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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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**Form 10-K**

 

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**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, 2009**

** **

**or**

 

| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For thetransition period from                            to**

 

**Commission file number: 001-33291**

 

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**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**

 

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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 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate website, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files):  Yes o  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,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange 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, 2009 (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 $444,240,000.

 

Thenumber of outstanding shares of the registrant’s common stock, par value $0.001per share, as of March 2, 2010 was 38,212,131

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of theDefinitive Proxy Statement for our 2010 Annual Meeting of Stockholders areincorporated by reference in Part III of this report.

 

 

 

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**OPTIMERPHARMACEUTICALS**

 

**FORM 10-K—ANNUALREPORT**

**Forthe Fiscal Year Ended December 31, 2009**

 

**Tableof Contents**

 
| **PART I**   | ** **                                                                                                          | ** ** |
|-------------------|---------------------------------------------------------------------------------------------------------------------|------------|
| Item 1            | Business                                                                                                            | 3          |
| Item 1A      | Risk  Factors                                                                                                       | 22         |
| Item 1B           | Unresolved Staff  Comments                                                                                          | 41         |
| Item  2           | Properties                                                                                                          | 41         |
| Item  3           | Legal  Proceedings                                                                                                  | 41         |
| Item 4            | (Removed and Reserved)                                                                                              | 41         |
| **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                                                                        | 53         |
| 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                                          | 75         |
| Item 14           | Principal  Accountant Fees and Services                                                                             | 75         |
| **PART IV**  | ** **                                                                                                          | ** ** |
| Item 15           | Exhibits and  Financial Statement Schedules                                                                         | 75         |
| **Signatures**    |                                                                                                                | 77         |

 

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**PART I**

 

**Cautionary Note Regarding Forward-Looking Statements**

 

This report and otherdocuments we file with the SEC contain forward looking statements that arebased on current expectations, estimates, forecasts and projections about us,our future performance, our business or others on our behalf, our beliefs andour management’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 are intended to identifysuch forward looking statements. These statements are not guarantees of futureperformance and involve certain risks, uncertainties and assumptions that aredifficult to predict. We describe our respective risks, uncertainties andassumptions that could affect the outcome or results of operations in “*Item 1A. Risk Factors*”. We have based ourforward looking statements on our management’s beliefs and assumptions based oninformation available to our management at the time the statements are made. Wecaution you that actual outcomes and results may differ materially from what isexpressed, implied or forecast by our forward looking statements. Except asrequired under the federal securities laws and the rules and regulationsof the SEC, we do not have any intention or obligation to update publicly anyforward looking statements after the distribution of this report, whether as aresult of new information, future events, changes in assumptions or otherwise.

 

**Item 1.Business**

 

**Overview**

 

We are a biopharmaceutical company focused ondiscovering, developing and commercializing innovative anti-infective products.Our current development efforts are focused on products that treatgastrointestinal infections,****andrelated diseases where current therapies have limitations, including limitedefficacy, serious adverse side effects, drug-to-drug interactions, difficultpatient compliance and bacterial resistance. We currently have two late-stage anti-infective product candidates,fidaxomicin and PruvelTM (prulifloxacin).

 

Fidaxomicin, our leadproduct candidate, is a narrow spectrum antibiotic with minimal systemicabsorption. We are developing fidaxomicin as a treatment for *Clostridium difficile*-infection, or CDI,the most common nosocomial, or hospital acquired, diarrhea. In February 2010,we reported positive top-line data from the second of two fidaxomicin Phase 3trials.  In November 2008, wereported positive data from the first Phase 3 trial.   Both Phase 3 trials compared fidaxomicin toVancocin, the only antibiotic currently approved by the U.S. Food and DrugAdministration, or FDA, for the treatment of CDI.  The top-line analysis of data from thesetrials showed that fidaxomicin achieved the primary endpoint of clinical cureand demonstrated a significantly lower recurrence rate compared toVancocin.  Fidaxomicin was alsowell-tolerated in both trials.  Wecurrently hold worldwide rights to fidaxomicin and intend to seek one or morepartners for the commercialization of fidaxomicin outside of the UnitedStates.  We plan to submit a New Drug Application, or NDA, tothe FDA in the second half of 2010 and are also preparing a MarketingAuthorization Application, or MAA, for submission to the European MedicinesAgency, or EMA.

 

Pruvel is a prodrug inthe fluoroquinolone class of antibiotics, a widely-used class of broad-spectrumantibiotics. We are developing Pruvel as a treatment for infectiousdiarrhea.  In July 2008, we reportedpositive top-line data from the first Phase 3 trial conducted in Mexico andPeru and in February 2009, we reported positive top-line data from thesecond Phase 3 trial conducted in India, Guatemala and Mexico.  The top-line analysis of data from thesestudies showed that Pruvel met the primary endpoint of time to last unformed stool,or TLUS, compared to placebo. We plan to initially seek approval for Pruvel forthe treatment of infectious diarrhea. We currently hold rights to commercializePruvel in the United States and we plan to submit a NDA to the FDA in 2010.

 

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.

 

Wehave also licensed rights to others to develop certain of our productcandidates.  CEM-101, a macrolideantibiotic which we licensed to Cempra Pharmaceuticals, Inc., or Cempra,is being developed by Cempra for the treatment of respiratory tract infections,or RTIs.  In addition, we have grantedrights to two other product candidates, OPT-88 and OPT-822/821, to ourmajority-owned subsidiary, Optimer Biopharmaceuticals, Inc., or OBI.  OPT-88 is being developed as adisease-modifying intra-articular, or within the joint, therapy for osteoarthritisand was originally licensed to us from The Scripps Research Institute, orTSRI.  OPT-

 

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822/821 is a novel carbohydrate-basedcancer immunotherapy which we originally licensed from the MemorialSloan-Kettering Cancer Center, or MSKCC. Under our agreements with Cempra and OBI, we are entitled to receivemilestone payments if specified development and commercialization milestonesare achieved, as well as royalty payments if the related product candidates arecommercialized.

 

We were incorporated in November 1998.We have one majority-owned subsidiary, OBI, which is located and incorporatedin Taiwan.  In this report, “OptimerPharmaceuticals,” “Optimer,” “we,” “us” and “our” refer to OptimerPharmaceuticals, Inc. and OBI on a consolidated basis, unless the contextotherwise provides.  Our principaloffices are in San Diego, California. We maintain an internet site at *www.optimerpharma.com*, which includeslinks to reports we have filed with the Securities and Exchange Commission, orSEC. Any information that is included on or linked to our Internet site is nota part of this report or any registration statement that incorporates thisreport by reference. Our filings may also be read and copied at the SEC’sPublic Reference Room at 100 F Street, NE, Washington, DC 20549.Information on the operation of the Public Reference Room may be obtainedby calling the SEC at 1-800-732-0330. The SEC also maintains a website thatcontains 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, and canoverwhelm the body’s immune system by establishing themselves throughout thebody 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 increasingly focusedon antibiotics that target specific bacteria, which may be beneficial for thetreatment 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. The largest antibacterial sales per regionwere: North America ($11 billion), Europe ($10 billion), Asia Pacific ($10billion), and others ($7 billion). The market for anti-infective products isgenerally divided into two categories, nosocomial infections andcommunity-acquired infections, which represent approximately 30% and 70% of theanti-infectives market, respectively. According to the U.S. Centers for DiseaseControl and Prevention, or CDC, approximately two million nosocomial infectionsoccur annually in the United States and these infections can increase theaverage length of hospital stays by seven to nine days. Approximately fourmillion nosocomial infections occur annually in Europe, three million in NorthAmerica, two million in South America and two million in East Asia (excludingChina). Nosocomial infections are costly to address, with an estimated annualaggregate healthcare cost in the United States and the United Kingdom ofapproximately $4.5 billion and $1.9 billion, respectively. In addition, in theUnited States, nosocomial infections cause approximately 100,000 deathsannually, making them one of the five leading causes of death in the UnitedStates. We believe that bacterial infections, especially infections caused bydifficult-to-treat, drug resistant bacteria, cause or contribute to a majorityof 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 these antibioticshave also been associated with serious adverse side effects, including renaltoxicities, heart rhythm abnormalities, phototoxicity, rashes and centralnervous effects, such as seizures. These side effects limit the use ofantibiotics for certain patients. In addition, certain antibiotics haveinteraction issues with prescribed drugs, such as cholesterol lowering agents.Safety problems can arise when increased doses of these antibiotics are neededto treat resistant bacteria. If bacteria develop resistance to currentlyavailable antibiotics, the underlying infection can become difficult orimpossible to treat, and may even lead to death. Patients also often fail tocomply with treatment regimens due to many factors including the inability totolerate an antibiotic due to its side effects, inconvenient method of dosingand undesirable frequency and length of dosing. Because of these shortcomingsassociated with marketed antibiotics, we believe an opportunity exists toimprove upon existing treatments.

 

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**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 ofdevelopment and none have been approved for sale by the FDA. Our ability or ourlicensees’ ability to obtain FDA approval of any of our product candidatesrequires us or our licensees to successfully complete the clinical developmentof each such product candidate. Clinical trials involve a lengthy and expensiveprocess with an uncertain outcome, and efficacy and safety data of earlierstudies and trials may not be predictive 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                |         | NDA and MAA preparations; Reported positive top-line results from two  Phase 3 clinical trials |         | Optimer worldwide          |
|                                 |         |                         |         |                                                                                           |         |                       |
|                                 |         | CDI oral suspension          |         | Pre-clinical                                                                                   |         |                       |
|                                 |         |                         |         |                                                                                           |         |                       |
|                                 |         | Prevention of VRE/MRS in CDI |         | Proof-of-Concept Trial (2)                                                                     |         |                       |
|                                 |         |                         |         |                                                                                           |         |                       |
| PruvelTM (prulifloxacin)         |         | Infectious diarrhea          |         | NDA preparation; Two Phase 3trials completed                                              |         | Optimer U.S.               |
|                                 |         |                         |         |                                                                                           |         |                       |
| CEM-101 (OP-1068)                    |         | Respiratory tract infections |         | Phase 2                                                                                        |         | Cempra worldwide (3)       |
|                                 |         |                         |         |                                                                                           |         |                       |
| ***Other Therapeutic Areas***        | *** *** | *** ***                 | *** *** | *** ***                                                                                   | *** *** | *** ***               |
| OPT-822/OPT-821  Combination Therapy |         | Breast cancer                |         | Phase 2                                                                                   |         | Licensed to OBI (4)        |
| OPT-88                               |         | Osteoarthritis               |         | Pre-clinical                                                                                   |         | Licensed to OBI (4)        |

 

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

(2)                            A proof-of-concept trial is an exploratoryclinical trial to provide or establish evidence that a product candidate isefficacious for a target indication.

(3)                            We granted to Cempra an exclusiveworldwide license, except in countries in the Association of Southeast AsianNations, or ASEAN.  We have the right toreceive royalties from Cempra on any sales of CEM-101 (OP-1068) outside ofASEAN countries.

(4)                            We have the right to receive royaltiesfrom OBI on any sales of OPT-822/821 and OPT-88.

 

***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.  Fidaxomicin has also been shown to inhibitthe growth of other potentially harmful bacteria such as Staphylococci, commonbacteria that reside on the skin and in the GI tract, and Enterococci, commonbacteria that reside in the GI tract.

 

We reported positivetop-line results from our two Phase 3 trials comparing fidaxomicin to Vancocinin the treatment of CDI in February 2010 and November 2008.    The two fidaxomicin trials combinedrepresent the largest database of CDI clinical trial data in the world andlargest comparative studies ever conducted against Vancocin.  The top-line analysis of data from thesetrials showed that fidaxomicin achieved the primary endpoint of clinical cure(defined as patients requiring no further CDI therapy two days after completionof study medication, as determined by the investigator) and demonstrated asignificantly lower recurrence rate and higher global cure rate (defined ascure with no recurrence within four weeks of completing therapy) compared toVancocin, the only FDA-approved antibiotic for the treatment of CDI.  Fidaxomicin was also well-tolerated in thetrials. We currently hold worldwide rights to fidaxomicin and intend to seekone or more partners for the commercialization of fidaxomicin outside of UnitedStates. We plan to submita NDA to the FDA in the second half of 2010 and are also preparing a MAA forsubmission to the EMA in Europe.

 

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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. Studies havesuggested that the use of proton pump inhibitors, or PPIs, a widely used groupof heartburn drugs, may also be linked to *C. difficile*infections. CDI accounts for up to 33% of antibiotic-associated diarrheaincidences as well as many cases of antibiotic-associated colitis, orinflammation of the colon. *C. difficile* can betransmitted by direct or indirect contact with infected patients via sporesthat can live for months on dry surfaces.

 

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 than whatis currently being reported because many hospitals are not required to and donot 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) which is 6.5 to 20 times higher than previous incidenceestimates. Additionally, recent reports indicate that the incidence ofcommunity-acquired CDI cases may be increasing. For example, a study conductedin one major U.S. city and cited at the 2006 Interscience Conference onantimicrobial Agents and Chemotherapy, or ICCAC, reported that the percentageof CDI cases found to be community-acquired increased from 12% in 2003 to 22%in 2004 and to 29% in 2005.  A recentlypublished survey conducted by a VA hospital in North Carolina showed that 35%patients with CDI experienced onset of the disease in the community. In thecommunity, exposure to CDI is believed to occur through household contacts ofpersons with diarrhea, or ingestion of contaminated food or soil.  Some animals, including domesticated pets,may also carry CDI.

 

Accordingto a study cited in the New England Journal of Medicine, the increased rates ofCDI and severity of the disease may be caused by a combination of factors,including the excessive use of antibiotics, a growing population over the ageof 65 and the impact of new hyper-virulent strains of *C. difficile*. Recent CDI studies havedemonstrated increasing frequency of new hyper-virulent strains, which canincrease the risk of clinical failure, recurrence and mortality. The analysisof C. difficile isolates from our first Phase 3 trial presented at the 2009ICAAC meeting demonstrated that even though the BI hyper-virulent groupcontinues to be dominant in North America, 60% of the strains analyzed belongedto non-BI groups including G, J, K and Y groups. Hyper-virulent strains arealso a growing concern in Europe.

 

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.

 

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*Current Treatments and Limitations*. Metronidazole is generally used forpatients in the United States and Europe experiencing their first episode orfirst recurrent episode of CDI. Metronidazole is a generic drug that is usedoff-label to treat CDI due to its low cost and historical efficacy. The typicaltreatment regimen for metronidazole is 250 mg every six hours, for a minimum often days. Metronidazole can be associated with numerous adverse side effectssuch as seizures, toxic reactions to alcohol, leukopenia, or reduction of whiteblood cells, neuropathy, a disease affecting one or more nerves, unpleasanttaste and dry mouth.

 

Oral vancomycin is used in the United States and alsoin Europe and Japan for the treatment of CDI. As a result of its broadantibacterial activity, intravenously administered vancomycin is frequentlyused for certain other life-threatening infections caused by multi-drugresistant bacteria such as vancomycin-resistant Enterococci, or VRE. In aneffort to slow the continuing emergence of vancomycin-resistant bacteria, themedical community discourages the use of the drug for the treatment of CDIexcept for patients who are not responding to metronidazole, for patients withsevere, life-threatening colitis or for patients with risk factors that arepredictive of negative treatment outcomes. 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, including VRE,and vancomycin-resistant Staphylococcus, which can also cause other seriousnosocomial infections. Furthermore, *C. difficile*resistance to metronidazole has been reported in at least one study.

 

·                  Adverse Side Effects. Metronidazole,which is systemically absorbed and must be administered in high doses to treatCDI, 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 patientcompliance.

 

*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 high potency activityagainst *C. difficile*,including hypervirulent strains such as B1/NAP1/027, with low rates oftreatment failures and recurrences.  Ourtwo Phase 3 studies provided evidence of a high cure rate and substantiallyimproved recurrence rates and global cure rates compared to Vancocin;

 

·                  Limited disruption of normal gut flora resulting in alower likelihood of inducement of CDI recurrence and decreased severity ofdisease;

 

·                  Minimal systemic exposure resulting in a favorablesafety profile;

 

·                  Improved outcomes comparedto oral vancomycin for CDI patients requiring concomitant antibiotics;

 

·                  Lower propensity to cause VRE colonization compared to vancomycin;

 

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·                  Faster time to resolution ofdiarrhea;

 

·      Evidence of low *C. difficile*resistance, including hypervirulent strains such as B1/NAP1/027; and

 

·                  Convenient, twice daily dosing regimen.

 

*Clinical Development*

 

*Phase 3Pivotal Trials*.

 

*Second Phase 3 trial.*In February 2010, we reportedpositive top-line results from our second of two Phase 3 clinical trial offidaxomicin for the treatment of CDI. This trial was a multi-center, randomized, double-blind trial offidaxomicin (200 mg q12h) against vancomycin (125 mg q6h) in adult subjectssuffering from CDI.  We enrolled 535adult subjects at more than 100 sites throughout North America and Europe.  The primary endpoint of the study wasclinical cure defined as patients requiring no further CDI therapy two daysafter completion of study medication, as determined by the treatingphysicians.  The secondary endpoint evaluatedCDI recurrence up to four weeks post therapy with recurrence defined as thereturn of diarrhea associated with CDI confirmed by a positive toxin test.  Global cure, also a secondary endpoint, wasdefined as patients who were cured and did not have a recurrence during thesubsequent four-week period.  We believethat global cure is the most significant outcome in CDI treatment as itindicates a complete cure without the need for further medical treatment relatedto CDI.  Patients were dosed with eitherfidaxomicin at 200 mg twice daily (400 mg/day) or Vancocin at its recommendeddosing regimen of 125 mg every six hours (500 mg/day) for ten days.

 

In the second Phase 3study, 91.7% of patients treated with fidaxomicin in the per protocolpopulation achieved clinical cure versus 90.6% for Vancocin. In addition, only12.8% of per protocol patients treated with fidaxomicin experienced arecurrence versus 25.3% for Vancocin (p = 0.002).  Per protocol patients treated withfidaxomicin had a global cure of 79.6% which was greater than Vancocin at 65.5%(p = <0.001).   Fidaxomicin was alsowell-tolerated in the study.  Thetop-line results from the second Phase 3 trial are summarized in the tablebelow.

 
| **Per  Protocol (microbiologically evaluable)** | ** ** | **Fidaxomicin****(200 mg bid)** | ** ** | **Vancocin ® capsules   (125 mg qid)** | ** ** | **P-Value** | ** ** | **95% Confidence  Interval of Difference** |
|-------------------------------------------------|------------|---------------------------------|------------|--------------------------------------------------|------------|-------------|------------|--------------------------------------------|
| Clinical cure                                   |       | 91.7% (198/216 patients)        |       | 90.6% (212/224 patients)                         |       | NA          |       | (-4.3, 6.3)                                |
| Recurrence                                      |       | 12.8% (23/180)                  |       | 25.3% (46/182)                                   |       | 0.002       |       | (-20.3, -4.4)                              |
| Global  Cure                                    |       | 79.6%  (172/216)                |       | 65.5%  (154/235)                                 |       | <0.001   |       | (5.9,  22.1)                               |

 
| **modified  Intent-to-Treat (mITT)** | ** ** | **Fidaxomicin****(200 mg bid)** | ** ** | **Vancocin ® capsules   (125 mg qid)** | ** ** | **P-Value** | ** ** | **95% Confidence  Interval of Difference** |
|--------------------------------------|------------|---------------------------------|------------|--------------------------------------------------|------------|-------------|------------|--------------------------------------------|
| Clinical  cure                       |       | 87.7%  (221/252 patients)       |       | 86.8%  (223/257 patients)                        |       | NA          |       | (-4.9,  6.7)                               |
| Recurrence                           |       | 12.7% (28/221)                  |       | 26.9% (60/223)                                   |       | <0.001   |       | (-21.4, -6.8)                              |
| Global Cure                          |       | 76.6% (193/252)                 |       | 63.4% (163/257)                                  |       | 0.001       |       | (5.2, 20.9)                                |

 

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NA = Not Applicable (trialmet non-inferiority endpoint)

 

The Per Protocol(microbiologically evaluable) population is the patient group with CDIconfirmed by diarrhea with a positive toxin assay, met all inclusion/exclusioncriteria, and that received at least 3 days of therapy if deemed a failure orat least 8 days of therapy if deemed a cure.

 

The modified Intent-to-Treatpopulation is the patient group that had CDI confirmed by diarrhea with apositive toxin assay and received at least one dose of study medication.

 

*First Phase 3 trial. *In November 2008, we reported positive top-lineresults from our 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 completion of study medication,as determined by the treating physicians. The secondary endpoint evaluated CDI recurrence up to four weeks posttherapy with recurrence defined as the return of diarrhea associated with CDIconfirmed by a positive toxin test. Global cure, an exploratory endpoint in the first Phase 3 trial, wasdefined as patients who were cured and did not have a recurrence during thefour week post-therapy period.  Patientswere dosed with either fidaxomicin at 200 mg twice daily (400 mg/day) orVancocin at its recommended dosing regimen of 125 mg every six hours (500mg/day) for ten days. In the initial Phase 2b portion of the trial, weenrolled a total of 93 CDI patients at 32 sites. Following an interim blindedsafety analysis by an independent data safety monitoring board, we transitionedinto a Phase 3 clinical trial in March 2007.

 

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In the first Phase 3study, 92.1% of patients treated with fidaxomicin in the per protocolpopulation achieved 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 results from the first Phase 3 trial are summarized in thetable 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, 7.1)                  |
| 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,  7.8)                 |
| 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)                  |

 

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NA = Not Applicable (trialmet non-inferiority endpoint)

 

The Per Protocol(microbiologically evaluable) population is the patient group that had CDIconfirmed by diarrhea with a positive toxin assay, met all inclusion/exclusioncriteria, and received at least 3 days of therapy and were considered a failureor received at least 8 days of therapy and were considered a cure.

 

The modified Intent-to-Treatpopulation is the patient group that had CDI confirmed by diarrhea with apositive toxin assay and received at least one dose of study medication.

 

Further analysis of theresults from the first Phase 3 trial demonstrated other potential advantages offidaxomicin. Specifically, data from the first Phase 3 trial demonstrated that:

 

·                  in patients with more pronounced diarrhea (diarrhea that did notresolve in the first 24 hours of therapy), fidaxomicin was associated with afaster time to resolution of diarrhea than vancomycin (79 hours versus 105hours, p=0.056);

 

·                  in patients who received concomitant antibiotics, those treated withfidaxomicin versus vancomycin had a significantly improved global cure rate(72% versus 50%, p=0.022), lower CDI recurrence rate (23% versus 40%, p=0.061),and higher clinical cure rate (87% versus 77%, p=0.171);

 

·                  in patients who did not receive either vancomycin or metronidazole inthe 24-hour pre-trial enrollment period, the difference in recurrence ratebetween fidaxomicin and vancomycin was more pronounced than in the overallpatient population at 10.9% versus 24.3%, respectively;

 

·                  CDI recurrence occurred significantly later in patients treated withfidaxomicin with only 3% and 9% recurrence rates versus 14% and 20% recurrencerates for vancomycin, at 10 and 20 days post-treatment, respectively; and

 

·                  fidaxomicin was less likely than vancomycin to promote VRE colonizationin patients treated for CDI, which we believe may be due to inhibitory activityof fidaxomicin against many VRE strains and fidaxomicin’s relative sparing ofthe intestinal flora including *Bacteroides*bacteria.  The analysis showed that only 7% of patientstreated with fidaxomicin acquired VRE versus 31% of vancomycin-treated patients(p<0.001) from among a subset of 302 CDI patients, 248 of whom had a negativeVRE stool sample upon entering the Phase 3 trial.

 

*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.

 

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Among the 45evaluated patients, only four patients failed to achieve clinical cure by theend of ten days of therapy, two of whom were in the 100 mg/day dose group andtwo of whom were in the 200 mg/day dose group. None of the patients in the 400mg/day dose group failed to achieve clinical cure. All 41 cured subjects weresubsequently monitored for six weeks following therapy for recurrence. CDIrecurred in two of the 41 cured subjects, one in the 100 mg/day dose group andone in the 400 mg/day dose group. The median cure times, or time-to-resolutionof diarrhea, were as follows: 5.5 days for the 100 mg/day dose group, 3.5 daysfor the 200 mg/day dose group and 3.0 days for the 400 mg/day dose group.

 

A summary of the results of the Phase 2a clinicaltrial 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 threeantibiotics.  However, fidaxomicin showedno difference in MIC values between the BI/NAP1/027 strains and the non-BI/NAP1/027 strains, whereas currentlyavailable antibiotics, metronidazole and vancomycin, showed slightly higher MICvaluesforthe 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, or minimum concentration of a drug needed toinhibit growth of 90% of microorganisms, of *C. difficile*.

 

*Commercialization*

 

We hold worldwide rightsto fidaxomicin.  We plan tosubmit a NDA to the FDA in the secondhalf of 2010, and we are also preparing a MAA for submission to the EMA in Europe. In February 2007, we regained worldwide rights to fidaxomicin fromPar Pharmaceuticals, Inc., or Par, under a prospective buy-back agreementto develop and commercialize fidaxomicin in North America and Israel.  We may be 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. We are required to pay theone-time $5.0 million milestone payment after the earliest to occur of (i) thesuccessful completion by us of our second pivotal Phase 3 trial forfidaxomicin, (ii) our grant to a third party of the rights to fidaxomicinor (iii) the submission to the FDA of an NDA for fidaxomicin.   In the event we license our right to marketfidaxomicin in the rest of the 

 

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world, we will be required to pay Par a 6.25% royaltyon net revenues we receive related to fidaxomicin. In addition, 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 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 of the United States.

 

*Fidaxomicin**— Label Expansion*

 

*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 who cannotswallow tablets. We have submitted an IND to pursue development for thispotential label indication expansion.

 

*Preventionof VRE/Methicillin-Resistant Staphylococci, or MRS, in CDI*. Pre-clinical data indicate thatfidaxomicin is active *in vitro*against antibiotic-resistant Enterococci, including VRE. Enterococci are commonbacteria that reside in the GI tract and generally do not pose a serious healthrisk. However, if Enterococci enter the bloodstream, they can cause serious andlife-threatening infections, especially in subjects with weakened immunesystems. Vancomycin is considered the last line of defense against suchinfection. However, growing bacterial resistance to vancomycin has emerged,requiring new therapeutic options.

 

Biological and stoolconcentration data from our Phase 1 and 2a CDI treatment trials indicatefidaxomicin may be useful in the prevention of VRE bloodstream infections byminimizing the colonization of these bacteria in the GI tract before they enterthe bloodstream. After the completion of our first Phase 3 CDI trial, wereported our analysis related to the propensity of Vancocin and fidaxomicin topromote VRE colonization. The analysis showed that only 7% of patients treatedwith fidaxomicin acquired VRE versus 31% of vancomycin treated patients(p<0.001) from among a subset of 302 CDI patients, 248 of whom had anegative VRE stool sample upon entering the Phase 3 trial. In addition, 63% ofthe patients treated with fidaxomicin were found to retain greater than 100,000Bacteroides bacteria per gram of stool versus only 13% of the vancomycintreated patients (p=0.004). These results provided further evidence that unlikevancomycin, fidaxomicin does not suppress Bacteroides bacteria, which is amajor component of the intestinal flora and prevents *C. difficile*overgrowth. We are continuing to assess whether to conduct aclinical trial to explore VRE prevention in CDI treatment.

 

We believe secondgeneration fidaxomicin compounds may be useful for the treatment ofStaphylococcal infections. Methicillin is a broad-spectrum antibiotic that waspreviously used to treat infections caused by susceptible gram-positivebacteria, such as *Staphylococcus aureus*,or *S. aureus*, and *Staphylococcus epidermidis*, or *S. epidermidis*, that would otherwisebe resistant to most penicillins.

