-$10.00            |       | 1,979,660                                                                               |       | 6.7 |   | $ | 3.64 |   | 1,226,615 |   | $ | 2.01 |   |

 

Of the optionsoutstanding, options to purchase 1,226,615 shares were vested as of December 31,2008, with a weighted average remaining contractual life of 5.6 years and aweighted average exercise price of $2.01 per share, while options to purchase753,045 shares were unvested.

 

*Share-BasedCompensation*

 

The Black-Scholesoption-pricing model was developed for use in estimating the fair value oftraded options, which have no vesting restrictions and are fullytransferable.  In addition, theBlack-Scholes option-pricing model requires the input of subjectiveassumptions, including the expected stock price volatility.  The following table shows the assumptionsused to compute stock-based compensation expense for the stock options grantedduring the years ended December 31, 2008, 2007 and 2006 using theBlack-Scholes option pricing model:

 
| **Employee Stock Options** | ** ** | **2008**    | ** ** | **2007**    | ** ** | **2006**  | ** ** |
|--------------------------------------|------------|-------------|------------|-------------|------------|-----------|------------|
| Risk-free interest rate              |       | 2.41%-3.00  | %          | 3.88%-4.80  | %          | 4.75-4.80 | %          |
| Dividend yield                       |       | 0.00        | %          | 0.00        | %          | 0.00      | %          |
| Expected life of options (years)     |       | 6.02-6.08   |       | 5.27-6.08   |       | 6.08      |       |
| Volatility                           |       | 64.95-67.00 | %          | 60.47-65.82 | %          | 65.82     | %          |

 

68

----

Table of Contents

 

The risk-free interestrate assumption was based on the United States Treasury’s rates for U.S.Treasury zero-coupon bonds with maturities similar to those of the expectedterm of the award being valued.  Theassumed dividend yield was based on the Company’s expectation of not payingdividends in the foreseeable future.  Theweighted average expected life of options was calculated using the simplifiedmethod as prescribed SAB No. 107, *Share-BasedPayment* (“SAB No. 107”). This decision was based on the lack of relevant historical data due tothe Company’s limited history.  Inaddition, due to the Company’s limited historical data, the estimatedvolatility also reflects the application of SAB No. 107,incorporating the historical volatility of comparable companies whose shareprices are publicly available.

 

Based on theseassumptions, the weighted average grant-date fair values of stock optionsgranted during the****year ended December 31,2008 was $6.95****per share.

 

As of December 31,2008, the total unrecognized compensation expense related to stock options wasapproximately $15,919,623 and the related weighted-average period over which itis expected to be recognized is approximately 6.6 years.

 

Total stock-based compensation expense, related toall of the Company’s stock options, stock awards and employee stock purchases,recognized for the years ended December 31, 2008, 2007 and 2006 wascomprised as follows:

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Research and development               |       | $                     | 527,874    |   | $ | 307,481 |   | $ | 297,331 |   |
| Marketing                              |       | 309,635               |       | 257,218 |   | — |   |
| General and administrative             |       | 926,567               |       | 679,323 |   | 414,700 |   |
| Total stock-based compensation expense |       | $                     | 1,764,076  |   | $ | 1,244,022 |   | $ | 712,031 |   |

 

*StockAwards*

 

On September 12,2007, the Company issued stock awards for 17,500 fully-vested shares of theCompany’s common stock to its directors under the 2006 Plan.  The grant date fair value of the stock awardswas $8.47 per share.

 

*EmployeeStock Purchase Plan*

 

Concurrent with theCompany’s initial public offering in February 2007, the Company’s board ofdirectors adopted the employee stock purchase plan (“ESPP”) in December 2006,and the stockholders approved the plan in January 2007.  A total of 200,000 shares of the Company’scommon stock were initially made available for sale under the plan.  In addition, the employee stock purchase planprovides for annual increases in the number of shares available for issuanceunder the purchase plan on the first day of each fiscal year, beginning withthe Company’s 2008 fiscal year, equal to the lesser of (i) 3% of theoutstanding shares of the Company’s common stock on the last day of theimmediately preceding fiscal year; (ii) 300,000 shares; or (iii) suchother amount as may be determined by the Company’s board of directors. Pursuantto this provision, 300,000 additional shares of the Company’s common stock werereserved for issuance under the ESPP on January 1, 2008. The Company’sboard of directors determined to reserve zero additional shares under the ESPPas of January 1, 2009.

 

As of December 31,2008, there were 70,409 shares of common stock issued and 429,591 sharesremained available for issuance under the ESPP.