 

*Pruvel(prulifloxacin)*

 

*Overview*. We are developing Pruvel for thetreatment of infectious diarrhea, including travelers’ diarrhea, acommunity-acquired infection which can be caused by a broad range of bacteria.We plan to initially seek approval for Pruvel for the treatment of infectiousdiarrhea. Pruvel 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, Pruvel 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 Pruvel for the treatment of travelers’ diarrheaand reported positive top-line data from each study. 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 Pruvel met the primary endpoint of TLUS compared toplacebo. Pruvel was generally well tolerated and had a similar safety profilecompared to placebo.  Based upon theresults of these two Phase 3 trials we intend to file an NDA for Pruvel in2010.

 

We believe that Pruvelwill be a differentiated therapeutic option for infectious diarrhea due to itsbroad and potent activity against gastrointestinal pathogens, favorable safetyprofile, clinical efficacy and convenient dosing regimen.

 

In June 2004, weacquired from Nippon Shinyaku Co., Ltd. the exclusive rights to develop andcommercialize Pruvel for all indications in the United States. Pruvel has beenmarketed by other companies in Japan since 2002 to treat a wide range ofbacterial infections, including infectious diarrhea, and in Italy since 2004 totreat urinary tract infections, or UTIs, and respiratory tract infections, orRTIs. Other parties have found that prulifloxacin is well-tolerated, asdemonstrated by its use in the treatment of more than four million patients. A1996 investigator-initiated clinical study of prulifloxacin in Japan by a thirdparty for the treatment of infectious diarrhea evaluated the safety andefficacy of prulifloxacin in 122 subjects, with an endpoint of clinical cure,as evidenced by eradication of bacterial pathogens. Prulifloxacin wasconsidered effective in approximately 98% of the 54 subjects evaluated forclinical cure. Prulifloxacin also eradicated the bacterial pathogen inapproximately 95% of the 77 subjects evaluated for bacteriological effect. Onehundred eight of the 109 subjects evaluated for safety had no adverse effectswhile one subject experienced a mild rash that was possibly related toprulifloxacin administration, but quickly recovered and continued to receiveall scheduled therapy.

 

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*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 States. Bacteriacause approximately 85% of travelers’ diarrhea in most localities, and themajority of these cases involve *E. coli*,Shigella or Salmonella. Severe infections can cause large fluid loss and resultin dehydration and hospitalization. The CDC estimates that 20% to 50% of travelersto high-risk regions (including most of Asia, the Middle East, Africa, CentralAmerica and South America) will develop travelers’ diarrhea during a one- totwo-week visit. The risk of infection increases with the duration of travel,and infection 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.

 

*PruvelAdvantages*. Webelieve that Pruvel will be a differentiated and better therapeutic course forbacterial 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 significantlydifferent from the TLUS for placebo with a p-value of <0.0001.

 

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.  The second trial wasconducted in India, Guatemala and Mexico. 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.

 

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·                  Unique PharmacokineticProfile. Ulifloxacin,the active metabolite of Pruvel, quickly reached effective concentration levelsfollowing a single administration of the drug in patients with profusediarrhea. Approximately two-thirds of the oral dose of Pruvel remains in thestool after being converted to ulifloxacin while approximately one-third isabsorbed and accumulated in tissues and in phagocytes, the white blood cellswhich engulf bacterial pathogens. Ulifloxacin remains active in these tissuesand available in the body to eliminate invasive and intracellular pathogenssuch as Shigella and Salmonella and invasive forms of *E. coli*.

 

·                  Spectrum of Activity. Ulifloxacin hasmore potent antibacterial activity relative to other antibacterial agentsagainst infectious diarrhea pathogens. In a study published in AntimicrobialAgents and Chemotherapy, ulifloxacin was the most active of nine antibacterialagents 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 |   |

 

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(1)         The potency ofan antibiotic normalized to rifaximin is expressed as the quotient obtained bydividing the MIC90 concentration of 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, Pruvel was generally well tolerated and had a similarsafety profile compared to placebo.

 

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

 

*On-GoingClinical Development and Next Steps*. We conducted two Phase 3 clinical trials forthe registration of Pruvel in the United States for the treatment of bacterialinfectious 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 Pruvel wasapproximately 24 hours; this was significantly different from the TLUS forplacebo with a p-value of <0.0001.  Pruvel was generally well toleratedand 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 received prulifloxacinin 600 mg doses and half of the patients received placebo. The primary endpointof both trials is TLUS. Secondary endpoints include microbiological eradicationof the disease pathogen and relief of other disease symptoms. Data from thisstudy showed that Pruvel met the objective of superiority to placebo in theresolution of diarrhea, measured by TLUS in both the mITT (n=200) andmicrobiologically evaluable (per protocol; n=173 populations compared toplacebo.  The median TLUS for patientstreated with Pruvel was 32.8 hours; this was significantly different from theTLUS for placebo with a p-value of <0.0001. We plan onsubmitting an NDA in 2010.

 

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·                  *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 Pruvel.

 

*AdditionalIndication for Urinary Tract Infection*.  If Pruvel isapproved for the treatment of infectious diarrhea, we may seek additionalapproval of Pruvel for the treatment of uncomplicated UTIs.  According to the American Academy of FamilyPhysicians, annual health care costs associated with UTIs in the United Statesexceed $1 billion. In the United States, each year there are between 6 to 8million cases of uncomplicated cystitis caused by *Escherichiacoli*, a bacterium that represents 70% to 95% of all uncomplicatedUTIs.  We believe Pruvel’s advantages,(including its broad spectrum and potent activity against urinary bacteria,safety and anticipated short course therapy of once daily for 3 days) would bea welcomed therapeutic option for the treatment of uncomplicated UTIs.  Pruvel is currently approved as therapy forcomplicated and uncomplicated UTIs in Italy and Japan.  Pruvel was compared to ciprofloxacin astherapy for uncomplicated cystitis in a 251-female patient, double-blind trialthat was conducted in Europe by third parties. Even as a single dose (1 tablet of Pruvel 600 mg), the rate ofmicrobiological eradication 5 to 7 days post-treatment was 97.2% and theclinical outcome success rate during the same period was 98.1%. These resultsdemonstrated that the efficacy, safety and tolerability of Pruvel wascomparable to that of ciprofloxacin, and confirmed the results from a similarstudy comparing Pruvel to pefloxacin in 239 patients.

 

*OPopS Drug Discovery*

 

Our OPopS drug discoveryplatform enables the rapid synthesis of a wide array of carbohydrate containingcompounds, from small molecules, to peptides, to complex oligosaccharides,large molecules containing a small number of simple sugars. We acquiredworldwide rights to this technology from TSRI, in July 1999. We have builtapproximately 500 carbohydrate building blocks, and are able to rapidly andreliably produce a wide variety of carbohydrate-based molecules.  Key components of our OPopS technology are:

 

·                  *GlycoOptimization*. This process enables the modificationof a carbohydrate group on an existing drug to improve its therapeuticproperties such as potency and pharmacokinetics.

 

·                  *De Novo Glycosylation*. This process enables the addition ofnew carbohydrate groups  on an existingdrug to create new, patentable compounds through improvement ofpharmacokinetics.

 

We intend to continue using our OPopS technology to develop a pipelineof promising new drug candidates for the treatment of various diseases, includinginfectious disease.

 

**Other Pipeline Product Candidates**

 

In addition tofidaxomicin and Pruvel which we are developing internally, we have alsolicensed rights to others to develop and commercialize our other productcandidates in order to maximize their potential.  These product candidates are as follows:

 

*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 ketolides.  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 completeda Phase 1 clinical trial with CEM-101 and has announced preparations for aPhase 2 trial in moderate to severe community-acquired bacterial pneumonia.

 

*Productsbeing develop by OBI*

 

*Overview*. In October 2009, we entered into a number of transactions involvingOBI, in which we sold 40% of our existing equity in OBI.  In connectionwith these transactions, we assigned to OBI certain of our patent rights andknow-how related to OPT-88, a disease-modifying intra-articular therapy forosteoarthritis which we licensed from TSRI and OPT-822/821, a novel carbohydrate-basedcancer immunotherapy which we licensed from MSKCC. We also assigned to OBI ourrights and obligations under the related license agreements with TSRI andMSKCC.

 

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*OPT-88:A Therapy for Osteoarthritis*.  OBI is developing OPT-88 as a disease-modifyingintra-articular therapy for osteoarthritis. Osteoarthritis is caused by thebreakdown and eventual loss of the cartilage of one or more joints in the body.Key symptoms include pain in joints such as knees, hips and fingers, inabilityto walk or bear weight and infection surrounding such joints. According to theNational Institute of Arthritis and Musculoskeletal and Skin Diseases,osteoarthritis is one of the most common types of joint diseases and isestimated 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.

 

*Invitro* 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 OBI is currently evaluating the development plan for OPT-88.

 

*OPT-822/OPT-821:A Cancer Immunotherapy.*  OBI is also developing OPT-822,a carbohydrate-based immunostimulant therapy, combined with adjuvant therapyOPT-821, for the treatment of metastatic breast cancer. According to theAmerican Cancer Society, breast cancer was the second most common form ofcancer among women in the United States, with more than 250,000 new cases andmore than 40,000 deaths in 2008. The survival rate for patients with metastaticbreast cancer remains limited, with a median survival of two to three years anda five-year survival rate of 21% for those patients diagnosed with late-stagecancer that has metastasized to other parts of the body. Carbohydrate antigensare known to stimulate the immune response against cancer cells in thebody.  We have applied our OPopS technology to manufacture effectivelycomplex carbohydrate cancer antigens, including Globo-H, a prominent antigen inbreast cancer cells, and sialyl Lewis a, an antigen in breast and small lungcancer cells.  OPT-822 is a novel cancer immunotherapy and is composed ofGlobo H linked to a protein carrier.

 

MSKCC completedPhase 1 safety studies of OPT-822 in prostate cancer patients and breastcancer patients in 1999 and 2001, respectively.  In these studies, OPT-822appeared to be well tolerated and to stimulate response to tumorantigens.  Eighteen of 27 metastatic breast cancer patients treated withOPT-822 in the studies survived after five years.  OBI currently plans toinitiate a Phase 2/3****clinicaltrial in Asia to evaluate the clinical efficacy of OPT-822 combined withOPT-822’s adjuvant, OPT-821.

 

**Our Strategy**

 

Our principal objective isto 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 Pruvel for the treatment ofinfectious diarrhea.  We also intend todevelop these two lead products for additional indications and selectivelyin-license additional anti-infective compounds for development and/orcommercialization.  In addition, in orderto maximize the value of our franchise, we intend to opportunistically seekpartners 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 and Pruvel.  Fidaxomicin potentially offers significantadvantages over existing therapeutics for CDI, a serious and growing hospitalacquired illness.  Pruvel alsopotentially offers significant advantages over existing therapeutics forinfectious diarrhea and has an extensive record of safety and efficacy, havingbeen used in over four  million patientsin Europe and Japan.  We reported thepositive results of our two fidaxomicin Phase 3 trials and we plan to submit anNDA in the U.S. in the second half of 2010 and a Marketing AuthorizationApplication, or MAA, in Europe as soon as practical.  We reported the positive results of our twoPruvel Phase 3 trials and we plan to file an NDA in 2010.

 

·                  *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 Pruvel 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 productcandidates.

 

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·                  *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 and/or through collaborations with third parties.  We hold worldwide rights to fidaxomicin andrights to commercialize Pruvel in the United States. Assuming approval by theFDA, we currently plan to build our own marketing and sales force forfidaxomicin in the United States and are evaluating our commercializationoptions for Pruvel in the United States. We plan to seek collaborations with one or more third parties for thecommercialization of fidaxomicin outside of the United States.  In the United States, we plan to target ourmarketing and sales of fidaxomicin to hospital-based and long-term carephysicians, including gastroenterologists, infectious disease specialists and internists.  We plan to selectively target the marketingand sales of Pruvel to high-prescribing physicians of antibiotics forinfectious diarrhea.

 

We have also establisheda medical affairs group to introduce our product candidates to key opinionleaders in CDI and healthcare professionals focusing on infectious diseases andgastroenterology.

 

**Collaborations, Commercial andLicense Agreements and Grants**

 

*ParPharmaceutical, Inc.*  In February 2007, werepurchased the right to develop and commercialize fidaxomicin in North Americaand Israel from Par under a prospective buy-back agreement.  As a result of the prospective buy-backagreement, we now hold worldwide rights to fidaxomicin.  We may be obligated to pay Par a one-time$5.0 million milestone payment, a 5% royalty on net sales by us or ouraffiliates of fidaxomicin in North America and Israel, and a 1.5% royalty onnet sales by us or our affiliates of fidaxomicin in the rest of the world.  We are required to pay the one-time $5.0million milestone payment after the earliest to occur of (i) thesuccessful completion by us of our second pivotal Phase 3 trial forfidaxomicin, (ii) our grant to a third party of the rights to fidaxomicinor (iii) the submission to the FDA of an NDA for fidaxomicin.   In the event we license our right to marketfidaxomicin in the rest of the world, we will be required to pay Par a 6.25%royalty on net revenues we receive related to fidaxomicin.  We are obligated to pay each of these royalties,if any, on a country-by-country basis for seven years commencing on theapplicable commercial launch in each such country.* *The agreement alsoincludes a mutual release between the parties and our indemnification of Parfor actions related to fidaxomicin, the agreements assigned to us by Par andcertain 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 offidaxomicin unless earlier terminated by mutual agreement or material defaultof either party.

 

*Nippon Shinyaku*. In June 2004, we entered into a license agreement with NipponShinyaku.  Under the terms of theagreement, we acquired the non-exclusive right to import and purchase Pruvel,and the exclusive right (with the right to sublicense) within the United Statesto develop, make, use, offer to sell, sell and license products suitable forconsumption by humans containing Pruvel.

 

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 Pruvel in the United States.  We also agreed to exclusively purchase Pruvelfrom Nippon Shinyaku and to purchase a certain amount of Pruvel annually thatis to be mutually agreed upon by us and Nippon Shinyaku, commencing in the yearof the first commercial sale of Pruvel in the United States.  If Nippon Shinyaku is unable to supply uswith the required amount of Pruvel, then Nippon Shinyaku is obligated to grantus a non-exclusive, worldwide license to make or have made Pruvel, in whichevent we will owe Nippon Shinyaku a royalty based on the amount of net sales ofPruvel generated by us and our sublicensees. Additionally, we will owe Nippon Shinyaku certain royalties based on theamount of net sales of Pruvel less the amount of Pruvel we buy from NipponShinyaku.

 

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 Pruvel in the UnitedStates or the date on which the last valid patent claim relating to Pruvelexpires in the United States.

 

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*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 of productcandidates arising under the agreement, including manufacturing, marketing andsales costs.  As partial considerationfor granting Cempra the license, we obtained equity interest in Cempra.   We will be entitled to 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 be entitled to receive royaltypayments based on a percentage of net sales of licensed products.  In consideration of the foregoing, Cemprawill be entitled to receive milestone payments of $1.0 million from us for eachof the first two products we develop which receive regulatory approval in ASEANcountries as well 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 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.

 

*OBI. *In October 2009, we entered into certaintransactions involving OBI, then our wholly-owned subsidiary, to providefunding for the development of two of our early-stage, non-core programs.  The transactions with OBI included an Intellectual PropertyAssignment and License Agreement, pursuant to which we assigned to OBI certainpatent rights, information and know-how related to OPT-88 and OPT-822/821.  In anticipation of these transactions, wealso assigned, and OBI assumed, our rights and obligations under relatedlicense agreements with MSKCC and TSRI. Under this agreement, we are eligible to receive up to $10 million inmilestone payments for each product developed under the development programsand are also eligible to receive royalties on net sales of any product which iscommercialized under the programs.  The term of the Intellectual Property Assignment andLicense Agreement continues until the last to expire of the patents assigned byus to OBI and the patents licensed to OBI under the TSRI and MSKCC agreements.

 

To provide capitalfor OBI’s product development efforts, we and OBI also entered into a financingagreement with a group of new investors.  Simultaneously, we sold 40percent of our existing OBI shares to the same group of new investors, and weand the new investors also purchased new OBI shares.  Also under thefinancing agreement, if OBI achieves certain development milestones in thefuture, we and the new investors will be obligated to invest approximately anadditional $8.6 million and $5.7 million, respectively, in exchange for new OBIshares.  Following the sale of our existing OBI shares and the initialinvestments in exchange for new OBI shares, we currently maintain a 60 percentownership interest in OBI.

 

*INC Research, Inc.* In November 2005, we entered into a master services agreement withINC Research, Inc., formerly known as Advanced Biologics, which wassubsequently amended in January 2006. Under the terms of the agreement, INC Research will, from time to time,at our request and pursuant to separate work orders, perform research and/oradministrative services in connection with certain of our clinical trials,including trial management, data collection, statistical programming oranalysis, quality assurance auditing, scientific and medical communications,regulatory affairs consulting, regulatory submissions and strategicconsulting.  Pursuant to the masterservices agreement, we have issued work orders totaling $46.2 million to-datefor services.  Unless extended by themutual agreement of the parties, the master services agreement will terminateon November 16, 2012.  We mayterminate the master services agreement at any time and for any reason, upon 30days’ prior notice to INC Research.

 

*NIHSmall Business Innovation Research Award*.  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 with fidaxomicin to confirm a narrow spectrum activityand potency of fidaxomicin against hyper-virulent epidemic strains, to supportadditional toxicology and microbiological studies to demonstrate the safety andefficacy of the fidaxomicin compound and its major metabolite in CDI patientsand to support a surveillance study of *C.difficile* isolates across North America to compare the activity offidaxomicin with existing CDI treatments.

 

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*MemorialSloan-Kettering Cancer Center*.  In July 2002,we entered into a license agreement with MSKCC, to acquire, together withcertain non-exclusive licenses, exclusive, worldwide licensing and sublicensingrights to certain patented and patent-pending carbohydrate-based cancerimmunotherapies, which includes OPT-822. As partial consideration for the licensing rights, we paid to MSKCC aone-time fee consisting of both cash and 55,383 shares of our common stock. Inanticipation of the various transactions involving OBI which we completed in October 2009,we assigned our rights and obligations under this agreement to OBI.   Under the agreement, which was amended in June 2005,OBI may owe MSKCC milestone payments in the following amounts for each licensedproduct: (i) $500,000 upon the commencement of Phase 3 clinicalstudies, (ii) $750,000 upon the submission 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, but only to the extent that we, and not a sublicensee, achieve suchmilestones.  OBI may owe MSKCC royaltiesbased on net sales generated from the licensed products and income OBI sourcesfrom its sublicensing activities, which royalty payments are credited against aminimum annual royalty payment OBI owes to MSKCC during the term of theagreement.

 

*TheScripps Research Institute*. In July 1999, we acquired exclusive, worldwiderights to our OPopS technology from TSRI. This agreement includes the license to us of patents, patentapplications 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.

 

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. In anticipation of the various transactionsinvolving OBI which we completed in October 2009, we assigned our rightsand obligations under one of these agreements related to osteoarthritis to OBI.

 

**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-partycontract manufacturers and processors produce APIs and finished products inaccordance with current Good Manufacturing Practices, or cGMP, and all otherapplicable laws and regulations.  Wemaintain confidentiality agreements with potential and existing manufacturersin order to protect our proprietary rights related to our drug candidates.

 

Parassigned to us its contract with Biocon to manufacture clinical trial suppliesof the API for fidaxomicin in February 2007 in connection with ourrepurchase of rights to fidaxomicin for North America and Israel. Wecontracted with Patheon Inc. to manufacture the drug product supplies used tocomplete our Phase 3 clinical trials for fidaxomicin.  The manufacturingfacilities of Biocon and Patheon have been approved by the FDA for othercompanies’ drug products, however, neither Biocon’s nor Patheon’s facilitieshave yet been approved by the FDA for the manufacture of our fidaxomicin drugsupplies. We may contract with other third-party contract manufacturers foradditional commercial supply of fidaxomicin API and fidaxomicin drug productfor commercial sale.

 

In June 2004,as part of our license agreement for exclusive rights to develop andcommercialize Pruvel in the United States, we entered into a supply agreementwith Nippon Shinyaku for the manufacture and supply of the API forPruvel.  In turn, Nippon Shinyaku contracts with Juzen Chemical Co. forthe manufacture of the API for Pruvel.  The tablets used in ourPhase 3 clinical trials for Pruvel were manufactured by Angelini ACRAF, orAngelini.  We have also contracted with Patheon for development servicesrelated to Pruvel tablet manufacturing. We are in discussion with Angelini,Patheon and other contract manufacturers for the manufacturing, packaging andlabeling of Pruvel for commercial sale in the United States.  Themanufacturing facilities of Juzen and of Patheon have been approved by the FDAfor other companies’ drug products, however, neither Juzen’s nor Patheon’sfacilities have been approved for the manufacture of our Pruvel drugsupplies.  Angelini’s facilities have not been inspected or approved bythe FDA for the manufacture of any drug.

 

We have used both in-housecapabilities and outside third-party cGMP manufacturers for the preparation ofcompounds for pre-clinical development and for the manufacture of limitedquantities of finished products for clinical development.  We have developed a proprietary syntheticprocess in our laboratories for Globo-H, the carbohydrate portion ofOPT-822.  Third parties with cGMPfacilities have manufactured OPT-822 for clinical trials.  We also expect that OBI will use third-partycGMP manufacturers for the production of the adjuvant, OPT-821, as well as forthe production OPT-88.

 

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**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 consider importantto the development of our business.  Inaddition, we use license agreements to selectively convey to others, rights toour own intellectual property.  We alsorely on trade secrets, know-how and continuing innovation to develop andmaintain our competitive position.  Wecannot be sure that patents will be granted with respect to any of our pendingpatent applications or with respect to any patent applications filed by us inthe future, nor can we be sure that any of our existing patents or any patentsthat may be granted to us in the future will be commercially useful inprotecting our technology.  For this andmore comprehensive risks related to our intellectual property, please see “RiskFactors — 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 100 patents and patentapplications that we either own or have licensed around our key products andtechnologies.  As of February 19,2010, this portfolio included 3 issued U.S. patents and 13 pending U.S. patentapplications.  Foreign counterparts tothese included 14 issued patents and 78 pending patent applications.  Of the more than 100 patents and patentapplications that we own or license, as of February 19, 2010, 30 wereowned or licensed by OBI.

 

For our lead productcandidate fidaxomicin, we have two issued U.S. patents and ten U.S. pendingpatent applications.  We also have twoissued foreign patents and 63 pending foreign counterparts in Australia,Canada, China, Europe, Hong Kong, Israel, Japan, South Korea, India, NewZealand, Taiwan, Mexico and Brazil.  Theissued patents cover a specific polymorphic form and specific manufacturingmethods and expire in 2027 and 2023, respectively.  The pending patent applications, if issued,may cover the composition of matter, an additional polymorphic form, methods ofuse and pharmaceutical formulations containing the various components and wouldexpire between 2023 and 2027.  For ourother product candidate Pruvel, we have licensed one issued U.S. patent fromNippon Shinyaku which covers the compound prulifloxacin, however, this patentexpired in February 2009. Another U.S. patent covering the novelpolymorphic form of the key intermediate in the manufacturing process wasissued in 2009 and will expire in 2023.  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, pharmaceuticaldrugs are subject to rigorous pre-clinical testing and clinical trials andother premarketing approval requirements by the FDA and regulatory authoritiesin other countries.  In the UnitedStates, various federal, and, in some cases, state statutes and regulations,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 mayresult in restrictions on their manufacture, sale or use or in their withdrawalfrom the market.

 

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 significant enough to merit a clinical hold, inwhich case, the IND sponsor and the FDA must resolve any outstanding concernsbefore a hold is lifted and clinical trials can 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.

 

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·                  *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 orregistration 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 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.

 

Any products we manufacture or distribute under FDAapprovals are subject to pervasive and continuing regulation by the FDA,including record-keeping requirements and reporting of adverse experiences withthe products.  Drug manufacturers andtheir subcontractors are required to register with the FDA and, whereappropriate, state agencies, and are subject to periodic unannouncedinspections by the FDA and state agencies for compliance with cGMP regulationswhich impose procedural and documentation requirements upon us and any thirdparty manufacturers we utilize.

 

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, restrict manufacturer’scommunications on the subject of off-label use and healthcare payors, includingthe federal government, can use the False Claims Act and related statutes topursue drug companies for off-label promotions that result in the submission ofclaims for payment for uses that have not been approved by the FDA as safe andeffective.

 

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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 target time frame from the time an NDA is acceptedfor filing.  A Fast Track designatedproduct would 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 Pruvel if approved formarketing.  Potentially significantcompetitors to fidaxomicin and Pruvel, both currently marketed and in clinicaldevelopment, include the following:

 
| **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             |       | Nanotherapeutics                     |
| ACAM-Cdiff  (vaccine)                      |       | Phase 2                            |       | Sanofi-Pasteur                       |
| MDX-066/ MDX-1388 (antibodies combination) |       | Phase 2                       |       | Medarex/Merck                        |
| CB-183,315                                 |       | Phase 1  completed                 |       | Cubist                               |
| ** **                                 |       |                               |       |                                 |
| **Pruvel 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           |
| Campy jejuni vaccine                       |       | Phase 2  completed            |       | ACE BioSciences                      |
| Rifamycin SV MMX®                     |       | Phase 2  completed            |       | Santarus                             |

 

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**Research and Development**

 

Our research anddevelopment efforts are primarily focused on developing fidaxomicin and Pruveland our other product candidates.  Ourresearch and development expense was approximately $33.7 million, $29.0 millionand $41.6 million in years 2009, 2008 and 2007, 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 we purchasedfrom Par.

 

**Employees**

 

As of March 1, 2010,we employed 69 persons, 19 of whom hold Ph.D., M.D. or DVM degrees.  Thirteen employees were engaged in discoveryresearch, 33 in clinical research and regulatory affairs, four in commercialand corporate development and 19 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 acompany with limited sources of revenue, and we are largely dependent on thesuccess of our lead product candidate****fidaxomicin****and, to a lesser degree, our other lead product candidate Pruvel.**

 

Weare a biopharmaceutical company with no products approved for commercial saleand, to date, 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 regulatory approvals for fidaxomicin and Pruvel and, to a lesserextent, other product candidates;

 

·                  commercializing, alone orwith a partner, any product candidates for which we receive approval from theFDA and/or comparable foreign regulatory authorities; and

 

·                  generating a pipeline ofinnovative product candidates utilizing our drug discovery platform or throughlicensing strategies.

 

Ourproduct candidates will generally require extensive clinical study andevaluation, regulatory approval in multiple jurisdictions, substantialinvestment and significant marketing efforts before we generate any revenuesfrom product sales.  We are not permittedto market or promote our product candidates before we receive regulatoryapproval from the FDA or comparable foreign regulatory authorities.  We have not submitted an NDA, or receivedmarketing approval for either fidaxomicin or Pruvel, and we cannot be certainthat either of these product candidates will receive regulatory approval or besuccessful in any future clinical trials. If we do not receive regulatory approval for and successfullycommercialize fidaxomicin and Pruvel, we will not generate any revenues fromproduct sales for several years, if at all, and we may not be able to continueour operations.

 

Webelieve our initial success will be more dependent on fidaxomicin than Pruvel,because we believe that the market for the treatment of CDI is larger than themarket for the treatment of infectious diarrhea.  Even if we successfully obtain regulatoryapproval to market fidaxomicin or Pruvel, our revenues for either drugcandidate will be dependent upon the size of the markets in the territories forwhich we have commercial rights and our ability to successfully commercializeour drug candidates in those markets, either alone or with a partner.  If the markets for the treatment of CDI orinfectious diarrhea are not as significant as we estimate or we are otherwiseunsuccessful in commercializing our drug candidates, our business and prospectswill be harmed.

 

**We haveincurred significant operating losses since inception and anticipate that wewill incur continued losses for the foreseeable future.**

 

Weexperienced significant operating losses since our inception in 1998.  As of December 31, 2009, we had anaccumulated deficit of approximately $175.5 million.  We have generated no revenues from productsales to date.  We have funded ouroperations through December 31, 2009 from the sale of approximately $202.4million 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 preparesubmissions for regulatory approval of our lead product candidates, build ourmarketing and sales capabilities and continue our clinical trial and researchand development initiatives.  Because ofthe numerous 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.

 

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**If we failto obtain additional financing, we may be unable to commercialize****fidaxomicin****and Pruvel or develop and commercialize our other product candidates, orcontinue our other research and development programs.**

 

Wewill require additional capital to commercialize our current lead productcandidates, fidaxomicin and Pruvel.  Wecannot be certain that additional funding will be available on acceptableterms, or at all.  Since 2008, the creditmarkets and the 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 oneor more of our current or future product candidates at an earlier stage thanotherwise would be desirable or on terms that are less favorable than mightotherwise be available; or

 

·                  relinquish or license onunfavorable terms our rights to technologies or product candidates that weotherwise would seek to develop or commercialize ourselves.

 

Anyof the above events could significantly harm our business and prospects andcould cause our stock price to decline.

 

Wedo not currently have sufficient resources to commercialize fidaxomicin andPruvel on our own. If we are unable to raise additional capital or are unableto effectively collaborate with one or more partners for the commercializationof fidaxomicin or Pruvel, we will not generate significant revenues from salesof these products and our business will be materially harmed.

 

**We are dependent on third party collaborators and wemay be unable to enter into future collaboration agreements or we may havedisagreements with these collaborators.**

 

Wecurrently plan to build our own marketing and sales force for fidaxomicin inthe United States and are evaluating our commercialization options for Pruvelin the United States, and we are seeking one or more partners for thecommercialization of fidaxomicin outside of the United States.  We cannot be certain that we will 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 andcommercialization initiatives,  whichwould harm our business and prospects, or raise significant additional funds todevelop clinical and commercialization capabilities internally.

 

Weare subject to a number of additional risks associated with our dependence oncollaborations with third parties.** **Conflicts may arise between us andcollaborators, such as conflicts concerning the payment or reimbursement ofdevelopment and commercialization costs, the strategies for developing andcommercializing product candidates subject to the collaboration, theachievement of milestones, the interpretation of financial provisions or theownership of intellectual property developed during the collaboration or theinterpretation of clinical data.  If anysuch conflicts arise, a collaborator could act in its own self-interest, whichmay be adverse to our best interests. Any such disagreement between us and a collaborator could result in oneor more of the following, each of which could delay or prevent the developmentor commercialization of fidaxomicin, and our other product candidates, and inturn prevent us from generating sufficient revenues to achieve or maintainprofitability:

 

·                  reductions in the payment ofroyalties or other payments we believe are due pursuant to the applicablecollaboration arrangement or agreement;

 

·                  uncertainties regardingownership of intellectual property rights arising from our collaborativeactivities, which could prevent us from entering into additional collaborationsand commercializing such rights;

 

·                  delays in furtherdevelopment or commercialization activities by us or a collaborator if we and acollaborator are unable to agree on development or commercialization activitiesor the associated costs of these activities;

 

·                  actions taken by acollaborator inside or outside our collaboration which could negatively impactour rights or benefits under our collaboration; or

 

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·                  unwillingness on the part ofa collaborator to keep us informed regarding the progress of its developmentand commercialization activities or to permit public disclosure of the resultsof those activities.

 

Inaddition, a collaborator may not have or devote sufficient resources to developand commercialize our product candidates, may elect to underfund, discontinueor may not properly perform pre-clinical studies or clinical trials, or maydivert resources to other programs that are potentially competitive with ourproduct candidates.

 

**If we areunable to obtain FDA approval of our product candidates, we will not be able tocommercialize them in the United States.**

 

Weneed FDA approval prior to marketing our product candidates in the UnitedStates.  If we fail to obtain FDAapproval to market our product candidates, we will be unable to sell ourproduct candidates in the United States, which will significantly impair ourability to generate any revenues.

 

Thisregulatory review and approval process, which includes evaluation ofpre-clinical studies and clinical trials of our product candidates as well asthe evaluation of our manufacturing processes and our third-party contractmanufacturers’ facilities, is lengthy, expensive and uncertain.  To receive approval for a product candidate,we must, among other things, demonstrate with substantial evidence fromwell-controlled clinical trials that the product candidate is both safe andeffective for each indication for which approval is sought.  Satisfaction of the approval requirementstypically takes several years and the time needed to satisfy them may vary substantially,based on the type, complexity and novelty of the pharmaceutical product.  We cannot predict if or when we might receiveregulatory approvals for any of our product candidates currently underdevelopment.

 

We mayalso experience delays in submitting NDAs to the FDA and/or delays in the FDAreview of our NDA submissions.  If weexperience difficulty or delays in acquiring and assembling the extensiveinformation needed to support an NDA filing for fidaxomicin or Pruvel, our NDAsubmissions with respect to these product candidates may be impaired ordelayed, which could negatively impact our or a collaborator’s ability tosuccessfully commercialize these product candidates.  After we submit an NDA filing with the FDA,we may also experience delays in the FDA’s review process.  As part of the Prescription Drug User FeeAct, or PDUFA, the FDA has a goal to review and act on a percentage of allsubmissions in a given time frame. The FDA has missed a portion of their PDUFAgoals, and it is unknown whether the review of an NDA filing for fidaxomicin orPruvel, or for any of our other drug candidates, will be completed within theFDA review goals or will be delayed. Moreover, the duration of the FDA’s reviewmay depend on the number and type of other NDAs that are filed with the FDAaround the same time period.

 

Even if our product candidates receive regulatoryapproval, 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.

 

The FDA has substantial discretion in the approvalprocess and may either refuse to consider our applications for substantivereview or may form the opinion after review of our data that our applicationsare insufficient to allow approval of our product candidates.  If the FDA does not consider or approve anapplication that we submit, it may require that we conduct additional clinical,pre-clinical or manufacturing validation studies and submit that data before itwill reconsider our application.  Dependingon the extent of these or any other studies, approval of any applications thatwe submit may be delayed by several years, or may require us to expend moreresources than we have available.  Forexample, we intend to rely in part on certain legacy data from a third party tosupport an NDA for Pruvel. If the FDA deems this data to be insufficient, itmay delay our filing of a NDA for Pruvel and could require us to completeadditional studies.  It is also possiblethat additional studies, if performed and completed, may not be successful orconsidered sufficient by the FDA for approval or even to make our applicationsapprovable.  If any of these outcomesoccur, we may be forced to abandon one or more of our future applications forapproval, which might significantly harm our business and prospects.

 

Evenafter we complete our planned clinical trials and other studies, our productcandidates could fail to receive regulatory approval for many reasons,including the following:

 

·                  the results of our clinicaltrials and other studies may not demonstrate to the satisfaction of or meet thelevel of statistical significance required by the FDA or comparable foreignregulatory authorities that a product candidate is safe and effective for anyindication;

 

·                  the FDA or comparableforeign regulatory authorities may disagree with the design or implementationof our clinical trials or other studies;

 

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·                  the  results of our clinical trials or otherstudies may not demonstrate that a product candidate’s clinical and otherbenefits outweigh its safety risks;

 

·                  the results of our clinicaltrials or other studies may not demonstrate that a product candidate presentsan advantage over existing therapies, or over placebo in any indications forwhich the FDA requires a placebo-controlled trial;

 

·                  the FDA or comparableforeign regulatory authorities may disagree with our interpretation of datafrom clinical trials or other studies;

 

·                  the data collected fromclinical trials and other studies of our product candidates may not besufficient to support the submission of an NDA or other submission or to obtain regulatory approval in the UnitedStates or elsewhere; and

 

·                  the approval policies orregulations of the FDA or comparable foreign regulatory authorities maysignificantly change in a manner rendering our clinical and other study datainsufficient for approval.

 

Itis possible that none of our existing product candidates or any productcandidates we may seek to develop in the future will ever obtain theappropriate regulatory approvals necessary for us or our collaborators tocommence product sales.  Increasedscrutiny by regulatory authorities may result in significant delays inobtaining regulatory approvals, as well as more stringent product labeling andpost-marketing testing requirements.

 

Althoughthe FDA has granted Fast Track status to fidaxomicin and selected it forparticipation in a CMA Pilot 2 Program, we cannot be certain that we willreceive any benefits from these designations or that the designations willexpedite regulatory review or approval of fidaxomicin.  Participation in these programs has noteliminated any phase of clinical development. Moreover, our participation in the CMA Pilot 2 Program has involvedand will continue to involve frequent discussions and other interactions withthe staff of the FDA.  These frequentdiscussions could subject fidaxomicin to a greater level of scrutiny than itmight otherwise have received or require us to make more frequent submissionsand endure other burdens that would have been avoided if we had notparticipated in the program.  Therefore,despite any potential benefits of fidaxomicin’s Fast Track and CMA Pilot 2Program designations, significant uncertainty remains regarding the clinicaldevelopment and regulatory approval process for fidaxomicin.

 

**Clinicaltrials involve a lengthy and expensive process with an uncertain outcome, andresults of earlier studies and trials may not be predictive of future trialresults.**

 

Clinicaltesting is expensive and can take many years to complete, and its outcome isuncertain.  Failure can occur at any timeduring the clinical trial process. The results of pre-clinical studies andearly clinical trials of our product candidates may not be predictive of theresults of later-stage clinical trials. 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, sub-analysis ofclinical trial data may reveal limitations of our product candidates eventhough top-line results are positive. The type and amount of clinical data necessary to gain regulatoryapproval for our product candidates may also change during or after completionof our clinical trials or we may inaccurately characterize such requirements.

 

**Delays inclinical trials are common and have many causes, and any such delays couldresult in increased costs to us and jeopardize or delay our ability to achieveregulatory approval and commence product sales as currently contemplated.**

 

Wehave in the past experienced delays in clinical trials of our productcandidates and we may experience delays in future clinical trials.  For example, we are planning to conduct aregistration study for other formulations and proof-of-concept clinical trialsfor other indications of fidaxomicin and intend to conduct a study subsequentto NDA submission to compare fidaxomicin to metronidazole for the treatment ofCDI.  We also intend to conduct aPhase 4 trial of Pruvel subsequent to NDA submission to compare Pruvel tociprofloxacin for the treatment of infectious diarrhea. We do not know whetherplanned clinical trials will begin on time, will need to be redesigned or willbe completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, includingdelays in obtaining regulatory approval to commence a trial, in reachingagreement on acceptable terms with prospective clinical research organizations,or CROs, and clinical trial sites, in obtaining institutional review boardapproval at each site, in recruiting suitable patients to participate in atrial, in having patients complete a trial or return for post-treatmentfollow-up, in adding new sites or in obtaining sufficient supplies of clinicaltrial materials.  Many factors affectpatient enrollment, including the size and nature of the patient population,the proximity of patients to clinical sites, the eligibility criteria for thetrial, the design of the clinical trial, competing clinical trials, clinicians’and patients’ perceptions as to the potential advantages of the drug beingstudied in relation to other available therapies, including any new drugs thatmay be approved for the indications we are investigating and whether theclinical trial design involves comparison to placebo.

 

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Wecould encounter delays if prescribing physicians encounter unresolved ethicalissues associated with enrolling patients in clinical trials of our productcandidates in lieu of prescribing existing antibiotics that have establishedsafety and efficacy profiles or with administering placebo to patients in ourplacebo-controlled trials.  Further, aclinical trial may be suspended or terminated by us, our collaborators, the FDAor other regulatory authorities due to a number of factors, including failureto conduct the clinical trial in accordance with regulatory requirements or ourclinical protocols, inspection of the clinical trial operations or trial siteby the FDA or other regulatory authorities resulting in the imposition of aclinical hold, unforeseen safety issues or adverse side effects, failure todemonstrate a benefit 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 may 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 productdevelopment and approval process and jeopardize our ability to commence productsales and generate revenues.  Any ofthese occurrences may significantly harm our business, financial condition andprospects.

 

**We may berequired to suspend or discontinue clinical trials due to adverse events,adverse side effects or other safety risks that could preclude approval of ourproduct candidates.**

 

Ourclinical trials may be suspended at any time for a number of reasons.  We may voluntarily suspend or terminate ourclinical trials if at any time we believe that they present an unacceptablerisk to participants.  In addition,regulatory agencies may order the temporary or permanent discontinuation of ourclinical trials at any time if they believe that the clinical trials are notbeing conducted in accordance with applicable regulatory requirements or thatthey present an unacceptable safety risk to participants.  In our Phase 3 clinical trials offidaxomicin, the most common drug-related side effects reported were nausea,vomiting, constipation, anorexia, headache and dizziness.  Patients treated with Pruvel have experienceddrug-related side effects including abdominal pain, diarrhea, nausea, renaltoxicities, cardiac arrhythmias, photosensitivity, rash, excessive flushing ofthe skin and central nervous system effects, such as seizures.  The FDA recommended that we conduct a studyto determine the effect, if any, of Pruvel on the prolongation of the QTinterval, a condition that is associated with potentially life-threateningcardiac arrhythmias.  In response to theFDA’s recommendation, we have completed a QT interval study of Pruvel and weplan to include the data from such QT interval study in our NDA filing to theFDA.  If adverse, drug-related events areencountered or suspected, our trials would be interrupted, delayed or haltedand the FDA or comparable foreign regulatory authorities could order us tocease further development of or deny approval of our product candidates for anyor all targeted indications.  Even if webelieve our product candidates are safe, our data is subject to review by theFDA, which may disagree with our conclusions and delay or deny approval of ourproduct candidates which would significantly harm the commercial prospects ofsuch product candidates.  Moreover, wecould be subject to significant liability if any volunteer or patient suffers,or appears to suffer, adverse side effects as a result of participating in ourclinical trials.  Any of theseoccurrences may significantly harm our business and prospects.

 

**We rely onthird parties to conduct our clinical trials. If these third parties do not successfully carry out their contractualduties or meet expected deadlines, we and our collaborators may not be able toobtain regulatory approval for or commercialize our product candidates.**

 

Wehave entered into agreements with third-party CROs, such as INC Research, toprovide monitors for and to manage data for our clinical programs.

 

Weand the CROs conducting clinical trials for our product candidates are requiredto comply with current good clinical practices, or GCPs, regulations andguidelines enforced by the FDA for all of our products in clinicaldevelopment.  The FDA enforces GCPsthrough periodic inspections of trial sponsors, principal investigators andtrial sites.  If we or the CROs conductingclinical trials of our product candidates fail to comply with applicable GCPs,the clinical data generated in the clinical trials may be deemed unreliable andthe FDA may require additional clinical trials before approving any marketingapplications.  We cannot assure you that,upon inspection, the FDA will determine that any clinical trials of our productcandidates comply with GCPs.  Inaddition, our clinical trials must be conducted with product produced undercGMP 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 CROs conducting 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 reasonably demonstratedthat the safety of the subjects participating in our clinical trials warrantssuch termination, if we make a general assignment for the benefit of ourcreditors or if we are liquidated.  Wehave relied substantially on INC Research to conduct the clinical trials forfidaxomicin and Pruvel.  INC Research hasalso subcontracted with other third-party CROs for various aspects of theclinical trials.  If any relationshipswith INC Research or these other third-party CROs terminate, we or our collaboratorsmay not be able to enter into arrangements with alternative CROs or we mayenter into arrangements with alternative CROs that do not have the expertise orrelationships that INC Research has with government agencies.

 

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Inaddition, these third-party CROs are not our employees, and we cannot controlwhether or not they devote sufficient time and resources to our 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 or may have to be repeated, and we may not be able toobtain regulatory approval for or 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 failto gain and/or maintain marketing approvals from regulatory authorities ininternational markets for****fidaxomicin****and any future product candidates for which we have rights ininternational markets, our market opportunities will be limited.**

 

Salesof our product candidates outside of the United States will be subject toforeign regulatory requirements governing clinical trials and marketingapproval.  Even if the FDA grantsmarketing approval for a product candidate, comparable regulatory authoritiesof foreign countries must also approve the marketing of the product candidatein those countries.  This is importantfor the commercialization of fidaxomicin for which we currently have exclusiveworldwide marketing 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 EMA duringits review, a subsequent NDA submission for fidaxomicin could be negativelyimpacted. Other than Pruvel, which is sold by other parties in Japan, Italy andcertain other European countries, none of our product candidates is approvedfor sale in any international market for which we have rights. If we fail tocomply with regulatory requirements in our international markets or to obtainand maintain required approvals, our target market will be reduced and ourability to generate revenues will be diminished, which would significantly harmour business, results of operations and prospects.

 

**We currently have no sales organization and have noexperience as a company in marketing drug products.  If we are unable to expand our marketingcapabilities and establish sales capabilities or enter into agreements withthird parties to market and sell our product candidates, we may not be able togenerate product revenues.**

 

Wecurrently have a limited marketing organization and do not have a salesorganization for marketing, sales and distribution of pharmaceutical products.In order to commercialize any products, we must build our marketing, sales,distribution, managerial and other non-technical capabilities or makearrangements with third parties to perform these services. We plan to build ourown marketing and sales force to commercialize fidaxomicin in the United Statesand are seeking third-party partners outside of the United States. We ownexclusive rights to commercialize Pruvel in the United States, and areevaluating our commercialization options for Pruvel in the United States. Theestablishment and development of our own sales force to market any products wemay develop will be expensive and time consuming and could delay any productlaunch, and we cannot be certain that we will be able to successfully developthis capability. We do not currently have sufficient funds to develop a salesforce and other resources that we believe would be necessary to adequatelymarket fidaxomicin and Pruvel in the United States. We will also have tocompete with other pharmaceutical and biotechnology companies to recruit, hire,train and retain marketing and sales personnel. To the extent we rely on thirdparties to commercialize our products, if any, we may receive less revenuesthan if we commercialized these products ourselves. In addition, we may havelittle or no control over the sales efforts of any third parties involved incommercializing our products. In the event we are unable to develop our ownmarketing and sales force or collaborate with a third-party marketing and salesorganization, we would not be able to commercialize our product candidateswhich would negatively impact our ability to generate product revenues.

 

**We may notbe able to enter into acceptable agreements to commercialize****fidaxomicin****outside of the United States or if, needed, adequately build our ownmarketing and sales capabilities.**

 

Ifappropriate regulatory approvals are obtained, we intend to commercializefidaxomicin outside of the United States through collaboration arrangementswith third parties.  We may be unable toenter into collaboration arrangements in international markets.  In addition, there can be no guarantee thatif we enter into these collaboration arrangements with other parties that theywill be successful or result in more revenues than we could obtain by marketingfidaxomicin on our own. If we are unable to enter into 

 

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collaboration arrangementsfor our products or develop an effective international sales force, our abilityto generate product revenues would be limited, which would adversely affect ourbusiness, financial condition, results of operations and prospects. If we areunable to enter into such collaboration arrangements, we may need to developour own marketing and sales force to market fidaxomicin in a number ofcountries in Europe and Latin America to hospital-based and long-term carephysicians.  These efforts may not besuccessful as we have no relationships among such hospital-based and long-termcare physicians and do not currently have sufficient funds to develop anadequate sales force in these regions. There is no guarantee that we will be able to develop an effectiveinternational sales force to successfully commercialize our products in theseinternational markets.  If we cannotcommercialize fidaxomicin, we will have to rely solely on Pruvel and earlierstage product candidates for any future revenues, and our ability to achieveand sustain profitability will be materially harmed.

 

**If ourproduct candidates are unable to compete effectively with branded and genericantibiotics, our commercial opportunity would be reduced or eliminated.**

 

Ifapproved, our lead product candidates will compete against both brandedantibiotic therapies, such as Vancocin Pulvules with respect to fidaxomicin andXifaxan®/rifaxamin withrespect to Pruvel, and generic antibiotics such as metronidazole and oralvancomycin with respect to fidaxomicin and ciprofloxacin with respect toPruvel.  In addition, we anticipate thatfidaxomicin will compete with other antibiotic and anti-infective productcandidates currently in development for the treatment of CDI, such as Xifaxan®/rifaxamin. Many of theseproducts have been or will be developed and marketed by major pharmaceuticalcompanies, who have significantly greater financial resources and expertise inresearch and development, pre-clinical testing, conducting clinical trials,obtaining regulatory approvals, manufacturing and marketing approved productsthan we do.  As a result, these companiesmay obtain 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.

 

Weanticipate that, if approved, fidaxomicin and Pruvel will face increasingcompetition in the form of generic versions of branded products of competitorsthat will lose their patent exclusivity. For example, fidaxomicin, if approved, will immediately face steepcompetition from an inexpensive generic form of metronidazole.  Fidaxomicin would currently face generic oralvancomycin competition in Europe and in the future may face competition fromgeneric oral vancomycin in the United States as well.  Generic antibiotic therapies typically aresold at lower prices than branded antibiotics and are generally preferred bymanaged care providers of health services. For example, because metronidazole is sold at such a low price, webelieve it will be difficult to sell fidaxomicin as a first-line therapy forthe treatment of CDI.  If we are unableto demonstrate to physicians and patients that, based on experience, clinicaldata, side-effect profiles and other factors, our products are preferable tothese generic antibiotic therapies, we may never generate meaningful productrevenues.  In addition, many antibioticsexperience bacterial resistance over time because of their continued use.  There can be no guarantee that bacteria wouldnot develop resistance to fidaxomicin, Pruvel or any of our other productcandidates.  Our commercial opportunitywould also be reduced or eliminated if our competitors develop andcommercialize generic or branded antibiotics that are safer, more effective,have fewer side effects or are less expensive than our product candidates.

 

**We currentlydepend, and will in the future continue to depend, on third parties tomanufacture our product candidates, including****fidaxomicin****and Pruvel.  If thesemanufacturers fail to provide us and our collaborators with adequate suppliesof clinical trial materials and commercial product or fail to comply with therequirements of regulatory authorities, we may be unable to develop orcommercialize our products.**

 

Weoutsource all manufacturing of clinical trial supplies of our productcandidates to third parties.  We seek toestablish long-term supply arrangements with third-party contractmanufacturers.  We intend to continueoutsourcing the manufacture of our product candidates to third parties for anyfuture clinical trials and large-scale commercialization of any productcandidates that receive regulatory approval and become commercial drugs.

 

Ourability to develop and commercialize fidaxomicin and Pruvel and any otherproduct candidates depends in part on our ability to arrange for collaboratorsor other third parties to manufacture our products at a competitive cost, inaccordance with strictly enforced regulatory requirements and in sufficientquantities for clinical testing and eventual commercialization.  We have not yet manufactured commercialbatches of fidaxomicin, Pruvel or any of our other product candidates.  Collaborators or third-party manufacturersthat we select to manufacture our product candidates for clinical testing or ona commercial scale may encounter difficulties with the small- and large-scaleformulation and manufacturing processes required for such manufacture.  Such difficulties could result in delays inclinical trials, regulatory submissions and approvals, or commercialization ofour product candidates.  The inability ofus or our collaborators to enter into and maintain agreements with third-partymanufacturers on acceptable terms would cause shortages of clinical trialsupplies of our product candidates, thereby delaying or preventing regulatoryapproval and/or commercialization of the affected product candidate, andadversely affecting our ability to generate revenues.  Further, development of large-scalemanufacturing processes will require additional validation studies, which theFDA must review and approve, and the time it will take us or a third partymanufacturer to develop such large-scale processes and capabilities may delayany 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.

 

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Inaddition, we, our collaborators and other third-party manufacturers of ourproducts must comply with strictly enforced current good manufacturingpractices, or cGMP, requirements enforced by the FDA through its facilitiesinspection program.  These requirementsinclude quality control, quality assurance and the maintenance of records anddocumentation.  We currently rely onBiocon to manufacture fidaxomicin active pharmaceutical ingredient and rely onPatheon, 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, as well as Angelini and Patheon,to manufacture Pruvel drug supplies.  Themanufacturing facilities of Biocon, Juzen and Patheon have been inspected andapproved by the FDA for other companies’ drug products; however, none of Biocon’s,Juzen’s nor Patheon’s facilities have been inspected by the FDA for themanufacture of our drug supplies. Angelini’s facilities have not been inspected or approved by theFDA.  We or other third-partymanufacturers of our products may be unable to comply with cGMP requirementsand with other FDA, state, local and foreign regulatory requirements.  We and our collaborators have little controlover third-party manufacturers’ compliance with these regulations andstandards.  A failure to comply withthese requirements by our third-party manufacturers, including Biocon, Juzen,Angelini, and Patheon could result in the issuance of untitled letters and/orwarning letters from authorities, as well as sanctions being imposed on us,including fines and civil penalties, suspension of production, suspension ordelay in product approval, product seizure or recall or withdrawal of productapproval.  In addition, we have nocontrol over these manufacturers’ ability to maintain adequate quality control,quality assurance and qualified personnel. If the safety of any quantities supplied by third parties is compromiseddue to their failure to adhere to applicable laws or for other reasons, we maynot be able to obtain or maintain regulatory approval for or successfullycommercialize one or more of our product candidates, which would significantlyharm our business and prospects.

 

**Thecommercial success of our product candidates will depend upon attaining significantmarket acceptance of these product candidates among physicians, patients,healthcare payors and the medical community.**

 

Evenif our product candidates are approved by the appropriate regulatoryauthorities for marketing and sale, physicians may not prescribe our productcandidates, which would prevent us from generating revenues or becomingprofitable.  Market acceptance offidaxomicin, Pruvel and any of our future product candidates by physicians,patients and healthcare payors will depend on a number of factors, many ofwhich are beyond our control, including:

 

·                  the clinical indications forwhich the product candidate is approved;

 

·                  acceptance by physicians andpatients of each product candidate as a safe and effective treatment;

 

·                  perceived advantages overalternative treatments;

 

·                  the cost of treatment inrelation to alternative treatments, including numerous generic antibiotics;

 

·                  the extent to which theproduct candidate is approved for inclusion on formularies of hospitals andmanaged care organizations;

 

·                  the extent to which bacteriadevelops resistance to the product candidate, thereby limiting its efficacy intreating or managing infections;

 

·                  whether the productcandidate is designated under physician treatment guidelines as a first-linetherapy or as a second- or third-line therapy for particular infections;

 

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

 

·                  limitations or warningscontained in a product’s FDA-approved labeling;

 

·                  relative convenience andease of administration; and

 

·                  prevalence and severity ofadverse side effects.

 

Becausefidaxomicin is a differentiated antibiotic for the treatment of CDI, it mayencounter additional hurdles to market acceptance by physicians, who may beskeptical about its clinical benefits, or healthcare payors, who may resistreimbursing a premium-priced therapeutic particularly in light of theavailability of generic alternatives.

 

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Weplan to target our marketing of Pruvel primarily to high-prescribing physiciansof antibiotics for infectious 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 Pruvel 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 of Pruvel.

 

Inaddition, in July 2008 the FDA notified makers of fluoroquinoloneantimicrobial drugs for systemic use that a boxed warning is necessary forthose products due to the risk of tendonitis and tendon rapture.  As prulifloxacin, the generic name forPruvel, is a fluoroquinolone antibiotic it may be required to carry a black boxwarning.  Although these risks have beendescribed for years on the product label of many fluoroquinolones, theincreased awareness of this risk may impact the market potential for thefluoroquinolone class of antibiotics, including prulifloxacin.  Furthermore, because prulifloxacin hasalready been marketed by other companies outside the United States to treat awide range of bacterial infections, including infectious diarrhea, urinarytract infections  and respiratory tractinfections, patients may be able to obtain prulifloxacin from these othercompanies, and not from us, if prulifloxacin is approved in the market wherethe patient is located.  We have rightsto Pruvel only in the United States. These patients may obtain prulifloxacin in these other markets fromother companies even if these patients are from the United States.