 

The following table showsthe assumptions used to compute stock-based compensation expense for the stockpurchased under the ESPP during the year ended December 31, 2008 and 2007using the Black-Scholes option pricing model:

 
| **Employee Stock Options** | ** ** | **2008**      | ** ** | **2007**    | ** ** |
|--------------------------------------|------------|---------------|------------|-------------|------------|
| Risk-free interest rate              |       | 1.30%-2.19    | %          | 3.58%-4.64  | %          |
| Dividend yield                       |       | 0.00          | %          | 0.00        | %          |
| Expected life (years)                |       | 6  months     |       | 6  months   |       |
| Volatility                           |       | 45.05%-143.12 | %          | 45.33-50.66 | %          |

 

For the years ended December 31,2008 and 2007, the Company recorded stock-based compensation expense related tothe ESPP of $147,712 and $63,681, respectively.

 

69

----

Table of Contents

 

**10.  Income Taxes**

 

On January 1, 2007,the Company adopted FASB Financial Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes — An Interpretation of FASBStatement No. 109.  FIN No. 48clarifies the accounting for uncertainty in income taxes recognized in anentity’s financial statements in accordance with SFAS No. 109, Accountingfor Income Taxes, and prescribes a recognition threshold and measurementattributes for financial statement disclosure of tax positions taken orexpected to be taken on a tax return. Under FIN No. 48, the impact of anuncertain income tax position on the income tax return must be recognized atthe largest amount that is more-likely-than-not to be sustained upon audit bythe relevant taxing authority. An uncertain income tax position will not berecognized if it has less than a 50% likelihood of being sustained. Additionally,FIN No. 48 provides guidance on derecognition, classification, interestand penalties, accounting in interim periods, disclosure and transition.

 

There were nounrecognized tax benefits as of the date of adoption and there were nounrecognized tax benefits included in the balance sheet at December 31,2008 that would, if recognized, affect the effective tax rate. The adoption ofFIN 48 did not impact the Company’s financial condition, results of operationsor cash flows.

 

The Company’s practice isto recognize interest and/or penalties related to income tax matters in incometax expense. The Company had no accrual for interest or penalties on theCompany’s balance sheets at December 31, 2008 and 2007 and has notrecognized interest and/or penalties in the statement of operations for theyear ended December 31, 2008.

 

The Company is subject totaxation in the United States, California and various foreign jurisdictions.The Company’s tax years for 1999 and forward are subject to examination by theFederal and California tax authorities due to the carryforward of unutilizednet operating losses and research and development credits.

 

TheCompany has completed a Section 382/383 analysis regarding the limitationof net operating loss and research and development credit carryforwards and haddetermined that the maximum amount federal and state net operating loss (“NOL”)and credit carryovers are available for utilization, subject to the annuallimitation. Based on the analysis, the related deferred taxassets were reinstated in 2008 and the corresponding valuation allowanceincreased.  Any carryforwards that willexpire prior to utilization as a result of future limitations will be removedfrom deferred tax assets with a corresponding reduction of the valuation allowance.  Due to the existence of the valuationallowance, future changes in the unrecognized tax benefits will not impact theeffective tax rate.

 

At December 31,2008, the Company had Federal, California and foreign income tax net operatingloss carryforwards of approximately $120.5 million, $123.9 million and $2.6million, respectively. The Federal and California tax loss carryforwards willbegin expiring in 2020 and 2012 respectively, unless previously utilized. Theforeign losses originate from the Company’s Taiwan subsidiary and expire fiveyears after origination.  In addition,the Company has Federal and California research tax credit carryforwards ofapproximately $2.2 million and $1.5 million, respectively. The Federal researchand development credit carryforwards will begin to expire in 2020 unlesspreviously utilized. The California research and development creditcarryforwards will carry forward indefinitely until utilized. The Company alsohas California state manufacturer’s investment tax credit carryforwards of$103,000 which will begin to expire in 2011 unless previously utilized.

 

Significant components ofthe Company’s deferred tax assets as of December 31, 2008 and 2007 arelisted below. A valuation allowance of $52.6 million and $680,000 at December 31,2008 and 2007, respectively, has been recognized to offset the net deferred taxassets as realization of such assets is uncertain. Amounts are shown as of December 31,of the respective years:

 
| ** **                                  | ** ** | **2008**    | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|-------------|------------|----------|------------|
| Deferred tax assets:                        |       |        |       |     |       |
| Net operating loss carryforwards            |       | $           | 48,196,000 |     | $          | — |   |
| Tax credits                                 |       | 3,282,000   |       | —   |       |
| Other, net                                  |       | 1,155,000   |       | 680,000  |       |
| Total deferred tax assets                   |       | 52,633,000  |       | 680,000  |       |
| Valuation allowance for deferred tax assets |       | (52,633,000 | )          | (680,000 | )          |
|                                        |       | $           | —     |     | $          | — |   |

 

**11.  Employee Benefit Plans**

 

Effective January 1,2000, the Company established a 401(k) plan covering substantially allemployees.  Employees may contribute upto 100% of their compensation per year (subject to a maximum limit prescribedby federal tax law).  The Company mayelect to make a discretionary contribution or match a discretionary percentageof employee contributions.  As of December 31,2008, 2007 and 2006, the Company had not elected to make any contributions tothe 401(k) plan.

 

70

----

Table ofContents

 

In October 2008, the Company’s CompensationCommittee adopted a Severance Benefit Plan covering certain eligibleemployees, including executive officers.  Pursuant to the plan, upon aninvoluntary termination other than for cause, an eligible employee may beentitled to receive specified severance benefits. The benefits may include cashseverance payments and acceleration of stock award vesting.  The level ofbenefits provided under the plan depends upon an eligible employee’s positionand years of service, and whether the termination is related to a change incontrol.

 

**12.  Subsequent Event**

** **

In March 2009, the Company received approximately$32.9 million in gross proceeds from the sale of its securities in aregistered direct offering to institutional investors. The Company sold2,794,700 shares of its common stock to certain investors at a purchaseprice of $10.00 per share pursuant to common stock purchase agreements and sold457,666 units to other investors at a purchase price of $10.925 per unit,pursuant to unit purchase agreements.  Each unit sold in theoffering consisted of one share of common stock and one warrant topurchase 0.20 of a share of common stock at an exercise price of $10.93 pershare.  The warrants are exercisable six months after the date of issuanceand will expire five years from the date of issuance. These securitieswere sold pursuant to a shelf registration statement relating to $100million worth of common or preferred stock, debt securities, warrants orany combination of these securities.  Following the March 2009offering, approximately $52.4 million of the securities remain available forfuture issuance under this registration statement.

 

71

----

Table of Contents

** **

**Item9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

None.

 

**Item 9A. Controls and Procedures.**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of the end ofthe period covered by this report, an evaluation was performed under thesupervision and with the participation of our management, including our chiefexecutive officer and chief financial officer (collectively, our “certifyingofficers”), of the effectiveness of the design and operation of our disclosurecontrols and procedures. Based on their evaluation, our certifying officersconcluded that these disclosure controls and procedures are effective inproviding reasonable assurance that the information required to be disclosed byus in our periodic reports filed with the SEC is recorded, processed,summarized and reported within the time periods specified by the SEC’s rules andSEC reports.

 

We believe that acontrols system, no matter how well designed and operated, is based in partupon certain assumptions about the likelihood of future events, and thereforecan only provide reasonable, not absolute, assurance that the objectives of thecontrols system are met, and no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within acompany have been detected.

 

In addition, wehave reviewed our internal controls over financial reporting and have made nochanges during the quarter ended December 31, 2008, that our certifyingofficers concluded materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**Internal Control Over Financial Reporting**

** **

***(a)******        ******Management’s Report on Internal Control OverFinancial Reporting***

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934. Our internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with accounting principles generallyaccepted in the United States of America.

 

Our internal control overfinancial reporting is supported by written policies and procedures thatpertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and disposition of our assets’ providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles and that our receipts and expenditures are being madeonly in accordance with authorizations of our management and our Board orDirectors; and provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use or disposition of our assets thatcould have a material effect on our financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Therefore, even those systems determined to be effectivecan provide only reasonable assurance with respect to financial statementpreparation and presentation. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Our management assessedthe effectiveness of our internal control over financial reporting as of December 31,2008. We based this assessment on criteria for effective internal control overfinancial reporting described in “Internal Control-Integrated Framework” issuedby the Committee of Sponsoring Organizations of the Treadway Commission(“COSO”). Our assessment included an evaluation of the design of our internalcontrol over financial reporting and testing of the operational effectivenessof its internal control over financial reporting. We reviewed the results ofour assessment with the Audit Committee.

 

Based on this assessment,management determined that, as of December 31, 2008, our internal controlover financial reporting was effective to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with accountingprinciples generally accepted in the United States of America.

 

Ernst & Young LLP, the Independent registeredpublic accounting firm that audited the Company’s consolidated financialstatements included in this annual report, has issued its report on theeffectiveness of the Company’s internal control over financial reporting as of December 31,2008.