 

**If we fail to develop and commercialize other productsor product candidates, we may be unable to grow our business.**

 

A key element of ourstrategy is to commercialize a portfolio of new anti-infective products inaddition to fidaxomicin and Pruvel.  As asignificant part of our growth strategy, we intend to develop andcommercialize, independently and/or through collaboration partners, additionalproducts and product candidates through our discovery research program usingour proprietary technology, including OPopS. The success of this strategy depends upon our ability to identify, selectand acquire pharmaceutical product candidates and products that fit into ourdevelopment plans on terms that are acceptable to us. To supplement thisstrategy, we may also obtain rights to additional product candidates from thirdparties through acquisition or in-licensing transactions.

 

Anyproduct candidate we identify or to which we acquire rights will likely requireadditional development efforts prior to commercial sale, including pre-clinicalstudies, extensive clinical testing and approval by the FDA and applicableforeign regulatory authorities.  Allproduct candidates 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 commercially availablealternatives.

 

Asignificant portion of the research that we are conducting involves new andunproven technologies.  Research programsto identify new disease targets and product candidates require substantialtechnical, financial and human resources whether or not we ultimately identifyany candidates.  Our research programsmay initially show promise in identifying potential product candidates, yetfail to yield product candidates for clinical development.

 

Ifwe are unable to develop suitable potential product candidates through internalresearch programs or by obtaining rights to novel therapeutics from thirdparties, our business and prospects will suffer.

 

Ourfocus on drug discovery and development using our technology platform,including our patented proprietary OPopS drug discovery platform, is novel andunique.  As a result, we cannot becertain that our product candidates will produce commercially viable drugs thatsafely and effectively 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 or our collaborators are successfulin completing clinical development and receiving regulatory approval for onecommercially viable drug for the treatment of one disease using our technologyplatform and carbohydrate chemistry focus, we cannot be certain that we or ourcollaborators will also be able to develop and receive regulatory approval forother drug candidates for the treatment of other forms of that disease or otherdiseases.  If we fail to develop andcommercialize, independently and/or through collaborators, viable drugs using ourplatform and specialized focus, we will not be successful in developing apipeline of potential product candidates to follow fidaxomicin and Pruvel, andour business prospects would be significantly harmed.

 

**Our futuregrowth depends on our ability to identify and acquire or in-licenseproducts.  If we do not successfullyidentify and acquire or in-license related product candidates or integrate theminto our operations, we may have limited growth opportunities.**

 

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Wein-licensed the U.S. rights to Pruvel from Nippon Shinyaku who, along withMeiji-Seika Kaisha Ltd., conducted the initial development of this productcandidate.  An important part of ourbusiness strategy is to continue to develop a pipeline of product candidates byacquiring or in-licensing products, businesses or technologies that we believeare a strategic fit for our business. Future in-licenses or acquisitions, however, may entail numerousoperational and financial risks, including:

 

·                  exposure to unknownliabilities;

 

·                  disruption of our businessand diversion of our management’s time and attention to develop acquiredproducts or technologies;

 

·                  incurrence of substantialdebt or dilutive issuances of securities to pay for acquisitions;

 

·                  higher than expectedacquisition and integration costs;

 

·                  increased amortizationexpenses;

 

·                  difficulty and cost incombining the operations and personnel of any acquired businesses with ouroperations and personnel;

 

·                  impairment of relationshipswith key suppliers or customers of any acquired businesses due to changes inmanagement and ownership; and

 

·                  inability to retain keyemployees of any acquired businesses.

 

Wehave limited resources to identify and execute the acquisition or in-licensingof third-party products, businesses and technologies and integrate them intoour current infrastructure.  Inparticular, we may compete with larger pharmaceutical companies and othercompetitors in our efforts to establish new collaborations and in-licensingopportunities.  These competitors likelywill have access to greater financial resources than us and may have greaterexpertise in identifying and evaluating new opportunities.  Moreover, we may devote resources topotential acquisitions or in-licensing opportunities that are never completed,or we may fail to realize the anticipated benefits of such efforts.

 

**Our abilityto pursue the development and commercialization of Pruvel, our other productcandidates and our future product candidates depends upon the continuation ofour licenses from third parties.**

 

Ourlicense agreement with Nippon Shinyaku provides us with an exclusive license todevelop and commercialize Pruvel for any indication in the United States, witha right to sublicense to third parties. In the event Nippon Shinyaku is not able to supply us with Pruvel, thelicense agreement provides us with a non-exclusive, worldwide right and licenseto manufacture or have Pruvel 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 Pruvel in theUnited States.  If our license agreementwith Nippon Shinyaku terminates, we will lose our rights to develop,manufacture and commercialize Pruvel and our potential revenues would belimited.  Similarly, if our agreementwith the Scripps Research Institute, or TSRI, for the license of our OPopStechnology is terminated, we will not be able to further develop future productcandidates using our OPopS technology, and our third party licensees may beunable to continue development of our existing out-licensed product candidates.

 

**We rely on our majority-ownedsubsidiary, OBI, for the development of certain of our product candidates.**

 

In October 2009, wecompleted a number of transactions involving our subsidiary, OBI, including thesale of 40% of our ownership interest in OBI to various third partyinvestors.  In connection with thesetransactions, we assigned to OBI, and OBI assumed from us, our rights andobligations under our license agreement with MSKCC related to our OPT-88product candidate and our rights and obligations under one of our licenseagreements with TSRI related to our OPT-822/821 product candidate.  We also assigned to OBI certain of ourintellectual property and know-how related to these two product candidates. Inexchange for these assignments, we have the right to receive certain milestoneor royalty payments relating to these product candidates.

 

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We cannot assure you thatOBI will successfully advance the development of OPT-88 or OPT-822/821.  In addition, if OBI does not comply with itsobligations under the agreements with MSKCC and TSRI, these agreements may beterminated and we may not be able to re-assume our rights under them.  If the agreements with MSKCC and/or TSRI wereterminated and we were unable to re-assume our rights, we would not be able topursue further development of OPT-88 and/or OPT-822/821, respectively.  Moreover, the addition of third partyinvestors in OBI has also diminished our ability to control OBI, which is nowsubject in some respects to the rights of the third party minoritystockholders.  In the future, additionalequity financings or other issuances of equity securities or securitiesconvertible into equity by OBI may further reduce our ownership position in OBIand we may not maintain a controlling interest in OBI.  To the extent that we do not maintain acontrolling equity interest in OBI in the future, we would have to rely on OBI’scontractual obligations, including under our Intellectual Property Assignmentand License Agreement, to ensure that OBI continues development of OPT-88 andOPT-822/821 and complies with its obligations under the MSKCC and TSRIagreements.  Finally, OBI will needadditional funds to further develop and commercialize, if ever, OPT-88 andOPT-822/821, and OBI may not be able to secure adequate funding at all or onterms you or we believe are favorable. If OBI is unable to raise additional funds to continue operations, orotherwise fails to advance the development of OPT-88 and OPT-822/821, we willnot receive milestone or royalty payments with respect to these productcandidates, and the value of our OBI equity position would likely diminish.

 

**If productliability lawsuits are brought against us, we may incur substantial liabilitiesand may be required to limit commercialization of our product candidates.**

 

Weface an inherent risk of product liability lawsuits related to the testing ofour product candidates, and will face an even greater risk if productcandidates are introduced commercially. An individual may bring a liability claim against us if one of ourproduct candidates causes, or merely appears to have caused, an injury.  If we cannot successfully defend ourselvesagainst the product liability claim, we may incur substantial liabilities.  Regardless of merit or eventual outcome,liability claims may result in:

 

·                  decreased demand for ourproduct candidates;

 

·                  injury to our reputation;

 

·                  termination of clinicaltrial sites or entire clinical trial programs;

 

·                  withdrawal of clinical trialparticipants;

 

·                  significant litigationcosts;

 

·                  substantial monetary awardsto or costly settlement with patients;

 

·                  product recalls;

 

·                  loss of revenues; and

 

·                  the inability tocommercialize our product candidates.

 

Wemay become dependent upon consumer perceptions of us and the safety and qualityof our product candidates.  We could beadversely affected 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.

 

Wehave global clinical trial liability insurance that covers our clinical trialsup to a $10.0 million annual aggregate limit. Our current or future insurance coverage may prove insufficient to coverany liability claims brought against us. We intend to expand our insurance coverage to include the sale ofcommercial products if marketing approval is obtained for our productcandidates, which would increase our insurance premiums.  Because of the increasing costs of insurancecoverage, we may not be able to maintain insurance coverage at a reasonablecost or obtain insurance coverage that will be adequate to satisfy anyliability that may arise.

 

**Even if wereceive regulatory approval for our product candidates, we will be subject toongoing significant regulatory obligations and oversight.**

 

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Evenif we receive regulatory approval to sell our product candidates, the FDA andforeign regulatory authorities will likely impose significant restrictions onthe indicated uses or marketing of such products, or impose ongoingrequirements for potentially costly post-approval studies.  In addition, following any regulatoryapproval of our product candidates, we and our collaborators will be subject tocontinuing regulatory obligations, such as requirements for storage,recordkeeping and safety reporting, and additional post-marketing obligations,including regulatory oversight of the labeling, packaging, promotion andmarketing of our products.  If we or ourcollaborators become aware of previously unknown problems with any of ourproduct candidates in the United States or overseas or at our third-partymanufacturers’ facilities, a regulatory agency may impose restrictions on ourproducts, our third-party manufacturers or on us, including requiring us toreformulate our products, conduct additional clinical trials, make changes inthe labeling of our products, implement changes to, or obtain re-approvals of,our third-party manufacturers’ facilities, or withdraw the product from themarket.  In addition, we or ourcollaborators may experience a significant drop in the sales of the affectedproducts and our product revenues will be reduced, our reputation in the marketplacemay suffer and we may become the target of lawsuits, including class actionsuits.  Moreover, if we or ourcollaborators or third-party manufacturers fail to comply with applicableregulatory requirements, we may be subject to civil or criminal fines,suspension or withdrawal of regulatory approvals, product recalls, seizure ofproducts, operating restrictions, costly new manufacturing requirements andcriminal prosecution.  Any of theseevents could harm or prevent sales of the affected products and reduce ourrelated revenues or could substantially increase the costs and expenses ofcommercializing and marketing these products, which would significantly harmour business, financial condition and prospects.

 

**If we fail to attract and retain senior management andkey scientific personnel, we may be unable to successfully develop our productcandidates, conduct our clinical trials and commercialize our productcandidates.**

 

Oursuccess depends in part on our continued ability to attract, retain andmotivate highly qualified management, clinical and scientific personnel and onour ability to develop and maintain important relationships with leadingacademic institutions, clinicians and scientists.  We are highly dependent on our chiefexecutive officer, and the other principal members of our executive andscientific teams. The unexpected loss of the service of any of these personsmay significantly delay or prevent the achievement of research, development,commercialization and other business objectives.  Replacing key employees may be difficult andcostly and may take an extended period of time because of the limited number ofindividuals in our industry with the breadth of skills and experience requiredto develop and commercialize pharmaceutical products successfully.  We do not maintain “key person” insurancepolicies on the lives of these individuals or the lives of any of our otheremployees.  We employ these individualson an at-will basis and their employment can be terminated by us or them at anytime, for any reason and with or without notice.

 

Wewill need to hire additional personnel as we expand our clinical developmentand commercial activities.  We may not beable to attract or retain qualified management and scientific personnel onacceptable terms in the future due to the intense competition for qualifiedpersonnel among biotechnology, pharmaceutical and other businesses,particularly in the San Diego, California area. If we are not able to attract and retain the necessary personnel to accomplishour business objectives, we may experience constraints that will impedesignificantly the achievement of our research and development objectives, ourability to 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 willneed to increase the size of our organization, and we may experiencedifficulties in managing growth.**

 

Weare a small company with 69 employees as of March 1, 2010.  To commercialize our product candidates orcommence new clinical trials, we will need to expand our employee base formanagerial, 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 and commercializationof our product candidates.  Our futurefinancial performance and our ability to commercialize our product candidatesand to compete effectively will depend, in part, on our ability to manage anyfuture growth effectively.  To that end,we must be able to:

 

·                  manage our developmentefforts effectively;

 

·                  manage our current clinicaltrials effectively;

 

·                  integrate additionalmanagement, administrative and manufacturing personnel;

 

·                  build a marketing and salesorganization; and

 

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

 

Wemay not be able to accomplish these tasks, and accordingly, may not achieve ourresearch, development and commercialization goals.  Our failure to accomplish any of these goalscould harm our financial results and prospects.

 

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**Third-partypayor coverage and reimbursement may be insufficient or unavailable altogetherfor our product candidates, which could diminish our sales or affect ourability to sell our products profitably.**

 

Marketacceptance and sales of our product candidates will depend on reimbursementpolicies and may be 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. Because third-party payors increasinglyare challenging 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 productcandidates on approved formularies or that reimbursement will be available inwhole or in part for any of our product candidates.  Also, we cannot be sure that insufficientreimbursement amounts will not reduce the demand for, or the price of, ourproducts, if approved.

 

Manyhealthcare providers, such as hospitals, receive a fixed reimbursement amountper procedure 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.

 

Wehave not commenced efforts to have our product candidates reimbursed bygovernment or third-party payors.  Ifreimbursement is not available or is available only to limited levels, we maynot be able to commercialize our products successfully or at all, which wouldharm our business and prospects.

 

**Recentproposed legislation may permit re-importation of drugs from foreign countriesinto the United States, including foreign countries where the drugs are sold atlower prices than in the United States, which could materially adversely affectour operating results and our overall financial condition.**

 

Wemay face competition for our products from lower priced products from foreigncountries that have placed 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 other governmentagencies.  For example, U.S. Customs Servicegenerally does not prevent individuals from importing from Canada less than a90-day supply of a prescription drug for personal use, when the drug otherwisecomplies 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.

 

**Currenthealthcare laws and regulations and future legislative or regulatory reforms tothe healthcare system may affect our ability to sell our product candidates profitably.**

 

Inboth the United States and certain foreign jurisdictions, there have been, andwe anticipate there will continue to be, a number of legislative and regulatorychanges to the healthcare system that could impact our ability to sell ourproducts profitably.  We cannot becertain that fidaxomicin and Pruvel or other current or future drug candidateswill successfully be placed on the list of drugs covered by particular healthplan formularies, 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 Pruvel or other current orfuture drug candidates are not included on these preferred drug lists,physicians may not be inclined to prescribe them to their Medicaid patients,thereby diminishing the potential market for our products.

 

Asa result of legislative proposals and the trend towards cost-effectivenesscriteria and managed healthcare in the United States, third-party payors areincreasingly attempting to contain healthcare costs by limiting both coverageand the level of reimbursement of new drugs. They may also refuse to provide any coverage of uses of approvedproducts for medical indications other than those for which the FDA has grantedmarket approvals.  As a result,significant uncertainty exists as to whether and how much third-party payorswill reimburse for newly-approved drugs, which in turn will put pressure on thepricing of drugs.  Further, we do nothave experience in ensuring approval by applicable third-party payors outsideof the United States for reimbursement of our products.  The availability of numerous generic antibioticsat lower prices than branded antibiotics can also be expected to substantiallyreduce the likelihood of reimbursement for fidaxomicin and Pruvel.  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.

 

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

 

Weare subject to various federal and state laws pertaining to healthcare fraudand abuse, including anti-kickback laws, the False Claims Act, the ForeignCorrupt Practices Act and state laws requiring reporting and certificationunder comprehensive compliance programs governing our financial relationshipswith healthcare providers.  Violations ofthese laws are punishable by criminal and civil sanctions, including, in someinstances, exclusion from participation in federal and state healthcareprograms, including Medicare and Medicaid, and the curtailment or restructuringof operations.  We believe that ouroperations are in material compliance with such laws and we are aware of theneed to 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.

 

**Ourbusiness involves the use of hazardous materials and we and our third-partymanufacturers must comply with environmental laws and regulations, which can beexpensive and restrict how we do business.**

 

Ourthird-party manufacturers’ activities and, to a lesser extent, our ownactivities involve the controlled storage, use and disposal of hazardousmaterials, including the components of our product candidates and otherhazardous compounds.  We and ourmanufacturers are subject to federal, state and local laws and regulationsgoverning the use, manufacture, storage, handling and disposal of thesehazardous materials.  Although we believethat the safety procedures for handling and disposing of these materials complywith the standards prescribed by these laws and regulations, we cannoteliminate the risk 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.

 

**Ourbusiness and operations would suffer in the event of computer,telecommunications or other system failure.**

 

Despitethe implementation 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 Pruvel, which is maintained by ourthird-party CRO, could result in delays in our regulatory approval efforts andsignificantly increase our costs to recover or reproduce the data.  To the extent that any disruption or securitybreach 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.

 

**RisksRelated to Our Intellectual Property**

 

**It isdifficult and costly to protect our intellectual property and our proprietarytechnologies, and we may not be able to ensure their protection.**

 

Ourcommercial success will depend in part on obtaining and maintaining patentprotection and trade secret protection of the use, formulation and structure ofour product candidates, and the methods used to manufacture them, as well assuccessfully defending these patents against third-party challenges, includingthose from generic drug manufacturers. Our ability to protect our product candidates from unauthorized making,using, selling, offering to sell or importing by third parties is dependent uponthe extent to which we have rights under valid and enforceable patents or tradesecrets that cover these activities.

 

Thepatent positions of pharmaceutical and biotechnology companies can be highlyuncertain and involve complex legal and factual questions for which importantlegal principles remain unresolved.  Noconsistent policy regarding the breadth of claims allowed in biotechnologypatents has emerged to date in the United States.  The biotechnology patent environment outsidethe United States is even more uncertain. Changes in either the patent laws or in interpretations of patent lawsin the United States and other countries may diminish the value of ourintellectual property.  Accordingly, wecannot predict the breadth of claims that may be allowed or enforced in ourlicensed patents, our patents or in third-party patents.

 

Thedegree of future protection for our proprietary rights is uncertain, becauselegal means afford only limited protection and may not adequately protect ourrights or permit us to gain or keep our competitive advantage.  For example:

 

·                  others may be able to make compounds that aresimilar to our product candidates but that are not covered by the claims of ourissued patents and pending patent applications or licensed patents and pendingpatent applications, or for which we are not licensed under our licenseagreements;

 

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·                  others may be able to makecompeting pharmaceutical formulations containing our product candidates orcomponents of our product formulations that are either not covered by theclaims of our issued patents or licensed patents, not licensed to us under ourlicense agreements or are subject to patents that expire;

 

·                  we or our licensors mightnot have been the first to make the inventions covered by our issued patentsand pending patent applications or the pending patent applications and issuedpatents of our licensors;

 

·                  we or our licensors mightnot have been the first to file patent applications for these inventions;

 

·                  others may independentlydevelop similar or alternative technologies or duplicate any of ourtechnologies;

 

·                  it is possible that ourpending patent applications or our licensed patent applications will not resultin issued patents;

 

·                  our issued patents andpending patent applications or the pending patent applications and issuedpatents of our licensors may not provide us with any competitive advantages,may be designed around by our competitors, including generic drug companies, ormay be held invalid or unenforceable as a result of legal challenges by thirdparties;

 

·                  we may not developadditional proprietary technologies that are patentable; or

 

·                  the patents of others mayhave an adverse effect on our business.

 

Inaddition, to the extent we are unable to obtain and maintain patent protectionfor our product candidates or in the event such patent protection expires, itmay no longer be cost effective to extend our portfolio by pursuing additionaldevelopment of a product candidate for follow-on indications.

 

Wehave filed 12 patent applications related to fidaxomicin, one of which hasresulted in the issuance of a polymorph patent and one of which has resulted ina manufacturing patent, from the United States Patent and Trademark Office, orUS PTO, and ten of which are pending.

 

These patent applicationsrelated to fidaxomicin encompass various topics relating to:

 

·                  composition of matter forfidaxomicin (issued in Taiwan);

 

·                  composition of matter forfidaxomicin related substances and use for CDI;

 

·                  polymorphic forms (issued inU.S. with respect to one polymorphic form);

 

·                  manufacturing processes(issued in U.S. and  in Australia);

 

·                  treatment of diseases usingfidaxomicin;

 

·                  formulation; and

 

·                  fidaxomicin relatedcompounds, such as metabolites.

 

Ifwe are unable to obtain a composition of matter patent, our competitors,including generic drug companies, may be able to design other similarformulations of the active ingredient of fidaxomicin.  Furthermore, even though the manufacturingprocess patent has issued, and even if the formulation patent applicationresults in an issued patent, our competitors, including generic drug companies,may be able to design around our manufacturing processes or formulation forfidaxomicin.  As a result, ourcompetitors may be able to develop competing products.

 

Inaddition, we currently plan to submit an NDA for Pruvel for the treatment ofinfectious diarrhea in 2010.  Thecomposition of matter patent covering Pruvel expired in February 2009.  In 2009, our licensor, Nippon Shinyakureceived a patent from the US PTO which covers the polymorphic form of a keyintermediate in the manufacturing process for Pruvel.  Despite its issuance, this patent may laterbe challenged by a third party or fail to prevent a third party from producingand marketing a generic form of Pruvel in the United States.   If we are unable to rely on therecently-issued polymorph patent, we will likely rely on one or more regulatorymarketing exclusivities for Pruvel in the United States.  Specifically, if our NDA for Pruvel isapproved, we expect to receive a five-

 

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yearperiod of marketing exclusivity under the Hatch-Waxman Act. This exclusivityperiod is available to the first applicant to gain approval of an NDA for a newchemical entity, or NCE, that has not previously been approved as an activeingredient under Section 505(b) of the Food Drug and Cosmetic Act, orFDCA.  While we expect that the NCEexclusivity period will be available for Pruvel, if the recent polymorph patentis insufficient to maintain exclusivity in the United States with respect toPruvel, we may face generic competition in the United States five years afterour NDA for Pruvel is approved by the FDA. If we are unable to obtain marketingexclusivity beyond five years from the approval of our NDA, our potentialrevenues from Pruvel sales in the U.S. will be limited.

 

Wedepend, in part, on our licensors and collaborators to protect a portion of ourproprietary rights.  In such cases, ourlicensors and collaborators may be primarily or wholly responsible for themaintenance of patents and prosecution of patent applications relating toimportant areas of our business.  Forexample, Nippon Shinyaku is responsible for the maintenance of patents andprosecution of patent applications relating to Pruvel.  We may also be dependent on Par to providetechnical support for patent applications relating to fidaxomicin.  If any of these parties fail to adequatelyprotect these product candidates with issued patents, our business andprospects would be significantly harmed.

 

Underour agreement with Nippon Shinyaku, in the event Nippon Shinyaku fails to takeall steps necessary to seek extension of the patents licensed to us in theUnited States 180 days after we request such action be taken, then we have theright to take all necessary actions to extend the licensed patents.  Our agreement with Par does not have explicitprovisions regarding our rights to take necessary action with respect tomaintenance of patents and prosecution of patent applications nor do suchagreements provide us with any legal recourse in the event such parties do notso maintain and/or prosecute.  If any ofthese parties or others on which we rely for patent maintenance and prosecutionfail to adequately maintain patents and prosecute patent applications relatingto technology licensed to or from us, we may be required to take further actionon our own to protect this technology. However, we may not be successful in maintaining such patents orprosecuting such patent applications and if so, our business and prospects wouldbe significantly harmed.

 

Wealso rely on trade secrets to protect our technology, especially where we donot believe patent protection is appropriate or obtainable.  However, trade secrets are difficult toprotect.  Although we use reasonableefforts to protect our trade secrets, our employees, consultants, contractors,outside scientific collaborators and other advisors may unintentionally orwillfully disclose our information to competitors.  Enforcing a claim that a third-party entityillegally obtained and is using any of our trade secrets is expensive and timeconsuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willingto protect trade secrets.  Moreover, ourcompetitors may independently develop equivalent knowledge, methods andknow-how.

 

Ifwe or our licensors fail to obtain or maintain patent protection or tradesecret protection for our product candidates or our technologies, third partiescould use our proprietary information, which could impair our ability tocompete in the market and adversely affect our ability to generate revenues andattain profitability.

 

**We mayincur substantial costs as a result of litigation or other proceedings relatingto our patent, trademark and other intellectual property rights, and we may beunable to protect our rights to, or use, our technology.**

 

Ifwe choose to go to court to stop someone else from using our inventions, thatindividual or company has the right to ask the court to rule that theunderlying patents are invalid and/or should not be enforced against that thirdparty.  These lawsuits are expensive andwould consume time and other resources even if we were successful in stoppingthe infringement of these patents.  Thereis also the risk that, even if the validity of these patents is upheld, thecourt will refuse to stop the other party on the ground that such other party’sactivities do not infringe our rights to these patents.

 

Furthermore,a third party may claim that we or our manufacturing or commercializationpartners are using inventions covered by the third party’s patent rights andmay go to court to stop us from engaging in our normal operations andactivities, including making, 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 ofuse.  The coverage of patents is subjectto interpretation by the courts and the interpretation is not alwaysuniform.  If we are sued for patentinfringement, we would need to demonstrate that our products or methods of useeither do not infringe the patent claims of the relevant patent and/or that thepatent claims are invalid, and we may not be able to do this.  Proving invalidity, in particular, isdifficult since it requires a showing of clear and convincing evidence toovercome the presumption of validity enjoyed by issued patents.

 

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Althoughwe have conducted searches of third-party patents with respect to fidaxomicinand Pruvel, 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”, “Optimer Pharmaceuticals” and “Pruvel”, we are awarethat the name “Optimer” has been registered as a trademark with the U.S. PTO bymore than 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.

 

Becausesome patent applications in the United States may be maintained in secrecyuntil the patents are issued, because patent applications in the United Statesand many foreign jurisdictions are typically not published until eighteenmonths after filing, and because publications in the scientific literatureoften lag behind actual discoveries, we cannot be certain that others have notfiled patent applications for technology covered by our licensors’ issued patentsor our pending applications or our licensors’ pending applications, or that weor our licensors 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.

 

Someof our competitors may be able to sustain the costs of complex patentlitigation more effectively than we can because they have substantially greaterresources.  In addition, anyuncertainties resulting from the initiation and continuation of any litigationcould have a material adverse effect on our ability to raise the fundsnecessary to continue our operations.

 

**RisksRelated to the Securities Market and Ownership of Our Common Stock**

 

**The marketprice of our common stock may be highly volatile.**

 

Beforeour initial public offering in February 2007, there was no public marketfor our common stock.  We cannot assureyou that an active trading market will exist for our common stock. You may not be able to sell yourshares quickly or at the market price if trading in our common stock is notactive.

 

Thetrading price of our common stock is likely to be highly volatile and could besubject to wide fluctuations in price in response to various factors, many ofwhich are beyond our control, including:

 

·                  general economic and marketconditions and other factors that may be unrelated to our operating performanceor the operating performance of our competitors;

 

·                  announcement of FDA orcomparable foreign regulatory agency approval or non-approval of our productcandidates, or specific label indications for their use, or delays in the FDAor comparable foreign regulatory agency review process;

 

·                  actions taken by the FDA orother regulatory agencies with respect to our product candidates, clinicaltrials, manufacturing process or marketing and sales activities;

 

·                  changes in laws orregulations applicable to our products, including but not limited to clinicaltrial requirements for approvals;

 

·                  the success of ourdevelopment efforts and clinical trials, particularly with respect tofidaxomicin and Pruvel;

 

·                  announcements by ourcollaborators with respect to clinical trial results, regulatory submissionsand communications from the FDA or comparable foreign regulatory agencies;

 

·                  the success of our efforts toacquire or in-license additional products or product candidates;

 

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·                  developments concerning ourcollaborations and partnerships, including but not limited to those with oursources of manufacturing supply and our development and commercializationpartners;

 

·                  actual or anticipatedvariations in our quarterly operating results;

 

·                  announcements oftechnological innovations by us, our collaborators or our competitors;

 

·                  new products or servicesintroduced or announced by us or our commercialization partners, or ourcompetitors and the timing of these introductions or announcements;

 

·                  third-party coverage orreimbursement policies;

 

·                  actual or anticipatedchanges in earnings estimates or recommendations by securities analysts;

 

·                  conditions or trends in thebiotechnology and biopharmaceutical industries;

 

·                  announcements by us or ourcompetitors of significant acquisitions, strategic partnerships, joint venturesor capital commitments;

 

·                  changes in the marketvaluations of similar companies;

 

·                  sales of common stock orother securities by us or our stockholders in the future;

 

·                  additions or departures ofkey scientific or management personnel;

 

·                  disputes or otherdevelopments relating to intellectual property, proprietary rights, includingpatents, litigation matters and our ability to obtain patent protection for ourtechnologies; and

 

·                  trading volume of our commonstock.