 

72

----

Table of Contents

** **

**(b)****         *****Reportof Independent Registered Public Accounting Firm***

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**ONINTERNAL CONTROL OVER FINANCIAL REPORTING**

 

TheBoard of Directors and

Stockholdersof Optimer Pharmaceuticals, Inc.

 

We have audited Optimer Pharmaceuticals, Inc.’sinternal control over financial reporting as of December 31, 2008, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“theCOSO criteria”). Optimer Pharmaceuticals, Inc.’s management isresponsible for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control overfinancial reporting included in the accompanying Management’s Report onInternal Control Over Financial Reporting. Our responsibility is to express anopinion on the Company’s internal control over financial reporting based on ouraudit.

 

We conducted our audit in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining an understandingof internal control over financial reporting, assessing the risk that amaterial weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performingsuch other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.

 

A company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of theCompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

In our opinion, Optimer Pharmaceuticals, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2008, based on the COSO criteria.

 

We also have audited, in accordance withthe standards of the Public Company Accounting Oversight Board (United States),the consolidated balance sheets of Optimer Pharmaceuticals, Inc. as of December 31,2008 and 2007, and the related consolidated statements of operations, redeemableconvertible preferred stock and stockholders’ equity (deficit), and cash flowsfor each of the three years in the period ended December 31, 2008 ofOptimer Pharmaceuticals, Inc. and our report dated March 11, 2009expressed an unqualified opinion thereon.

 
|                        | /s/  Ernst & Young LLP |
|------------------------|---------------------------------|
| San  Diego, California |
| March 11,  2009   |

 

73

----

Table ofContents

 

**Item9B.  Other Information.**

 

None.

 

**PART III**

 

Certaininformation required by Part III is omitted from this report because wewill file a definitive proxy statement within 120 days after the end ofour fiscal year ended December 31, 2008 pursuant to Regulation 14A(the “Proxy Statement”) for our annual meeting of stockholders to be held on May 6,2009, and certain information included in the Proxy Statement is incorporatedherein by reference.

 

**Item 10.Directors, Executive Officers and Corporate Governance**

 

We have adopted a Code ofBusiness Conduct and Ethics that applies to all officers, directors andemployees. The Code of Business Conduct and Ethics is available on our websiteat www.optimerpharma.com. If we make any substantive amendments to the Code ofBusiness Conduct and Ethics or grant any waiver from a provision of the Code toany executive officer or director, we will promptly disclose the nature of theamendment or waiver on our website. We will promptly disclose on our website (i) thenature of any amendment to the policy that applies to our principal executiveofficer, principal financial officer, principal accounting officer orcontroller, or persons performing similar functions and (ii) the nature ofany waiver, including an implicit waiver, from a provision of the policy thatis granted to one of these specified individuals, the name of such person whois granted the waiver and the date of the waiver.

 

The other informationrequired by this item will be set forth in the Proxy Statement and isincorporated in this report by reference.

 

**Item 11.Executive Compensation**

 

The information requiredby this item will be set forth in the Proxy Statement and is incorporated inthis report by reference.

 

**Item 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

 

The information requiredby this item will be set forth in the Proxy Statement and is incorporated inthis report by reference.

 

**Item 13.Certain Relationships and Related Transactions, and Director Independence**

 

The information requiredby this item will be set forth in the Proxy Statement and is incorporated inthis report by reference.

 

**Item 14.Principal Accountant Fees and Services**

 

The information requiredby this item will be set forth in the Proxy Statement and is incorporated inthis report by reference.

 

**PART IV**

 

**Item 15.Exhibits and Financial Statement Schedules**

 

1. *Financial Statements*

 

See Index toConsolidated Financial Statements in Item 8 of this report.

 

2. *Financial Statement Schedules*

 

None

 

74

----

Table ofContents

 

3. *Exhibits*

 
| **Exhibit No.** | ** ** | ** ** | **Description of Document**                                                                                                                                                                                                                                                        |
|----------------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  | (3)        |       | Certificate of Incorporation of Optimer  Pharmaceuticals, Inc., as amended and restated.                                                                                                                                                                                                |
| 3.2                  | (7)        |       | Bylaws of Optimer Pharmaceuticals, Inc., as  amended.                                                                                                                                                                                                                                   |
| 4.1                  | (4)        |       | Common Stock Certificate of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                               |
| 4.2                  | (1)        |       | Investors’ Rights Agreement by and among Optimer  Pharmaceuticals, Inc. and certain stockholders of the registrant dated November 30,  2005, as amended and restated.                                                                                                         |
| 4.3                  | (6)        |       | Registration Rights Agreement, dated October 23,  2007, by and between Optimer Pharmaceuticals, Inc. and the purchasers  listed on the signature pages thereto.                                                                                                               |
| 4.4                  | (11)       |       | Form of Warrant.                                                                                                                                                                                                                                                                        |
| 10.1                 | (1)*       |       | Master Service Agreement between Optimer  Pharmaceuticals, Inc. and Advanced Biologics, LLC (subsequently INC  Research, Inc.), dated November 16, 2005, as amended.                                                                                                          |
| 10.2                 | *          |       | Collaboration Research and Development and License  Agreement between Optimer Pharmaceuticals, Inc. and Cempra  Pharmaceuticals, Inc., dated March 31, 2006, as amended.                                                                                                      |
| 10.3                 | (4)*       |       | Agreement between Optimer Pharmaceuticals, Inc.  and Sloan-Kettering Institute for Cancer Research dated July 31, 2002,  as amended.                                                                                                                                               |
| 10.4                 | (3)*       |       | License Agreement between Optimer Pharmaceuticals, Inc.  and Nippon Shinyaku Co., Ltd., dated June 10, 2004.                                                                                                                                                                       |
| 10.5                 | (1)*       |       | License Agreement between Optimer Pharmaceuticals, Inc.  and The Scripps Research Institute dated July 23, 1999.                                                                                                                                                                   |
| 10.6                 | (1)*       |       | License Agreement between Optimer Pharmaceuticals, Inc.  and The Scripps Research Institute dated May 30, 2001.                                                                                                                                                                    |
| 10.7                 | (1)*       |       | License Agreement between Optimer Pharmaceuticals, Inc.  and The Scripps Research Institute dated May 30, 2001.                                                                                                                                                                    |
| 10.8                 | (1)*       |       | License Agreement between Optimer Pharmaceuticals, Inc.  and The Scripps Research Institute dated June 1, 2004.                                                                                                                                                                    |
| 10.9                 | (3)        |       | Building Lease between Optimer Pharmaceuticals, Inc.  and Pacific Sorrento Technology Park dated May 1, 2001, as amended by  the First Amendment to Building Lease between Optimer Pharmaceuticals, Inc.  and Pacific Sorrento Technology Park dated July 12, 2001.      |
| 10.10                | (1)+       |       | Form of Employee Proprietary Information  Agreement of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                               |
| 10.11                | +          |       | Employment Agreement between Optimer Pharmaceuticals, Inc.  and Michael N. Chang dated June 17, 2005, as amended on October 2, 2008.                                                                                                                                          |
| 10.12                | (1)+       |       | Offer letter between Optimer Pharmaceuticals, Inc.  and Sherwood L. Gorbach dated October 6, 2005.                                                                                                                                                                                 |
| 10.13                | +          |       | Offer letter between Optimer Pharmaceuticals, Inc.  and Kevin P. Poulos dated June 15, 2006, as amended on October 2,  2008.                                                                                                                                                  |
| 10.14                | +          |       | Offer letter between Optimer Pharmaceuticals, Inc.  and John D. Prunty dated May 10, 2006, as amended on October 2,  2008.                                                                                                                                                    |
| 10.15                | (1)+       |       | Offer letter between Optimer Pharmaceuticals, Inc.  and Tessie M. Che dated August 30, 2001.                                                                                                                                                                                       |
| 10.16                | (1)+       |       | Offer letter between Optimer Pharmaceuticals, Inc.  and Youe-Kong Shue dated February 18, 2000.                                                                                                                                                                                    |
| 10.17                | (1)+       |       | Form of Indemnification Agreement between  Optimer Pharmaceuticals, Inc. and its directors and officers.                                                                                                                                                                           |
| 10.18                | (1)+       |       | 1998 Stock Plan of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                                        |
| 10.19                | (1)+       |       | Stock Plan Stock Option Agreement of Optimer  Pharmaceuticals, Inc.                                                                                                                                                                                                                     |
| 10.20                | (3)+       |       | 2006 Equity Incentive Plan of Optimer  Pharmaceuticals, Inc.                                                                                                                                                                                                                            |
| 10.21                | (7)+       |       | Employee Stock Purchase Plan of Optimer  Pharmaceuticals, Inc., as amended.                                                                                                                                                                                                             |
| 10.22                | (3)        |       | Prospective Buy-Back Agreement between Optimer  Pharmaceuticals, Inc. and Par Pharmaceutical, Inc. dated January 19,  2007.                                                                                                                                                   |
| 10.23                | (5)*       |       | Supply Agreement with Biocon Limited dated August 29,  2005, as amended.                                                                                                                                                                                                                |
| 10.24                | (5)*       |       | Assignment letter between Par Pharmaceutical, Inc.  and Biocon Limited dated January 16, 2007.                                                                                                                                                                                     |
| 10.25                | (8)+       |       | Summary of Optimer Pharmaceuticals, Inc. 2009  Incentive Compensation Plan.                                                                                                                                                                                                             |
| 10.26                | (9)        |       | Office Lease, dated August 18, 2008, by and  between Optimer Pharmaceuticals, Inc. and Trizec Sorrento Towers, LLC.                                                                                                                                                                |
| 10.27                | (10)+      |       | Optimer Pharmaceuticals, Inc. Severance Benefit  Plan                                                                                                                                                                                                                                   |
| 23.1                 |       |       | Consent of Independent Registered Public Accounting  Firm.                                                                                                                                                                                                                                   |
| 31.1                 |       |       | Certification of principal executive officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                                   |
| 31.2                 |       |       | Certification of principal financial officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                                   |
| 32                   |       |       | Certification by the Chief Executive Officer and the  Chief Financial Officer of Optimer Pharmaceuticals, Inc., as required by  Rule 13a-14(b) or 15d-14(b) and Section 1350 of  Chapter 63 of Title 18 of the United States Code (18 U.S.C.  1350). |