 

Inaddition, the stock market in general and the market for biotechnology andbiopharmaceutical companies in particular have experienced extreme price andvolume fluctuations that have often been unrelated and/or disproportionate tothe operating performance of those companies. These broad market and industry factors may significantly harm themarket price of our 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.

 

**Futuresales of our common stock in the public market could cause our stock price todecline.**

 

Personswho were our stockholders prior to our initial public offering continue to holda substantial 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 asubstantial number of shares of our common stock have rights, subject tocertain conditions, to require us to file registration statements to permit theresale of their shares in the public market or to include their shares inregistration statements that we may file for ourselves or other stockholders.

 

Wehave also registered all common stock that we have issued under our employeebenefits plans. As a result, these shares can be freely sold in the publicmarket upon issuance, subject to any applicable restrictions under thesecurities laws. In addition, our directors and executive officers may in thefuture establish programmed selling plans under Rule 10b5-1 of theSecurities Exchange Act for the purpose of effecting sales of our common stock.If any of these events cause a large number of our shares to be sold in thepublic market, the sales could reduce the trading price of our common stock andimpede our ability to raise future capital.

 

**We may notbe able to liquidate our holding in an auction rate security.**

 

Ourinvestment securities consist of money market funds, corporate debt securitiesand government agency securities. As of December 31, 2009, we held oneauction rate preferred security valued at $882,000 with perpetual maturitydates that reset every 28 days.  Thenegative conditions in the global credit markets have prevented some investorsfrom liquidating their holdings, including 

 

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their holdings of auctionrate securities.  There was insufficientdemand at auction for our auction rate preferred security.  As a result, such security is currently notliquid, and we could be required to hold it until it is redeemed by the issueror to maturity.  In the event we need toaccess the funds that are in an illiquid state, we will not be able to do sowithout a loss of principal, until a future auction on this investment issuccessful, the security is redeemed by the issuer or it matures. We havereduced the carrying value of our auction rate security by $118,000 to reflectan estimated change in fair market value due primarily to a lack of liquidity.Although the auction rate security continues to pay interest according to itsstated terms, based on valuation models, we have recorded an unrealized lossfor an other-than-temporary change in valuation of $118,000.  If the credit ratings of the security issuerdeteriorates 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 willcontinue to incur significant costs as a result of operating as a publiccompany, and our management will be required to devote substantial time to newcompliance initiatives.**

 

Asa public company, we will continue to incur significant legal, accounting andother expenses.  In addition, theSarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules subsequentlyimplemented by the SEC and the Nasdaq Stock 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 result in increased legal and financialcompliance costs and will make some activities more time-consuming andcostly.  For example, these rules andregulations 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.

 

TheSarbanes-Oxley Act requires, among other things, that we maintain effectiveinternal controls for financial reporting and disclosure controls andprocedures. We are required to perform an evaluation of our internal controlsover financial reporting to allow management to report on the effectiveness ofthose controls, 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, 2009, 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.

 

**Someprovisions of our charter documents and Delaware law may have anti-takeovereffects that could discourage an acquisition of us by others, even if anacquisition would be beneficial to our stockholders and may prevent attempts byour stockholders to replace or remove our current management.**

 

Provisionsin our amended and restated certificate of incorporation and bylaws, as well asprovisions of Delaware law, could make it more difficult for a third party toacquire us, even if doing so would benefit our stockholders, or remove ourcurrent management.  These provisionsinclude:

 

·                  a board of directors dividedinto three classes serving staggered three-year terms, such that not allmembers of the board will be elected at one time;

 

·                  authorizing the issuance of “blankcheck” preferred stock, the terms of which may be established and shares ofwhich may be issued without stockholder approval;

 

·                  limiting the removal ofdirectors by the stockholders;

 

·                  prohibiting stockholderaction by written consent, thereby requiring all stockholder actions to betaken at a meeting of our stockholders;

 

·                  eliminating the ability ofstockholders to call a special meeting of stockholders; and

 

·                  establishing advance noticerequirements for nominations for election to the board of directors or forproposing matters that can be acted upon at stockholder meetings.

 

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Theseprovisions may frustrate or prevent any attempts by our stockholders to replaceor remove our current management by making it more difficult for stockholdersto replace members of our board of directors, which is responsible forappointing the members of our management. In addition, we are subject to Section 203 of the Delaware GeneralCorporation Law, which generally prohibits a Delaware corporation from engagingin any of a broad range of business combinations with a stockholder owning 15%or more of our outstanding voting stock for a period of three years followingthe date on which 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. The leases for both facilities expire in November 2011, with onelease subject to one five-year renewal option and the other lease subject totwo five-year renewal options.

 

We believe thesefacilities are adequate to meet our current needs and that additional space willbe available on commercially reasonable terms as needed.

 

**Item 3.Legal Proceedings**

 

We are not currently aparty to any legal proceeding.

 

**Item 4.(Removed and Reserved)**

 

**PART II**

 

**Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities**

 

Our common stock has been traded on the Nasdaq GlobalMarket under the symbol “OPTR” since February 9, 2007. Prior to that time,there was no public market for our common stock. The following table sets forththe range of high and low sale prices for our common stock reported by NasdaqGlobal Market.

 
| **2009**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $        | 14.00      |    | $          | 9.12 |   |
| Second Quarter |       | $        | 15.00      |    | $          | 9.54 |   |
| Third Quarter  |       | $        | 15.17      |    | $          | 12.49 |   |
| Fourth Quarter |       | $        | 14.03      |    | $          | 10.64 |   |

 
| **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 |   |

 

As of March 1, 2010,there were approximately 51 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.

 

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**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 35 MONTH CUMULATIVETOTAL RETURN***

Among OptimerPharmaceuticals, Inc. The NASDAQ Composite Index

And The NASDAQBiotechnology Index

 

****

 

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*$100 invested on 2/9/07 in stock or 1/31/07 inindex, including reinvestment of dividends. Fiscal year ending December 31.

 

(1) This section is not “soliciting material”, isnot deemed “filed” with the SEC, is not subject to the liabilities of Section18 of the Exchange Act, and is not to be incorporated by reference in any ofour filings under the Exchange Act whether made before of after the date hereofand irrespective of any general incorporation language in any such filing.

 

**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,**                           | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2009**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Statement of Operations Data:**                                                         |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Collaboration and grant  revenues                                                         |       | $                                                                     | 893        |   | $ | 1,023 |   | $ | 767 |   | $ | 933 |   | $ | 2,147 |   |
| Operating expenses:                                                                       |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Research and development                                                                  |       | 33,716                                                                |       | 29,036 |   | 41,569 |   | 10,481 |   | 7,047 |   |
| Marketing                                                                                 |       | 1,751                                                                 |       | 2,451 |   | 2,048 |   | — |   | — |   |
| General and administrative                                                                |       | 8,024                                                                 |       | 6,683 |   | 5,351 |   | 3,523 |   | 2,782 |   |
| Total operating expenses                                                                  |       | 43,491                                                                |       | 38,170 |   | 48,968 |   | 14,004 |   | 9,829 |   |
| Loss from operations                                                                      |       | (42,598                                                               | )          | (37,147 | ) | (48,201 | ) | (13,071 | ) | (7,682 | ) |
| Interest income and other,  net                                                           |       | 364                                                                   |       | 1,562 |   | 2,062 |   | 1,169 |   | 237 |   |
| Net loss before accretion  to redemption amount of redeemable convertible preferred stock |       | (42,234                                                               | )          | (35,585 | ) | (46,139 | ) | (11,902 | ) | (7,445 | ) |
| Accretion to redemption  amount of redeemable convertible preferred stock                 |       | —                                                                |       | — |   | — |   | (329 | ) | (223 | ) |
| Net loss attributable to  noncontrolling interest, net of tax                             |       | 142                                                                   |       | — |   | — |   | — |   | — |   |
| Net loss attributable to  Optimer Pharmaceuticals, Inc.                              |       | $                                                                     | (42,092    | ) | $ | (35,585 | ) | $ | (46,139 | ) | $ | (12,231 | ) | $ | (7,668 | ) |
| Basic and diluted net loss  per share attributable to common stockholders                 |       | $                                                                     | (1.30      | ) | $ | (1.24 | ) | $ | (2.12 | ) | $ | (4.81 | ) | $ | (3.22 | ) |
| Weighted average shares  outstanding                                                      |       | 32,469                                                                |       | 28,683 |   | 21,715 |   | 2,543 |   | 2,383 |   |

 

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| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **2009**                              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(in thousands)**               | ** ** |
| **Balance Sheet Data:**                            |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and  short-term investments |       | $                                     | 38,185     |   | $ | 39,326 |   | $ | 58,806 |   | $ | 21,341 |   | $ | 29,880 |   |
| Working capital                                    |       | 30,951                                |       | 32,258 |   | 52,173 |   | 17,990 |   | 28,490 |   |
| Total assets                                       |       | 40,656                                |       | 42,295 |   | 60,786 |   | 24,114 |   | 32,335 |   |
| Redeemable convertible  preferred stock            |       | —                                |       | — |   | — |   | 65,460 |   | 65,078 |   |
| Accumulated deficit                                |       | (175,475                              | )          | (133,382 | ) | (97,698 | ) | (51,558 | ) | (39,656 | ) |
| Noncontrolling interest                            |       | 3,040                                 |       | — |   | — |   | — |   | — |   |
| Total stockholders’ equity  (deficit)         |       | 32,752                                |       | 34,231 |   | 52,903 |   | (46,702 | ) | (35,143 | ) |
|                                                    |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

*The followingdiscussion and analysis should be read in conjunction with our “SelectedConsolidated Financial Data” and consolidated financial statements andaccompanying 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 a biopharmaceutical company focused ondiscovering, developing and commercializing innovative anti-infective products.Our current development efforts are focused on products that treatgastrointestinal infections,****andrelated diseases where current therapies have limitations, including limitedefficacy, serious adverse side effects, drug-to-drug interactions, difficultpatient compliance and bacterial resistance. We currently have two late-stageanti-infective product candidates, fidaxomicin and PruvelTM (prulifloxacin).

 

Fidaxomicin, our leadproduct candidate, is a narrow spectrum antibiotic with minimal systemicabsorption.  We are developingfidaxomicin for the treatment of CDI, the most common nosocomial, or hospitalacquired, diarrhea. In February 2010, we reported positive top-line datafrom the second of two fidaxomicin Phase 3 trials.  In November 2008, we reported positivedata from the first fidaxomicin Phase 3 trial, the largest single comparativestudy ever conducted against Vancocin. The top-line analysis of data from thesetrials showed that fidaxomicin achieved the primary endpoint of clinical cureand demonstrated a significantly lower recurrence rate compared to Vancocin,the only FDA-approved antibiotic for the treatment of CDI. Fidaxomicin was alsowell-tolerated in the trials.  Throughout2009, we presented additional data from the first fidaxomicin Phase 3trial.  In May 2009, we presentedadditional data at the Digestive Disease Week that showed that fidaxomicinoverall demonstrated a lower recurrence rate compared to oral vancomycin in thepatient regardless of serum albumin levels, white blood cell count andtemperature, and non-BI (NAP1/027) strains, the risk factors believed to bepredictive of CDI recurrence following treatment.  In September 2009, we reportedadditional data during the 49th Annual Interscience Conference onAntimicrobial Agents, or ICAAC which describe fidaxomicin’s low recurrencerate, safety profile, potent activity against CDI, and minimal disruption tothe normal intestinal flora.  In October 2009,we reported additional data during the 47th Annual Meeting of the Infectious DiseasesSociety of America (IDSA) which showed that fidaxomicin was associated with afaster time to resolution of diarrhea than vancomycin and that patients whoreceived concomitant antibiotics, those treated with fidaxomicin versusvancomycin, had significantly improved global rate cure rate, lower CDIrecurrence rate and higher clinical cure rate. We expect to report additional data from our second fidaxomicin Phase 3trial at scientific and medical conferences throughout 2010.  We currently hold worldwide rights tofidaxomicin and intend to seek one or more partners for thecommercialization of fidaxomicin outside of the United States.  We plan to submit a New Drug Application, or NDA, tothe FDA in the second half of 2010 and are also preparing a MarketingAuthorization Application, or MAA, for submission to the European MedicinesAgency, or EMA.

 

Pruvel is a prodrug inthe fluoroquinolone class of antibiotics, a widely-used class of broad-spectrumantibiotics. We are developing Pruvel as a treatment for infectiousdiarrhea.  In July 2008, we reportedpositive top-line data from the first Phase 3 trial conducted in Mexico andPeru and in February 2009, we reported positive top-line data from thesecond Phase 3 trial conducted in India, Guatemala and Mexico.  The top-line analysis of data from thesestudies showed that Pruvel met the primary endpoint of TLUS compared toplacebo. We intend to conduct a Phase 4 trial of Pruvel subsequent to aNDA submission to compare Pruvel to ciprofloxacin for the treatment ofinfectious diarrhea.  We plan toinitially seek approval for Pruvel for the treatment of infectious diarrhea.

 

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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 therapeuticapplication.

 

Wepreviously acquired exclusive rights to two other product candidates: OPT-88, adisease-modifying intra-articular therapy for osteoarthritis which we licensedfrom TSRI and OPT-822/821, a novel carbohydrate-based cancer immunotherapywhich we licensed from MSKCC.  In October 2009, we entered into anumber of transactions involving our Taiwanese subsidiary OBI, in which we sold40% of our existing equity in OBI to a group of new investors and,simultaneously, we and the group of new investors purchased approximately $3.7million and $2.5 million, respectively, of new common shares of OBI.  Inconnection with these transactions, we assigned to OBI certain of our patentrights and know-how related to OPT-88 and OPT-822/821 and also assigned to OBIour rights and obligations under the TSRI and MSKCC agreements.  Weanticipate that OBI will use the proceeds from the sale of new common shares tofund the development of OPT-88 and OPT-822/821.  Following thesetransactions, we maintain a 60% equity interest in OBI and have the right to receiveup to $10 million in future milestone payments for each product incorporatingOPT-88 or OPT-822/821 and royalties on net sales of any such products.

 

We were incorporated in November 1998.  Since inception, we have focused ondeveloping our product candidates, including fidaxomicin and Pruvel.  We have never been profitable and haveincurred significant net losses since our inception.  As of December 31, 2009, we had anaccumulated deficit of $175.5 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, regulatory approval andcommercialization of our product candidates, as well as acquire or in-licenseadditional products or product candidates, technologies or businesses that arecomplementary to our own.

 

**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 andgrants from government agencies.  We mayalso periodically 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, costsassociated with clinical trials managed by our CROs and costs associated withnon-clinical research activities and regulatory approvals.  Our most significant costs are for clinicaltrials, including payments to vendors such as CROs, investigators,manufacturers of clinical supplies and related consultants.  Our historical research and developmentexpenses have resulted predominantly from our clinical trials of fidaxomicin andPruvel, the development of our carbohydrate technology platforms, includingOPopS, in-licensing fees and general research activities.  We charge all research and developmentexpenses to operations as they are incurred because the underlying technologyassociated with these expenditures relates to our research and developmentefforts and has no alternative future uses. From inception through December 31, 2009, we incurred totalresearch and development expenses of approximately $147.1 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.

 

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External costs areexpensed as incurred.  We incurred $20.8million, $18.6 million and $85.5 million of research and development expensesdirectly related to the development of fidaxomicin for the years ended December 31,2009 and 2008, and cumulatively through December 31, 2009,respectively.  We incurred $7.8 million,$7.5 million, and $24.1 million of research and development expenses directlyrelated to the development of Pruvel for the years ended December 31, 2009and 2008, and cumulatively through December 31, 2009, respectively.  All other research and development expenseswere for other clinical programs.

 

We expect our researchand development expenses to increase as we complete our clinical trialactivities with respect to fidaxomicin, prepare regulatory filings formarketing approval of fidaxomicin and Pruvel, incur expenses related tolarge-scale manufacturing of fidaxomicin and Pruvel, advance our other productcandidates through the development process and invest in additional productopportunities and research programs. Although we expect our costs associated with clinical trials to decreaseas we complete the second of two Phase 3 clinical trials for fidaxomicin, weexpect to incur substantial costs in the preparation of applications forregulatory approval and manufacturing and scale-up for fidaxomicin and Pruvel.  The process of conducting pre-clinical andclinical trials and obtaining regulatory approval for our product candidates istime-consuming, expensive and subject to many uncertainties. For example, thecost of clinical trials may vary significantly over the life of a project as aresult of a variety of factors, including the number of patients enrolled,the rate of enrollment and the duration of patient treatment andfollow-up.  In addition, it is notuncommon for the FDA to request additional data following its review of an NDA,which can significantly lengthen the regulatory approval process and increaseexpenses.

 

As a result of theuncertainties discussed above, we are unable to determine with any significantdegree of certainty the duration and completion costs of our research anddevelopment projects or when and to what extent we will generate revenues fromthe 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 $4.5 million to complete thePhase 3****clinical trials forfidaxomicin to treat CDI.

 

*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 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 31,2009 we had federal, state and foreign net operating loss carryforwards ofapproximately $156.4 million, $154.8 million and $21,000,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 ten years afterorigination.  As of December 31,2009, we had both federal and state research and development tax creditcarryforwards of approximately $4.6 million and $2.5 million,respectively.  The federal tax creditswill begin expiring in 2020 unless previously utilized and the state taxcredits carryforward indefinitely.  As ofDecember 31, 2009, 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 31,2009, 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 corresponding reductionof the valuation allowance.  Due to theexistence of the valuation allowance, future changes in the unrecognized taxbenefits will not impact the effective tax rate.

 

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**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 accountingpolicies to be critical to the judgments and estimates used in the preparationof our consolidated financial statements.

 

*Revenue Recognition*

 

Ourlicense and collaboration agreements contain multiple elements, includingnon-refundable upfront fees, payments for reimbursement of third-party researchcosts, payments for ongoing research, payments associated with achievingspecific development milestones and royalties based on specified percentages ofnet product sales, if any.  We consider avariety of factors in determining the appropriate method of revenue recognitionunder these arrangements, such as whether the elements are separable, whetherthere are determinable fair values and whether there is a unique earningsprocess associated with each element of a 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.  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 payments are allowed to be recognized as revenue if and whenthe performance milestone is achieved if they represent a substantive earningsprocess.

 

Inconnection with certain research collaboration agreements, revenues arerecognized from non-refundable upfront fees, which we do not believe arespecifically tied to a separate earnings process, ratably over the term of theagreement or the period over which we have significant involvement or performservices.  Research fees are recognizedas revenue as the related research activities are performed.

 

Withrespect to revenues derived from reimbursement of direct out-of-pocket expensesfor research costs associated with grants, in transactions where we act as aprincipal with discretion to choose suppliers, bear credit risk and performpart of the services required in the transaction, we record revenue for thegross 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 we have received from collaborators to date, whetherrecognized as revenue or deferred, are refundable even if the related programis not successful.

 

*Research and Development*

 

Research and developmentcosts are expensed as incurred and consist primarily of costs associated withclinical trials, compensation, including stock-based compensation, and otherexpenses related to research and development, including personnel 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 defer and capitalize these types ofpayments. The capitalized amounts are expensed when the related goods aredelivered or the services are performed.

 

*Accrued Clinical Trial Costs*

* *

Asubstantial portion of our on-going research and development activities areperformed under agreements we enter into with external service providers,including CROs, who conduct many of our research and developmentactivities.  We accrue the costs incurredunder these contracts based on factors such as estimates of work performed,milestones achieved, patient enrollment and costs historically incurred forsimilar contracts.  As actual costsbecome known, we adjust our accruals. Historically, our accruals have been within management’s estimates, andno material adjustments to research and development expenses have beenrecognized.  Subsequent changes inestimates may result in a material change in our accruals, which could alsomaterially affect our results of operations.

 

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*Stock-Based Compensation*

 

Authoritative guidanceissued by the Financial Accounting Standards Board, or FASB, authoritativeguidance requires that share-based payment transactions with employees berecognized in the financial statements based on their fair value and recognizedas compensation expense over the vesting period.  We used the modified prospectivemethod and accordingly we did not restate the results of operations forthe prior periods. Compensation expense of $2.8 million, $1.8 million and $1.2million was recognized in the years ended December 31, 2009, 2008 and2007, respectively.

 

Stock-based compensation expense is estimated as ofthe grant date based on the fair value of the award and is recognized asexpense over the requisite service period, which generally represents thevesting period. We estimate the fair value of our stock options using theBlack-Scholes option-pricing model and the fair value of our stock awards basedon the quoted market price of our common stock.

 

Estimating the fair valuefor 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 the Simplified Method for Estimating theExpected Term.  Expected dividendsare estimated based on our dividend history as well as our current projections.The risk-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 instruments issued to non-employees arerecorded at their fair value and are periodically revalued as the equityinstruments vest and are recognized as expense over the related service period.

 

**Results of Operations**

 

***Comparison of YearsEnded December 31, 2009 and 2008***

 

*Collaborationand Grant Revenues*.  Collaboration and grant revenues for theyears ended December 31, 2009 and 2008 were $892,000 and $1,023,000,respectively.  The decrease of $131,000,or 13%, was primarily due to the conclusion of one of two National Institutes of Health grants as wellas a decrease in revenue from the remaining grant.

 

*Researchand Development Expense*.  Research and developmentexpense for the years ended December 31, 2009 and 2008 was $33,715,000 and$29,036,000, respectively.  The increaseof $4,679,000, or 16%, was due primarily to an increase in developmentexpenses, manufacturing scale-up expenses and expenses to prepare regulatoryfilings related to fidaxomicin and Pruvel.

 

*Marketing Expense*. * *Marketing expense for the yearsended December 31, 2009 and 2008 was $1,751,000 and $2,451,000,respectively. The decrease of $700,000, or 29%, was primarily due to lowermedical education, tradeshow and consulting expenses.

 

*Generaland Administrative Expense*.  General andadministrative expense for the years ended December 31, 2009 and 2008 was$8,024,000 and $6,683,000, respectively. The increase of $1,341,000, or 20%, was due to higher compensationexpenses, including $1,274,000 of stock compensation expense, an increase of$350,000 over the same period in the prior year, as well as an increase inpatent and consulting expenses.

 

*Interest Income and Other, net*. Net interest income and other for the year ended December 31, 2009and 2008 were $364,000 and $1,562,000, respectively.  The decrease was primarilydue to lower interest rates on cash, cash equivalents and investments.

 

***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 collaboration with anatural healthcare company which was completed in 2007.

 

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*Researchand Development Expense*.  Research and developmentexpense for the 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 fidaxomicinand prulifloxacin 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 impairment on ourlong-term investments of $118,000 in 2008.

 

**Liquidity and Capital Resources**

 

*Sources of Liquidity*

* *

Since inception, our operations have been financedprimarily through the sale of equity securities.  Through March 1, 2010, we received gross proceeds of approximately $256.2million from the sale of shares of our preferred 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 of $35.9 million;

 

·                  in July 2008,we sold a total of 1.7 million shares of our common stock in a registereddirect offering for proceeds of $14.7 million;

 

·                  in March 2009,we sold a total of 3.3 million shares of our common stock and warrants topurchase up to an aggregate of 91,533 shares of our common stock in a registereddirect offering for proceeds of $32.9 million; and

 

·                  in March 2010, we sold a total of 4.9 millionshares of our common stock in a public offering for proceeds of $53.8 million.

 

Untilrequired for operations, we invest a substantial portion of our available fundsin money market funds, United States government instruments and other readilymarketable debt instruments, all of which are investment-grade quality.  We have established guidelines relating todiversification and maturities of our investments to preserve principal andmaintain liquidity.

 

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*Cash Flows*

* *

Asof December 31, 2009, cash, cash equivalents and short-term investmentstotaled approximately $38.2 million as compared to $39.3 million as of December 31,2008, a decrease of approximately $1.1 million. The decrease in our cash, cash equivalents and short-term investmentswas primarily due to the use of cash for our operating expenses offset by the$32.9 million raised in a registered direct offering of our common stock in March 2009and $4.5 million of net cash received from the October 2009 OBItransactions.  Of the $38.2 million, $6.1million was held by OBI as of December 31, 2009.

 

Wecannot be certain if, when or to what extent we will receive cash inflows fromthe commercialization of our product candidates.  We expect our development expenses to besubstantial and to increase over the next few years as we advance thedevelopment of our product candidates and prepare for regulatory submissionsand commercialization.

 

In February 2007, weregained worldwide rights to fidaxomicin from Par under a prospective buy-backagreement.  We are obligated to pay Par aone-time $5.0 million milestone payment, a 5% royalty on net sales by us or ouraffiliates of fidaxomicin in North America and Israel, and a 1.5% royalty onnet sales by us or 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 a country-by-country basis for seven years commencing onthe 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 active pharmaceuticalingredients for certain markets.

 

In June 2004, we entered into a license agreementwith Nippon Shinyaku to which we acquired the non-exclusive right to import andpurchase Pruvel, and the exclusive right (with the right to sublicense), withinthe United States, to develop, make, use, offer to sell, sell and licenseproducts suitable for consumption by humans containing Pruvel.  Under the terms of the agreement, we will berequired to pay Nippon Shinyaku a milestone payment in the amount of $1.0million upon the filing, if any, of a NDA for Pruvel 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.

 

InOctober 2009, we entered into certain transactions with our subsidiary,OBI, pursuant to which we assigned certain intellectual property rights andlicense agreements to OBI related to our OPT-88 and OPT-822/821 productcandidates.  In connection with these transactions, we entered into afinancing agreement with OBI and a group of new investors.  Under theterms of the financing agreement, if OBI achieves certain developmentmilestones with respect to OPT-88 and OPT-822/821, we and the group of newinvestors may be required to purchase approximately an additional $8.6million and $5.7 million, respectively, of new OBI common shares. While we currently cannot anticipate when, if ever, OBI will achieve thesedevelopment milestones, under the terms of the financing agreement, ourobligation to purchase the additional OBI common shares will not be triggeredprior to June 30, 2010.

 

*FundingRequirements*

 

Ourfuture capital uses and requirements depend on numerous factors including, butnot limited to, the following:

 

·                  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 licensing 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 success of the commercialization of our products;and

 

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

 

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Webelieve that our existing cash and cash equivalents will be sufficient to meetour capital requirements for at least the next 12 months.