 

75

----

Table of Contents

 

----

| +    |   | Indicates management contract or compensatory plan.                                                                                                                                  |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *    |   | Confidential treatment has been granted with respect  to certain portions of this exhibit. Omitted portions have been filed separately  with the Securities and Exchange Commission. |
| (1)  |   | Filed with Registrant’s Registration Statement on Form S-1  on November 9, 2006.                                                                                      |
| (2)  |   | Filed with Registrant’s Amendment No. 2 to  Registration Statement on Form S-1 on January 5, 2007.                                                               |
| (3)  |   | Filed with Registrant’s Amendment No. 3 to  Registration Statement on Form S-1 on January 22, 2007.                                                              |
| (4)  |   | Filed with Registrant’s Amendment No. 4 to  Registration Statement on Form S-1 on February 5, 2007.                                                              |
| (5)  |   | Filed with the Registrant’s Current Report on Form 8-K  on February 26, 2007.                                                                                         |
| (6)  |   | Filed with the Registrant’s Current Report on Form 8-K  on October 29, 2007.                                                                                          |
| (7)  |   | Filed with the Registrant’s Current Report on Form 8-K  on September 18, 2007.                                                                                        |
| (8)  |   | Filed with the Registrant’s Current Report on Form 8-K  on January 13, 2009.                                                                                          |
| (9)  |   | Filed with the Registrant’s Current Report on Form 8-K  on August 21, 2008.                                                                                           |
| (10) |   | Filed with the Registrant’s Current Report on Form 8-K  on October 8, 2008.                                                                                           |
| (11) |   | Filed with the Registrant’s Current Report on Form 8-K  on March 5, 2009.                                                                                             |

 

76

----

Table of Contents

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| ** **                 | **OPTIMER PHARMACEUTICALS** |
|----------------------------|-----------------------------|
|                       |                        |
| Dated: March 12, 2009 | By:                         | /s/ Michael  N. Chang |
| ** **                 | **Name:**                   | **Michael  N. Chang** |
| ** **                 | **Title:**                  | ***President and Chief Executive Officer*** |
|                            |                             |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed by the following persons onbehalf of the registrant and in the capacities and on the dates indicated:

 

 
| **Signature**                | ** ** | **Title**                                                                      | ** ** | **Date**             |
|------------------------------|------------|--------------------------------------------------------------------------------|------------|----------------------|
| ** **                   | ** ** | ** **                                                                     | ** ** | ** **           |
| /s/  MICHAEL N. CHANG   |       | President, Chief Executive Officer and Director  (Principal Executive Officer) |       | March 12,  2009 |
| Michael N.  Chang       |       |                                                                           |       |                 |
|                         |       |                                                                           |       |                 |
| /s/ JOHN D.  PRUNTY     |       | Chief Financial Officer (Principal Accounting and  Financial Officer)          |       | March 12,  2009 |
| John D.  Prunty         |       |                                                                           |       |                 |
|                         |       |                                                                           |       |                 |
| /s/ ANTHONY E.  ALTIG        |       | Director                                                                       |       | March 12,  2009 |
| Anthony E. Altig             |       |                                                                           |       |                 |
|                         |       |                                                                           |       |                 |
| /s/ MARK  AUERBACH           |       | Director                                                                       |       | March 12,  2009 |
| Mark Auerbach                |       |                                                                           |       |                 |
|                         |       |                                                                           |       |                 |
| /s/  JOSEPH Y. CHANG    |       | Director                                                                       |       | March 12,  2009 |
| Joseph Y.  Chang        |       |                                                                           |       |                 |
|                         |       |                                                                           |       |                 |
| /s/ PETER E.  GREBOW         |       | Director                                                                       |       | March 12,  2009 |
| PETER E. GREBOW              |       |                                                                           |       |                 |
|                         |       |                                                                           |       |                 |
| /s/  ALAIN B. SCHREIBER |       | Director                                                                       |       | March 12,  2009 |
| Alain B.  Schreiber     |       |                                                                           |       |                 |

 

77

----

Table of Contents

** **

**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | ** ** | **Description of Document**                                                                                                                                                                                                                                                        |
|----------------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  | (3)        |       | Certificate of Incorporation of Optimer  Pharmaceuticals, Inc., as amended and restated.                                                                                                                                                                                                |
| 3.2                  | (7)        |       | Bylaws of Optimer Pharmaceuticals, Inc., as  amended.                                                                                                                                                                                                                                   |
| 4.1                  | (4)        |       | Common Stock Certificate of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                               |
| 4.2                  | (1)        |       | Investors’ Rights Agreement by and among Optimer  Pharmaceuticals, Inc. and certain stockholders of the registrant dated November 30,  2005, as amended and restated.                                                                                                         |
| 4.3                  | (6)        |       | Registration Rights Agreement, dated October 23,  2007, by and between Optimer Pharmaceuticals, Inc. and the purchasers  listed on the signature pages thereto.                                                                                                               |
| 4.4                  | (11)       |       | Form of Warrant.                                                                                                                                                                                                                                                                        |
| 10.1                 | (1)*       |       | Master Service Agreement between Optimer  Pharmaceuticals, Inc. and Advanced Biologics, LLC (subsequently INC  Research, Inc.), dated November 16, 2005, as amended.                                                                                                          |
| 10.2                 | *          |       | Collaboration Research and Development and License  Agreement between Optimer Pharmaceuticals, Inc. and Cempra  Pharmaceuticals, Inc., dated March 31, 2006, as amended.                                                                                                      |
| 10.3                 | (4)*       |       | Agreement between Optimer Pharmaceuticals, Inc.  and Sloan-Kettering Institute for Cancer Research dated July 31, 2002,  as amended.                                                                                                                                               |
| 10.4                 | (3)*       |       | License Agreement between Optimer Pharmaceuticals, Inc.  and Nippon Shinyaku Co., Ltd., dated June 10, 2004.                                                                                                                                                                       |
| 10.5                 | (1)*       |       | License Agreement between Optimer Pharmaceuticals, Inc.  and The Scripps Research Institute dated July 23, 1999.                                                                                                                                                                   |
| 10.6                 | (1)*       |       | License Agreement between Optimer Pharmaceuticals, Inc.  and The Scripps Research Institute dated May 30, 2001.                                                                                                                                                                    |
| 10.7                 | (1)*       |       | License Agreement between Optimer Pharmaceuticals, Inc.  and The Scripps Research Institute dated May 30, 2001.                                                                                                                                                                    |
| 10.8                 | (1)*       |       | License Agreement between Optimer Pharmaceuticals, Inc.  and The Scripps Research Institute dated June 1, 2004.                                                                                                                                                                    |
| 10.9                 | (3)        |       | Building Lease between Optimer Pharmaceuticals, Inc.  and Pacific Sorrento Technology Park dated May 1, 2001, as amended by  the First Amendment to Building Lease between Optimer Pharmaceuticals, Inc.  and Pacific Sorrento Technology Park dated July 12, 2001.      |
| 10.10                | (1)+       |       | Form of Employee Proprietary Information  Agreement of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                               |
| 10.11                | +          |       | Employment Agreement between Optimer Pharmaceuticals, Inc.  and Michael N. Chang dated June 17, 2005, as amended on October 2, 2008.                                                                                                                                          |
| 10.12                | (1)+       |       | Offer letter between Optimer Pharmaceuticals, Inc.  and Sherwood L. Gorbach dated October 6, 2005.                                                                                                                                                                                 |
| 10.13                | +          |       | Offer letter between Optimer Pharmaceuticals, Inc.  and Kevin P. Poulos dated June 15, 2006, as amended on October 2,  2008.                                                                                                                                                  |
| 10.14                | +          |       | Offer letter between Optimer Pharmaceuticals, Inc.  and John D. Prunty dated May 10, 2006, as amended on October 2,  2008.                                                                                                                                                    |
| 10.15                | (1)+       |       | Offer letter between Optimer Pharmaceuticals, Inc.  and Tessie M. Che dated August 30, 2001.                                                                                                                                                                                       |
| 10.16                | (1)+       |       | Offer letter between Optimer Pharmaceuticals, Inc.  and Youe-Kong Shue dated February 18, 2000.                                                                                                                                                                                    |
| 10.17                | (1)+       |       | Form of Indemnification Agreement between  Optimer Pharmaceuticals, Inc. and its directors and officers.                                                                                                                                                                           |
| 10.18                | (1)+       |       | 1998 Stock Plan of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                                        |
| 10.19                | (1)+       |       | Stock Plan Stock Option Agreement of Optimer  Pharmaceuticals, Inc.                                                                                                                                                                                                                     |
| 10.20                | (3)+       |       | 2006 Equity Incentive Plan of Optimer  Pharmaceuticals, Inc.                                                                                                                                                                                                                            |
| 10.21                | (7)+       |       | Employee Stock Purchase Plan of Optimer  Pharmaceuticals, Inc., as amended.                                                                                                                                                                                                             |
| 10.22                | (3)        |       | Prospective Buy-Back Agreement between Optimer  Pharmaceuticals, Inc. and Par Pharmaceutical, Inc. dated January 19,  2007.                                                                                                                                                   |
| 10.23                | (5)*       |       | Supply Agreement with Biocon Limited dated August 29,  2005, as amended.                                                                                                                                                                                                                |
| 10.24                | (5)*       |       | Assignment letter between Par Pharmaceutical, Inc.  and Biocon Limited dated January 16, 2007.                                                                                                                                                                                     |
| 10.25                | (8)+       |       | Summary of Optimer Pharmaceuticals, Inc. 2009  Incentive Compensation Plan.                                                                                                                                                                                                             |
| 10.26                | (9)        |       | Office Lease, dated August 18, 2008, by and  between Optimer Pharmaceuticals, Inc. and Trizec Sorrento Towers, LLC.                                                                                                                                                                |
| 10.27                | (10)+      |       | Optimer Pharmaceuticals, Inc. Severance Benefit  Plan                                                                                                                                                                                                                                   |
| 23.1                 |       |       | Consent of Independent Registered Public Accounting  Firm.                                                                                                                                                                                                                                   |
| 31.1                 |       |       | Certification of principal executive officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                                   |
| 31.2                 |       |       | Certification of principal financial officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                                   |
| 32                   |       |       | Certification by the Chief Executive Officer and the  Chief Financial Officer of Optimer Pharmaceuticals, Inc., as required by  Rule 13a-14(b) or 15d-14(b) and Section 1350 of  Chapter 63 of Title 18 of the United States Code (18 U.S.C.  1350). |