 

Untilwe can generate significant cash from our operations, we expect to continue tofund our operations with existing cash resources that were primarily generatedfrom the proceeds of offerings of our equity securities and collaborations andgovernment grants.  In addition, we mayfinance future cash needs through the sale of additional equity securities,strategic collaboration agreements and debt financing.  However, we may not be successful incompleting future equity financings, in entering into additional collaborationagreements, in receiving milestone or royalty payments under new or existingcollaboration agreements, in obtaining new government grants or in obtainingdebt financing.  In addition, we cannotbe sure that our existing cash and investment resources will be adequate, thatfinancing will be available when needed or that, if available, financing willbe obtained on terms favorable to us or our stockholders.  The credit markets and the financial servicesindustry have been experiencing a period of unprecedented turmoil and upheavalcharacterized by the government take-over, bankruptcy, failure, collapse orsale of various financial institutions. These events have generally made equity and debt financing moredifficult to obtain, and may negatively impact our ability to completefinancing transactions.  Havinginsufficient funds may require us to delay, scale-back or eliminate some or allof our development programs, relinquish some or even all of our rights toproduct candidates at an earlier stage of development or renegotiate lessfavorable terms than we would otherwise choose. Failure to obtain adequate financing also may adversely affect ourability to operate as a going concern. If we raise funds by issuing equity securities, substantial dilution toexisting stockholders would likely result. If we raise funds by incurring additional debt financing, the terms ofthe debt may involve significant cash payment obligations as well as covenantsand specific financial ratios that may restrict our ability to operate ourbusiness.

 

**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 31,2009:

 
| ** **                   | ** ** | **Payments Due by Period** | ** ** |
|------------------------------|------------|-------------------------------------------|------------|
| ** **                   | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-2 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
| ** **                   | ** ** | **(in thousands)**                   | ** ** |
| Operating lease  obligations |       | $                                         | 2,424      |   | $ | 1,185 |   | $ | 1,239 |   | $ | — |   | $ | — |   |
|                              |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our facilities currentlyconsist of laboratory and office space in two facilities in San Diego,California.  Our operating leases for thesefacilities expire on November 2011 with one of our leases subject to a onefive-year renewal option and the other lease subject to a two-year renewaloption.

 

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 $46.2 million as of December 31,2009 for these services, $3.7 million, $8.4 million and $9.8 million wereissued in 2009, 2008, and 2007, respectively. As of December 31, 2009, we have paid $38.2 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 tothe CRO 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 Pruvel, (b) potential requirement topurchase approximately $8.6 million of new OBI common stock shares if OBIachieves certain development milestones with respect to OPT-88 and OPT-822/821product candidates, (c) potential future milestone payments to Cempra inthe amount of $1.0 million due upon the regulatory approval of each of thefirst two products we develop under our licensing agreement with Cempra in anycountry which is a member of the Association of Southeast Asian Nations, orASEAN, (d) potential future milestone payments of up to $11.1 million toTSRI due upon achievement of certain clinical milestones, the filing of NDAs ortheir foreign equivalents and government marketing and distribution approval or(e) a future $5.0 million milestone payment to Par upon the earliestoccurrence of (i) the successful completion by us of our second 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 Pruvel, 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.

 

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**RecentlyIssued Accounting Pronouncements**

 

FASBissued the following recent new accounting standards:

 

In September 2009,the FASB issued an update to the accounting and disclosure requirements relatedto recurring and nonrecurring fair value measurements.  This update requires new disclosures on significanttransfers or assets and liabilities between Level 1 and Level 2 of the fairvalue hierarchy (including the reasons these transfers) and the reasons for anytransfers in or out of Level 3.  Thisupdate also requires a reconciliation of recurring Level 3 measurements aboutpurchases, sales and issuances and settlements on a gross basis.  In addition to these new disclosurerequirements, this update clarifies certain existing disclosure requirements.For example, this update clarifies that reporting entities are required toprovide fair value measurement disclosures for each class of assets andliabilities rather than each major category of assets and liabilities. Thisupdate also clarifies the requirement for entities to disclose information aboutboth the valuation techniques and inputs used in estimating Level 2 andLevel 3 fair value measurements. This update will be effective for us withthe interim and annual reporting period beginning January 1, 2010, exceptfor the requirement to provide the Level 3 activity of purchases, sales,issuances, and settlements on a gross basis, which will become effective for uswith the interim and annual reporting period beginning January 1, 2011. We arecurrently evaluating the potential impact of this standard on our financialposition and results of operations.

 

In October 2009, the FASB issued an update to the accounting anddisclosure requirements for revenue recognition on revenue arrangements with multiple-deliverable*.*This update eliminates therequirement to establish the fair value of undelivered products and servicesand instead provides for separate revenue recognition based upon management’sestimate of the selling price for an undelivered item when there is no othermeans to determine the fair value of that undelivered item. This update iseffective prospectively for revenue arrangements entered into or materiallymodified in fiscal years beginning on or after June 15, 2010. We arecurrently evaluating the potential impact of this standard on our financialposition and results of operations.

 

In June 2009, the FASBissued an update to the accounting and disclosure requirements for theconsolidation of variable interest entities, or VIE**. ****This update requires aquantitative approach to identifying a controlling financial interest in a VIE,and requires ongoing assessment of whether an entity is a VIE and whether aninterest in a VIE makes the holder the primary beneficiary of the VIE. **The update will beeffective as to us on January 1, 2010.  We are currently evaluatingthe impact, if any, of this update, but do not expect that this update willhave a material effect on our financial position and results of operations.

 

In June 2009, the FASBissued an update to the accounting and disclosure requirements for transfers offinancial assets.  This update isintended to improve the relevance, representational faithfulness, andcomparability of the information that a reporting entity provides in itsfinancial statements about a transfer of financial assets, the effects of atransfer on its financial position, financial performance, and cash flows, anda transferor’s continuing involvement, if any, in transferred financialassets.  This update removes the conceptof a qualifying special-purpose entity and the exception from applying *Consolidation of Variable Interest Entities*toqualifying special-purpose entities.  Therecognition and measurement provisions of this update will be applied totransfers that occur on or after January 1, 2010, which is the date upon whichthis accounting update becomes effective for us. We are currently evaluatingthe impact, if any, of this update, but do not expect that this update willhave a material effect on our financial position and results of operations.

 

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

 

*CashEquivalents and Marketable Securities Risk*

 

Ourcash and cash equivalents and short-term investments as of December 31,2009 consisted primarily of money market funds and United States governmentinstruments 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 31,2009 would have resulted in approximately a $36,000 change in netloss. Accordingly, we would not expect our operating results or cash flowsto be affected to any significant degree by a sudden change in market interestrates applicable to our securities portfolio. In general, money market funds are not subject to market risk becausethe interest paid on such funds fluctuates with the prevailing interest rate.

 

*FairValue measurements*

 

All of ourinvestment securities are available-for-sale securities and are reported on theconsolidated balance sheet at market value except for one auction ratepreferred securities, or ARPS with a par value of approximately$1.0 million. As a result of the negative conditions in the global creditmarkets, our ARPS is currently not liquid. In the event we need to access the funds that are in an illiquid state,we will not be able to do so without a loss of principal, until the securitiesare redeemed by the issuer or they mature.

 

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*ForeignCurrency Risk*

 

We have operatedprimarily in the United States of America and most transactions during the yearended December 31, 2009, have been made in U.S. dollars. Accordingly, wehave not had any material exposure to foreign currency rate fluctuations. We donot have any foreign currency hedging instruments in place.

 

We have conductedclinical trials in Europe in conjunction with INC Research, our CRO, where wehave clinical sites being monitored by clinical research associates. Whileinvoices relating to these clinical trials are generally denominated in U.S.dollars, our financial results could be affected by factors such as inflationin foreign currencies, in relation to the U.S. dollar, in markets where thesevendors have assisted us in conducting these clinical trials.

 

Certaintransactions related to our Company and our subsidiary, OBI, are denominatedprimarily in Taiwan dollars.  As a result, our financial results could beaffected by factors such as changes in foreign currency exchange rates or weakeconomic conditions in foreign markets where Optimer conducts business,including the impact of the existing crisis in the global financial markets insuch countries and the impact on both the U.S. dollar and the Taiwan dollars.

 

We do not usederivative financial instruments for speculative purposes. We do not engage inexchange rate hedging or hold or issue foreign exchange contracts for tradingpurposes. Currently, we do not expect the impact of fluctuations in therelative fair value of other currencies to be material in 2010.

 

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

 

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Independent Registered Public Accounting  Firm                                                   | 54 |
|------------------------------------------------------------------------------------------------------------|----|
| Consolidated Balance Sheets                                                                                | 55 |
| Consolidated Statements of Operations                                                                      | 56 |
| Consolidated Statements of Redeemable Convertible  Preferred Stock and Stockholders’ Equity (Deficit) | 57 |
| Consolidated Statements of Cash Flows                                                                      | 58 |
| Notes to Consolidated Financial Statements                                                                 | 59 |

 

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** **

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

TheBoard of Directors and

Stockholdersof Optimer Pharmaceuticals Inc.

 

We have audited the accompanying consolidatedbalance sheets of Optimer Pharmaceuticals, Inc. as of December 31,2009 and 2008, and the related consolidated statements of operations andstockholders’ equity (deficit), and cash flows for each of the three years inthe period ended December 31, 2009. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits in accordance with thestandards 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 statements referred toabove present fairly, in all material respects, the consolidated financialposition of Optimer Pharmaceuticals, Inc. at December 31, 2009 and2008, and the consolidated results of its operations and its cash flows foreach of the three years in the period ended December 31, 2009, 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, 2009, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 11,2010 expressed an unqualified opinion thereon.

 
|                   |   | /s/  ERNST & YOUNG LLP |
|------------------------|--------|---------------------------------|
|                   |   |                            |
| San  Diego, California |   |                            |
| March 11,  2010   |   |                            |

 

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**Optimer Pharmaceuticals, Inc.**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                       | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **ASSETS**                                                                                                                                                                       | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current  assets:                                                                                                                                                                 |       |                  |       |   |   |
| Cash  and cash equivalents                                                                                                                                                       |       | $                     | 17,054,328 |   | $ | 16,778,880 |   |
| Short-term  investments                                                                                                                                                          |       | 21,131,145            |       | 22,547,515 |   |
| Research  grant, contract, and other receivables                                                                                                                                 |       | 84,164                |       | 211,299 |   |
| Prepaid  expenses and other current assets                                                                                                                                       |       | 332,695               |       | 533,371 |   |
| Total  current assets                                                                                                                                                            |       | 38,602,332            |       | 40,071,065 |   |
| Property  and equipment, net                                                                                                                                                     |       | 672,896               |       | 694,183 |   |
| Long-term  investments                                                                                                                                                           |       | 882,000               |       | 1,032,000 |   |
| Other  assets                                                                                                                                                                    |       | 498,762               |       | 498,250 |   |
| Total  assets                                                                                                                                                                    |       | $                     | 40,655,990 |   | $ | 42,295,498 |   |
|                                                                                                                                                                             |       |                  |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                    |       |                  |       |   |   |
| Current  liabilities:                                                                                                                                                            |       |                  |       |   |   |
| Accounts  payable                                                                                                                                                                |       | $                     | 2,625,240  |   | $ | 3,767,831 |   |
| Accrued  expenses                                                                                                                                                                |       | 5,025,669             |       | 4,045,660 |   |
| Total  current liabilities                                                                                                                                                       |       | 7,650,909             |       | 7,813,491 |   |
| Deferred  rent                                                                                                                                                                   |       | 253,474               |       | 251,504 |   |
| Commitments  and contingencies                                                                                                                                                   |       | —                |       | — |   |
| Stockholders’  equity:                                                                                                                                                      |       |                  |       |   |   |
| Preferred  stock, par value $0.001, 10,000,000 shares authorized and no shares issued  and outstanding at December 31, 2009 and 2008, respectively                          |       | —                |       | — |   |
| Common  stock, $0.001 par value, 75,000,000 shares authorized, 33,139,373 shares and  29,716,751 shares issued and outstanding at December 31, 2009 and 2008,  respectively |       | 33,139                |       | 29,717 |   |
| Additional  paid-in capital                                                                                                                                                      |       | 205,114,914           |       | 167,544,806 |   |
| Accumulated  other comprehensive gain                                                                                                                                            |       | 38,063                |       | 38,088 |   |
| Accumulated  deficit                                                                                                                                                             |       | (175,474,665          | )          | (133,382,108 | ) |
| Total  Optimer Pharmaceuticals, Inc. stockholders’ equity                                                                                                              |       | 29,711,451            |       | 34,230,503 |   |
| Noncontrolling  interest                                                                                                                                                         |       | 3,040,156             |       | — |   |
| Total  stockholders’ equity                                                                                                                                                 |       | 32,751,607            |       | 34,230,503 |   |
| Total  liabilities and stockholders’ equity                                                                                                                                 |       | $                     | 40,655,990 |   | $ | 42,295,498 |   |

 

See accompanyingnotes.

 

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**Optimer Pharmaceuticals, Inc.**

**ConsolidatedStatements of Operations**

 
| ** **                                                                                                    | ** ** | **Years Ended December 31,** | ** **  |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                                                                    | ** ** | **2009**                          | ** **  | **2008** | ** ** | **2007** | ** ** |
|                                                                                                          | ** ** | ** **                        | ** **  | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                                                     |       |                              |        |   |   |   |   |
| Research  grants                                                                                              |       | $                                 | 792,644     |   | $ | 973,370 |   | $ | 333,610 |   |
| Collaborative  research agreements                                                                            |       | 100,000                           |        | 50,000 |   | 433,555 |   |
| Total  revenues                                                                                               |       | 892,644                           |        | 1,023,370 |   | 767,165 |   |
| Operating  expenses:                                                                                          |       |                              |        |   |   |   |   |
| Research  and development                                                                                     |       | 33,715,430                        |        | 29,035,828 |   | 41,569,067 |   |
| Marketing                                                                                                     |       | 1,751,313                         |        | 2,451,191 |   | 2,048,002 |   |
| General  and administrative                                                                                   |       | 8,024,138                         |        | 6,682,881 |   | 5,350,800 |   |
| Total  operating expenses                                                                                     |       | 43,490,881                        |        | 38,169,900 |   | 48,967,869 |   |
| Loss  from operations                                                                                         |       | (42,598,237                       | )           | (37,146,530 | ) | (48,200,704 | ) |
| Interest  income and other, net                                                                               |       | 363,998                           |        | 1,561,934 |   | 2,061,527 |   |
| Consolidated  net loss                                                                                        |       | (42,234,239                       | )           | (35,584,596 | ) | (46,139,177 | ) |
| Net  loss attributable to noncontrolling interest                                                             |       | 141,682                           |        | — |   | — |   |
| Net  loss attributable to Optimer Pharmaceuticals, Inc.                                                  |       | $                                 | (42,092,557 | ) | $ | (35,584,596 | ) | $ | (46,139,177 | ) |
|                                                                                                          |       |                              |        |   |   |   |   |
| Basic  and diluted net loss per share attributable to Optimer  Pharmaceuticals, Inc. common stockholders |       | $                                 | (1.30       | ) | $ | (1.24 | ) | $ | (2.12 | ) |
|                                                                                                          |       |                              |        |   |   |   |   |
| Shares  used to compute basic and diluted net loss per share attributable to common  stockholders             |       | 32,468,702                        |        | 28,682,542 |   | 21,715,332 |   |

 

See accompanyingnotes.

 

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Optimer Pharmaceuticals, Inc. 

Consolidated Statements ofStockholders’ Equity (Deficit)

 
|                                                                  |       |                                                                |       |                                           |       |              |       |                |       |                  |       |                                  |       |            |       |               |       |            |       |               |       |         |        |         |       |        |       |   |         |   |   |      |   |   |       |   |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|------------------------------------------------|------------|-------------------|------------|---------------------|------------|-----------------------|------------|---------------------------------------|------------|-----------------|------------|--------------------|------------|-----------------|------------|--------------------|------------|--------------|-------------|--------------|------------|-------------|------------|--------|--------------|--------|--------|-----------|--------|--------|------------|--------|
| ** **                                                            | ** ** | **Redeemable  Convertible**                                         | ** ** | **Stockholders’  Equity (Deficit)**       | ** ** |
| ** **                                                            | ** ** | **Redeemable  Convertible Series B, C and  D Preferred Stock** | ** ** | **Series A  Convertible Preferred Stock** | ** ** | **Common  Stock** | ** ** | **Treasury  Stock** | ** ** | **Additional  paid-** | ** ** | **Accumulated  other  comprehensive** | ** ** | **Accumulated** | ** ** | **Noncontrolling** | ** ** | ** **      | ** ** |
| ** **                                                            | ** ** | **Shares**                                                          | ** ** | **Amount**                                     | ** ** | **Shares**        | ** ** | **Amount**          | ** ** | **Shares**            | ** ** | **Amount**                            | ** ** | **Shares**      | ** ** | **Amount**         | ** ** | **in  capital** | ** ** | **income  (loss)** | ** ** | **deficit**  | ** **  | **Interest** | ** ** | **Total**   | ** ** |
| 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  |       |
| Issuance  of common stock upon exercise of options                    |       | —                                                              |       | —                                         |       | —            |       | —              |       | 68,077                |       | 68                                    |       | —          |       | —             |       | 69,694          |       | —             |       | —       |        |         |       | 69,762      |       |
| Issuance  of common stock during the registered direct offerings, 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                                         |       | —                                                              |       | —                                         |       | —            |       | —              |       | (46,153               | )          | (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                                    |       | —                                                              |       | —                                         |       | —            |       | —              |       | 29,716,751            |       | 29,717                                |       | —          |       | —             |       | 167,544,806     |       | 38,088             |       | (133,382,108 | )           | —       |       | 34,230,503  |       |
| Issuance  of common stock upon exercise of options                    |       | —                                                              |       | —                                         |       | —            |       | —              |       | 125,430               |       | 125                                   |       | —          |       | —             |       | 145,050         |       | —             |       | —       |        |         |       | 145,175     |       |
| Issuance  of common stock during the registered direct offerings, net |       | —                                                              |       | —                                         |       | —            |       | —              |       | 3,252,366             |       | 3,252                                 |       | —          |       | —             |       | 32,865,715      |       | —             |       | —       |        |         |       | 32,868,967  |       |
| Issuance  of common stock pursuant to employee stock purchase plan    |       |                                                                |       | —                                         |       | —            |       | —              |       | 44,826                |       | 45                                    |       | —          |       | —             |       | 382,246         |       | —             |       | —       |        |         |       | 382,291     |       |
| Compensation  expense related to grants of consultant stock options   |       | —                                                              |       | —                                         |       | —            |       | —              |       | —                |       | —                                |       | —          |       | —             |       | 89,395          |       | —             |       | —       |        |         |       | 89,395      |       |
| Employee  stock based compensation under FAS123(R)                    |       | —                                                              |       | —                                         |       | —            |       | —              |       | —                |       | —                                |       | —          |       | —             |       | 2,718,597       |       | —             |       | —       |        |         |       | 2,718,597   |       |
| Sale  of investment in subsidiary to non-controlling interest         |       |                                                                |       |                                           |       |              |       |                |       |                  |       |                                  |       |            |       |               |       | 1,369,105       |       |               |       |         |        | 3,165,906    |       | 4,535,011   |       |
| Comprehensive  loss:                                                  |       |                                                                |       |                                           |       |              |       |                | ** ** | ** **            | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **         |       |            |       |               | ** ** | ** **   | ** **  | ** **   |       |        |       |
| Unrealized  loss on short-term investment                             |       | —                                                              |       | —                                         |       | —            |       | —              |       | —                |       | —                                |       | —          |       | —             |       | —          |       | 13,959             |       |         | ** **  | ** **   |       | 13,959      |       |
| Foreign  currency translation adjustment                              |       | —                                                              |       | —                                         |       | —            |       | —              |       | —                |       | —                                |       | —          |       | —             |       | —          |       | (13,984            | )          | —       |        | 15,932       |       | 1,948       |       |
| Net  loss                                                             |       | —                                                              |       | —                                         |       | —            |       | —              |       | —                |       | —                                |       | —          |       | —             |       | —          |       | —             |       | (42,092,557  | )           | (141,682     | )          | (42,234,239 | )          |
| Comprehensive  loss                                                   |       |                                                                |       |                                           |       |              |       |                |       |                  |       |                                  |       |            |       |               |       |            |       |               |       |         |        | (125,750     | )          | (42,218,332 | )          |
| Balance  at December 31, 2009                                    |       | —                                                              |       | $                                              | —     |              | —     |                | $          | —                |       | 33,139,373                            |       | $               | 33,139     |               | —     |            | $          | —             |       | $            | 205,114,914 |         | $          | 38,063      |       | $      | (175,474,665 | )      | $      | 3,040,156 |   | $      | 32,751,607 |   |
|                                                                       |            |                                                                     |            |                                                |            |                   |            |                     |            |                       |            |                                       |            |                 |            |                    |            |                 |            |                    |            |              |             |              |            |             |            |        |              |        |        |           |        |        |            |        |  |

 

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**Optimer Pharmaceuticals, Inc.**

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                                   | ** ** | **Years Ended December 31,** | ** **  |
|------------------------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                                   | ** ** | **2009**                          | ** **  | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                   | ** ** | ** **                        | ** **  | ** ** | ** ** | ** ** | ** ** |
| **Operating activities**                                                     |       |                              |        |   |   |   |   |
| Consolidated net loss                                                        |       | $                                 | (42,234,239 | ) | $ | (35,584,596 | ) | $ | (46,139,177 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                              |        |   |   |   |   |
| Depreciation and amortization                                                |       | 216,783                           |        | 219,878 |   | 285,515 |   |
| Stock based compensation                                                     |       | 2,807,992                         |        | 1,764,076 |   | 1,244,022 |   |
| Stock awards                                                                 |       | —                            |        | — |   | 148,226 |   |
| Loss on disposal of assets                                                   |       | 20,267                            |        | — |   | — |   |
| Fair value adjustment for auction rate securities                            |       | —                            |        | 118,000 |   | — |   |
| Deferred rent                                                                |       | 1,970                             |        | (30,390 | ) | (10,490 | ) |
| Changes in operating assets and liabilities:                                 |       |                              |        |   |   |   |   |
| Prepaid expenses and other current assets                                    |       | 200,676                           |        | 339,439 |   | 676,252 |   |
| Research grant and contract receivables                                      |       | 127,135                           |        | (116,115 | ) | 68,318 |   |
| Restricted cash                                                              |       | —                            |        | (170,000 | ) | — |   |
| Other assets                                                                 |       | (512                              | )           | (21,677 | ) | 8,917 |   |
| Accounts payable and accrued expenses                                        |       | (162,582                          | )           | 213,314 |   | 2,536,584 |   |
| Net cash used in operating activities                                        |       | (39,022,510                       | )           | (33,268,071 | ) | (41,181,833 | ) |
|                                                                         |       |                              |        |   |   |   |   |
| **Investing activities**                                                     |       |                              |        |   |   |   |   |
| Purchases of short-term investments                                          |       | (28,567,298                       | )           | (31,306,561 | ) | (86,993,067 | ) |
| Sales or maturity of short-term investments                                  |       | 30,153,000                        |        | 63,250,000 |   | 46,610,000 |   |
| Purchase of property and equipment                                           |       | (215,763                          | )           | (208,686 | ) | (246,326 | ) |
| Net cash provided (used) in investing activities                             |       | 1,369,939                         |        | 31,734,753 |   | (40,629,393 | ) |
|                                                                         |       |                              |        |   |   |   |   |
| **Financing activities**                                                     |       |                              |        |   |   |   |   |
| Proceeds from sale of common stock                                           |       | 33,396,433                        |        | 15,101,070 |   | 77,485,617 |   |
| Proceeds from sale of subsidiary common stock                                |       | 4,535,011                         |        | — |   | — |   |
| Proceeds from exercise of Series D warrants                             |       | —                            |        | — |   | 1,370,267 |   |
| Net cash provided by financing activities                                    |       | 37,931,444                        |        | 15,101,070 |   | 78,855,884 |   |
| Effect of exchange rate changes on cash and cash  equivalents                |       | (3,425                            | )           | 19,314 |   | 24,718 |   |
| Net increase (decrease) in cash and cash  equivalents                        |       | 275,448                           |        | 13,587,066 |   | (2,930,624 | ) |
| Cash and cash equivalents at beginning of year                               |       | 16,778,880                        |        | 3,191,814 |   | 6,122,438 |   |
| Cash and cash equivalents at end of year                                     |       | $                                 | 17,054,328  |   | $ | 16,778,880 |   | $ | 3,191,814 |   |
|                                                                         |       |                              |        |   |   |   |   |
| **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.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                                     ****Organization and Summaryof Significant Accounting Policies**

 

Optimer Pharmaceuticals, Inc. (“Optimer” or the “Company”)was incorporated in Delaware on November 18, 1998. The Company has onemajority-owned subsidiary, Optimer Biotechnology, Inc. (“OBI”), which isincorporated and located in Taiwan. In October 2009, Optimer sold 40% ofits equity interest in OBI. Prior to the sale, OBI was a wholly ownedsubsidiary of Optimer.

 

Optimer is abiopharmaceutical company focused on discovering, developing andcommercializing anti-infective products. The Company currently has two anti-infective product candidates,fidaxomicin, for the treatment of *Clostridiumdifficile*-infection, and PruvelTM (prulifloxacin), for the treatmentof infectious diarrhea. The Company is developing additional product candidatesusing its proprietary technology, including its OPopSTM drug discovery platform.

 

*Principles of Consolidation*

 

The consolidatedfinancial statements include all the accounts of the Company and its majorityowned subsidiary.  All intercompanybalances and transactions have been eliminated in consolidation.

 

*Use of Estimates*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes.  Actual results coulddiffer from those estimates.

 

*Cash, Cash Equivalents andShort-Term Investments*

 

Investments with originalmaturities of less than 90 days at the date of purchase are considered to becash equivalents.  All other investmentsare classified as short-term investments which are deemed by management to beavailable-for-sale and are reported at fair value with net unrealized gains orlosses reported in the consolidated statement stockholders’ equity(deficit).  Realized gains and losses,and declines in value judged to be other than temporary, are included ininvestment income or interest expense. The cost of securities sold is computed using the specificidentification method.

 

*Concentration of Credit Risk*

 

Financial instrumentsthat potentially subject the Company to a significant concentration of creditrisk 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.

 

*Property and Equipment*

 

Property and 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.

 

*Deferred Rent*

 

Rent expense is recordedon 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. Deferred rent is amortized over thelease term as a reduction of rent expense.

 

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*ForeignCurrency Translation*

 

The financial statements of foreign subsidiarieshaving the U.S. dollar as the functional currency, with certain transactionsdenominated in a local currency, are remeasured into U.S. dollars at theirhistorical rates.  The remeasurement oflocal currency amounts into U.S. dollars creates translation adjustments thatare included in net loss.  Transactionand translation gains or losses were not material to the Company’s financialstatements for any periods presented.

 

*Fair Value of Financial Instruments*

 

The carrying amount ofcash and cash equivalents, short-term investments and accounts payable and accruedliabilities are considered to be representative of their respective fair valuesbecause of the short-term nature of those instruments.  The fair value of available-for-salesecurities is based upon market prices quoted on the last day of the fiscal period.

 

*Impairment of Long-Lived Assets*

 

Long-lived assets, suchas property and equipment, are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.  Recoverability of assetsto be held and used is measured by a comparison of the carrying amount of anasset to estimated undiscounted future cash flows expected to be generated bythe asset.  If the carrying amount of anasset exceeds its estimated future cash flows, an impairment charge isrecognized by the amount by which the carrying amount of the asset exceeds thefair value of the asset.  Assets to bedisposed of would be separately presented in the balance sheet and reported atthe lower of the carrying amount or the fair value less costs to sell, and areno longer depreciated.  Assets andliabilities that are part of a disposed group and classified as held for salewould be presented separately in the appropriate asset and liability sectionsof the balance sheet.  Although theCompany has accumulated losses since inception, the Company believes the futurecash flows to be received from its long-lived assets will exceed the assets’carrying value and, accordingly, the Company has not recognized any impairmentlosses through December 31, 2009.

 

*Income Taxes*

 

Income taxes areaccounted 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.

 

*Revenue Recognition*

 

TheCompany’s license and collaboration agreements contain multiple elements, includingnon-refundable upfront fees, payments for reimbursement of third-party researchcosts, payments for ongoing research, payments associated with achievingspecific development milestones and royalties based on specified percentages ofnet product sales, if any.  The Companyconsiders a variety of factors in determining the appropriate method of revenuerecognition under these arrangements, such as whether the elements areseparable, whether there are determinable fair values and whether there is aunique earnings process associated with each element of a 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.