 

----

Table of Contents

 

----

| +    |   | Indicates management contract or compensatory plan.                                                                                                                                  |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *    |   | Confidential treatment has been granted with respect  to certain portions of this exhibit. Omitted portions have been filed  separately with the Securities and Exchange Commission. |
| (1)  |   | Filed with Registrant’s Registration Statement on Form S-1  on November 9, 2006.                                                                                      |
| (2)  |   | Filed with Registrant’s Amendment No. 2 to  Registration Statement on Form S-1 on January 5, 2007.                                                               |
| (3)  |   | Filed with Registrant’s Amendment No. 3 to  Registration Statement on Form S-1 on January 22, 2007.                                                              |
| (4)  |   | Filed with Registrant’s Amendment No. 4 to  Registration Statement on Form S-1 on February 5, 2007.                                                              |
| (5)  |   | Filed with the Registrant’s Current Report on Form 8-K  on February 26, 2007.                                                                                         |
| (6)  |   | Filed with the Registrant’s Current Report on Form 8-K  on October 29, 2007.                                                                                          |
| (7)  |   | Filed with the Registrant’s Current Report on Form 8-K  on September 18, 2007.                                                                                        |
| (8)  |   | Filed with the Registrant’s Current Report on Form 8-K  on January 13, 2009.                                                                                          |
| (9)  |   | Filed with the Registrant’s Current Report on Form 8-K  on August 21, 2008.                                                                                           |
| (10) |   | Filed with the Registrant’s Current Report on Form 8-K  on October 8, 2008.                                                                                           |
| (11) |   | Filed with the Registrant’s Current Report on Form 8-K  on March 5, 2009.                                                                                             |

 

----