 

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.

 

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Withrespect to revenues derived from reimbursement of direct out-of-pocket expensesfor research costs associated with grants, where the Company acts as aprincipal, with discretion to choose suppliers, bears credit risk and performspart of the services required in the transaction, the Company records revenuefor the gross amount of the reimbursement. The costs associated with these reimbursementsare reflected as a component of research and development expense in theconsolidated 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.

 

*Research and Development Expenses*

* *

TheCompany expenses costs related to research and development until technologicalfeasibility has been established for the product.  Once technological feasibility isestablished, all product costs are generally capitalized until the product isavailable for general release to customers. The Company has determined that technological feasibility for itsproduct candidates will be reached when the requisite regulatory approvals areobtained to make the product available for sale, which, in the United States,generally occurs upon the approval of the new drug application (“NDA”) for suchproduct.  The Company’s research anddevelopment expenses consist primarily of license fees, salaries and relatedemployee benefits, costs associated with clinical trials managed by the Company’scontract research organizations 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 nonrefundablepayments for goods or services to be received in the future for use in researchand development activities are made, the Company defers and capitalizes thesetypes of payments. The capitalized amounts are expensed when the related goodsare delivered or the services are performed.

 

*Stock-Based Compensation*

 

The Company recognizes inits financial statements the share-based payment transactions with employeesbased on their fair value and recognized as compensation expense over thevesting period.  Compensation expense of$2.8 million, $1.8 million and $1.2 million was recognized in the years ended December 31,2009, 2008 and 2007, 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. The Company estimates the fair value of itsstock options using the Black-Scholes option-pricing model and the fair valueof its stock awards based on the quoted market price of its common stock.

 

Estimating thefair value for stock options requires judgment, including estimatingstock-price volatility, expected term, expected dividends and risk-freeinterest rates. The expected volatility rates are based on the historicalfluctuation in the stock price since inception. The average expected term iscalculated using the simplified method.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.

 

Equity instruments issuedto non-employees are recorded at their fair value, are periodically revalued asthe equity instruments vest and are recognized as expense over the relatedservice period.

 

*Comprehensive Income (Loss)*

 

Comprehensive income(loss) is defined as the change in equity during a period from transactions andother events and circumstances from non-owner sources.  Net income (loss) and other comprehensiveincome (loss), including foreign currency translation adjustments andunrealized gains and losses on investments, is required to be reported, net oftheir related tax effect, to arrive at comprehensive income (loss). As of December 31,2009, the cumulative unrealized gain on investments and the cumulative gain on foreigncurrency translation adjustment was $13,959 and $52,022, respectively. As of December 31,2008, the cumulative unrealized loss on investments and the cumulative loss on foreigncurrency adjustment was $5,374 and $32,714, respectively.

 

*Net Loss Per Share Attributable toCommon Stockholders*

 

Basic net loss per shareattributable to common stockholders is calculated by dividing the net lossattributable to common stockholders by the weighted average number of shares ofcommon stock outstanding for the period, without consideration for common stockequivalents.  Diluted net loss per shareattributable to common stockholders is computed by dividing the net loss 

 

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attributable to common stockholders by the weightedaverage number of common stock equivalents outstanding for the perioddetermined using the treasury-stock method. For purposes of this calculation stock options and warrants areconsidered to be common stock equivalents and are only included in thecalculation of diluted net loss per share attributable to common stockholderswhen their effect is dilutive.

 
| ** **                                                                                                   | ** ** | **Years Ended December 31,** | ** **  |
|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                                                   | ** ** | **2009**                                    | ** **  | **2008** | ** ** | **2007** | ** ** |
| **Historical**                                                                                               |       |                                        |        |   |   |   |   |
| Numerator:                                                                                                   |       |                                        |        |   |   |   |   |
| Net loss attributable to common stockholders                                                                 |       | $                                           | (42,092,557 | ) | $ | (35,584,596 | ) | $ | (46,139,177 | ) |
| Denominator:                                                                                                 |       |                                        |        |   |   |   |   |
| Weighted average common shares outstanding                                                                   |       | 32,468,702                                  |        | 28,682,542 |   | 21,715,332 |   |
| Net loss attributable to common stockholders per  share — basic and diluted                             |       | $                                           | (1.30       | ) | $ | (1.24 | ) | $ | (2.12 | ) |
| **Historical outstanding  anti-dilutive securities not included in diluted net loss per share  calculation** |       |                                        |        |   |   |   |   |
| Common stock options                                                                                         |       | 2,466,751                                   |        | 1,979,660 |   | 1,615,317 |   |
| Common stock warrants                                                                                        |       | 91,533                                      |        | — |   | 13,845 |   |
| Total                                                                                                        |       | 2,558,284                                   |        | 1,979,660 |   | 1,629,162 |   |

 

*Recently Issued AccountingPronouncements*

 

TheFinancial Accounting Standards Board (“FASB”) issued the following newaccounting standards:

 

In September 2009,the FASB issued an update to the accounting and disclosure requirements relatedto recurring and nonrecurring fair value measurements.  This update requires new disclosures onsignificant transfers or assets and liabilities between Level 1 and Level 2 ofthe fair value hierarchy (including the reasons these transfers) and thereasons for any transfers in or out of Level 3. This update also requires a reconciliation of recurring Level 3measurements about purchases, sales and issuances and settlements on a grossbasis.  In addition to these newdisclosure requirements, this update clarifies certain existing disclosurerequirements. For example, this update clarifies that reporting entities arerequired to provide fair value measurement disclosures for each class of assetsand liabilities rather than each major category of assets and liabilities. Thisupdate also clarifies the requirement for entities to disclose informationabout both the valuation techniques and inputs used in estimating Level 2and Level 3 fair value measurements. This update will be effective for theCompany with the interim and annual reporting period beginning January 1,2010, except for the requirement to provide the Level 3 activity ofpurchases, sales, issuances, and settlements on a gross basis, which willbecome effective for the Company with the interim and annual reporting periodbeginning January 1, 2011. The Company is currentlyevaluating the potential impact of this standard on its financial position andresults of operations.

 

In October 2009, the FASB issued an update to the accounting anddisclosure requirements for revenue recognition on revenue arrangements with multiple-deliverable*.*This update eliminates therequirement to establish the fair value of undelivered products and services andinstead provides for separate revenue recognition based upon management’sestimate of the selling price for an undelivered item when there is no othermeans to determine the fair value of that undelivered item. This update iseffective prospectively for revenue arrangements entered into or materiallymodified in fiscal years beginning on or after June 15, 2010. The Companyis currently evaluating the potential impact of this standard on its financialposition and results of operations.

 

In June 2009, the FASBissued an update to the accounting and disclosure requirements for theconsolidation of variable interest entities (“VIE”)**. ****This update requires aquantitative approach to identifying a controlling financial interest in a VIE,and requires ongoing assessment of whether an entity is a VIE and whether aninterest in a VIE makes the holder the primary beneficiary of the VIE. **The update will beeffective as to the Company on January 1, 2010.  The Company iscurrently evaluating the impact, if any, of this update, but do not expect thatthis update will have a material effect on its financial position and resultsof operations.

 

In June 2009, the FASBissued an update to the accounting and disclosure requirements for transfers offinancial assets.  This update isintended to improve the relevance, representational faithfulness, andcomparability of the information that a reporting entity provides in itsfinancial statements about a transfer of financial assets, the effects of atransfer on its financial position, financial performance, and cash flows, anda transferor’s continuing involvement, if any, in transferred financialassets.  This update removes the conceptof a qualifying special-purpose entity and the exception from applying *Consolidation of Variable Interest Entities*toqualifying special-purpose entities.  Therecognition and measurement provisions of this update will be applied totransfers that occur on or after January 1, 2010, which is the date uponwhich this accounting update becomes effective for the Company. The Company is currentlyevaluating the impact, if any, of this update, but do not expect that thisupdate will have a material effect on its financial position and results ofoperations.

 

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**2.****                                     ****Fair Value of FinancialInstruments**

 

The following table summarizes the Company’s assets measured at fair valueon a recurring basis subject to the disclosure requirements as of December 31,2009:

 
| ** **              | ** ** | **Quoted Prices in  Active Markets  (Level 1)** | ** ** | **Other  Observable  Inputs  (Level 2)** | ** ** | **Unobservable  Inputs  (Level 3)** | ** ** | **Total**  | ** ** |
|-------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|------------|------------|
| Cash equivalents        |       | $                                                                   | 10,821,821 |                                          | $          | —                                   |       | $          | —     |   | $ | 10,821,821 |   |
| Marketable securities   |       | 21,131,145                                                          |       | —                                        |       | —                                   |       | 21,131,145 |       |
| Auction rate securities |       | —                                                              |       | —                                        |       | 882,000                                  |       | 882,000    |       |
|                         |            |                                                                     |            |                                               |            |                                          |            |            |            |  |  |  |  |

 
| 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.                                                                                                                                                                                     |

 

A reconciliation of thebeginning and ending balances of assets measured at fair value on a recurringbasis using Level 3 inputs is as follows:

 
| ** **                                                                             | ** ** | **Auction Rate  Preferred Securities** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Beginning balance at January 1, 2009                                              |       | $                                                | 1,032,000  |   |
| Transfers in (out) of Level 3                                                          |       | —                                           |       |
| Total unrealized gains/losses included in accumulated other  comprehensive income      |       | —                                           |       |
| Total realized gains/losses included in interest income and other,  net                |       | —                                           |       |
| Purchases, sales, issuances and settlements                                            |       | (150,000                                         | )          |
| Ending balance at December 31, 2009                                               |       | $                                                | 882,000    |   |
|                                                                                   |       |                                             |       |
| Change in unrealized gains (losses) included in  net loss related to assets still held |       | $                                                | —     |   |

 

All of the Company’s investments inavailable-for-sale securities are recorded at fair value based on quoted marketprices. As of December 31, 2009, the Company held one auction ratepreferred security (“ARPS”) valued at $882,000 with a perpetual maturity datethat resets every 28 days.  Although asof December 31, 2009, the Company’s remaining ARPS continued to payinterest according to its stated terms, the market in these securitiescontinues to be illiquid. Based on a discounted cash flow model used todetermine the estimated fair value of its investment in ARPS, the Company haspreviously recognized in the consolidated statement of operations an unrealizedloss of approximately $118,000 in investment income since the Company haddetermined that the decline in value was other than temporary. The assumptions used for the discountedcash flow model include estimates for interest rates, timing and amount of cashflows and expected holding period of the ARPS.  The Company’s ARPS is classified as a long-terminvestment on the consolidated balance sheets, as the Company does not believeit could liquidate the security in the near term.

 

**3.****                                     ****Short-Term Investments**

 

The following is asummary of the Company’s investment securities, all of which are classified asavailable-for-sale. Determination of estimated fair value is based upon quotedmarket prices.

 
| ** **           | ** ** | **December 31, 2009**  | ** ** |
|----------------------|------------|----------------------------------|------------|
| ** **           | ** ** | **Gross  Amortized********Cost** | ** ** | **Gross  Unrealized********Gains** | ** ** | **Gross  Unrealized********Losses** | ** ** | **Market Value** | ** ** |
| Government  agencies |       | $                                | 21,117,189 |   | $ | 14,235 |   | $ | (279 | ) | $ | 21,131,145 |   |
|                      |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                  | ** ** | **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                       |       | $                                | 22,552,889 |   | $ | 46,019 |   | $ | (51,393 | ) | $ | 22,547,515 |   |

 

Investments in netunrealized loss positions as of December 31, 2009 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** | ** ** |
| Government agencies |       | 2                               |       | $                                                                         | 2,008,198  |                                                                         | $          | (279                                 | )          | $ | — |   | $ | — |   | $ | 2,008,198 |   | $ | (279 | ) |
|                     |            |                                 |            |                                                                           |            |                                                                              |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortized cost andestimated fair value of securities available-for-sale at December 31,2009, by contractual maturity, are as follows:

 
| ** **              | ** ** | **Amortized Cost** | ** ** | **Estimated Fair Value** | ** ** |
|-------------------------|------------|-------------------------|------------|------------------------------------|------------|
| Due in one year or less |       | $                       | 21,117,189 |                               | $          | 21,131,145 |   |
|                         |            |                         |            |                                    |            |  |  |

 

The weightedaverage maturity of short-term investments as of December 31, 2009 and2008, was approximately three months.

 

The Company considered anumber of factors to determine whether the decline in value in its investmentsis other than temporary, including the length of time and the extent of whichthe market value has been less than cost, the financial condition of the issuerand the Company’s intent to hold and ability to retain these short-terminvestments.  Based on these factors, theCompany believes that the decline in value is temporary and primarily relatedto the change in market interest rates since purchase.  The Company anticipates full recovery of amortizedcost with respect to these securities at maturity or sooner in the event of achange in the market interest rate environment.

 

**4.****            ****Property and Equipment**

 

Property and equipment isstated at cost and consists of the following:

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Equipment                                      |       | $                     | 2,475,135  |   | $ | 3,089,953 |   |
| Furniture and fixtures                         |       | 198,716               |       | 291,665 |   |
| Leasehold improvements                         |       | 1,217,694             |       | 1,399,163 |   |
| Computer equipment and software                |       | 364,155               |       | 308,144 |   |
|                                           |       | 4,255,700             |       | 5,088,925 |   |
| Less accumulated depreciation and amortization |       | (3,582,804            | )          | (4,394,742 | ) |
| Total property and equipment, net              |       | $                     | 672,896    |   | $ | 694,183 |   |

 

Depreciation of propertyand equipment is computed using the straight-line method over the estimateduseful 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.

 

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**5.****    ****Accrued Expenses**

 

Accrued expensesconsisted of the following:

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Accrued preclinical and clinical expenses |       | $                     | 3,443,275  |   | $ | 2,541,437 |   |
| Accrued research services                 |       | 165,705               |       | 215,490 |   |
| Accrued legal fees                        |       | 73,663                |       | 51,132 |   |
| Accrued salaries, wages and benefits      |       | 1,313,145             |       | 1,199,338 |   |
| Other accrued liabilities                 |       | 29,881                |       | 38,263 |   |
| Total accrued expenses                    |       | $                     | 5,025,669  |   | $ | 4,045,660 |   |

 

**6.****    ****Revenue and Other Collaborative Agreements**

 

*Revenuesfrom Research Grants*

 

The Company has receivedseveral research grants from U.S. government agencies since 2003, all of whichexcept for one were completed on or prior to June 30, 2009. The activegrant was awarded from National Institute of Allergy and Infectious Diseases (“NIAID”)in September 2007. This grant is renewable for $1 million each year until August 2010,up to a maximum of $3 million. The award is being used to conduct supplementarystudies to the ongoing fidaxomicin trials to confirm narrow spectrum activityand potency of fidaxomicin against hypervirulent epidemic strains, to supportadditional toxicology and microbiological studies to demonstrate the safety andefficacy of the fidaxomicin compound and its major metabolite in CDI patientsand to support a surveillance study of *C.difficile* isolates across North America to compare activity offidaxomicin with existing CDI treatments. For the years ended December 31, 2009, 2008 and 2007, the Companyrecognized revenues related to research grants of $792,644, $973,370 and$338,735, respectively.

 

*Other Collaborative Agreements*

 

*Par Pharmaceuticals, Inc.*

 

The Company holdsworldwide rights to fidaxomicin.  In February 2007,the Company repurchased the rights to develop and commercialize fidaxomicin inNorth America and Israel from Par Pharmaceuticals, Inc. (“Par”) under aprospective buy-back agreement.  TheCompany may be obligated to pay Par a one-time $5.0 million milestone payment,a 5% royalty on net sales by the Company, its affiliates or its licensees offidaxomicin in North America and Israel, and a 1.5% royalty on net sales by theCompany or its affiliates of fidaxomicin in the rest of the world. The one-time$5.0 million milestone payment is required to be paid after the earliest to occurof (i) the successful completion by the Company of its second pivotalPhase 3 trial for fidaxomicin, (ii) the Company’s grant to a thirdparty of the rights to fidaxomicin or (iii) the submission to the FDA ofan NDA for fidaxomicin.  In addition, inthe event the Company licenses its right to market fidaxomicin in the rest ofthe world, the Company will be required to pay Par a 6.25% royalty on netrevenues received 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.

 

*Nippon Shinyaku, Co., Ltd.*

 

In June 2004, theCompany entered into a license agreement with Nippon Shinyaku, Co., Ltd. (“NipponShinyaku”).  Under the terms of theagreement, the Company acquired the non-exclusive right to import and purchasePruvel, and the exclusive right (with the right to sublicense), within theUnited States, to develop, make, use, offer to sell, sell and license productssuitable for consumption by humans containing Pruvel.  Under this agreement, the Company paid NipponShinyaku an up-front fee in the amount of $1.0 million and will be required tomake one future milestone payment in the amount of $1.0 million upon filing, ifany, its first NDA for Pruvel in the United States.  Under the agreement, the Company pays NipponShinyaku for certain materials.  IfNippon Shinyaku is unable to supply the Company with the contracted amount ofPruvel, then Nippon Shinyaku is obligated to grant the Company a non-exclusive,worldwide license to make or have made Pruvel, in which event the Company willowe Nippon Shinyaku a royalty based on the amount of net sales of Pruvelgenerated by the Company and the Company’s subsidiary.  Additionally, the Company will owe NipponShinyaku certain royalties based on the amount of net sales of Pruvel less theamount of Pruvel the Company buys from Nippon Shinyaku.  Either party may terminate the agreement 60days after giving notice of a material breach which remains uncured 60 daysafter written notice.  If not terminatedearlier, the agreement will terminate upon the later of ten years from the dateof the first commercial sale of Pruvel in the United States or the date onwhich the last valid patent claim relating to Pruvel expires in the UnitedStates.

 

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*Cempra Pharmaceuticals, Inc.*

 

In March 2006, theCompany entered into a collaborative research and development and licenseagreement with Cempra Pharmaceuticals, Inc. (“Cempra”).  The Company granted to Cempra an exclusiveworldwide license, except in Association of Southeast Asian Nations (“ASEAN”)countries, with the right to sublicense, the Company’s patent and know-howrelated to the Company’s macrolide and ketolide antibacterial program.  As partial consideration for granting Cemprathe licenses, the Company obtained equity of Cempra and the Company assigned novalue to such equity.  The Company mayreceive milestone payments as product candidates are developed and/orco-developed by Cempra, in addition to milestone payments based on certainsublicense revenue.  The aggregatepotential amount of such milestone payments is not capped and, based in part onthe number of products developed under the agreement, may exceed $24.5million.  The Company will also receiveroyalty payments based on a percentage of net sales of licensed products.  The milestone payments will be triggered uponthe completion of certain clinical development milestones and in certaininstances, regulatory approval of products. In consideration of the foregoing, Cempra may receive milestone paymentsfrom the Company in the amount of $1.0 million for each of the first twoproducts the Company develops which receive regulatory approval in ASEANcountries, as well as royalty payments on the net sales of such products.  The research term of the agreement wascompleted in March 2008.  Subject tocertain exceptions, on a country-by-country basis, the general terms of thisagreement continue until the later of: (i) the expiration of the last toexpire patent rights of a covered product in the applicable country or (ii) tenyears from the first commercial sale of a covered product in the applicablecountry.  Either party may terminate theagreement in the event of a material breach by the other party, subject toprior notice and the opportunity to cure. Either party may also terminate the agreement for any reason upon 30days’ prior written notice provided that all licenses granted by theterminating party to the non-terminating party will survive upon the expresselection of the non-terminating party.

 

*OptimerBiotechnology, Inc.*

 

In October 2009,the Company entered into certain transactions involving OBI, then itswholly-owned subsidiary, to provide funding for the development of two of itsearly-stage, non-core programs.  The transactions with OBI included an IntellectualProperty Assignment and License Agreement, pursuant to which the Companyassigned to OBI certain patent rights, information and know-how related toOPT-88 and OPT-822/821.  In anticipationof these transactions, the Company also assigned, and OBI assumed, its rightsand obligations under related license agreements with MSKCC and TSRI.  Under this agreement, the Company is eligibleto receive up to $10 million in milestone payments for each product developedunder the development programs and is also eligible to receive royalties on netsales of any product which is commercialized under the programs.  The term of the Intellectual Property Assignment andLicense Agreement continues until the last to expire of the patents assigned bythe Company to OBI and the patents licensed to OBI under the TSRI and MSKCCagreements.

 

To provide capitalfor OBI’s product development efforts, the Company and OBI also entered into afinancing agreement with a group of new investors.  Simultaneously, theCompany sold 40 percent of its existing OBI shares to the same group of newinvestors, and the Company and the new investors also purchased new OBIshares.  Also under the financing agreement, if OBI achieves certaindevelopment milestones in the future, the Company and the new investors will beobligated to invest approximately an additional $8.6 million and $5.7 million,respectively, in exchange for new OBI shares.  Following the sale of itsexisting OBI shares and the initial investments in exchange for new OBI shares,the Company currently maintains a 60 percent ownership interest in OBI.

 

*Memorial Sloan-Kettering Cancer Center*

 

In July 2002, theCompany entered into a license agreement with Memorial Sloan-Kettering CancerCenter (“MSKCC”) to acquire, together with certain nonexclusive licenses,exclusive, worldwide licensing and sublicensing rights to certain patented andpatent-pending carbohydrate-based cancer immunotherapies.  As partial consideration for the licensingrights, the Company paid to MSKCC a one-time fee consisting of both cash and55,383 shares of its common stock.  Inanticipation of the various transactions involving OBI which the Companycompleted in October 2009, the Company assigned its rights and obligationsunder this agreement with OBI. Under the agreement, which was amended in June 2005,the Company owes MSKCC milestone payments in the following amounts for eachlicensed product: (i) $500,000 upon the commencement of Phase 3clinical studies, (ii) $750,000 upon the filing of the first NDA, (iii) $1.5million upon obtaining marketing approval in the United States and (iv) $1.0million upon obtaining marketing approval in each and any of Japan and certainEuropean countries, but only to the extent that the Company, and not asublicensee, achieves such milestones. OBI may owe MSKCC royalties based on net sales generated from thelicensed products and income OBI sources from its sublicensing activities,which royalty payments are credited against a minimum annual royalty paymentOBI owes to MSKCC during the term of the agreement.

 

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*Scripps Research Institute*

 

In July 1999, theCompany acquired exclusive, worldwide rights to its OPopS technology from theScripps 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 with TSRI, the Company paid TSRI license feesconsisting of an aggregate of 239,996 shares of its common stock with a deemedaggregate fair 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.  Inanticipation of the various transactions involving OBI which the Companycompleted in October 2009, the Company assigned its rights and obligationsunder one of these agreements related to osteoarthritis to OBI.

 

**7.****    ****Commitments**

 

*Leases*

 

The Company leases officeand research facilities under operating lease agreements that extend through November 2011with one lease subject to one five-year renewal option and the other leasesubject to two five-year renewal options. The Company has recorded deferred rent of $253,474 and $251,504 as of December 31,2009 and 2008, respectively, in conjunction with the lease agreements.

 

At December 31,2009, annual minimum rental payments due under the Company’s operating leasesare as follows:

 
| **Years ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2010                                         |       | $          | 1,185,001  |   |
| 2011                                         |       | 1,127,865  |       |
| 2012                                         |       | 111,204    |       |
| Total minimum lease payments                 |       | $          | 2,424,070  |   |

 

Rent expense was$1,068,542, $831,137 and $768,854, for the years ended December 31, 2009,2008, and 2007, respectively.

 

*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 Pruvel Phase 3 clinical trials.  At December 31, 2009, the Company hadissued purchase orders totaling $46.2 million for these services, $3.8 million,$8.4 million and $9.8 million of which were issued in 2009, 2008 and 2007,respectively.  As of December 31,2009, the Company had paid $38.2 million related to these purchase orders.  The Company can terminate the serviceagreement at any time upon 60 days’ prior written notice to the CRO.

 

**8.****    ****Stockholders’ Equity**

 

*PublicOfferings*

 

In July 2008, the Companyreceived approximately $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.

 

In March 2009, the Company receivedapproximately $32.9 million in gross proceeds from the sale ofits securities in a registered direct offering to institutionalinvestors. The Company sold 3,252,366 million shares and warrants topurchase up to an aggregate of 91,533 shares of its common stock.  The warrants are exercisable at an exerciseprice of $10.93 per share and will expire on March 9, 2014.

 

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*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 its 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 the registered direct offering which occurred in March 2009,the Company sold warrants to purchase up to an aggregate of 91,533 shares ofits common stock. The warrants are exercisable at an exercise price of $10.93per share and will expire on March 9, 2014.

 

*NoncontrollingInterest*

 

In October 2009, the Company sold 40% of its equity interest inOBI.  Pursuant to authoritative guidance,the Company accounts and reports for minority interests, the portion of OBI notowned by the Company, as noncontrolling interests and classifies them as acomponent of stockholders’ equity on the consolidated balance sheet of theCompany.  The Company includes the netloss attributable to noncontrolling interests as part of its consolidated netloss.

 

*EquityCompensation Plans*

 

*Stock Options*

 

In November 1998, the Company adopted the 1998Stock Plan (the “1998 Plan”).  TheCompany terminated and ceased granting options under the 1998 Plan upon theclosing of the Company’s initial public offering 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, 2009 and 2008.  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.

 

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 four years.  The exercise price of options granted must atleast be equal to the fair market value of the Company’s common stock on thedate of grant.  The 2006 Plan isadministered 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. TheNew Hire Stock Option has authority to grant stock options under specifiedparameters to newly-hired, non-executive employees.

 

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Following is a summary of stock option activity:

 
| ** **                           | ** ** | **Options** | ** ** | **Weighted-   Average  Exercise Price** | ** ** |
|--------------------------------------|------------|-------------|------------|---------------------------------------------------|------------|
| 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       |   |
| Granted                              |       | 637,750     |       | $                                                 | 11.24      |   |
| Exercised                            |       | (125,430    | )          | $                                                 | 1.16       |   |
| Canceled                             |       | (25,229     | )          | $                                                 | 7.60       |   |
| Balance as of December 31, 2009 |       | 2,466,751   |       | $                                                 | 5.69       |   |

 

The aggregate intrinsicvalue of options exercised during the year ended December 31, 2009, 2008and 2007 was approximately $1,439,842, $522,059 and $1,070,930,respectively..  The aggregate intrinsicvalue of options outstanding and options exercisable as of December 31,2009 was approximately $14,009,361 and $12,120,795, respectively.

 

The following tablesummarizes information concerning outstanding and exercisable stock options asof December 31, 2009:

 
| ** **              | ** ** | **December 31, 2009**                                       | ** ** |
|-------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **              | ** ** | **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 - $1.08           |       | 822,985                                                               |       | 3.98 |   | $ | 0.91 |   | 822,696 |   | $ | 0.91 |   |
| $2.17 - $6.90           |       | 687,846                                                               |       | 7.36 |   | $ | 4.73 |   | 433,417 |   | $ | 4.03 |   |
| $7.10 - $10.75          |       | 672,920                                                               |       | 8.31 |   | $ | 9.92 |   | 226,131 |   | $ | 9.26 |   |
| $10.78 - $14.86         |       | 283,000                                                               |       | 9.27 |   | $ | 11.86 |   | 7,083 |   | $ | 10.85 |   |
| $0.22 - $14.86          |       | 2,466,751                                                             |       | 6.71 |   | $ | 5.69 |   | 1,489,327 |   | $ | 3.13 |   |

 

Of the optionsoutstanding, options to purchase 1,489,327 shares were vested as of December 31,2009, with a weighted average remaining contractual life of 5.5 years and aweighted average exercise price of $3.13 per share, while options to purchase977,424 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, 2009, 2008 and 2007 using theBlack-Scholes option pricing model:

 
| **Employee Stock Options** | ** ** | **2009**    | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|--------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Risk-free interest rate              |       | 2.00-2.56   | %          | 2.41%-3.00  | %          | 3.88%-4.80  | %          |
| Dividend yield                       |       | 0.00        | %          | 0.00        | %          | 0.00        | %          |
| Expected life of options (years)     |       | 5.27-6.08   |       | 6.02-6.08   |       | 5.27-6.08   |       |
| Volatility                           |       | 69.93-71.39 | %          | 64.95-67.00 | %          | 60.47-65.82 | %          |

 

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.  This decision was based on thelack of relevant historical data due to the Company’s limited history.  In addition, due to the Company’s limitedhistorical data, the estimated volatility incorporates the historicalvolatility of comparable companies whose share prices are publicly available.

 

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Based on theseassumptions, the weighted average grant-date fair values of stock optionsgranted during the****years ended December 31,2009, 2008 and 2007 was $7.11, $4.01 and $5.96****per share, respectively.

 

As of December 31,2009, the total unrecognized compensation expense related to stock options wasapproximately $5,214,028 and the related weighted-average period over which itis expected to be recognized is approximately 2.6 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, 2009, 2008 and 2007 wascomprised as follows:

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Research and development               |       | $                     | 1,162,274  |   | $ | 527,874 |   | $ | 307,481 |   |
| Marketing                              |       | 371,738               |       | 309,635 |   | 257,218 |   |
| General and administrative             |       | 1,273,980             |       | 926,567 |   | 679,323 |   |
| Total stock-based compensation expense |       | $                     | 2,807,992  |   | $ | 1,764,076 |   | $ | 1,244,022 |   |

 

*Stock Awards*

 

On September 12, 2007, the Company issued stockawards for 17,500 fully-vested shares of the Company’s common stock to itsdirectors under the 2006 Plan.  The grantdate fair value of the stock awards was $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, 2010 and 2009.

 

As of December 31,2009, there were 115,235 shares of common stock issued and 384,765 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, 2009, 2008 and2007 using the Black-Scholes option pricing model:

 
| **Employee Stock Options** | ** ** | **2009**     | ** ** | **2008**      | ** ** | **2007**    | ** ** |
|--------------------------------------|------------|--------------|------------|---------------|------------|-------------|------------|
| Risk-free interest rate              |       | 0.21%-0.43   | %          | 1.30%-2.19    | %          | 3.58%-4.64  | %          |
| Dividend yield                       |       | 0.00         | %          | 0.00          | %          | 0.00        | %          |
| Expected life (years)                |       | 6 months     |       | 6 months      |       | 6 months    |       |
| Volatility                           |       | 35.53%-74.94 | %          | 45.05%-143.12 | %          | 45.33-50.66 | %          |

 

For the years ended December 31,2009, 2008 and 2007, the Company recorded stock-based compensation expenserelated to the ESPP of $146,777, $147,712 and $63,681, respectively.

 

**9.     Income Taxes**

 

There were nounrecognized tax benefits as of the date of adoption and there were nounrecognized tax benefits included in the balance sheet at December 31,2009 that would, if recognized, affect the effective tax rate.

 

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, 2009 and 2008 and has notrecognized interest and/or penalties in the statement of operations for theyear ended December 31, 2009.

 

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.

 

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As of December 31,2009, the Company completed a Section 382/383 analysis regarding thelimitation of net operating loss and research and development creditcarryforwards and determined that the maximum amount federal and state netoperating loss (“NOL”) and credit carryovers are available for utilization,subject to the annual limitation. 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 valuationallowance.  Due to the existence of thevaluation allowance, future changes in the unrecognized tax benefits will notimpact the effective tax rate.

 

At December 31,2009, the Company had Federal, California and foreign income tax net operatingloss carryforwards of approximately $156.4 million, $154.8 million and $21,000,respectively. The Federal and California tax loss carryforwards will beginexpiring in 2020 and 2012 respectively, unless previously utilized. The foreignlosses originate from the Company’s Taiwan subsidiary and expire ten yearsafter origination.  In addition, theCompany has Federal and California research tax credit carryforwards ofapproximately $4.6 million and $2.5 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. Underthe Section 382 of the Internal Revenue Code of 1986, as amended,substantial changes in our ownership may limit the amount of net operating lossand tax credit carryforwards that could be utilized annually in the future tooffset taxable income.  Any such annuallimitation may significantly reduce the utilization of the net operating lossesand tax credits before they expire.

 

Significant components ofthe Company’s deferred tax assets as of December 31, 2009 and 2008 arelisted below. A valuation allowance of $71.4 million and $52.6 million at December 31,2009 and 2008, 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:

 
| ** **                                  | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|---------------------------------------------|------------|-------------|------------|-------------|------------|
| Deferred tax assets:                        |       |        |       |        |       |
| Net operating loss carryforwards            |       | $           | 61,743,000 |        | $          | 48,196,000 |   |
| Tax credits                                 |       | 6,303,000   |       | 3,282,000   |       |
| Other, net                                  |       | 3,340,000   |       | 1,155,000   |       |
| Total deferred tax assets                   |       | 71,386,000  |       | 52,633,000  |       |
| Valuation allowance for deferred tax assets |       | (71,386,000 | )          | (52,633,000 | )          |
|                                        |       | $           | —     |        | $          | — |   |

 

Incometaxes computed by applying the U.S. Federal Statutory rates to income fromcontinuing operations before income taxes are reconciled to the provision forincome taxes set forth in the statement of earnings as follows:

 
| ** **                                                | ** ** | **2009**    | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|-----------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Tax benefit at statutory federal rate                     |       | $           | 14,308,000 |        | $          | 12,099,000  |       | $ | 15,687,000 |   |
| State tax benefit, net of federal                         |       | 2,453,000   |       | 2,075,000   |       | 2,690,000   |       |
| Foreign subsidiary transactions                           |       | 115,000     |       | (223,000    | )          | (132,000    | )          |
| Generation of research and development credits            |       | 3,020,000   |       | 524,000     |       | 541,000     |       |
| Stock compensation expense                                |       | (248,000    | )          | (207,000    | )          | (272,000    | )          |
| Permanent difference for R&D credit expense  add back |       | (862,000    | )          | (143,000    | )          | (115,000    | )          |
| Other                                                     |       | (33,000     | )          | 94,000      |       | 30,000      |       |
| Change in valuation allowance                             |       | (18,753,000 | )          | (14,219,000 | )          | (18,429,000 | )          |
|                                                      |       | $           | —     |        | $          | —      |       | $ | — |   |

 

**10.  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 31,2009, 2008 and 2007, the Company had not elected to make any contributions tothe 401(k) plan.

 

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.

 

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**11.  Subsequent Event**

 

On March 1, 2010, the Company completed thesale of 4,887,500 shares of its common stock in a public offering whichincludes 637,500 shares sold pursuant to the full exercise of an overallotmentoption previously granted to the underwriter. The net proceeds to the Company from the sale of shares in the offeringwere approximately $51.2 million.

 

**12.****      ****Quarterly Financial Date (Unaudited)**

 

Selected quarterlyconsolidated financial data is shown below (in thousands, except per sharedata).

 
| ** **                                                                                          | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| **2009 Quarters**                                                                                   |       |               |       |                |       |               |       |                |       |
| Revenue                                                                                             |       | $                  | 83         |                | $          | 425                |       | $                   | 176        |   | $ | 209 |   |
| Operating  expenses                                                                                 |       | 11,158             |       | 12,875              |       | 9,616              |       | 9,842               |       |
| Loss  from operations                                                                               |       | (11,074            | )          | (12,450             | )          | (9,440             | )          | (9,634              | )          |
| Net  loss                                                                                           |       | (10,887            | )          | (12,362             | )          | (9,406             | )          | (9,579              | )          |
| Net  loss attributable to Optimer Pharmaceuticals, Inc. common stockholders                    |       | $                  | (10,887    | )                   | $          | (12,362            | )          | $                   | (9,406     | ) | $ | (9,437 | ) |
| Basic  and diluted net loss attributable to Optimer Pharmaceuticals, Inc.  common stockholders |       | $                  | (0.36      | )                   | $          | (0.37              | )          | $                   | (0.28      | ) | $ | (0.28 | ) |

 
| ** **                                                                                          | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| **2008 Quarters**                                                                                   |       |               |       |                |       |               |       |                |       |
| Revenue                                                                                             |       | $                  | 487        |                | $          | 169                |       | $                   | 239        |   | $ | 128 |   |
| Operating  expenses                                                                                 |       | 9,008              |       | 8,656               |       | 9,839              |       | 10,667              |       |
| Loss  from operations                                                                               |       | (8,521             | )          | (8,487              | )          | (9,600             | )          | (10,539             | )          |
| Net  loss                                                                                           |       | (7,940             | )          | (8,054              | )          | (9,188             | )          | (10,403             | )          |
| Net  loss attributable to Optimer Pharmaceuticals, Inc. common stockholders                    |       | $                  | (7,940     | )                   | $          | (8,054             | )          | $                   | (9,188     | ) | $ | (10,403 | ) |
| Basic  and diluted net loss attributable to Optimer Pharmaceuticals, Inc.  common stockholders |       | $                  | (0.28      | )                   | $          | (0.29              | )          | $                   | (0.31      | ) | $ | (0.35 | ) |

 

**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, 2009, that our certifyingofficers concluded materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**Internal Control Over FinancialReporting**

 

***(a)******        ******Management’sReport on Internal Control Over Financial 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 31,2009. 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 internal controlover financial reporting and testing of the operational effectiveness of itsinternal control over financial reporting. We reviewed the results of ourassessment with the Audit Committee.

 

Based on this assessment,management determined that, as of December 31, 2009, our internal controlover financial reporting was effective to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with accounting principlesgenerally accepted in the United States of America.

 

Ernst & Young LLP, the independent registeredpublic accounting firm that audited our consolidated financial statementsincluded in this annual report, has issued its report on the effectiveness ofour internal control over financial reporting as of December 31, 2009.

 

**(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 OptimerPharmaceuticals, Inc.’s internal control over financial reporting as of December 31,2009, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(“the COSO 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 auditin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinion.

 

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A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial 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 inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion, OptimerPharmaceuticals, Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2009, basedon the COSO criteria.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Optimer Pharmaceuticals, Inc.as of December 31, 2009 and 2008, and the related consolidated statementsof operations and stockholders’ equity (deficit), and cash flows for each ofthe three years in the period ended December 31, 2009 of OptimerPharmaceuticals, Inc. and our report dated March 11, 2010 expressedan unqualified opinion thereon.

 
|                   | /s/  Ernst & Young LLP |
|------------------------|---------------------------------|
| San  Diego, California |                            |
| March 11,  2010   |                            |

 

**Item 9B.  OtherInformation.**

 

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, 2009 pursuant to Regulation 14A(the “Proxy Statement”) for our annual meeting of stockholders to be held on May 5,2010, 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.

 

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**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

 

3. *Exhibits*

 
| **Exhibit No.** | ** ** | ** ** | ** ** | **Description of Document**                                                                                                                                                |
|----------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | (2)        |       | Certificate of Incorporation of Optimer  Pharmaceuticals, Inc., as amended and restated.                                                                                        |
| 3.2                  |       | (6)        |       | Bylaws of Optimer Pharmaceuticals, Inc., as  amended.                                                                                                                           |
| 4.1                  |       | (3)        |       | Common Stock Certificate of Optimer  Pharmaceuticals, Inc.                                                                                                                      |
| 4.2                  |       | (1)        |       | Investors’ Rights Agreement by and among Optimer Pharmaceuticals, Inc.  and certain investors listed therein dated November 30, 2005, as amended  and restated.       |
| 4.3                  |       | (5)        |       | Registration Rights Agreement, dated  October 23, 2007, by and between Optimer Pharmaceuticals, Inc. and  the purchasers listed on the signature pages thereto.       |
| 4.4                  |       | (10)       |       | Form of Warrant to Purchase Common Stock.                                                                                                                                       |
| 10.1                 |       | (1)*       |       | Master Services Agreement between Optimer  Pharmaceuticals, Inc. and Advanced Biologics, LLC (subsequently INC  Research, Inc.), dated November 16, 2005, as amended. |
| 10.2                 |       | (3)*       |       | License Agreement between Optimer  Pharmaceuticals, Inc. and Sloan-Kettering Institute for Cancer Research  dated July 31, 2002, as amended.                               |
| 10.3                 |       | (2)*       |       | License Agreement between Optimer  Pharmaceuticals, Inc. and Nippon Shinyaku Co., Ltd., dated June 10,  2004.                                                              |
| 10.4                 |       | (1)*       |       | License Agreement between Optimer  Pharmaceuticals, Inc. and The Scripps Research Institute dated  July 23, 1999.                                                          |
| 10.5                 |       | (1)*       |       | License Agreement between Optimer  Pharmaceuticals, Inc. and The Scripps Research Institute dated  May 30, 2001.                                                           |
| 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  June 1, 2004.                                                           |
| 10.8                 |       | (2)        |       | Building Lease between Optimer  Pharmaceuticals, Inc. and Pacific Sorrento Technology Park dated  May 1, 2001, as amended.                                                 |
| 10.9                 |       | (1)+       |       | Form of Employee Proprietary Information  Agreement of Optimer Pharmaceuticals, Inc.                                                                                       |
| 10.10                |       | (12)+      |       | Employment Agreement between Optimer  Pharmaceuticals, Inc. and Michael N. Chang dated June 17, 2005, as  amended.                                                         |
| 10.11                |       | (1)+       |       | Offer letter between Optimer  Pharmaceuticals, Inc. and Sherwood L. Gorbach dated October 6,  2005.                                                                        |
| 10.12                |       | (12)+      |       | Offer letter between Optimer Pharmaceuticals, Inc.  and Kevin P. Poulos dated June 15, 2006, as amended.                                                                   |
| 10.13                |       | (12)+      |       | Offer letter between Optimer  Pharmaceuticals, Inc. and John D. Prunty dated May 10, 2006, as  amended.                                                                    |
| 10.14                |       | (1)+       |       | Offer letter between Optimer  Pharmaceuticals, Inc. and Tessie M. Che dated August 30, 2001.                                                                               |
| 10.15                |       | (1)+       |       | Offer letter between Optimer  Pharmaceuticals, Inc. and Youe-Kong Shue dated February 18, 2000.                                                                            |
| 10.16                |       | (1)+       |       | Form of Indemnification Agreement between  Optimer Pharmaceuticals, Inc. and its directors and officers.                                                                   |
| 10.17                |       | (1)+       |       | 1998 Stock Plan of Optimer  Pharmaceuticals, Inc.                                                                                                                               |
| 10.18                |       | (1)+       |       | Stock Plan Stock Option Agreement of Optimer  Pharmaceuticals, Inc.                                                                                                             |
| 10.19                |       | (2)+       |       | 2006 Equity Incentive Plan of Optimer  Pharmaceuticals, Inc.                                                                                                                    |
| 10.20                |       | (6)+       |       | Employee Stock Purchase Plan of Optimer  Pharmaceuticals, Inc., as amended.                                                                                                     |
| 10.21                |       | (2)        |       | Prospective Buy-Back Agreement between Optimer  Pharmaceuticals, Inc. and Par Pharmaceutical, Inc. dated January 19,  2007.                                           |

 

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| 10.22 |   | (4)*   |   | Supply Agreement with Biocon Limited dated  August 29, 2005, as amended.                                                                                                                                                                                                                |
|-------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.23 |   | (4)*   |   | Assignment letter between Par  Pharmaceutical, Inc. and Biocon Limited dated January 16, 2007.                                                                                                                                                                                     |
| 10.24 |   | (7)+   |   | Summary of Optimer Pharmaceuticals, Inc. 2010  Incentive Compensation Plan.                                                                                                                                                                                                             |
| 10.25 |   | (8)    |   | Office Lease, dated August 18, 2008, by and  between Optimer Pharmaceuticals, Inc. and Trizec Sorrento Towers, LLC.                                                                                                                                                                |
| 10.26 |   | (9)+   |   | Optimer Pharmaceuticals, Inc. Severance Benefit  Plan.                                                                                                                                                                                                                                  |
| 10.27 |   | (11)*  |   | Collaboration Research and Development and License  Agreement between Optimer Pharmaceuticals, Inc. and Cempra  Pharmaceuticals, Inc., dated March 31, 2006, as amended.                                                                                                      |
| 10.28 |   | (11)*  |   | Intellectual Property Assignment and License  Agreement between Optimer Pharmaceuticals, Inc. and Optimer  Biotechnology, Inc., dated October 30, 2009.                                                                                                                       |
| 10.29 |   | (11)   |   | Financing Agreement between Optimer  Pharmaceuticals, Inc. Optimer Biotechnology, Inc. and certain  investors named therein, dated October 30, 2009.                                                                                                                          |
| 10.30 |   | +      |   | Offer letter between Optimer  Pharmaceuticals, Inc. and Francois-Xavier Frapaise dated  January 27, 2009.                                                                                                                                                                          |
| 21.1  |   |   |   | Subsidiary of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                                             |
| 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). |

 

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| +    |   | 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. 3 to  Registration Statement on Form S-1 on January 22, 2007.                                                              |
| (3)  |   | Filed with Registrant’s Amendment No. 4 to  Registration Statement on Form S-1 on February 5, 2007.                                                              |
| (4)  |   | Filed with the Registrant’s Current Report on  Form 8-K on February 26, 2007.                                                                                         |
| (5)  |   | Filed with the Registrant’s Current Report on  Form 8-K on October 29, 2007.                                                                                          |
| (6)  |   | Filed with the Registrant’s Current Report on  Form 8-K on September 18, 2007.                                                                                        |
| (7)  |   | Filed with the Registrant’s Current Report on  Form 8-K on March 11, 2010.                                                                                            |
| (8)  |   | Filed with the Registrant’s Current Report on  Form 8-K on August 21, 2008.                                                                                           |
| (9)  |   | Filed with the Registrant’s Current Report on  Form 8-K on October 8, 2008.                                                                                           |
| (10) |   | Filed with the Registrant’s Current Report on  Form 8-K on March 5, 2009.                                                                                             |
| (11) |   | Filed with the Registrant’s Quarterly Report on  Form 10-Q on November 3, 2009.                                                                                       |
| (12) |   | Filed with the Registrant’s Annual Report on  Form 10-K on March 12, 2009.                                                                                            |

 

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**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 11, 2010 |       | 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 11,  2010 |
| Michael N.  Chang       |       |                                                                           |       |                 |
|                         |       |                                                                           |       |                 |
| /s/ JOHN D.  PRUNTY     |       | Chief Financial Officer (Principal Accounting and  Financial Officer)          |       | March 11,  2010 |
| John D.  Prunty         |       |                                                                           |       |                 |
|                         |       |                                                                           |       |                 |
| /s/ ANTHONY E.  ALTIG        |       | Director                                                                       |       | March 11,  2010 |
| Anthony E. Altig             |       |                                                                           |       |                 |
|                         |       |                                                                           |       |                 |
| /s/ MARK  AUERBACH           |       | Director                                                                       |       | March 11,  2010 |
| Mark Auerbach                |       |                                                                           |       |                 |
|                         |       |                                                                           |       |                 |
| /s/  JOSEPH Y. CHANG    |       | Director                                                                       |       | March 11,  2010 |
| Joseph Y.  Chang        |       |                                                                           |       |                 |
|                         |       |                                                                           |       |                 |
| /s/ PETER E.  GREBOW         |       | Director                                                                       |       | March 11,  2010 |
| PETER E. GREBOW              |       |                                                                           |       |                 |
|                         |       |                                                                           |       |                 |
| /s/  ALAIN B. SCHREIBER |       | Director                                                                       |       | March 11,  2010 |
| Alain B.  Schreiber     |       |                                                                           |       |                 |
|                         |       |                                                                           |       |                 |
| /s/ ROBERT L.  ZERBE         |       | Director                                                                       |       | March 11,  2010 |
| Robert L. Zerbe              |       |                                                                           |       |                 |

 

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**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | ** ** | ** ** | **Description of Document**                                                                                                                                                                                                                                                        |
|----------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | (2)        |       | Certificate of Incorporation of Optimer  Pharmaceuticals, Inc., as amended and restated.                                                                                                                                                                                                |
| 3.2                  |       | (6)        |       | Bylaws of Optimer Pharmaceuticals, Inc., as  amended.                                                                                                                                                                                                                                   |
| 4.1                  |       | (3)        |       | Common Stock Certificate of Optimer  Pharmaceuticals, Inc.                                                                                                                                                                                                                              |
| 4.2                  |       | (1)        |       | Investors’ Rights Agreement by and among Optimer  Pharmaceuticals, Inc. and certain investors listed therein dated  November 30, 2005, as amended and restated.                                                                                                               |
| 4.3                  |       | (5)        |       | Registration Rights Agreement, dated  October 23, 2007, by and between Optimer Pharmaceuticals, Inc. and  the purchasers listed on the signature pages thereto.                                                                                                               |
| 4.4                  |       | (10)       |       | Form of Warrant to Purchase Common Stock.                                                                                                                                                                                                                                               |
| 10.1                 |       | (1)*       |       | Master Services Agreement between Optimer  Pharmaceuticals, Inc. and Advanced Biologics, LLC (subsequently INC  Research, Inc.), dated November 16, 2005, as amended.                                                                                                         |
| 10.2                 |       | (3)*       |       | License Agreement between Optimer  Pharmaceuticals, Inc. and Sloan-Kettering Institute for Cancer Research  dated July 31, 2002, as amended.                                                                                                                                       |
| 10.3                 |       | (2)*       |       | License Agreement between Optimer  Pharmaceuticals, Inc. and Nippon Shinyaku Co., Ltd., dated June 10,  2004.                                                                                                                                                                      |
| 10.4                 |       | (1)*       |       | License Agreement between Optimer  Pharmaceuticals, Inc. and The Scripps Research Institute dated  July 23, 1999.                                                                                                                                                                  |
| 10.5                 |       | (1)*       |       | License Agreement between Optimer  Pharmaceuticals, Inc. and The Scripps Research Institute dated  May 30, 2001.                                                                                                                                                                   |
| 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  June 1, 2004.                                                                                                                                                                   |
| 10.8                 |       | (2)        |       | Building Lease between Optimer  Pharmaceuticals, Inc. and Pacific Sorrento Technology Park dated  May 1, 2001, as amended.                                                                                                                                                         |
| 10.9                 |       | (1)+       |       | Form of Employee Proprietary Information  Agreement of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                               |
| 10.10                |       | (12)+      |       | Employment Agreement between Optimer  Pharmaceuticals, Inc. and Michael N. Chang dated June 17, 2005, as  amended.                                                                                                                                                                 |
| 10.11                |       | (1)+       |       | Offer letter between Optimer  Pharmaceuticals, Inc. and Sherwood L. Gorbach dated October 6,  2005.                                                                                                                                                                                |
| 10.12                |       | (12)+      |       | Offer letter between Optimer  Pharmaceuticals, Inc. and Kevin P. Poulos dated June 15, 2006, as  amended.                                                                                                                                                                          |
| 10.13                |       | (12)+      |       | Offer letter between Optimer  Pharmaceuticals, Inc. and John D. Prunty dated May 10, 2006, as  amended.                                                                                                                                                                            |
| 10.14                |       | (1)+       |       | Offer letter between Optimer  Pharmaceuticals, Inc. and Tessie M. Che dated August 30, 2001.                                                                                                                                                                                       |
| 10.15                |       | (1)+       |       | Offer letter between Optimer  Pharmaceuticals, Inc. and Youe-Kong Shue dated February 18, 2000.                                                                                                                                                                                    |
| 10.16                |       | (1)+       |       | Form of Indemnification Agreement between  Optimer Pharmaceuticals, Inc. and its directors and officers.                                                                                                                                                                           |
| 10.17                |       | (1)+       |       | 1998 Stock Plan of Optimer  Pharmaceuticals, Inc.                                                                                                                                                                                                                                       |
| 10.18                |       | (1)+       |       | Stock Plan Stock Option Agreement of Optimer  Pharmaceuticals, Inc.                                                                                                                                                                                                                     |
| 10.19                |       | (2)+       |       | 2006 Equity Incentive Plan of Optimer  Pharmaceuticals, Inc.                                                                                                                                                                                                                            |
| 10.20                |       | (6)+       |       | Employee Stock Purchase Plan of Optimer  Pharmaceuticals, Inc., as amended.                                                                                                                                                                                                             |
| 10.21                |       | (2)        |       | Prospective Buy-Back Agreement between Optimer  Pharmaceuticals, Inc. and Par Pharmaceutical, Inc. dated  January 19, 2007.                                                                                                                                                   |
| 10.22                |       | (4)*       |       | Supply Agreement with Biocon Limited dated  August 29, 2005, as amended.                                                                                                                                                                                                                |
| 10.23                |       | (4)*       |       | Assignment letter between Par  Pharmaceutical, Inc. and Biocon Limited dated January 16, 2007.                                                                                                                                                                                     |
| 10.24                |       | (7)+       |       | Summary of Optimer Pharmaceuticals, Inc. 2010  Incentive Compensation Plan.                                                                                                                                                                                                             |
| 10.25                |       | (8)        |       | Office Lease, dated August 18, 2008, by and  between Optimer Pharmaceuticals, Inc. and Trizec Sorrento Towers, LLC.                                                                                                                                                                |
| 10.26                |       | (9)+       |       | Optimer Pharmaceuticals, Inc. Severance Benefit  Plan.                                                                                                                                                                                                                                  |
| 10.27                |       | (11)*      |       | Collaboration Research and Development and License  Agreement between Optimer Pharmaceuticals, Inc. and Cempra  Pharmaceuticals, Inc., dated March 31, 2006, as amended.                                                                                                      |
| 10.28                |       | (11)*      |       | Intellectual Property Assignment and License  Agreement between Optimer Pharmaceuticals, Inc. and Optimer  Biotechnology, Inc., dated October 30, 2009.                                                                                                                       |
| 10.29                |       | (11)       |       | Financing Agreement between Optimer  Pharmaceuticals, Inc. Optimer Biotechnology, Inc. and certain investors  named therein, dated October 30, 2009.                                                                                                                          |
| 10.30                |       | +          |       | Offer letter between Optimer  Pharmaceuticals, Inc. and Francois-Xavier Frapaise dated  January 27, 2009.                                                                                                                                                                          |
| 21.1                 |       |       |       | Subsidiary of Optimer Pharmaceuticals, Inc.                                                                                                                                                                                                                                             |
| 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). |

 

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----

| +    |   | 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. 3 to  Registration Statement on Form S-1 on January 22, 2007.                                                              |
| (3)  |   | Filed with Registrant’s Amendment No. 4 to  Registration Statement on Form S-1 on February 5, 2007.                                                              |
| (4)  |   | Filed with the Registrant’s Current Report on  Form 8-K on February 26, 2007.                                                                                         |
| (5)  |   | Filed with the Registrant’s Current Report on  Form 8-K on October 29, 2007.                                                                                          |
| (6)  |   | Filed with the Registrant’s Current Report on  Form 8-K on September 18, 2007.                                                                                        |
| (7)  |   | Filed with the Registrant’s Current Report on  Form 8-K on March 11, 2010.                                                                                            |
| (8)  |   | Filed with the Registrant’s Current Report on  Form 8-K on August 21, 2008.                                                                                           |
| (9)  |   | Filed with the Registrant’s Current Report on  Form 8-K on October 8, 2008.                                                                                           |
| (10) |   | Filed with the Registrant’s Current Report on  Form 8-K on March 5, 2009.                                                                                             |
| (11) |   | Filed with the Registrant’s Quarterly Report on  Form 10-Q on November 3, 2009.                                                                                       |
| (12) |   | Filed with the Registrant’s Annual Report on  Form 10-K on March 12, 2009.                                                                                            |

 

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